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Dunkin' Brands Group (NASDAQ:DNKN)

Q3 2012 Earnings Call

October 25, 2012 8:00 am ET

Executives

Stacey Caravella - Director of Investor Relations

Nigel Travis - Chief Executive Officer, Director and President of Dunkin' Donuts Incorporated

Neil Moses - Chief Global Strategy Officer

Paul C. Carbone - Chief Financial Officer

John H. Costello - Chief Global Marketing & Innovation Officer

Analysts

Gregory R. Badishkanian - Citigroup Inc, Research Division

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

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Will Slabaugh - Stephens Inc., Research Division

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

John S. Glass - Morgan Stanley, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Michael W. Gallo - CL King & Associates, Inc., Research Division

Howard W. Penney - Hedgeye Risk Management LLC

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

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

Operator

Good day, ladies and gentlemen, and welcome to the Dunkin' Brands Third Quarter 2012 Earnings Call. [Operator Instructions] I'd now like to turn the conference over to your host, Ms. Stacey Caravella, Director of Investor Relations. Please go ahead.

Stacey Caravella

Thank you, operator, and good morning, everyone. With me today are Dunkin' Brands' Chief Executive Officer and Dunkin' Donuts' President, Nigel Travis; Dunkin' Brands' Chief Global Strategy Officer, Neil Moses; and Dunkin' Brands' Chief Financial Officer, Paul Carbone, each of whom will speak on today's call. Additionally, Dunkin' Brands' Chief Global Marketing and Innovation Officer, John Costello, is here, and he'll be available for questions during the Q&A session at the end of the call.

Today's call is being webcast live and recorded for replay.

Before I turn the call over to Nigel, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during this call. Our release can be found on our website, www.investor.dunkinbrands.com, along with any reconciliation of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

Now, I'd like to turn the call over to Nigel Travis.

Nigel Travis

Thank you, Stacey, and good morning, everyone. I'd like to thank everyone who joined today for our third quarter earnings results. During the quarter, I feel we executed on all cylinders, resulting in a strong performance with 5% revenue growth; 12.5% adjusted operating income growth, a goal that we've put on the table for some time; 50% adjusted operating income margin; and 34% adjusted net income growth. And behind all that, all delivering adjusted earnings per share of $0.37, which is a 32% increase over last year. We believe this is a continued demonstration of the power of our asset-light, nearly 100% franchised business model. And with the exceptional growth of the Dunkin' Donuts brand over the last 2 years and our intense focus on franchisee profitability, our franchisees are seeing very strong unit economics and in turn, are driving our robust restaurant expansion across the U.S.

Through the end of the third quarter, they added 142 net new units, which is 15% more than last year. This performance was against the backdrop of a slowing overall QSR growth and increased competitive activity. During the quarter, we demonstrated our ability to quickly recognize and respond to challenging headwinds. This nimbleness in tackling issues is an attribute that, I believe, we've shown over the past 3 years in several areas. And I'll give you some examples.

Back in 2009, when I arrived in the midst of the recession, we had several Dunkin' Donuts U.S. franchisees who were facing severe financial difficulties. As a result, we made a fast organizational shift to focus on store-level unit economics and driving franchisee profitability. This focus has paid off, and we are seeing compelling performance not only with our stores in core markets but with new markets that we've opened in the west and emerging markets, both in 2010 and 2011. We recently employed this same strategy for the Baskin U.S. business and are beginning to see traction there as well, as we've discussed many times before.

Our BR International business continues to be very strong, which we further improved by revamping our supply chains to support long-term growth. And as for Dunkin' Donuts International, Giorgio Minardi, our International President, is making great strides with this segment of our business. We continue to be pleased with the Dunkin' U.S. business and the vast majority of our franchisees are very happy with their profitability. But the consumer environment has become more challenging and the competition is aggressive. We don't believe either will change in the near-term and we're not waiting for that to happen. We continue to execute on our core strategies of: Number one, driving comps, sales and brand differentiation; number two, growing our beverage and total coffee business; number three, protecting and growing our critical AM day part and growing the PM day part. More news on that later. And the last one, number five, is maintaining our historically strong value position.

During the quarter, we worked with our franchisees on a more aggressive approach to address marketplace shifts by using opportunistic, operational and marketing tactics that, combined with those core strategies, enable us to stay competitive and grow market share in today's environment.

So with that, let's dive deeper into our Q3 performance, focusing first on the Dunkin' Donuts U.S. comp performance. In the quarter, we delivered a solid 2.8% comp store sales gain, which produced a 2-year comp of 8.8%, a sequential increase over our Q2 2-year comp of 7.8%. While we were rolling over last year's introduction of our highly successful K-Cup platform, we saw a balanced growth in both the AM and PM day parts with increases in both guest counts and average tickets in the morning and the rest of the day segments. This growth reflected a level of pricing as we focused on maintaining value for our guests.

Growth was driven by our core strategy of products and marketing innovation with continued momentum in cold beverages, the introduction of new innovative products on the bakery products, our breakfast sandwich momentum, the expansion of our PM bakery sandwich platform and the exciting launch of our mobile app. More on that in a moment.

On the cold beverage platform, driven during the quarter by iced coffee flavors and the Oreo Coolatta promotion in August, continues to be our main growth driver. The momentum of our breakfast sandwich platform continues to build. During the quarter, we saw our core sandwiches and the second half of our breakfast burrito promotion drive overall category growth. Our PM bakery sandwich platform or the afternoon, we perhaps should say, has been a great success since its launch a year ago. In Q3, it was driven by a $2.99 offer and the launch of a limited time offer on the roast beef sandwich in select markets. Now, here's a secret. That is my personal favorite sandwich that we sell. The bakery sandwich focused -- couples nicely with our regional efforts to grow beverages in the afternoon day part.

Many people ask about this, but product innovation continues to be core to our strategy, and our pipeline of new products is stronger than it has ever been. During the quarter we rolled out Mocha, Caramel, Mocha Almond and Pumpkin Iced Coffee flavors, as well as the Iced Apple Cider. On the food side, in addition to the roast beef bakery sandwich, we had the Oreo doughnut and a variety of Apple products including Apple Crisp Muffins, apple pie and the Apple Orchard doughnut. For the quarter, K-Cups contributed 0.4% to comps. Since we rolled over the launch of K-Cups in August, we will no longer report K-Cup contributions to comp sales moving forward. But for the next 4 quarters only, as so many people ask us about it, we will provide K-Cup comps so that you can continue to understand how that business is evolving. For this quarter, we'll share September K-Cup comps since it was the first month in 2011 that they were rolled out completely across the system with full advertising.

During September, we had a 4% comp growth for the K-Cup category driven by the very popular pumpkin K-Cups. So we all know the mobile revolution is here. But the key is how to benefit from it. We launched our mobile app on August 16, which was a significant step towards providing our guests with best-in-class technology solutions to enhance their experience in our restaurants. Both the app and the enhancement of our digital offers have engaged our guests in new ways in Q3, and provide a solid platform to introduce even more exciting elements in Q4 and beyond. To date, we have just under 600,000 downloads, and feedback from the app from the consumers has been very positive. Mobile offers on the app will launch in early November, and this will enable us to move into the exciting new world of one-to-one marketing. This is a crucial shift that will benefit our brands -- our 2 brands way into the future. I'm sure we can discuss this more in the Q&A session.

As I mentioned earlier, we're also implementing some new tactics to continue to drive the business despite the macro and competitive headwinds. This isn't the first time we've faced a competitive economic environment and increased competitive activity. In 2008, we faced considerably tougher marketplace conditions, but we were resilient. And since that time, we've been able to significantly grow our share of total coffee servings.

So in today's marketplace, we're being nimble and reacting to changing market conditions by doing things such as launching the brand's first national digital coupon effort on September 19. This saw a retention rate way above what you would typically see with traditional coupons. We believe this is a good indication of the power that mobile offers will have when we roll them out shortly. Additionally, we've been holding town hall meetings with our franchisees to reinforce our relentless focus on guest service speed, merchandising, training, suggestive selling and crew engagement. And I have to say, it's working.

Due to recent -- strong recent comp sales performance and favorable commodity price increases -- sorry, commodity price movements, our franchisees are more profitable than ever. But that doesn't mean they, or we, are declaring victory. Our plan is to maintain and grow the market share that we have gained over the past 4 years. Year-to-date, our Dunkin' U.S. business has been 4% comp sales growth. While this is in the middle of the range of our annual guidance of 4% to 5% comp store sales growth, we are rolling over the tougher year ago comps in Q4. Given this and the tougher-than-expected macroeconomic environment, we expect that we will finish the year at the low end of our comp store sales guidance range. So just to make that clear, we stand at the lower end of the 4% to 5%.

We're regularly asked about the Dunkin' U.S. comp run rate since Quarter 4, 2011. Now this is a tough thing to analyze. But when we analyze the health and the growth of the brand, we measure the performance of the base business after stripping out one-time factors such as weather, pricing and product launches like that K-Cups. So when we do this analysis, which we recognize as more art than science, we've had comp growth, excluding these factors, between approximately 2% to 3% for the past 4 quarters.

We're very excited about our strong marketing and product plans for Q4 and into early 2013. Our October Fall Flavors advances in full swing with special pumpkin beverages, bakery and K-Cups. And next week, we will be launching our next marketing window featuring the return of the very popular smoked sausage sandwich, along with mint hot chocolate and new Holiday Latte flavors. And there will be more exciting product launches later in the quarter, including a holiday K-Cup limited time offer.

As for the long-term, we continue to feel good about our guidance for comp store sales growth of between 2% to 4% for the U.S. businesses combined. So just to make that clear, that's Baskin and Dunkin' together. We believe Baskin will be at the lower end and Dunkin' on the higher end of that range. We continue to believe this is the right long-term comp run rate for the business.

So to summarize where we are, our business fundamentals continue to be strong, our franchisee relationships are first class, we have positive underlying trends and we are focused on aggressively addressing both consumer and competitive challenges while staying true to our core strategies.

Now let me talk about the single biggest growth driver of our business: Dunkin' Donuts' U.S. contiguous store expansion. We had a really excellent quarter in terms of growing our footprint for Dunkin' Donuts restaurants in the U.S. One journalist described it as an expansion spree. We added 78 net new units during the quarter versus 57 last year during the same period. Year-to-date, through the end of Q3, we added 142 net new units, compared to 123 last year. I'm pleased to say that we're raising our annual guidance for net development for Dunkin' U.S. to between 280 and 300 net new units from the previous range of 260 to 280 this year. At the middle of the range, that will mean we will grow our store base over 4% this year, which would put us well on the way to achieving our 2015 goal of 5%-plus annual net unit development. Of the 78 net new units, 37% were in core markets, 45% in established markets, 13% in the emerging markets and 5% in the west. Consistent with past development, 90% of those units were opened by existing franchisees.

For the year, we expect 30% of new units to be in our core markets, 40% in the established markets, 20% in the emerging and 10% in the west. Our franchisees completed 144 remodels during the quarter, up slightly from the same period last year. And year-to-date, they've completed 408 remodels versus 387 last year. Our average image age of our stores is now down to just under 5 years, with 63% of the system in the current image.

I'd like to reiterate that our development is typically back-end loaded. We have slightly more than half of our targeted development to complete in Q4, but we feel very good about the ability to deliver on this growth. Our real estate and development team are closely aligned with our franchisees and have a strong line of sight into Q4 development. It's this line of sight that enables us to upwardly revise our guidance at this time.

In terms of developing our pipeline for the next several years -- again, a subject we're regularly questioned on -- demand for our brand continues to be incredibly strong and of very high quality. SDA or to spell out the acronym, Store Development Agreement sales were up slightly in Q3 this year over last year; again, a demonstration of that demand. The pipeline is seeding the ground for future development, 18 to 24 months out. And some of the markets where SDAs were sold included Austin, Salt Lake City, Green Bay, Houston and Grand Rapids.

As I said at the beginning of my comments, we are manically focused on unit-level economics. Our goal is to achieve 5%-plus unit growth by compromising the high financial targets that we set for new restaurants, and we continue to make good progress in this area.

Let me now turn to Neil to talk about unit economics in our International business and Baskin-Robbins U.S.

Neil Moses

Thank you, Nigel. As Nigel mentioned, in 2009, we made an organizational shift to focusing on store-unit economics. Back in May, as part of our Annual Investor Day event, we provided detailed information on the restaurant level results of the new stores that have opened from 2008 to 2011. At the time, a majority of our 2011 stores had been open for 6 months or less. Based on their results through the end of Q3, we are pleased to report that the 2011 cohort of stores continue to perform in line with the data we previously shared.

As a reminder, restaurants in the west and emerging regions which opened in 2011 are seeing 25%-plus first-year cash on cash returns. We will provide details on the performance of the restaurants opened in 2012 in the second quarter of next year, as the majority of 2012 openings will occur in the current quarter.

With a strong performance from the 2010 and 2011 store cohorts, we continue to be very excited about the unit economics of Dunkin' U.S. restaurants. This gives us great confidence in our ability to continue to capitalize on the significant westward expansion opportunity that, we believe, we have for the brand.

Now, let me cover our International businesses. I'll start with Baskin-Robbins' performance. Baskin-Robbins International had 3% comp store sales growth during the quarter. From a regional perspective, we saw a strong performance in Korea, the Middle East and China, while Japan started to show encouraging signs after a challenging Q2. On the marketing side, innovation continues to drive brand growth with the Snowman cake, Winter Warmer's desserts and Lucky 8 waffle cone platforms bringing fun and new product news to the brand in most of our major markets. And we continue to leverage the LeBron James King Cone in China, with the Slam Dunk Flavor of the Month tie-in. By the way, Nigel and John Costello were in China 2 weeks ago and returned excited about the opportunities Baskin-Robbins has there. And we're in the process of recruiting several new franchisees for the country.

The Peterborough, Canada ice cream plant officially shut down on September 27, slightly ahead of schedule. And Dean Foods is now producing Baskin-Robbins ice cream for the 30% of the International business that the Peterborough plant previously served. The transition has gone very smoothly, and we look forward to being able to provide even better support for our growing International Baskin-Robbins business with the flexibility we have in using production from the many Dean plants. As a reminder, we expect this switch will result in between $4 million and $5 million in annual cost savings and resulting EBITDA growth for the Baskin-Robbins International business in 2013.

Now let me talk about the Dunkin' International business. Dunkin' International had 2.1% comp store sales growth in Q3. In Korea, a new Dunkaccino campaign, I'm Drinking Dunkin'! TV spots, crew engagement and doughnut innovation, all are helping to continue to drive a turnaround of the business in that country. We are also continuing to leverage the LeBron James partnership for Dunkin' in China with a new Munchkin Bucket basketball theme and new doughnut designs. On the development front, we are beginning initial franchisee recruitment efforts in Brazil and the U.K.

As you know, we are committed to an asset-light model with industry leading operating margins and low capital expenditures. But on a limited basis, we have invested in markets to either stimulate growth or resolve individual franchise issues. Examples of these are markets like Dallas and Atlanta here in the United States. And we're doing something simpler -- something similar, excuse me, with Dunkin' in Spain, where I visited our stores in Madrid and Barcelona recently.

We have a strong licensee partner for the country who has been facing significant macroeconomic and supply chain challenges. Because we believe in the long-term opportunity for Dunkin' in Europe, we decided to step in and help our licensee partner. We're making an investment in the operation in exchange for an equity stake, with the goal of helping them navigate through their near-term financial challenges in a region where, we believe, there is significant long-term opportunity.

Now on to Baskin Robbins U.S. Baskin-Robbins U.S. had 1.1% comp store sales growth in Q3, its fifth straight quarter of positive comp sales. We continue to expect that Baskin-Robbins U.S. will have 2% to 4% comp sales growth for the full year. With one quarter to go, we anticipate that the business will finish the year in the middle of that range. We continue to focus on the brand's flavor equity and during the quarter, featured Flavors of the Month were Oreo and Chocolate, Gold Medal Ribbon and Apple Cinnamon Crisp. We also saw good growth in the key cake and beverage categories.

Earlier this month, we launched Dunkin' Donuts K-Cups in Baskin-Robbins restaurants in California. About 300 locations are now selling our K-Cups. We closed one net unit per Baskin in the U.S. versus 18 closures last year in the third quarter. Year-to-date, we've closed one net unit per Baskin-Robbins U.S. versus 57 last year. While we are still optimizing the store base by closing or transferring underperforming locations, the decline in the store base continues to slow with the recent positive momentum of the business.

Our guidance per net unit closures for the segment remains net 40 to 60 closures for the full year. So there will be a ramp up in closures in the fourth quarter as we near the end of our accelerated transfer and store optimization program.

And now, I'd like to turn it over to Paul to cover our financial results.

Paul C. Carbone

Great. Thanks, Neil, and good morning, everyone. Let me start with Dunkin' Brands' results. During the quarter, we repurchased 450 million in common stock from our former private equity owners. To fund this transaction, we used $400 million from our recently upsized term loan facility and $50 million in cash on hand. As a result of this transaction and a concurrent registered offering of shares, our former owner sold all of their remaining shares in the company.

Also during the quarter, we hedged $900 million of our approximately $1.8 billion in outstanding long-term debt. We were able to execute a five-year swap at 4.37%, just 37 basis points above the floating rate that we currently have at 4%. And just as a reminder, that rate is LIBOR plus 300 basis points with a 1% floor. We were pleased to lock this very attractive rate for our long-term debt, and provide additional stability to our already resilient and strong cash-flow generating business model.

Net of both transactions, we will see $0.02 of accretion for the full year. In Q3, we had a $0.01 of accretion from the stock buyback and no material impact from the hedge. In Q4, we will realize another $0.01 of accretion, $0.02 from the buyback offset by approximately $0.01 from the additional interest expense.

Overall, global system-wide sales grew 4.7%, or 5.5% on a constant currency basis. Growth in the third quarter was primarily attributable to Dunkin' Donuts U.S. comp store sales growth, global store development and growth in Baskin-Robbins International sales. Revenues grew by 5% compared to the third quarter of 2011, primarily from increased royalty income driven by the increase in system-wide sales and incremental sales in company-owned restaurants due to acquisitions of locations since the prior year. We ended the quarter with 37 company-owned restaurants versus 22 last year.

Operating income increased $16.2 million, or 30% from the third quarter of 2011, primarily as a result of the increase in revenues and a $147-million sponsor termination fee incurred in the prior year upon the completion of the company's IPO.

Adjusted operating income increased $9.5 million, or 12% from the third quarter of last year, primarily from the increase in revenues and continued G&A leverage, which is one of the key strengths of our business model. On an adjusted basis, our G&A leverage increased -- improved 400 basis points. Our adjusted operating income margin was nearly 50% for the quarter, up from 46% in the third quarter of last year, an increase of about 330 basis points.

Net income was up $22.1 million, compared to the third quarter of 2011, primarily from the $16.2 million increase in operating income, a $14.1 million decline in charges incurred in connection with debt refinancing transactions, and a $5.1 million decline in interest expense as a result of refinancing. Offsetting these increases was a $13.7 million increase in tax expense resulting from the increased profitability. Adjusted net income was up $10.8 million, or more than 34%, compared to the third quarter of 2011 as a result of the increase in adjusted operating income and a decrease in interest expense, net of an increase in tax expense.

At the end of the third quarter, we had a debt to adjusted EBITDA ratio of 5.2:1. Our effective tax rate for the third quarter was 38%. During the quarter, we generated approximately $31 million in free cash flow, and ended the quarter with $166 million in cash in the balance sheet. Of that $166 million, almost $80 million represents cash associated with our gift card programs and marketing funds balances. In addition to the $50 million we used for the share repurchase which I spoke of earlier, we used $18 million in cash during the quarter to pay our Q3 cash dividend to shareholders.

From an earnings per share perspective, we continue to report pro forma shares outstanding for the third quarter of last year, which reflects the conversion of Class L shares to common as if the conversion had occurred in the beginning of the period. We also calculate earnings per share using our adjusted net income for both years. We refer to this EPS metric as Diluted Adjusted Earnings Per Pro Forma Common Share.

Diluted adjusted earnings per pro forma common share were $0.37, compared to $0.28 for the same quarter last year. A 32% increase in EPS year-over-year was less than the increase in adjusted net income as a result of the additional shares we issued in our IPO, net of the 15 million shares we repurchased halfway through the third quarter of 2012. Our diluted weighted average shares for the quarter were 115 million.

Now let's look more closely at each of our 4 segments' performance during the quarter. And I'll start with Dunkin' Donuts U.S. Revenues of approximately $124 million represents an increase of nearly 6% year-over-year. The increase in revenue was driven by an increase in royalty income as a result of nearly 6% increase in system-wide sales, as well as additional sales from company-owned restaurants. Offsetting these increases was a decrease in franchise fees driven by fewer renewals this year than last year during the third quarter.

Segment profit increased to over $91 million, an increase of 2% over last year. The increase was driven by revenue growth, partially offset by costs related to additional company-owned stores and continued investments in our Dunkin' Donuts U.S. business.

Baskin-Robbins International system-wide sales increased approximately 5% year-over-year, driven by strong sales in Japan, Korea and the Middle East. On a constant currency basis, system-wide sales increased by approximately 8%. Revenues for Baskin-Robbins International increased 7% year-over-year to approximately $30 million, fueled by strong ice cream sales in the Middle East.

Segment profit increased 12% year-over-year to over $16 million, resulting from an increase in net margin on ice cream, also driven by strong sales in the Middle East. During the quarter, Baskin-Robbins International franchisees and licensees added 74 net new locations, bringing this segment up to 210 net new locations year-to-date.

Dunkin' Donuts International system-wide sales grew 1.2% for the quarter. On a constant currency basis, system-wide sales increased by approximately 6%. Revenues remained flat to the prior year with approximately $3.7 million. Profit for this segment declined approximately 4% to $2.4 million, driven mostly by continued investments in the DD International operational infrastructure to support the business turnaround. Offsetting these additional investments was an increase in income from our Korean joint venture of $0.4 million, which is great to see, given the recent challenges with that business. For the quarter, Dunkin' Donuts International opened 36 net new units, an improvement of 60 net new units as compared to prior year.

Baskin-Robbins U.S. segment revenue declined 6% from the prior year driven by declines in royalty, rental and licensing income. These declines were due to a 2% decrease in system-wide sales as a result of a net reduction in the store base. Profits for the Baskin-Robbins U.S. segment increased $0.9 million, or 13% year-over-year as a result of rolling over prior year investments.

Now let me turn to our guidance and an updated 2012 target. As you heard earlier, we expect Dunkin' Donuts U.S. comp store sales growth to be at the low end of the 4% to 5% range, and Baskin U.S. comp sales -- store sales growth to be in the middle of the 2% to 4% range.

As Nigel covered earlier, we now expect that Dunkin' Donuts U.S. will add between 280 and 300 net new restaurants. As a reminder, the previous range was 260 to 280 net. We continue to expect Baskin-Robbins U.S. will close between 40 and 60 restaurants on a net basis. Internationally, we continue to target opening 400 to 450 net units across the 2 brands. Our global growth target for the year has been increased to between 620 to 710 net new units.

We now expect revenue growth to be between 6% and 7%. Previously, the range was 7% to 8%. This is a result of a change in ice cream shipping terms related to the manufacturing shift to Dean Foods that was announced in July 2012. And as a result, it's expected to be at the low end of the targeted range for Dunkin' Donuts U.S. comp store sales growth. The change in shipping terms will result in a one-time delay in revenue recognition that will impact Q4 sales of ice cream products. We continue to expect adjusted operating income growth of between 12% and 14%. These targets for revenue and adjusted operating income growth are based on a 52-week year in 2011.

Lastly, I'm happy to share we are increasing our range for adjusted earnings per share to $1.25 to $1.27, which would represent a 33% to 35% growth over the $0.94 adjusted earnings per share in 2011, and is an increase from the previous target of $1.22 to $1.25.

And before I hand it back to the operator to open it up for Q&A, I would ask that as you ask your questions, you limit it to one question and one follow-up question, so we may get through the whole Q&A queue. And with that, I will turn it back over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from line of Greg Badishkanian with Citigroup.

Gregory R. Badishkanian - Citigroup Inc, Research Division

The question is related to how you think maybe Dunkin' U.S. same-store sales are going to trend next year? I know you're not giving out quantitative information, but just qualitatively, some of the puts and takes, your pricing, new products, your lapping K cups and as well as the competitive environment, maybe just kind of how are you thinking about next year?

Nigel Travis

Greg, I'll start by saying I feel pretty good. I think when you look -- when we did the IPO, we went out, we talked about the fact that had a very good product pipeline, and innovation was part of our history. It will continue to be part of our future, so I feel good about that. We then talked about marketing, and we feel good about that. And I should take this opportunity to recognize the gentleman sitting on my right, John Costello. During that quarter, there was a survey of, I think, it was 15,000 Chief Marketing Officers in the country. John came number 6, overall, and number one in QSR. So I think that reinforces our confidence in our marketing plans. We then talked about operations. Operations continue to improve at a very rapid rate. As I said in my remarks, we've had recent town hall meetings that seem to have stimulated even more activity. And last week, we reached an all-time high on Dunkin' operating metrics. And then I add the last one, which we didn't talk about at the IPO, which is really this whole digital piece that I touched on in my earlier comments. To give a little bit more color -- so to summarize, I feel good about next year. To add some color -- John, do want to add it -- add some color?

John H. Costello

Sure. I'll talk about innovation, mobile loyalty and pricing. Our product pipeline is the strongest that it's been in years. We have a full slate of product innovation and marketing innovation scheduled for 2013. As Nigel touched on in his comments, we've had a very successful launch of our new mobile app, and downloads continue at a very attractive pace. We will begin mobile offers in November as planned, and we will begin to unveil a new loyalty program in 2013, as announced. On the pricing side, our franchisees continue to do a great job of maintaining our value position in the marketplace, and we expect that to continue. That said, we see continued opportunities to continue our growth in ticket through the continued development of premium breakfast sandwiches, as well as the success we've seen with our franchisees adding on to our beverages and premium breakfast sandwiches with attachment of things like hash browns or even DD Smart items like bananas. So we also have been -- I think, our franchisees and local operations and marketing teams have also been very nimble and very responsive to adjusting to any change in market situations on a market-by-market basis. So we feel very good about the pipeline of innovation we have in place for 2013.

Nigel Travis

And just to finalize, one point that we missed in your question was K-Cups. I think -- I went into some meetings we had in the quarter, saying I was optimistic about K-Cups. I think I would add to that now, I'm more optimistic than I've ever been. I think we've found a terrific formula. The limited time offers are working really well. So I feel, as I'd said, much better about K-Cups than I did 1 month ago, and I think that strength will carry right into next year.

John H. Costello

Yes, to build on Nigel's comment, many of you commented about our launch of our Pumpkin K-cup in Q3. We have the new K-cup LTO coming up in December, and you'll see our full schedule of K-Cup LTOs on the product side throughout 2013.

Gregory R. Badishkanian - Citigroup Inc, Research Division

That's very encouraging. And just as my follow-up question, I'm assuming that the momentum this year is continued into October, meaning that about 2%, I think that's kind of the implied guidance. So I'm assuming it's still kind of running positive low single-digit?

Nigel Travis

Well, we don't like to give guidance for the new quarter, but what I will say is that we feel our trends are stronger than some other people have talked about our color.

Operator

Our next question comes from the line of Andy Barish with Jefferies.

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

Just wondering, kind of on the free cash flow side of things, just the slight bump in interest expense that you talked about, Paul, with the -- with locking in some rates here on the swap. How should we think about that, just big picture for 2013? Is there a full year negative impact? Or do you anticipate offsetting some or all of that with some debt paydown from free cash flow?

Paul C. Carbone

Yes. So I think the way you should think about it is, this business will produce somewhere in $100 million to $120 million of free cash flow. And the net effect of the increase in interest will be slightly offset by some paydown of debt. But we, as we've spoken in the past, will make minimum debt repayments, as it is relatively inexpensive money both the floating and the fixed. So the hedging will have some negative effect in 2013.

Operator

Our next question comes from the line of Joe Buckley with Bank of America.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Two questions. You mentioned making an equity investment in your Spanish franchisee. Can you talk about the amount and can you talk about kind of the state of the international franchisee base? Is this likely to be the first of several franchise adjustments?

Paul C. Carbone

Joe, this is Paul. I'll take the first part of that, on the amount. So first, let me say that the transaction is going to close in the fourth quarter. So it hasn't yet -- it didn't officially close, so you won't see it in our financials. But the investment was by Dunkin' Brands size, very small. It was approximately $2 million. There's some equity in there, some debt, though. From our basis, a de minimis investment, but very, very helpful obviously to the partner in Spain.

Neil Moses

And to answer your second question, Joe -- it's Neil. I think we're going to be opportunistic internationally as we have been here in the U.S., which is -- as I mentioned, we're going to do this on a limited basis, when we think we can either help accelerate the growth of the market that we're currently in or where we see a partner that we think is operationally very strong but needs some short term assistance.

Nigel Travis

And Joe, just to finish up, in terms of Spain, where we've got a limited exposure in Europe, we're actually excited about some of the opportunities we've got in Europe. And we don't reveal country by country comps, but our performance in Spain despite some of the issues that we've touched on, has been very strong this year in an economy I think all of us know is very challenged.

Operator

Our next question comes from the line of Will Slabaugh with Stephens.

Will Slabaugh - Stephens Inc., Research Division

I want to ask again about pricing. And using that 2% to 3% core traffic comp you mentioned earlier, that would imply your pricing was only about 0.4% in the quarter, if you take the K-Cups out. So first of all, am I correct there? And also I wonder to the extent that you could speak about franchise pricing plans kind of as you go forward?

Nigel Travis

So, yes. Firstly, as I said right at the start, I think we've brainwashed our franchisees to believing that we're all about value and we are, and we continue to do pricing studies and that proves that they've done a fantastic job of controlling their prices. Now it is helped by the fact that they are seeing margins that they probably have never seen in years. So when you're making lots of money, it's easier to keep your prices down. So that's the good and good news. Now obviously, when you're not increasing pricing, it's more difficult to raise your comps. So we see some opportunities. The other thing, we're pleased that we've seen growth in traffic, but we're also, as John touched on earlier, we also believe that we can trade people up to our breakfast sandwiches. We also believe we can improve the attachment to our coffee and to our sandwiches. John talked about adding on some of the products like -- he talked about hash browns, he talked about bananas. That's been a concerted focus for us, and the results are coming through on a daily basis. We think we will do more of that. And the final point I'll make about it is, we've got some new tools coming that will help us analyze every franchisee's business in a different way. We think we can help our franchisees increase prices without removing our value equation. So I think we're going to be much more sophisticated in how we handle it in the future. I mean, this will be light years from where we were back in '09. So we feel that there is opportunities there, but it's going to be handled in a much more sophisticated way than just jacking up the prices.

John H. Costello

To build -- this is John. To build on your -- build on Nigel's comment, first regarding your Q3 math, I think your math is good. I think we can say that the impact on pricing in Q3 was less than half a comp point, so your math is right in that range. Going forward, working very closely with our franchisees, we have a very surgical approach to pricing, and what that means is, we actually do market-by-market analyses of pricing that factor in market demand, franchisee trends, competitive trends. And working with the franchisees in doing quite a bit of an analysis, we build market-by-market plans that enable us to be competitive while preserving franchisee profitability. And so I think what you'll see in 2013 is a continuation of the approach that worked in 2012.

Will Slabaugh - Stephens Inc., Research Division

Got you. And as a quick follow-up on the profitability point, you've talked about improving your returns on some of these Western and emerging markets. I wonder if you could talk just quickly about the components of that a little bit more and maybe more from a sales composition standpoint, which I would assume involves in some of these newer and Western markets a somewhat smaller percentage of the higher-margin coffee beverages. So just wondering if you're seeing more of a trade up to the newer, higher-priced offerings there and sort of what that sales composition looks like and how that gets to the improved profitability?

John H. Costello

Well, I think the answer to your question -- first of all, there was an earlier question asked about how we felt about comps for next year. And remember that as we continue to open stores in our emerging and West markets, which have been out-comping our core markets for the last several years, all other things being equal, that's a positive to comps. Just a little bit more color on our performance in the emerging and West markets. First of all, our average weekly sales continue to be at the level or above the level that we've seen in our core markets. So I think we shared that with you last March, and that kind of top level performance has continued. Obviously, that was quite a different story a few years ago, so we're pleased to see that really for the last, let's call it, several years, we've seen average weekly sales performance in line with our core markets. In terms of the composition of those sales, I think we've talked about the fact before that most of our stores open more as, if you will, doughnut or bakery stores as opposed to coffee or beverage stores in terms of mix. That continues to be the case. That said, I think we've made quite a bit of progress with our What Are you Drinkin'? campaign and with our emphasis on beverage acceleration and growth, in growing beverage mix in stores and new markets. But it continues to be a focal point for us going forward.

Operator

Our next question comes from the line of David Tarantino with Robert W. Baird.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Just a couple of clarifications on the outlook for Q4. First on the comp side. I guess -- I hate to split hairs, but you can get to the 4% for the year by rounding up or down, and that would imply a fairly wide range for Q4. So just wondering directionally, would you be expecting the comp trend to slow down a little bit from what you reported from Q3 based on the comparison you're facing?

Paul C. Carbone

That's an interesting question on the round up or round down, David. So what I would say is that we expect to come in at the low end of the range, 4% to 5%. That would imply -- the math would imply a slightly lower comp in Q4 than we reported in Q3. Although on a 2-year sequential basis, it will actually be an acceleration. So Q3 was an acceleration over Q2 and a 2-year sequential would be an acceleration of Q4 over Q3.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Very helpful. And then, Paul, I don't know if I missed it, but did you talk about what the profit impact of the ice cream, the one-time revenue recognition issue on the ice cream is? Is there going to be a big profit impact in the fourth quarter? And if so...

Paul C. Carbone

Yes, so -- yes. That's a good question, David. So that as a profit piece is actually incorporated in the $16 million to $18 million one-time charge that we talked about in the second quarter when we announced this transaction. So that margin flows through. So we took account of the profit piece already as an adjustment. It was just this revenue piece we were working through the final details through the quarter and wanted to update everyone now.

Operator

Our next question comes from the line of John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

First, just on the development front. I see you raised this year for Dunkin U.S. One, just maybe where the incremental stores are coming from specifically? And if there's any insight into '13 development yet, would 300 units be sort of a minimum in your view, just given you're bumping up against that this year? And any insights there would be helpful.

Nigel Travis

So, of course, everyone always tries to get us into guidance for next year. So I think the fact that we've moved our number up, as we've discussed, is indicative that we're more confident about next year. And I think -- you can do a quick math, but -- and if we get to 5% by 2015, that we're in the range that you're indicating. So I think to say, it's going to start with a 3%, is fairly obvious. But whereabouts in the 3%, we've not even discussed yet. But we feel good. The pipeline is excellent, the quality is excellent, the returns are excellent, so development is a big, big story. We're really executing on the development side. And I think your earlier point is, where is it going to come? We haven't actually worked out the split for next year, but as you see from the numbers that I described in my earlier comments, there is a slow migration to the emerging and West.

Paul C. Carbone

And then, John, this is Paul. To put a dot on that, I think the increase this year and where is that coming from, I think it's broad-based, mainly emerging and developing or -- emerging and core. Less so, that increase in the West. So that number is pretty much the same as from our old range, but we're seeing the increase in emerging and the core.

Nigel Travis

And the reason it's not the West is, as we've explained many times, and Neil is the expert on this, it takes about 2 years to sign an SDA and get a market open. So even though we've been talking about many places like Iowa, some parts of Texas, Denver, et cetera for some time now -- it seems a long time to all of us. But in the life cycle of getting a market open, we're in the middle.

John S. Glass - Morgan Stanley, Research Division

Just following up on that. At one point, I'd seen a map where you had -- your distribution club had a DC opening in Phoenix in October of this year. I think that was right. Did that impact happen or is that happening? What's the ramp-up to that and how does that influence development? Do you need to put more stores in more rapidly to get the scale you need to support that?

Neil Moses

Yes, John, it's Neil. That is happening. We're very excited about it, and I think that, that distribution center -- we've obviously shared our plans for Westward expansion with the NDCP, which is our franchisee-owned procurement and distribution arm, and they're opening that DC specifically to support our Western-based expansion. There's an opportunity, a, to expand that facility long-term, and obviously, they're looking at new facilities out West, in addition to the one in Phoenix, to support our Westward expansion there.

Nigel Travis

I think Neil, it may be worth following on: How do you feel about flat pricing?

Neil Moses

Well, the flat pricing, we've had one installment already. We've got another one that will hit January 1. I think it's very exciting in terms of helping to spur Westward expansion. I think the fact, Nigel, that we're seeing 25% cash-on-cash returns in Western-based markets today and average weekly sales comparable to what we're seeing in our Eastern-based markets, when the beverage mix is still closer to 40% out West and we've only seen 1/6 of the impact of flat pricing, is very encouraging.

Operator

Our next question comes from the line of Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

So you guys mentioned several times when it comes to Dunkin' U.S. a more aggressive, competitive environment. Rather than being presumptive on what exactly that means, I was hoping to hear from you guys what, specifically, from a competitive standpoint you see as "aggressive" or "challenging" right now and then whether you've adjusted your plans, even if just around the edges, to respond at all?

John H. Costello

Yes, this is John. I think if you look at the -- if you listen to some of the public statements by some of the other companies in the QSR space, whether you include traditional QSR or add coffee and bakery, almost all of them have talked about the challenges they're facing and the need to step up their competitive activity. And so we've seen things like McDonald's offer free coffee, Starbucks offering 2-for-1 frappuccinos, McDonald's and others offering $0.99 any-size soft drinks or hot or iced beverages. A number of competitors have talked about increasing their activities. There have also been published reports about convenience stores stepping up their activities. You also read about both Burger King and Wendy's talking about stepping up their activities, as well as increased activities by Taco Bell. We don't compete directly with all of those folks. But if you cut across almost all of the QSR, a number of people have talked about the need to change their strategies or adjust. And I think what we're saying is, we feel very comfortable with the 5 core strategies that Nigel talked about earlier in his remarks, and we're adding that to being nimble to respond. So we've been in competitive categories for 20 years, and we think the best defense is to stay on the offense. So we're reading the same reports that you are about competitive activity, but we feel very good about our product marketing and operational strategies and our ability to grow within that environment.

Nigel Travis

And I think to answer your exact question, we sent out the digital coupons that I talked about. They had a much-better-than-average return because they were digital. We also had a coupon on K-Cups before we launched the -- our now famous Mocha limited time offer. Various markets, as John touched on, have had aggressive promotions that are focused on certain times of day. But we try and be, to use John's early word, surgical about this. We don't blanket the place with coupons. When I was in the pizza industry, over 70% of the business came from coupons. We're in a much more fortunate situation here. And we stand back, we identify and then we go in surgically to see where we can get the best bang by bringing in extra guests without hurting franchisee profitability.

John H. Costello

Yes, but the key is -- we think the key to winning in this market is, product innovation, operational excellence, marketing innovation and very entrepreneurial-engaged franchisees who know their markets better than anybody, and we think that 4-part strategy remains a winning strategy for us.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then just a quick follow-up. You mentioned for Dunkin' U.S. that the core drivers were cold beverages, breakfast sandwiches, bakery and K-Cups. And one thing not on that list is your core hot coffee business. Was that positive in the quarter?

John H. Costello

We don't break out in that detail. What we can tell you is that our -- that obviously, there are swings between hot and iced coffee depending on weather patterns. Obviously, cooler weather drives hot coffee and warmer weather drives iced coffee. What we can tell you is, our total coffee business for both the quarter and for the year continues to grow at an attractive rate.

Operator

Our next question comes from the line of Jeffrey Bernstein with Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Just looking somewhat to '13 or maybe just longer-term, because I know there's no specific '13 guidance. But perhaps holistically, when you think about the margin opportunities, I'm just wondering whether you think you can continue the momentum that you've seen, especially in '13, what would seem to be a low-single digit comp. Just wondering whether there's still ability to leverage the fixed cost or at what point do you reach somewhat of a glass ceiling, limiting the upside? I guess I'm referring to the adjusted operating margin, which is currently pushing 50% today, and it was up a few hundred basis points this quarter. So, one, just how the comp impacts that, and two, kind of where that could go, whether it'd be next year or over the next number of years. And then I had a quick follow-up.

Paul C. Carbone

All right. It's Paul. So a couple of things. One, as Nigel talked about, we got very close to 50% adjusted operating margins this quarter. Now let me say our full year guidance is -- continues to be in that 46%, 47% range. This is a seasonal high quarter, right? So we have the ice cream business; that has the seasonality. So even in Q4 if you play out and do the math, our Q4 op income margin would be below in an absolute number this year -- or this quarter, but the growth will be very similar as it is for this quarter year-over-year. Long-term as we look at this business, you know, it has the ability to leverage and continue to leverage comp. It's certainly a driver of it. I tell you, the biggest driver is new store development adding to the revenues. But we see this approaching, for a full year basis, getting very close to 50% over the next few years. And part of that is going to be offset by as we continue to build out the infrastructure for International, with Giorgio joining us at the beginning part of this year, and really getting that business and operational structure to look not similar, not exactly like the U.S. but more support for our international licensees than we've had in the past.

Neil Moses

And maybe just we should take an opportunity to reiterate our longer-term guidance, so everyone remembers. It's 6% to 8% revenue growth, 10% to 12% operating income growth, 15%-plus earnings per share growth. And I think, you know, we feel comfortable that that's not a short-term opportunity; that's a long-term opportunity.

Nigel Travis

And I think it's worth saying, because sometimes people see comps and revenues together, that we have 2 huge growth opportunities in terms of development -- the U.S. and International. And I'll take this opportunity also to say that we're very close to seeing Baskin-Robbins turning into a small, low, whatever word you want to use, growth business.

Paul C. Carbone

The U.S. business.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

If I could just slip in one follow-up. You guys have mentioned on a couple occasions the market share. And I'm not sure to what level of granularity you'd share that, but I'm guessing you have better data than we do. I'm wondering how you measure that, or -- you talk about how it's up from a years ago, but yet you talk about all the competitors making big moves. Do you look at it as a percentage of drip or a percentage of premium, or -- kind of, can you frame any reference for what type of market share you do have in this segment?

John H. Costello

This is John. We use a combination of internal surveys. We also subscribe to external reporting as well, and our contracts prohibit us from releasing the specifics of those. So what we're able to say is, if you look at our performance year-to-date versus the broad measure of QSR, that we are outperforming QSR as an aggregate based on those independent third-party surveys done. But we're not permitted to release the specifics of that.

Nigel Travis

I think what I would add is, as we grow more and more stores and we're already into the certain parts of the country, inevitably our share's going to go up of the country in just about every category that we operate.

Operator

Our next question comes from line of Michael Gallo with CL King.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Most of my questions have been answered. Nigel, a question on as you look in March, New York City to the potential here for that sugary drink ban above 16 ounces, I was wondering if you could comment on what kind of impact you think that might have in the marketplace, particularly as you look at frozen and other beverages and how you might have to look at some contingency plans for how to address that?

Nigel Travis

Okay. So the first thing I want to say is, as I've said publicly, many times, we think this is the wrong way to go about obesity. There's no doubt the country has an obesity problem, but this isn't the way to tackle it, by banning things like sugary drinks, particularly when you can go from one side of the road from a Dunkin' Donuts and go across to a convenience store on the other side of the road. And having talked to a convenience store CEO recently, I think they realize, they're next in line. So anyway, that's the political statement. The American business -- the American Beverage Association has filed a lawsuit that I think is highly warranted. So we'll have to wait and see what happens with that. We've actually calculated, the impact on our business is a very low percent. Our franchisees, not only enraged by it but engaged to overcome it. They're determined to describe what Bloomberg is doing. If it does happen -- and I think there's a strong chance it won't, because I feel the legal case is very strong. But if it does happen, I think we've got all the plans in place. We're working on it now. I think we will also possibly even pick up consumers who are going to feel that we've being targeted in an unfair way, and we will certainly make that point. So in the way that is totally consistent with our remarks earlier, we see problems, we attack problems; we see this is as a problem and we're going to find a way of making it beneficial to Dunkin' Donuts.

Operator

Our next question comes from the line of Howard Penney with Hedgeye Risk Management.

Howard W. Penney - Hedgeye Risk Management LLC

I was wondering if -- I know you said you have 600,000 downloads of the app. And I was wondering if you can measure the percentage of transactions that are actually using the app. And then...

Nigel Travis

The answer is -- this is going to sound a weird answer, but the answer is, it's kind of difficult at the moment. We're waiting for a little bit of software, and we should be able to talk about it more on subsequent calls.

Howard W. Penney - Hedgeye Risk Management LLC

Do you anticipate it will improve your throughput, not that you need improving on throughput, but is this something that will enhance or add to comps over time, do you think?

Nigel Travis

Oh, yes. I mean -- I think, as I've said many times, this is a new dawn. We will look back in 5 years and say, do remember when the app only did this? This is a gateway to the future. And as John mentioned earlier, mobile offers are coming. This will get us into the really exciting world of one-to-one marketing. When you come from businesses like I did: Papa John's and Blockbuster, where they knew everything about every customer, to come back into QSR where they kind of act as a generic, was very frustrating. We're now going to get into that world. Sitting on my right is the person who's going to leverage all that information and move on it. So that's one part of it. The other part is, it's making it easier for our customers. The more and more that they use it, they will find that paying speeds up -- that the paying with the app speeds up the transaction. And I'm excited about the future here. And so to answer your question, I feel quite strongly that this will help us with our comps down the road.

Operator

Our next question comes from the line of John Ivankoe with JPMorgan.

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

Just -- I think a couple of follow-ups, if I may. I know you talked about being opportunistic in domestic and international markets. So the question, therefore, would be, fiscal '13 CapEx, especially relative to '12, if you could begin to give us some direction in that? And then the second, maybe kind of a bigger question is, how your speed of service has been doing with some of the new products. I mean, marketing might want to innovate and innovate and innovate, but your store operations oftentimes can get pushed back in terms of how much more their stores can handle. So if you can focus a little bit on the operations side of what you've been doing, what's been happening with the speed of service, for example, in the third quarter, and what might be the direction of that going forward into '13 based on recent initiatives you've implemented.

Paul C. Carbone

It's Paul. So, another great attempt to try and get '13 guidance out of us. I appreciate it. So, what we've said overall is, CapEx for this business won't exceed 10% of EBITDA. And we've kind of used that as a general rule. And you know as we launched the IPO, we set CapEx in the $25 million to $30 million range. Clearly, our EBITDA this year is north of $300 million. So I don't think we're going outside that range. If we see opportunities to invest in International, either like we did with Spain, although a very small amount of money, or even going into a new market and taking an equity piece of a new market, we will do that. But yes, you could continue to think about CapEx in a -- at or below 10% of our EBITDA.

Nigel Travis

And on the speed of service, I think we're actually getting better at it. I talked about the town hall meetings we've had. The town hall meetings are not only about the competitive environment, but about how we can operate better. And there's a whole series of tests that are being done in the Northeast, which we're trying to migrate to a lot more stores, in fact, hundreds of stores. But outside of that, the franchisees were so impressed with the results of some of the investments that the test markets have done that they've been investing in new drive-through tools for example, which should speed things up. There's also been a number of changes in recent weeks in where we position the drive-through menu board that's going to be helpful. And we're measuring the impact of all that, and the speed of service is continuing to improve. As I talked, I think it was 3 earnings calls, again, the sandwich station, we've had an issue caused by the success of the breakfast sandwiches. We're re-engineering that, and that's getting a lot easier. I think the relationship between the market and our operations is getting stronger because every time we roll out a product, we need to get through operational tests. And all that is focused on, how can we speed up our speed of service? And of course, that's what we're famous for. I think we're world-class in speed, but we're not sitting back and saying, "We're world class in speed." We need to get whatever is the next level above that, and I'm pretty convinced that with the focus that Paul Twohig and his team are giving to it, we will get there. And I also hope to migrate some of those speed of service initiatives into international.

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

And if I may, what you've identified in the Northeast, how big of an opportunity is it on speed of service, particularly at peak day parts? And when might that be realized across the system?

Nigel Travis

Okay. The initiatives in the Northeast, we haven't actually taken really beyond a very small area. What I will tell you is, the franchisees are so excited about it that we are looking for, say, 100 to test these. And at the last count, we have 600 people putting their -- 600 franchisees putting their hands up. So I can't actually quantify it, John, and we've not even tried to do it. All I would say is it's not only speed of service, it's some other service initiatives. And I really think it is significant. But I wouldn't like to quantify it, and I'm not trying, for once, to avoid answering it. We just don't know.

Operator

Our next question comes from the line of Jeff Farmer with Wells Fargo.

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

I think going back to -- I think it was Michael asked earlier about the competitive environment. I'm just curious from your perspective which macro factors are most weighing on the consumer right now? What's your take in terms of the things they're most worried about?

Nigel Travis

Okay. So that's an interesting one. And as I've been talking about this within these town hall meetings, I'm going to pick one, which is the amount of household income. That's gone down. And I think that is -- the number of dual-working families in a house is a big factor. There was an article in the paper, I think about 4 or 5 weeks ago, about it. So if you've got one person in the house who's unemployed, you normally have 2 that's working, that's been an issue. So it's unemployment, I think, is an overwhelmingly -- is overwhelmingly the issue, and that results in a reduction of household income. And I think that's what people worry about. So if I had to pick, that one factor. But obviously everyone is concerned about the election, fiscal cliff and all that stuff, and I for one am confident that whatever the result of the election, having been in Washington a few weeks ago with some other CEOs, that whoever wins the election, there will be a much more, let's say, a moderate approach to resolving the deficit crisis than we've seen in the last couple of years. I'm hoping that there will be some positive news there, but I may be being overly optimistic.

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

Okay. And just one more quick one. I just want to go back to the Dunkin' Donuts -- Dunkin' International for a minute. Just -- can you provide some more color on how your strategy in that segment has changed over the last couple of years in terms of, I guess, things like partner selection, supply chain, et cetera, and what that might mean for your economics? My understanding is that, as you guys have gotten better at this, you should be getting a lot better economics moving forward relative to what you've received in the prior years and even prior decades.

John H. Costello

Yes, if I could just broadly characterized how we've changed our approach to that business, I think historically we were somewhat of a flag planter within Dunkin' Donuts' International business. So in other words, we were out there doing development work and signing up master licensees in various countries. We did not provide those franchisees or licensees with a lot of support operationally, supply-chain-wise, marketing-wise. And I think that's one of the reasons that, that business has struggled over the last couple of years. So really -- and since -- actually, before Giorgio came, but really the last, let's call it, 12 to 18 months, we have been investing in support of the Dunkin' Donuts International business. It has impacted our short-term performance in that business. We've invested in particular in the supply chain, because Georgio has been quick to point out to all of us that having a healthy, if you will, central manufacturing location or supply-chain ecosystem for that business is very, very important in getting our partners internationally off on the right foot. So quite a bit of investment there. I think that investment has actually been very encouraging in terms of what we expect to happen long term with that business. And Giorgio has been here now for about 9 months. I think you'll some additional investment going into the first part of next year in that business. But I'm optimistic that we've got the business on the right track.

Nigel Travis

Okay. So thank you, everyone, for your questions, and I'm sure some people will be asking questions at another stage. So in closing, I'd like to reiterate that we feel very good about the business. Our fundamentals continue to be strong. Our global franchisee relationships are first class. We have positive underlying trends, and we're focused on aggressively addressing both the consumer and competitive challenges while staying true to our core strategies.

So with that, thank you for your interest in Dunkin' brands. We look forward to speaking to you in the quarter or next time, and have a good day. Thank you.

Operator

Ladies and gentlemen, this does concludes your conference. You may all disconnect, and have a good day.

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