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Dunkin' Brands Group, Inc. (NASDAQ:DNKN)

Wells Fargo Securities 2013 Retail and Restaurants Summit Conference Call

October 2, 2013, 9:40 AM ET

Executives

Paul Carbone - Chief Financial Officer

Analysts

Jeff Farmer - Wells Fargo

Jeff Farmer - Wells Fargo

Good morning, everyone. Again, my name is Jeff Farmer, Wells Fargo's restaurant sector analyst. I'll be joining Dunkin' Brands' CFO, Paul Carbone on the stage this morning to discuss the Dunkin' Brands business, the consumer as well as a host of other topics. So Paul, thank you for joining us and I will come right down there with you.

Question-and-Answer Session

Jeff Farmer - Wells Fargo

So beginning with consumer market conditions, some consumer trends, over the Q2 earnings season Dunkin' was one of the few restaurant companies to sound relatively upbeat about the consumer. Setting aside the relatively low discretionary nature of your core products, why do you believe you've been able to deliver stronger same-store sales and traffic growth than most?

Paul Carbone

Yes. So I think it's a couple of things. It is a differentiated product menu, so there is continuous limited time offer, new items coming out, continuously talking to the consumer. I think that's number one. I think number two is great operations, right. So we have really increased our focus over the last two or three years in operations with world-class speed. And then I think thirdly, it is a ritual business with a low-ticket. And it's one of the last things people will trade down to trade out of.

But the consumer from our point of view feels good, business is good. We had a strong second quarter of plus 4 comps. And we continue to out comp when we look at the QSR industry through NPD, we continue to out comp the QSR industry. So we're happy with the business.

Jeff Farmer - Wells Fargo

All right, that's good to know. One of the few things that struck me was that talking to some of the more senior casual dining executive, they had pointed out that this is an unusual situation all over the restaurants right now, where traffic trends across all major segments, I mean in casual dining, quick service, fast-casual, even down to sort of the pure quick service have all seen traffic decelerations. Then you pointed out that you guys have hold on better than most.

But for the sake of this conversation, if you were to see a little bit of edge softness from a macro standpoint, is there anything that you guys would point to? I mean, again, a lot of people are talking about things like autos, durables, soft real wage growth, et cetera, anything that jumps up on your radar?

Paul Carbone

Not really. As we look out from a metric, from an external metric, certainly unemployment and wage growth is a good thing for us. And we continue to watch that. But overall, we haven't seen the softness inside of breakfast. Even back in '08 and '09, in the worst of times, the breakfast category was flat or still grow. So again, it comes to that being a ritual low ticket. So we haven't seen a lot of those external factors impacting the consumer.

Jeff Farmer - Wells Fargo

Somewhat abruptly jumping topics here. There was a report written a couple of weeks back, basically coining the question some of the performance of new restaurants in your -- I guess which is western, not just western emerging, but in your west market. From our perspective, we've been to a couple of your Analyst Days, went through the IPO process, and this is what objectively I think you've told us.

That for the Dunkin' restaurant that have been opened in the last five years, again and this is in the western emerging markets, first year total sales, the sales mix of higher margin beverage and breakfast products and EBITDA margins for the new unit openings are all up dramatically over the last four years in the west and emerging markets. Unit investment costs are down and first year cash and cash returns have been above 25% for three consecutive years. Really from that perspective, that all sounds good. Anything that you can read into potentially why this third-party report was out there?

Paul Carbone

I don't know I think maybe they weren't burdened by the facts of what we have showed. But clearly going back to when things weren't good, so in 2008 the cash and cash returns were 5% in our western emerging markets. We came back, we looked at that, we focused on it and we have seen three years of north of 25%.

We're very transparent with the numbers. We're focused on five things: real estate site selection, national media, focus on beverages, great operations in the store, and franchise selections. So the new restaurants are doing great. We just opened in Denver last week. So we opened up two locations in Denver, a free standing and then a APOD in the airport. Sales were phenomenal.

Sales in California for restaurants are very, very strong. SDAs, the demand for the brand has never been better. Phoenix is strong. Texas is strong. So we think we can have 1,000 stores in Texas. So I've heard about that report. I'm not sure. I haven't actually read the report. But I think we've been open and transparent with the numbers and great comps and great store returns are going to drive our development.

Jeff Farmer - Wells Fargo

So keeping on the West Coast, just thoughts on California. So I believe it was in July that you did announce either three or four fairly large transactions, multi-unit development agreements in Southern California. So I guess I'd like you to sort of take us through that process, what the demand to actually be named a developer was? How I guess stringent you could be with sort of you were looking at it, it sounded like there was pretty significant demand to become a franchisee. So could you walk us through that process, how you decided to choose those that you chose and what's going to happen from here on?

Paul Carbone

So we opened it last January. The way the process works is we open a territory for sales. So last year January we opened in Southern California. So that means our franchising guys go out and make that soliciting business plans. So response was tremendous, may have gotten in the hundreds of submission. And then we kind of narrow that down. And some of the things we're looking for right at the top is you have to have an operations background, and obviously you have to have the financial wherewithal to open up the restaurant. And that cuts the number down.

And then, as we get down to the last group of probably 15, 20 business plans, it's a cross-functional team, development franchise in operations, marketing and finance, and they are reviewing all the business plans. And what we are looking for is people that have operations background that know the local area, so no real estate can develop site.

Well, I wasn't part of the final selection for Southern California. I was when we did Denver. And part of that, some of the people we picked was a restaurant group that had a 145 Little Caesars, another gentleman who used to own 20 Subways. So we're looking for people that have done this before. We had a group come out from New Jersey that again opened up in California. So that was a little bit easier, because we know them, they know the brand. So it is about having operation background, the financial wherewithal to do it and the local connections in the market.

Jeff Farmer - Wells Fargo

Do you think the Denver market as an example, how many restaurants are in Denver right now?

Paul Carbone

Two open.

Jeff Farmer - Wells Fargo

So then not to put you on the spot, so there's two now. As you've looked, I'm sure you've game planned this over the next decade or so, so two restaurants open just one developer, I'm assuming.

Paul Carbone

We sold, and this maybe where you're going, so we sold Denver, 60 restaurants and five franchisees.

Jeff Farmer - Wells Fargo

So then the question would be, those five, would you expect to have those 60 restaurants open up over the next five years?

Paul Carbone

Probably eight to 10 years.

Jeff Farmer - Wells Fargo

And then you sort of keep it with that group of developers, you expand that or you keep that group and allow them to add more restaurants?

Paul Carbone

We would probably let them. They would have to first pick on adding more restaurants as we go out. So we're doing down, Denver proper 60 restaurants. So as we fill that in the next tranche would be, can you put more restaurants in that group and then can you go out further outside of metro Denver.

And we may bring in new franchise, because of that franchisees at that point. I think one of those franchisees in Denver will probably go to Northern California eventually, because there are bigger companies, there are company that owns Little Caesars. I mean they are looking for growth. So they may actually go to California with us.

Jeff Farmer - Wells Fargo

You made the point in a lot of your presentations, your Analyst Day presentation, the national, the brand awareness of concept is a lot greater than it was 10 or 15 years ago. So now as you get into markets like, again, California, what are you finding out from a brand awareness standpoint? I imagine that the battle is much more easily fought and you'd still win so. Just discuss that a little bit and the drivers of that brand awareness.

Paul Carbone

Yes. So one of our investors did a survey, told us about it after, in California, 21% of the respondents in LA said they get their morning coffee at Dunkin'. And as a reminder, we have zero stores in LA. So that's from the coffee in the grocery store. They're buying pounds of coffee in the grocery store, when they travel or they are Bostonian or Northeast transplants.

So brand awareness is very, very strong in California, in the western states. And it's really a couple of things. The first is we have been selling coffee in the grocery stores since 2007-2008-ish. So the brand has been out there. It's been on the store shelves and people are drinking a lot of coffee. We sell the most coffee poundage in California.

Secondly, in 2010, we went to national advertising. So a consumer in Southern California -- the first Dunkin' will open in 2015. And they have seen commercials on TV for five years, about our beverages, about our breakfast sandwiches. So that's driven significant consumer awareness.

Now, compare that to when we went into Vegas in 2005, our first asset was on the ground 2005, late 2004. The first time they saw Dunkin' on TV, it was 2010 as well, right. So the comparative of having five years of media, before we put an asset on the ground, is driving that brand awareness.

People know the brand. It's an iconic brand. It's one of the benefits. We have great brand heritage, 65 years of brand heritage in Dunkin' and basically a handful of restaurants in west of the Mississippi. And we all the way get that in the domestic. There's a not a lot of domestic growth stories like that.

Jeff Farmer - Wells Fargo

One of the questions I receive a lot is how will Dunkin' fair moving into California that's just dominated by Starbucks at this point. So my question for you is, is there a case study, is there a market where, I don't know for Chicago where it might be worth. Starbucks was there 10, 15 years before you, very well in trenched, say one unit for every 10,000 people. Where you've been able to move in and do well, are the situations like that, are the case studies of that nature?

Paul Carbone

Well, I think it's a couple of things. I think there is a few markets, not all the way to the west, but we went into Kansas City, went into St. Louis, as we go in Texas more, so opening up in Austin, Houston; Starbucks has a good presence there. But our number one competitor is McDonalds. Our number two is gas & convenience, so Cumberland Farms, Wawa, Sheetz. Number three is Tim Hortons, where they exist. And number four is Starbucks.

So McDonalds sells a lot of dripped coffee in California. And that's who we're going to go after. We go into a new market, we take share from McDonalds, we take share from independents, I'm sure we're taking some from Starbucks, but it's really those talk to competitors that we're going after.

Jeff Farmer - Wells Fargo

Shifting gears a little bit, and you're just talking about same-store sales here in U.S. for the core Dunkin' brand. 12 marketing windows for U.S. is my understanding. I'm curious how this has evolved? I think they're almost all LTOs and that's my understanding. So last spring we heard a lot about the product pipeline, but can you just sort of talk about some of the hits, swings and misses. Well, some of the things you've done right and wrong on the LTO, a strategy what's resonating. What can we look forward to over the next couple of quarters?

Paul Carbone

Our pipeline has never been deeper. We have tested products, probably going out 18 months. We just launched this week the Angus Steak & Cheese Wrap, right. And this is a perfect example of kind of our pipeline in a product lifeline. So two years ago we launch the Angus Steak Breakfast Sandwich, and it was a success. We also launched the Big N' Toasted, which was bacon and fried, that was a success.

Three months ago, we launched the Angus Big N' Toasted, right. So we took a protein network in a carrier that worked and we put them together, right. It was a very big success. We launched Tuna and Chicken Salad a couple of years ago. About six months ago, we've launched Tuna and Chicken Salad Wraps. And now we have the Angus Steak & Cheese Wrap, right. So we're constantly taking winners, the protein itself carriers into changing them, right.

And this is the idea of begin to winning, so once you get on a roll with product. So we launched a breaded chicken sandwich, a bakery sandwich, right. It's been a huge success. I'm guessing, because I don't really know this for a fact, they don't let me in the R&D lab, but I'm guessing where we have this wrap platform that is working, at some point you will see a breaded chicken wrap in the future and I'm sure it will be a success.

So we have a robust testing. I'm happy to say over the last three years, we had one swing in a miss, it went through testing and tested well. We came out it was like a stuffed breadstick, I think it was like a hot pocket type of product. And it tested well, it came out and it did just okay, below what our testing said. And that was our one big item that didn't kind of live up to our expectations. But we've hit this petty well. I think it's the tasting regimen that we have, alpha beta marketing test that really is driving the success.

Jeff Farmer - Wells Fargo

And then you have this wave after wave of LTOs, are they truly LTOs, do they disappear for a nine and 10 months or what? Do any of these things earn the right to permanently be on the menu or you had issues or some of this.

Paul Carbone

So a couple of earned their right to be in the menu. One is the Big N' Toasted. So the Big N' Toasted was at the time one of our biggest LTOs ever, so we put that in the menu. And then second one that earned its way on the menu is the Turkey Sausage Breakfast Sandwich. So that launch in January was a huge success, less than 400 calories, part of the DDSMART menu, and that's earned its way. But we're really rigorous about on and off, and then they come back like you said 10 months, 12 months later.

Jeff Farmer - Wells Fargo

QSR hamburger markets are a little bit different, but all four big U.S. hamburger chains are telling you the same thing right now, which is that if you're not aggressively promoting value, you're losing share. And one exception to that is Wendy's had a pretzel bacon double cheeseburger, a new product. Fairly high price point, have done exceptionally well. But in your world, I know there's a little bit of a balance due to consumers respond, better to at this current time, value or new product? And what do you seen drives the traffic number?

Paul Carbone

New product drives that. So it is about differentiated products. We came out with a roast beef pretzel roll sandwich, absolute success. It is all about differentiated products. We do like in Chicago, we do an afternoon coffee break, so you come back and you can buy a small coffee, medium-iced coffee at a discount. So we do some of that bouncing back. So it's not like we ignore value, but it's all about differentiated products.

Jeff Farmer - Wells Fargo

I think your annual marketing budget is right around $330 million or something like that. So just curious, this is not necessarily a Dunkin' question, but over the years, so you guys have TV, radio, billboard prints, social media sponsorships, et cetera. How has that evolve? And this is really sort of social media, new media question. How your media dollar allocation has grown dramatically into that social world, how should I be thinking about that?

Paul Carbone

It's a good question. So the good news is traditional media still works very well for us. So we put something on TV, a new product, and it drives people to the restaurant, so traditional media continues to be very important. From a growth perspective, clearly digital/social has the highest percent growth, like small base highest percent growth.

We continue growing further into digital and social media to advertise to really talk to our guests. We launched mobile, I mean loyalty, end of this year going to '14, we launched the mobile app last year, so it continues to be a focus area of ours and in percent growth growing the most.

Jeff Farmer - Wells Fargo

So you segregate into that nicely, so a lot of us are waiting for the loyalty app. I think you recently surpassed 3 million downloads for the mobile app. How are the customers using that app right now? What's been the biggest impact on either sales or sales mix?

Paul Carbone

They are using this for a few things. They're using it for store locate. They're using it for payments. So you can put your Dunkin' Card on there, so you can actually pay. We can send location based office. So if the phone is in Chicago, so if you're traveling to Chicago, Jeff, we can send locations just for Chicago. We can send office just for Boston. So they're using it that way.

And then we do other things that we don't incent people to download. So you don't download the app and get something. But we just did a -- we have a season-long promo going on in Philadelphia for instance, that is The Eagles Win, and you download the app, you'll get a coupon for $0.99 coffee, right. It's a wide downloads absolutely, and The Eagles aren't very good this year, but already we've given away many coffees.

But things like that, National Coffee Day was this past Sunday, so we did a national offer, $0.99, a free small coffee with the app. Huge drove, huge downloads. So it's very important. The consumers using it like I said for pay, it helps us get some information back. And it is a mobile loyalty strategy. So mobile is first and then we'll go into loyalty.

Jeff Farmer - Wells Fargo

In loyalty, I know you've kept the cards close to the vest on this one. So I'll take a few stabs at some of this stuff, probably get shot down, but we'll see as it relates to nature of Loyalty Program. So typically you might feel surprised and delight or a sort of an accrued benefit in earned rewards. How are you guys thinking about those things?

Paul Carbone

I think we're thinking about it in both ways. I think they both have merit. So certainly an earned and accrued reward makes sense, so spend, and you get something. And then I think once you have enough data, and not surprise and delight out of the blue, but if I know that, from your history, Jeff, that you come in three times a week and you're buying bakery sandwiches in the afternoon, right. And I'm going to launch a new bakery sandwich, I may surprise and delight you with an offer for that bakery sandwich, right.

So it might not be something that's totally off base from what your normal habit is, right. But we will do both, both the earn, and then based on the data knowing what you do, I may get you into a new breakfast sandwich or a new bakery sandwich.

Jeff Farmer - Wells Fargo

Then I know you haven't talked about it much, but I think you recently hired two new IT guys or technology guys. I'm assuming they're having something to do with this program. So I know it's just fine tuning this, but why did you guys have not been a little bit more specific with the case, it's going to be the end of '13 versus maybe ready for the holiday season as opposed to early '14 or maybe you miss that window?

Paul Carbone

Yes, so we are building this, we're going to go with testing it. We want to get it right. And in a franchisee system, it's a little bit different than in a company-owned system like Starbucks, right. So there is customer acquisition, so how do you pay for customer acquisition in the franchisee system, and so we're trying a few different models. So not being specific is just based on us wanting to get it right and that people in your role would hold us to something if I said, it will roll by first quarter 2014.

Candidly, we don't want to put that pressure. So John Costello, our Head of Marketing is getting lots of pressure from, Nigel, right. So that has build lack of pressure to get this done. But we also don't want to put out a deadline where we are rushing, if we find something that isn't working. So this is a long-term play.

Our competitors have been in the loyalty business for many, many years. So listen, if I'm successful in loyalty, in three years when we're sitting, we're not going to have a discussion of, boy, you rolled it out in Q2 of '14 versus Q1. We're going to be talking about how successful it is. If I'm not successful, we will have that conversation of why didn't we wait three months?

Jeff Farmer - Wells Fargo

Little bit of switching gears, so speed of service initiatives. I know you've said that you have some opportunities there in the store. So can you hit on a couple of those where we stand with some and some of the benefits you're seeing?

Paul Carbone

Yes, so I don't know if we talk about this enough, we're world-class at speed and its part of our product offering of getting people in and getting people out, so fast-friendly service. And there are certainly restaurants -- our Head of Operations, Weldon, he was out with us, he talks about this. He says, every restaurant is like a snowflake. So we certainly have restaurants that have throughput challenges, right. And they are all different of why, right. So it might be the customer stake at the drive-through or it might be inside the restaurant.

The good news is we have ways of speeding that up and pushing throughput from a redesigned sandwich station. Everything from the menu, there is a menu book of recipes of how to put sandwiches together. Having it hang on the clip versus lying down, something as simple as that. We've come out with a new or the vendors have come out with the new TurboChef oven that saves seconds off of hitting, a smart toaster that could toast not only an English Muffin, but a bagel with two different setting.

And those things in restaurants that have throughput challenges, items like that pay for themselves hands down. So we really do this in a chain of 7,500 restaurants. We really do this restaurant by restaurant, and going we have an operation services team that looks at this and we'll go in and diagnose what the best solution is. And it could be a new TurboChef oven. It could be moving the speaker of the drive-through where it is in the stack. So there is a lot of different things and it really is about driving people through the line faster.

Jeff Farmer - Wells Fargo

In my perspective, again, in casual dining and even quick service or drive-throughs, you get a lot of this. That extra amount of incremental drive-through for our cars, an hour equals one point of comp. In your perspective, they're clearly bottleneck period that's sort of -- that early morning period and all those things. So have you guys looked it, obviously you have the metrics, but how big is the price here in terms of getting some of the stuffs try to improving.

Paul Carbone

So I think if you think about it, there is certainly -- if you think about our business, we do 60% from 5 AM to 11 AM. And in restaurants that have bottleneck, it's probably 6 AM to 8 AM. Right, I mean you can kind of narrow it down, a handful of restaurants, I shouldn't say its handful, it's restaurants in the chains, it's probably more of an handful, certainly less than significant. Getting people through the line at any point in time during the day drives comps.

And we have x seconds equals to certain number of comps on a national basis. But it's certainly a comp driver and it's more importantly, it's a get satisfaction driver, right. So we may not be that particular getting that guest through two seconds faster is going to help comps for say nationally, certainly will in that restaurant and the DMA. But it's really about guest satisfaction, about them coming back, not driving past, because consumers queue fair in and I think it's well-known. It isn't about how long the line is it's about how fast the line is moving. So people will get in a long line as long as they think it's moving quickly.

Jeff Farmer - Wells Fargo

Makes sense, very helpful.

Paul Carbone

That's a good non-answer for you.

Jeff Farmer - Wells Fargo

At your Analyst Day, sort of again unrelated, you walked us through several different versions of sort of remodeled restaurants, the next generation of the restaurants. So could you sort of get us something to speed on where you are with that? What we should expect to see over the next several years in terms of just this new evolution of design.

Paul Carbone

So we launched a new design, so all remodels and newbuild starting in the second quarter going forward would be in the new design. It's called Fresh Brew. It is, inside a Fresh Brew, there is three options, but they're generally the same, different tones of colors. There is one that's more urban, but generally they're very similar.

So all newbuilds, we have I think over 500 already in the ground. So we tested it. We probably started with 200 that we tested over the last year and a half. And then all newbuilds and remodels. We'll do 500 remodels this year. Net development, we said at the top end of our range is 330 to 360, but that's net. So our gross is higher. So those will all be in Fresh Brew. So you'll see this rollout.

The important thing that I think from an investor standpoint is, nearly a 100% of the restaurants, west, will be a Fresh Brew, right. So all my Denver restaurants will be Fresh Brew. Obviously, you will see as a percent, less in New England, in Boston. But 100% in Denver, 100% in Southern California and 100% in Salt Lake City, where we were, and 100% in Houston. So all these new markets will have all Fresh Brew, which is really important.

Jeff Farmer - Wells Fargo

So in the established markets, some of the core East Coast markets here, what's the franchisee appetite to pursue these remodels?

Paul Carbone

Very high. So couple of reasons, the first is these guys have never made more money than they have in the past. So they're very open to it. And then secondly and most importantly, we have been very disciplined about talking about remodels, not as both externally with people in your field and investors, but also with our franchisees, not as a comp lift, right. So yes, do we get a lift on remodel? Sure. Do we talk about what it is? No.

But when we talk about remodel, it's a contractual obligation that franchisee makes when he signs up to be a Dunkin' Donuts franchisee. So we don't have a lot of conversation of should you do a remodel or not. It's contractually obligated and it's really about keeping pace with McDonalds, again our number one competitor, putting in double drive-throughs, about Panera adding drive-throughs, Starbucks adding drive-throughs. So we talk about remodels in just keeping pace with the competition.

Jeff Farmer - Wells Fargo

So I'll jump in around a little bit on your menu pricing, opportunities in 2014 for your franchisees?

Paul Carbone

If you look at our long-term comp guidance, we said 3 to 4, and x any commodity stock, x any significant inflation changes, we see pricing giving us about 1% of that. More on differentiated products, right. So the easiest thing to compare is the couple of black coffee, so even when coffee prices spiked, we didn't take the price on coffee. We took it on breakfast sandwiches, things that you can't compare against us from the competitors.

Jeff Farmer - Wells Fargo

All right, we've have a few more minutes of questions. I can hope to give you guys about five minutes of Q&A that would be the game plan. So Dunkin' Donuts International, recently announced the decision to enter into United Kingdom, can you just again share a little color on, that back story there, opportunity?

Paul Carbone

Yes. It has nothing do with CEOs of [indiscernible], it had no weighing. With Dunkin' in international, it's really about going into countries. So we make money of the royalties, like we do in the U.S. So it's really about going into countries, high GDP, high AWS, right.

So we have a lot of stores in Indonesia for instance, $2,500 average weekly sale, the licensee, because these thing costs $50,000 to $60,000 to bill, it's making a ton of money. So we talked about licensee in Indonesia. He loves the Dunkin' business. We are making 5% of $2,500 a week. It doesn't mean anything to us.

So we opened a restaurant in Germany and its $40,000 or $50,000 a week. The franchisees making a ton of money and now we are making 5% of $40,000 or $50,000, now that means something to us. So it's really about going into London, in the U.K. is about our strategy of the high AWS countries, right. So where can we go and open-up restaurants $12,000, $15,000, $20,000, that's beneficial for the licensee and also beneficial for us.

We were in -- Stacey and I were in Copenhagen a few weeks ago and we can't buy a cup of coffee for less than $7, right. That's an interesting place for a franchise, whoever that makes some money off the topline. Now, Denmark will not have 200 Dunkin', right. But maybe they will have 20, and if they're doing $30,000 or $40,000 a week, they will need to have 200 and make it a profitable country for us. So that's the broader plan, which London, in the U.K. fits into.

Jeff Farmer - Wells Fargo

And then finishing up for me with margins and some capital priorities, so I don't think much has changed here. You've got to 150 bps to 250 bps or 200 bps rather of annual operating income, margin expansion over the longer-term. I think it sounds great. I think a lot of us get the fact that as you just continue to build these franchisee units that you are leveraging some corporate and regional overhead and things like that. But your revenue is expected to outpace G&A growth by 2 to 1 ratio, but what other margin leverage are you able to pull, to sort of consistently drive that 150 to 200 bps moving forward of expansion?

Paul Carbone

So if you look at our P&L, its G&A and then internationally, we sell ice cream. So it's cost of ice cream versus sales of ice cream on the operating margin line. So on the ice cream piece, we completely outsourced it. We picked up significant margin expansion. So we continue to look at that.

On the G&A, it's to your point, Jeff. It is just about leveraging the topline. So most of our G&A, two-thirds of it is salaries and most of us like to get a raise every year. But we should be able to grow at that 3% to 4% range half of our revenues and the model just works very nicely. We're going to continue to invest in International, but the dollars I would invest in International relative to the revenue growth in Dunkin' U.S. is de minimus, so it is in that nice model, in that 150 to 200 basis point margin expansion over the long-term. We see it's very doable.

Jeff Farmer - Wells Fargo

And then final question that you get all the time and you've talked about it for a while, the opportunity to potentially lever up, pursue accretive share repurchase. So I keep seeing different numbers on the ratios, but I think it's an adjusted debt-to-EBITDA number. So where does that stands at the end of the first quarter and up to the second quarter?

Paul Carbone

We're little bit below 5. So we have talked about being comfortable in this 4 to 5, 5.5 range times EBITDA-to-debt. The company will always have debt on it, its part of the beauty of the franchise model. We've also said we could lever up with rates where they are into the 5.5, maybe push it to 6, as a onetime to do something. So as we look at levering up and before we talk about proceeds, our current debt, we have $1.8 billion, it's at 275 bps margin with the 1% floor.

So to lever up in our credit agreement, we couldn't lever up at a rate greater than 325. We have a mechanism, the most favorite nation mechanism that if I borrow more money, it's greater in 50 bps, I have to re-price the $1.8 billion. So 325 is kind of out because I couldn't do anything that make sense financially if I have to re-price the quantum.

So that leaves me at 300 bps, going out at a 300 spread. And as we look out and we do this all the time, what we've heard from our debt investors is, boy, if you go out and you want to lever up, you want to borrow new money at 300, we may push you to re-price the quantum. But we may, contractually I don't have to, but we may.

So 300 again, is another one that's hard to get done, so the opportunity to raise money in this 275 range. Well, markets have gotten better and we continue to monitor this. It's really at this 275 that we could borrow money. So the window is narrow what I can borrow at, right. I'm burdened by a fantastic current credit agreement and not being able to borrow with much higher rates, if not having to re-price.

So that's kind of how we would raise the debt. And then if we were to raise money and we've talked about this, it's about giving it back to shareholder, share repurchases, things of that nature, we think less about special dividend, bit more that share repurchases, but we really focus on raising the money first.

Jeff Farmer - Wells Fargo

With that we'd love to take questions from the audience. If there are some, please raise your hands, if you have one.

Paul Carbone

You did a good job covering the all questions, I guess.

Jeff Farmer - Wells Fargo

So I'll just actually ask one more and you alluded to this, so you said special dividends, but in terms of just your ongoing dividend philosophy, which I think it's got one handle on it, I forgot what the yield is, longer-term thoughts on that one?

Paul Carbone

If we look at the yields secondary, because we have a nice multiple and it brings down the yield. So what we look at is payout ratio. So we initiated the dividends, we initiated a 50% payout ratio. Some of your colleagues would say we should pay out, have a payout ratio of a 100%. So as a CFO, I'm somewhere in between 50 and 100. I don't think we need to be at a 100. I don't think that's wise. Can we be higher than 50, absolutely.

We see the dividend growing faster than earnings. And I'm going to grow the dividend faster than earnings with two levers, first is going to be share buyback. So if I do a share buyback, it's going to naturally let me grow it faster. And then secondly, if I don't do a material share buyback, the payout ratio, right, so it's at 50, it could tick up to 52, 53 whatever the math tells you to get faster than earning. So it is very important, when we came out it was a 2% yield.

We wanted to signal to the market six month after going public. The stability of our cash flows that we are a different model, 100% franchisees different than less than a 100% for the stability of cash flow. We think it's an important return of capital to shareholders. And you will see us over time increase that generally faster than earnings.

Jeff Farmer - Wells Fargo

Extremely helpful. Thank you very much for being here today.

Paul Carbone

Great. Thanks, Jeff.

Jeff Farmer - Wells Fargo

Thank you very much.

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Source: Dunkin' Brands Group's Management Presents at Wells Fargo Securities 2013 Retail and Restaurants Summit Conference (Transcript)
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