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Call Start: 16:30

Call End: 17:19

Krispy Kreme Doughnuts, Inc (NYSE:KKD)

Q1 2015 Earnings Conference Call

May 2, 2014 04:30 PM ET

Executives

Anita Booe - IR

Jim Morgan - Executive Chairman

Tony Thompson - President and CEO

Doug Muir - EVP and CFO

Analysts

Will Slabaugh - Stephens Inc.

Tony Brenner - Ross Capital Partners

Michael Halen - Sidoti and Company

Nick Setyan - Wedbush Securities

Operator

Good day, ladies and gentlemen, and welcome to Krispy Kreme Doughnuts’ First Quarter 2015 Earnings Results Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to turn the call over to Ms. Anita Booe. Ma’am you may begin.

Anita Booe

Good afternoon and welcome to the Krispy Kreme first quarter conference call. My name is Anita Booe, and I am the Director of Investor Relations. On the call today are Jim Morgan, Executive Chairman; Tony Thompson, President and Chief Executive Officer; and Doug Muir, Executive Vice President and Chief Financial Officer.

Some of the information in today's press release and statements on today's call includes forward-looking statements that reflect our expectations or beliefs about the future; including, but not limited to, our expectations and beliefs regarding financial performance. We cannot assure you that we will achieve or realize these expectations. Like any such statements, they are subject to a number of factors, risks and uncertainties that could cause actual results to differ materially from our expectations or beliefs. These factors include items discussed today and in our SEC filings, including our Annual Report on Form 10-K for fiscal 2014. As we announced in our fourth quarter call beginning this quarter we’ll revise our computation of things for sale and now I put shop in the computation after 18 months of operation compared to 13 months under the old methodology. All of the same-store sales metrics mentioned on today’s call for all periods reflect the new computation. Please see our form 8K filed on May 8 for detail and a comparison of old and new comp by quarter going back to fiscal 2012.

I'd now like to turn the call over to Jim.

Jim Morgan

Thank you Anita and thank each of you for joining us. I’m going to begin by welcoming Tony Thompson who’s sitting here beside me, to the Krispy Kreme family he’s our new President and Chief Executive Officer. This is actually his first official day at Krispy Kreme, many of know Tony or know of him through his most recent position and President and Chief Operating officer of Papa John who’s brand presence spans 4200 units in the US and 35 other countries. Tony’s background also includes successful roles at other highly respected companies including Con Agro, Gulf Coast Coca Cola and Scotts Miracle-Gro Company. As you know we have been preparing for executive succession for quite some time, I actually believe that in Tony we have found someone that has both the skill set and the passion to guide Krispy Kreme to even greater successes in the years ahead. His career accomplishments, his professionalism and his personal qualities represent the perfect complement to the culture, mission and values at Krispy Kreme. As Executive Chairman I look forward to working with Tony as he takes on his new responsibilities as our CEO.

Since this is Tony’s first official day in office you can appreciate that it will be somewhat premature for him to entertain questions on the business or discuss his thought on how best to achieve the tremendous long term potential of our brand. He will occasions to speak to on these topics in the not too distant future but for now we’re going to provide him a little time to settle in and have a dialogue first with our team members, franchise partners and customers, before engaging directly with shareholders and the analyst community. Turning to results for the quarter on a pretax basis, we reported our highest quarterly earnings for a single quarter in over 10 years which I believe is a remarkable achievement for our company. On an adjusted basis net income rose to $15.8 million and adjusted earnings per share was $0.23 up $0.15 on top of a 43% increase in first quarter last year.

As we shared with you on our March 12 call, we got off to a slow start in our company shops in February with severe winter storms in much of the Southeast and we continued to experience challenging weather during the balance of the quarter. Most severely hit was Valentines’ week which is historically our business week of the year. In the end, company store comps fell 1.5% in the first quarter and that was the biggest contributor to the decline in profitability in the company stores segment in the quarter. Stepping and looking at the longer term however our two year stack comp of 10.7% is pretty impressive and demonstrates the strength and health of our domestic business. In fact, with the exception of the first quarter last year company stores profitability in this quarter was the strongest of any quarter in many years.

Looking beyond the company stores comp to the bigger total domestic sales picture, our domestic franchisees many of which are outside of the Southeast and therefore had less headwind from weather posted a very solid 4.5% comp in the first quarter against an almost 12% gain last year. That performance put on total domestic comp system wise at plus 2.3% and when combined with strong performance among the supply chain segment drove overall profitability higher in the first quarter. We fully understand that achieving organic and consistent same store sales growth is predicated on providing our guest with an outstanding product and hospitality experience with every shop visit. Our focus is therefore driving more everyday use occasions by giving customers exactly what they are looking for. Hot original Glazed and other delicious donuts a variety of great hot and cold coffees and other specialty beverages and a friendly and welcoming interactions with the staff in our shops. Encouraging more everyday occasions requires that we keep customers constantly engaged with our brand. We are therefore been growing our digital presence as a key component in facilitating that everyday connection.

To assist us in doing an even better job developing and implementing best in class digital experiences we are now working with a global marketing agency with a demonstrative ability to successfully execute unique and memorable campaign on a global scale. We think enhancing our global presence in new and existing digital, social and interactive media channels is critical through worldwide customer engagement and will help keep Krispy Kreme top of mind. Key to building and maintaining long term top of mind consumer awareness is building greater connectivity to Krispy Kreme by making our products more convenient and available in a variety of venues outside our shops. Examples of this are; ready-to-drink bottled coffee, bagged coffee, bagged ground coffee and by the end of the year take up force in fact through our partnership with Keurig Green Mountain.

We believe that by making more of our products accessible to customers outside of our shops and in channels where they customary black coffee we can then trial usage and product affinity that could also translate into higher coffee and same store sales at our domestic shops. And ready-to-drink bag and take up products represent our initial entries into brand licensing. We believe there are many opportunities to expand and capitalize on our Krispy Kreme brand awareness and reputation through thoughtful arrangement with first class licensing partners. We are planning additional such arrangements in the coming quarters and years.

Turning to shop development, we opened a net of 27 stores in the first quarter and believe we are now on track to grow our system wide store count by 10% or more this year. During May, we celebrate a milestone with opening in Puerto Rico of our 600th international store. Our new President of International Dan Beem has been travelling almost non-stop since joining us in February spending time with our international franchise partners to learn more about Krispy Kreme’s uniqueness in the more than 20 countries in which they operate and making sure that we maintain and improve the support we have in place to help them grow and drive alongside Krispy Kreme.

Domestically, we are continuing to focus company shop growth exclusively on small factory shops. Importantly, we are beginning to see franchisee adoption of the small factory model. During the quarter, the first franchisee of a small factory opened in Dallas and we expect several more small factory shops openings by domestic franchisees before the end of the year. In terms of potential new franchisees, our domestic franchise development staff is pretty doggone busy these days and we expect additional development announcements over the coming quarters.

Let me turn for just a moment to our forecast for the full year which we are now reducing about $0.04 to $0.05 per share to account for three main factors. First, first quarter results, while very good, were short of our expectations and we are in fact transition those into our full year assumptions. Second, our ERP implementation costs are coming higher than anticipated. And third, our senior management succession plan costs are higher than what we planned for in our original guidance, in part, due to timing. We view both the ERP implementation and the top management succession as important investments that help ensure we are positioned to fully exploit a myriad of opportunities that lie ahead of us. So, while we may not achieve quite the earnings growth this year that we had initially expected, considering that adjusted EPS was up 30% last year on balance I think our multiyear earnings growth is quite respectable and quite likely is consistent with our long-term goal. More importantly we are taking the long view and making the investments into people, leadership and franchisee support to ensure we and those who come after us have what it takes in place to achieve the full potential of this outstanding brand.

Finally, we also continue to demonstrate our ability and willingness to utilize our balance sheet and free cash flow to return capital to shareholders. In the first quarter alone, we repurchased over $25 million of our shares as part of our $80 million share repurchase authorization and we remain committed to using buybacks as one of several leverage at our disposal to enhance value. We enjoyed being in a position where we can make investments needed to on business maintain an essentially debt free balance sheet and when conditions were met further improve shareholder returns with thoughtful use of excess cash flow.

Now I will turn the call over to Doug to review our financials.

Doug Muir

Good afternoon and thanks for joining us. Total revenues increased about 8/10ths of 1% in the quarter to about a $122 million, excluding the effects of refranchising six stores last year, revenues rose about 2.1%; consolidated operating income was 7% to $60 million while adjusted earnings per share gained 15% to $0.23.

Now let’s look at the results by segment. In the company stores segment, total revenues declined 1.8% to $80 million, but exclusive of the effects of the franchising company stores revenues increased to about 1.3 points. Total on premises sales increased about 1% from last year as was the case with consolidated revenues the franchising of six stores in Kansas, Missouri and Dallas last year, adversely affected first quarter revenue comparisons. Same store sales declined 1.5%; candidly we were disappointed not to have extended our streak of steadily rising comps to 22 quarters. We were up against a 12.2 comp in the first quarter last year which was the strongest comp we have ever recorded.

Nevertheless, the two-year stat comp of 10.7% we thought was pretty impressive. The comparisons were moderate as the year progresses but we’ll still be up against a 10% comp in the second quarter. We were up 4% in Q3 last year and 2% in Q4, so we expect to have more moderate comp hurdles in the second half of the year. In the wholesale channel, first quarter sales fell 4%, exclusive from the effects of refranchising sales were down about 1.6%. The same weather conditions in February and March that closed our shops and prevented customers from getting to our shops in the Southeast also affected our ability to make deliveries to our hotel customers, looking at wholesale metrics, average weekly sales per door in grocery and mass merchant declined about 1% while the number of doors declined 3%.

The refranchising accounted for the loss in doors. Over in the sea store channel average weekly sales per door decreased about 5% while the average weekly number of doors served actually went up about 2.5 points. The company store segment posted operating income of $4.4 million compared to $5.3 million in the first quarter last year. While various factors made us unable to beat last year’s profit in the segment it doesn’t our belief that fundamentally the long term trend of improving margins in the company’s store segment is intact. I would note that with the exception of our first quarter last year the most profitable quarter posted by the company’s store segment in years is the one we’re reporting today.

Let me take you just a moment -- I’ll take just a moment to update you on the financial results and our new free standing small factory shops. Today we have opened 10 of the new small free standing shops including 2 in the first quarter. Generally, we continue to be very pleased with the revenue results we are seeing, the two shops we previously identified as revenue underperforms continue to reside in that camp. But so far none of the other new free standing shops had joined that group and we continue to have some outstanding overachievers. One new statistic that I’m able to report is that we now have a trailing 12-months sales metric per shop that excludes the first three months of operation when Krispy Kreme shops typically enjoy an elevated heavy new sales level. We’ve been waiting to see shops revenue through a full angle cycle without a lot of the honeymoon effects. So we’re glad to finally have the first measurement. Our new shop in Greenville, South Carolina, opened in January of 2013, with sales for the trailing 12 months ended April 2014 averaged about 31,000 a week, that’s about the same level of sales, we saw for that shop in the July, October, and January quarters. So it seems to have settled in, in the late 30s in weekly sales, which is a very profitable level. It will be interesting to see how it matures in coming quarters but we really like where we are right now. In summary, it’s still so far so good, on the new shops revenues and that’s the driver of ROI. But as you know we are working with small sample sizes and so we’re really looking forward to results from more new shops and getting more data as existing shops age, so that we can see more examples of normalized sales levels.

Turning to the domestic franchise segment, first quarter revenues rose about 22% to $3.5 million. Higher royalties from an 8% increase in sales which about 2 points represents the refranchised stores and higher initial franchise space and ancillary revenues accounted for the increase. And as the franchisees posted an increase in same store sales of 4.5% for the quarter despite being up against an almost 12% comp last year. Operating margins expanded as expected and the segmented operating income rose to $2.2 million from $1.4 million last year. In our international franchise segment, revenues increased about 2% to $6.6 million driven by higher royalties, sales by international franchise stores rose about 4% and excluding the effects of foreign exchange rate changes franchisee sales internationally rose almost 6%, exclusive of currency effects, same store sales at international franchise shops fell 2.2%.

International franchise segment generated operating income of $4.3 million compared to $4.5 million in the first quarter last year. The decline reflects continued deployment of increased resources to support current and anticipated future international growth as well as the management transition cost. In the supply chain, revenues including sales to company stores were $60 million, an increase of about 1%. The supply chain generated operating income of $12.8 million in the first quarter compared to $10.2 million in the same period last year. KK Supply Chain operating income in the first quarter this year includes about $1.4 million of realized and unrealized gains on agricultural derivative positions. Those gains added $0.02 to adjusted earnings per share.

Turning to general and administrative expenses. Total G&A was $7 million, up from $6.1 million last year. The increase in G&A expenses in the first quarter reflects, among other things, additional incremental expenses related to the implementation of the new ERP system and there were no similar costs in the first quarter last year. Adjusted net income was $15.8 million or $0.23 a share compared to $14.1 million and that’s $0.20 a share in the first quarter last year. Adjusted net income and adjusted EPS which are non-GAAP measures reflect income tax expense only to the extent currently payable in cash which we think is the most useful measure in light of our substantial NOL carryovers.

As noted in the press release, we have continued to execute on our share buyback authorization. During the quarter, we repurchased 1,437,000 shares or just over 25 million, network staff to an average price of just under 1,750. As of last Friday, there was about $25 million remaining under the board’s current $80 million aggregate repurchase authorization. Jim indicated looking to the balance of the year; we are reducing our forecast for the full year to adjusted net income in the range of $48 million to $51 million which would work out to between $0.69 and $0.74 a share diluted. The reduction reflects the three principle factors Jim mentioned, higher costs than anticipated of implemented the new ERP system, higher cost associated with the transition of top management that is to say in excess of our estimates previously and it also reflects our performance in the first quarter. Still, this forecast, if achieved, it represent a year-over-year increase in adjusted EPS of between 13% and 21% compared to the $0.61 a share we posted for fiscal 2014.

And with that I’ll turn the call back over to Jim.

Jim Morgan

Thank you. I am going to leave each of you with some closing thoughts and probably want to do it a little bit more free form than I have in the past six years and I guess the main reason for that is that going forward in the future quarterly calls, Tony will be hosting this part of the call and I couldn’t be more excited about that. But this means this is an opportunity to me to kind of share some thoughts and maybe this year the way I’d be at Krispy Kreme.

First let me begin by saying that I have thoroughly enjoyed my time as President and CEO of Krispy Kreme and I am grateful for the Krispy Kreme team what they’ve accomplished with this incredible iconic brand over the past six years that I’ve been here has been amazing. I am now shifting into the role of Executive Chairman, relinquishing the CEO and further responsibility and I am more than convinced that our company is not only in season in capable hands but strong hands that understand the culture and the mission and the values and the vision of this company. In fact, Tony and I have talked a lot. We met each other a while back and we share a vision the Krispy Kreme’s best days are still lie in front of me. So together with our board and our corporate team and our franchisees there is not double in my mind that Tony will continue to unlock Krispy Kreme’s full potential and quite frankly spread even more joy to customers and guests worldwide.

It’s my genuine opinion that this I thought why I am most excited about Tony coming in there is just no doubt in my mind that he is better equipped more capable and better equipped in a better position to take Krispy Kreme to the next level from where we are now than I possibly could have been, so the timing is great for the company and I have the great pleasure and be able to stand by and watch by his side and observe and be a sounding board wherever he needs me and I am excited about that. I also excited the real story of Krispy Kreme is not what it’s been accomplished these last six years that I’ve been here that is what is not that accomplished. If I will look at Krispy Kreme from the outside and many of you know that I want both in high sales side for the great majority of my business life if I more than now I think I would be looking at some of the following elements of Krispy Kreme and this is why I believe that it’s poised for truly sustainable multiyear growth for many years to come.

We have incredibly proven leadership team one or two of which including Tony have come from outside recently with great track records others who have built the track records here and others who’ve been here for a number of years and had tremendous success at QSR concepts are proud of coming here. So we’ve got that both in our corporate management team in the field and among our franchisees, great proven leadership. We are in very early stage of accelerating our domestic growth and that’s exciting. Our new VP new of Franchise Development has come on and she’s been going full steam for a year and a few months and in this field it looks great and expected the small factory store models built this year is giving us some great results that’s allowing us to recruit new domestic and I think that’s also contribute to the international including site and that allows us also to strengthen the existing partnerships we have with our current franchisees as we’re looking at follow on development agreements with many of them.

We are very much focusing on equaling the quality of our donuts with the quality of our in store experience and I think you will see and hear about that and believe at all my heart we will build the reputation as the place that wows people with the experience over the coming years and that’s exciting because it fits our brand perfectly. We are through that engagement with customers in new and creative ways through the digital media I think that recent agency change that we’ve made is exciting I think our guests and our customers and our friends are going to feel more connected to our brand and more encouraged by Krispy Kreme and part of their everyday lives than ever before. The long term opportunities that we have from the ongoing global unit growth from many development which is in very early stage of Krispy Kreme from increased beverage sales where we are woefully behind and have not made the progress we should in the last couple of years from improved consumer relationships to from additional licensing opportunities which we touched no earlier all of these are just tremendous opportunities that we barely scratched the surface upon.

And all these efforts I think will complementing by continuing to optimize shareholder returns through the stock repurchases where appropriate so in essence I think this is the company that although we hope and believe in the quarter can be something that’s pleasing we’re not building into that we’re building that that we have year by year growth that is more than awarding shareholders for many years to come and I think that’s what’s most exciting about it, most exciting thing about it. So, that’s why I am pleased with the board and Tony let me stay and keep my Executive Chairmanship role and let me close by saying this. Tony has asked that he can have just a couple of moments here to share some his thoughts and view about why he came to Krispy Kreme. So I am going to turn it over to Tony at this point time. Tony, it’s yours.

Tony Thompson

Thanks Jim. I am very excited to be here today and now part of the Krispy Kreme family and this iconic brand. Passion of the team members, franchisees and incredible culture combined with Krispy Kreme’s global brand strength recognition and consumer demand is a winning formula for long term growth and success. I am looking forward to being part of the company’s next level of growth and beyond in years to come.

With that I am going to turn it over to the operator to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Will Slabaugh from Stephens. Your line is open, please go ahead.

Will Slabaugh - Stephens Inc.

Yeah thanks guys. First I wanted to ask the question and maybe difficult to answer I know as you mentioned weather hurts in your company stores have you attempted to make any progression on that weather impact would have may have been and actually I just trying to get to what the maybe more apples-to-apples GAAP may have been between same store sales growth at company stores domestically and then your franchise domestic stores?

Jim Morgan

Hello it’s Jim. How are you doing?

Will Slabaugh - Stephens Inc.

Great, how are you?

Jim Morgan

Great. I think on the first part the reason I think we have we’re not going to try to do that because we are just too unsure and we know it was the thing that -- that we know it’s manageable but there are so many moving parts out there as you know and we’re little bit reluctant to put a specific number on it. I think the fact that part of the difference that we see in same store shift for the quarter between us and our franchisees does seem to have a lot to do with geography tells us that it was a pretty significant effect and also keep in mind that the fact that the worst storm in our company store markets happen to come Valentine’s week that is not insignificant as you well know that historically has been either best day of the year or -- and our best year or right within the top two year in year out so that was a devastating time to get people where they couldn’t open the stores much less could people get out the company stores.

And then your second part was asking about the difference between the two. Doug you wanted to -- you've done a little work on that you want to on it?

Doug Muir

Well, we tried to quantify the hard part it’s very easy to know when sales at your store are zero because it’s closed it’s more difficult to tell when the sales are curtailed because the highways are freezing up or there is a tornado coming through where we just could not come up with a reliable enough number that we felt that about quoting it. We can say I think the calendar this could be the math is at work at least to some extent because the places like California that were as has been indicated before big drivers of the domestic franchise comp clearly didn’t have freezing other problems and so I think just geography certain quite evolve. But I think it’d be a reliable number.

Jim Morgan

Will, we are continuing to communicate with obviously the franchisees and any learnings we get that they’re doing something different than we are that in fact it goes beyond weather and other words whether it’s operational or local agent marketing or something like we are obviously spending time with them talking about that to see anything that would allow us to close that gap beyond the things we can’t control.

Will Slabaugh - Stephens Inc.

That's helpful, thank you. And on the franchisee part of the business that you mentioned there, regarding the pipeline, obviously there's another quarter of mid single digit comps over franchisees which I would assume is another positive in terms of sunning up new partners so you can expand on what you mentioned earlier, Jim about how you did expect more announcements coming in the next few quarter and what the potential pipeline of franchise new partner looks like?

Jim Morgan

It's hard to be specific but I think you will see over the coming quarters you'll see several new and I also think you'll see very possibly a number of the current domestic franchisees sign up the new stores and as you know, we have not had much of that over the years, it’s been a long, long time so I think you'll see it come from two directions. I think you'll see current franchisees looking to sign up and add as well as the newer franchisees opening at a very nice pace and then the sign ups that we'll have that I think you'll see a pretty steady stream might be too bold of a word but pretty steady count of those coming quarter-by-quarter we've got several of them at various stages is probably the best way to put it so we have some confidence that you'll be seeing more of that.

Operator

And our next question comes from Tony Brenner from Ross Capital Partners, your line is open, please go ahead.

Tony Brenner - Ross Capital Partners

Thank you. First of all, Jim, I'd like to offer my congratulations for having steered Krispy Kreme from the precipice to the strong position it’s in now and now you can sit back and complain without having to explain.

Jim Morgan

I'm going to remember that Tony. I appreciate that. I'm glad you said that where everyone here can hear it too.

Tony Brenner - Ross Capital Partners

Couple of questions. Does the 12.2% year ago same-store sale figure adjust for the re-franchising of those stores because you reported a different number than that a year ago.

Douglas Muir

Remember, Tony this is measured under the new metric, the 79 week metric and not the old 57-week metric and that accounts for the difference in what we previously reported.

Tony Brenner - Ross Capital Partners

Okay. One thing does puzzle me, your fourth quarter conference call was on March 12 when you had already experienced most if not all of the bad weather incurred doing quarter one and your explanation in part for reducing your full year guidance now is worse than expected first-quarter results so I'm wondering what other than that really bad February weather is surprising in the quarter, other than the ERP and recruiting reasons that were also given?

Jim Morgan

Interesting to note we had more bad weather after that call both in the form of winter storms in March and believe it or not this will sound funny but more tornado warnings and stoppages in April than this area we never had in my memory. So we continue to have pretty serious business interruptions in the next two months as well and that was one of the big differences and we knew at that time we said on the call we had been hit hard and dug a hole and as you know we re-committed that I think our words were, we still plan on having positive same-store sales for the year or something like that but we did not expect March and April to continue to hit us with that kind of weather.

Tony Brenner - Ross Capital Partners

Okay, can you quantify the increase from expectations in ERP and the recruiting metric?

Douglas Muir

Yes, sure. I think we had previously indicated Tony that we thought the total incremental P&L related to ERP this year would be on the order of about $2.8 million. For reasons I'll be glad to get into if anybody wants the details, I suspect it could run up to a million dollars higher than that and just so I don't give the wrong impression about where that is it's not that the train has derailed but as we got into scoping the project and thinking it through and planning what was right for Krispy Kreme and the detailed execution and implementation plan, there were a couple of things that are not directly Oracle product related that sales tax for example, that we said gee, we really need to get better and more robust tools to deal with those issues while we're at it and that's the principal reason for the cost increase. Second, we had factored in costs for some Management succession. I was a little off on my timing. Fortunately, sooner than planned and I was a little low on certain other estimates. There were some things the Company concluded it needed to do to make Tony hold some things he left behind some other places we were delighted to do that but it made the number a little bigger than I forecasted.

Tony Brenner - Ross Capital Partners

Okay that $1 million incremental in ERP, is that to be spread out evenly through the year? Or is it short-term?

Douglas Muir

It's all-in the next three quarters. Relative to the earlier expectation. Or substantially all.

Tony Brenner - Ross Capital Partners

Thank you very much.

Jim Morgan

Tony it's Jim. Let me throw out one thing because I think you and I talked about this before but one thing about the ERP, and this is so Krispy Kreme-type situation is for us, what we're spending for us is a lot of money on that. It is a great investment; it was necessarily important critical foundation for our future. As the cost on that payer back over the coming couple years there will still be maintenance costs but they will payer back significantly. As they pay her back the benefits the economic benefits we believe are truly there and will be coming from us. So the great thing about the ERP is it’s not only temporary but truly an investment that will have the reversal of fortunes for us on the top and bottom line especially look out two, three, four years and beyond. So I just wanted -- I assume everybody know that. But I think it’s worth pointing out because the law of small numbers hits us pretty hard with something like that.

Operator

And our next question comes from Michael Halen from Sidoti and Company, your line is open, please go ahead.

Michael Halen - Sidoti and Company

In terms of site selection, can you talk about mainly what you have learned from the two underperforming units?

Jim Morgan

Hey Mike this is Jim. We have spent a good deal of time studying the various demographics, aspects of those. We've gone back and studied the books we put together on selecting them and without going more specific than I should at this point in time, on one of - I think to put things very simple and that is we got there a little bit too early and it's a little bit too hidden and it has to do with zoning and some other things that makes that almost impossible, as simple things that quite frankly we took a chance on. The other one I think has got a few more moving parts, it’s the one -- ones in Atlanta area, and I think we’re learning from that that we did hours of operation of businesses nearby, the type of roof tops that are nearby we probably have made some change -- we changed some things in our model. Then we just put it simple. We changed some things in our model that I think should allow us to avoid that mistake again.

Michael Halen - Sidoti and Company

Okay, great thanks. And I want to congratulate Tony and just ask him I guess if there's if you see any low hanging fruit in terms of the operations of the Company whether it be improving margins in the Company owned segment, the franchise segment or the supply chain.

Tony Thompson

Thanks Michael, at this time I think it will be premature for me to comment on any of that. We will have plenty of time for me to comment on that in the near future.

Operator

Our next question comes from Michael Gallo from CLK. Your line is open, please go ahead.

Michael Gallo - C.L. King

Hi good afternoon. I want to echo my congratulations to Jim for doing a great job over these years. Doug, question for you maybe you gave the number, I don't think I quite heard it. What was the total amount you expect to be spent on Management succession?

Douglas Muir

I didn't put out a total amount. I would just tell you that we have filed Tony's employment agreement, so that’s in the public record. The increment over what I planned was about a penny a share. Again, that reflects timing as well as other factors.

Michael Gallo - C.L. King

And that’s mostly going to be here in the second quarter?

Douglas Muir

That’s spread over the balance of the year. That’s the number in the entire year relative to what I already had baked in.

Michael Gallo - C.L. King

Okay, that's great. I was wondering if we can drill down into the new small format, you've got now 12 months on Greenville, I believe you now have the first franchise store open under the 110m, so was wondering if you can talk about sort of what hurdles you think still exist in terms of really seeing flood gates open on the franchise side and then if you can update us on where you are in terms of securing new Company locations as you start to build the pipeline for 15 and 16 and beyond, given another quarter goes by and it seems like the overall results of the 110m are pretty close to your original model which will generate a substantial ROI for the Company. Thank you.

Douglas Muir

Yes I don't know what a flood gate of franchisee openings of 110 is but I think it's rather 12-18 more franchise store openings for the balance of the year. That's roughly the number I would call it. You might very well could see more than half of those as new 110m model shops so I think we are definitely seeing signs of franchisee uptake on that model. In terms of pipeline and real estate for the Company, I think one exception all of the real estate for the rest of the year is already locked down. There may be occasionally some environmental due diligence or something like that but in terms of being pretty well locked up I think we have pretty well all of those in the bag. I will tell you that the roughly 10 or 11 more stores we project for this year, there's about three currently projected into January and you always have the risk of slippage, but there is not a big gap in there in terms of just not even knowing where the real estate is that we have to somehow scramble to get them between now and January. There's the normal risk of construction and permitting but nothing much beyond that that I'm aware of.

Jim Morgan

Mike it's Jim. I think the great thing is that the only thing holding franchisees back is the development agreements that I was talking about on the current franchisees. In other words I think they have seen enough and are seeing enough from the model to begin to be deeply committed to the 110m and the economics from that so I think it was part of your question. I don't think we've got anymore barriers on that. We'll keep monitoring closely etc., but I think that part is kind of moving over toward the proven enough to do it stage.

Michael Gallo - C.L. King

In terms of just one other follow up to that, some of the legacy franchise agreements working to restructure some of those. Is there any update on that front?

Doug Muir

There is. We've been very open on that and it’s been a great experience with the franchisees. I just can't tell you what a great experience it’s been. It’s been a real partnership in the right sense hopefully a lot of give and take that they are as excited about it as we are so I would tell you that during the course of this summer is when I think you'll hear more and more about it but certainly during the course of this Fiscal Year, you should see us being able to tell you kind of how that came out.

Operator

Thank you. And our final question comes from Nick Setyan from Wedbush Securities. Your line is open, please go ahead.

Nick Setyan - Wedbush Securities

My question is I do want to follow up on the ERP again, on the implementation I mean from a different perspective though. I can attribute a lot of professional catalyst in terms of sales drivers once that’s implemented whether it’s gift cards, online or ordering an app all kinds of things, once that came in. So I wanted to kind of get maybe just a revisit the timing of when that entire implementation will be complete or at least what’s the timing of the phase where we can actually see maybe things like a gift card.

Doug Muir

Sure, Nick first off I don’t see loyalty gift card conceivably and I think he’s got tonnes of experience from other places he’s been with the e-business side of things. I don’t think that is necessarily dependent at all on Oracle, I would characterize this is probably going to be on parallel pads. What we’re doing in Oracle right now is basically phase 1 of what we currently contemplate probably as three phases. The first phase is just basic financials, general receivables, payables, fixed assets, data base management. All of the back bone infrastructure that is necessary to support things that come down in phase 2 and phase 3 like demand planning, production scheduling, things like that that can really be drivers of better decision making. Unfortunately, I got to get the spade work so to speak and the infrastructure built first and that’s what we’re trying to accomplish in phase 1. Those two phases were not actually -- really get some uplift for your business further down the road but again I don’t think loyalty and other consumer facing initiatives are necessarily on that same calendar.

Jim Morgan

Nick its Jim, on the other part of it I think as Doug said is parallel payers and as you know we have already done the hardware software on the POS system as far as all the company stores is concerned and I would think it would not be too long, certainly by this time next year that it will be in a pretty strong testing stage on the customer relationship opportunities as that presents. So we’re getting closer and closer to those expenses we put in becoming meaningful both data, knowledge and revenue sources and that’s something we’re working hard on.

Nick Setyan - Wedbush Securities

Got it, so sounds like the customer facing part of the roll out, either you complete or we can actually see some of these initiatives early next year.

Jim Morgan

We’re planning I think the current story for marketing is that between now and the end of the year we might be doing some initial work on design and letting that potentially letting consumers look at it. Again it’s on a totally different track and not dependent on the timing or Oracle.

Nick Setyan - Wedbush Securities

Got it. Okay I’d like to -- folks on the cost, in terms of inflation and what we’re seeing with some of your hedging. Can you just remind us the contract the timing and the kind of the expenses to reach our contract some of the major items there?

Jim Morgan

Yeah I’d be glad to. We’re now, we’re locked into Sugar for this year and for all of calendar ’15, I think we’re good to roughly the end of calendar -- fiscal ’16 roughly calendar ‘15. So sugar is a known number, right now on shortening and flour I think we’re pretty well locked up for Q3 and are probably buying currently into Q4 of this year.

We do see some whip-sawing related -- because we don’t have hedge accounting here for the derivatives but you should not read a gain on derivatives which is normally indicative of rising input prices. You should not read that as something that we expect to hammer us in terms of input costs in the back end part of the year.

Nick Setyan - Wedbush Securities

Okay, in terms of just half percentage points they’re just too much to talk about or maybe you can point us directionally to this kind of more specific percentage for the second half of the year at least in terms of inflation.

Douglas Muir

I think, I don’t see a big headwind or a big tailwind from flour, shortening and sugar for the balance of the year. Either relative to Q1 and in a huge way, even relative to last year, right now it’s relatively benign that’s not to say there are positive minuses and different inputs going in different directions but if you look at the total market basket of what we buy at Krispy Kreme, but right now looks reasonably benign to us.

Nick Setyan - Wedbush Securities

And just a final question on international, I know we were in planning some infrastructure, stepped up investments in the infrastructure, are we, is that behind us now or is there some more investment to come.

Douglas Muir

I think there’re always investments to come and when you’re growing the business that rapidly, you’re talking about more countries. Do I expect those calls to grow disproportionately to revenues from this point? Not in any significant way and certainly maybe a little in the short term but certainly not over the long term. So I wouldn’t expect any really a whole lot more buildup in that, other than what you would expect with those expanding geographic base and expanding number of stores to work with and expanding number of franchisees.

Operator

And we’re showing no further questions at this time. Now I would like to hand the conference back over for any closing remarks.

Anita Booe 

Thank you for your time, have a great evening.

Operator

Ladies and gentlemen thank you for participating in today’s conference, this concludes our program, you may all disconnect and have a wonderful day.

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