Q2 2020 Dunkin' Brands Group Inc Earnings Call

Ladies and gentlemen, please stand by your conference call will begin momentarily once again Youre Dunkin' Brands' second quarter 2020 earnings conference call will begin momentarily. Thank you for your patience and police continued to hold.

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Ladies and gentlemen, thank you for standing by welcome to the Dunkin' Brands' second quarter 2020 earnings call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone.

As a reminder, todays program may be recorded I would now like to introduce your host for todays program seek to Carabello Senior Director Investor Relations. Please go ahead.

Thank you Jonathan and good morning, everyone.

Speaking on today's call will be Dunkin' brands, Chief Executive Officer, Dave Hoffman.

President of Dunkin' Americas, Scott Murphy.

And Dunkin' brands, Chief Financial Officer, Kate Fine.

Following prepared remarks, well open the call two questions.

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

Before I turn the call over to Dave 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 and best or Dot Dunkin' brands Dotcom, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures.

Now I'll turn the call over today.

Thanks Stacy.

And thanks, everyone for joining US early this morning, I want to take a moment upfront to get a heartfelt. Thank you to everyone listening.

Many of you watch still working from home.

As we navigate our way through this pandemic, we're viewing our business during covert 19 in terms of three phases.

Running.

Working.

And recovering.

So let me start with running.

For 70 years Dunkin' has been keeping America running.

Well the cobot 19 pandemic is unlike anything we've experienced before we knew our take away model with additional safety protocols in place would serve as well.

We have always been the great coffee fast brand and our continued focus on convenience and accessibility along with beverage and snacking intubation drove sequential improvement of Duncan U.S. same store sales throughout the quarter.

Our franchisees went the extra mile to keep the vast majority of our Dunkin' U.S. restaurants opened during the second quarter to help our guests get through the day and to provide a sense of normalcy during these times.

As of today, there are fewer than 70 traditional Duncan location still close most of which are in Manhattan or Boston.

In addition, there are approximately 300 alternative locations close that are primarily in transportation hubs, we're on college campuses.

And all approximately 96% of Duncan stores in the U.S. are open.

And that number is similar for Baskin Robbins U.S. as well.

During the second quarter sales in our newer markets were bright spot.

One other restaurants were closed we were open.

New guests discovered our innovative everyday value price beverages, and our low context service options, including drive through on the go mobile ordering curbside or delivery.

They now know it's much more than just the Dona brand.

Together with our franchisees, we did what it was right in our restaurants to protect dedicated crew members and loyal customers.

And going forward, we know that safety remains a high priority for customers.

Protocols, we implemented very early on such as mask for crew members plexiglas at the serving areas and enhance sanitation practices are still in place.

We believe keeping these health and safety protocols in place will service well as the country continues to deal with this pandemic.

And Scott will get into this more in his comments.

As a part of a desire for a safe experienced customers are increasingly interested in a quick contact with shopping experience.

No touch is truly become the new high touch and more customers than ever before availed themselves of our digital offerings, including through our perks loyalty program on the go mobile ordering and delivery for faster low context service.

Our active perks membership is seeing tremendous growth both year over year and also versus Q1 pre cobot levels with a higher percentage of members Youve using mobile order ahead than ever before.

Our investment to bring the intellectual property that runs our Dunkin' App in house is paying off by allowing us to make apt changes more quickly than ever before.

For example, we launched new curbside capabilities within the App to any franchisee who wanted it and added the more sophisticated curbside order inflow for consumers make it simple forgets to safely have their dunkin' order delivered to their car.

We now have more than 1400 restaurants, offering curbside as an option and these are primarily locations that do not have a drive through.

A cornerstone of our blueprint for growth.

Digital technology played a strong role in driving sales this quarter and will increasingly be at the forefront of enabling brands to deliver a great guest experience.

So we're doubling down on our digital platform and last week announced that we had hired Philhower Buck to the newly created position of Chief digital and strategy Officer.

A true transformational leader, Phil will be responsible for fast tracking our digital platform to deliver a more frictionless personalized experience for guess however, they choose to use us through the perks loyalty program, our mobile App drive-thru delivery.

In restaurant and even other channels, we haven't even envisioned yet.

The digital engagement team, we have assembled under fill includes global I T.

Digital marketing business analytics, consumer insights and our media and partnership teams.

In other words, we have combined all the functions needed to fire up our digital transformation and grow our business with technology and advanced analytics at the forefront than ever before.

We are excited about the incredible opportunities that awareness and are delighted to welcome filled to the Dunkin' family.

Okay.

Not or second phase working.

In conjunction with our franchisees are great franchisees were proud to keep America working at a time of record high unemployment Dunkin' franchisees have kept their restaurants open.

With an emphasis on safety and their crews employed.

As small business owners, our franchisees continue to be an essential trusted part of the communities, where they live and work and a continued source of jobs.

Now as more of America opens up Dunkin' franchisees are seeking to higher up to 25000, new restaurant employees at Dunkin' locations from front counter to restaurant management.

We recently announced a new program that will enable any Duncan crew member full or part time anywhere in the country to receive a low cost College education.

We're also proud that we avoided curb corporate furloughs since the crisis started.

Instead, we identified other gionee and Capex savings to preserve cash while protecting our workforce.

And we're doing things like a gig program that allows employees with rolls impacted by coded to be reallocated to other critical functional areas.

Finally, this leads me to our third phase recovery.

Today, our board of directors announced that we are reinstating a regular dividend program.

We suspended that last quarter out of an abundance of caution than what we believed was the responsible thing to do.

But this management team and our board remained committed to return cash to shareholders with cash collections resuming in late April and with the vast majority of our restaurants open. We believe this is the appropriate time to reinstate that dividend.

We're also taking the opportunity to assess our global real estate portfolio and work with our franchisees to permanently close off strategy locations.

For Dunkin' Us this means locations that have low average weekly sales.

Those that cannot support our beverage innovation or a next generation generation remodel.

Or frankly their locations, where the traffic patterns have changed and they can't be relocated or add a drive through.

For Baskin Robbins U.S., the closures are continuation to its raising the bar strategy and working with franchisees to close underperforming locations is Jason's mission.

And outside the U.S. certain licensees have and will continue to close smaller limited menu locations in specific countries.

Kate will address corporate liquidity.

Franchisee financial stability and the expected closures in her comments.

We think this is the perfect time to strengthen our global footprint and set ourselves up for stronger growth in the future.

Well, we know the full recovery of the global economy is not imminent. We are encouraged by the upward trend in sales in store Reopenings that both of our brands have experienced in the second quarter worldwide.

We always say that our number one asset is our relationship with our franchisees. We knew we had a great franchise system and that is never never been more evident that during this crisis.

Because of our solid relationships, we were able to come together with our Duncan and Baskin Robbins franchisees to make necessary marketing and operations decisions quickly, including measures focused on crew and guests safety.

Taking much of the bureaucracy out of our decision, making process and enabling faster to market solutions. In innovation. This will continue we'll continue to serve us well in a post pandemic world. These are lessons, we won't forget when the current health crisis is over.

So with that I will hand, it over to Scott to provide more detail on the Q2 performance for Dunkin' U.S Scott.

Thanks, Dave.

During the second quarter Dunkin' U.S same store sales fell 18.7%, but improved sequentially each month.

Cobot at its peak April was down 32% then made down 17%.

In June only down 9%.

We effectively cut our losses in half each of the three months in the quarter.

Through the week ended July 25 sales have been down low single digits, continuing our solid recovery from the pandemic.

In fact with the morning commute largely on hold I'm quite pleased with the state of the business.

A large part of the recovery was due to a sticking to our blueprint for growth strategy, which from day. One has been all about allowing guests to get in get out and get on their way.

That strategy is paying off for us today, where guests want to grab a beverage and snacking safe low touch environment.

You'll recall that the three main pillars of our blueprint.

Our menu evolution.

Digital transformation and convenience and accessibility.

The blueprint served us well and if anything Kogut has allowed the strongest parts of our business to rise to the top.

So let me start with the first pillar menu evolution.

The sequential improvement we saw in Q2 resulted in increased average weekly sales gains more than 50%.

From the end of the first quarter to the ended the second quarter.

Since the onset of the cobot pandemic changes in guest routines shifted sales from early morning to mid day, particularly 11 am to tube.

And our product innovation has addressed that shifting consumer visits to Duncan.

Espresso sales have been resilient during coded and new specialty beverages, such as much a lot is performed well, particularly in newer markets.

Both have strong appeal to Duncan customers coming later in the day and are more difficult to replicate at home.

All varieties of great attachment rates and healthy margins for our franchisees.

During the final two weeks of the quarter, we launched Duncan Refreshers with an initial two dollar offer which drove high trial by new and existing guests, including a younger more female demographic.

Duncan Refreshers had been are most successful new product offerings since cold brew in 2016, and they also appeal to an afternoon customer looking for a pick me up.

Duncan Refreshers have a higher attachment rate of 70% in an average check just under $7.

And they also appeared largely incremental a significant portion of our loyalty guests who bought Duncan Refreshers have continue purchasing their regular beverages. In addition to this new product.

The new Duncan Snacking products also appeal to a mid day customer.

Croissant, Stuffers and snacking, Bacon, which pair perfectly with our iced beverage lineup and carry an attachment rate of greater than 95%.

But I want to note that even as we add new items, we are laser focused on reducing operational complexity in the restaurants. So crew members can focus on our enhanced safety and cleaning protocols.

Chris on Stuffers, and Duncan Refreshers or two great. Examples of successful products that are simple to make high margin and most importantly delicious.

Looking forward, we will continue to focus on beverage and food innovation design to satisfy all day snacking occasions, such as our recently launched Hammond cheese, and Bacon and cheese roll ups.

And lastly on menu evolution.

We are continuing our high volume smart brewer installations and expect to be complete in the first quarter of 2021.

The smart Brewers will enable us to expand our variety of drip coffee blends reduce waste and most importantly enhanced quality consistency across the system.

Now onto the second pillar digital transformation.

Another bright spot during the quarter was our perks performance.

Perks active enrollment increased nearly 110% year over year in Q2.

Perks transactions as a percentage of rooftop finished the quarter at just over 20% in nearly 600 basis point increase versus last year.

With more customers prefer in low touch service. We also saw an increase in on the go orders, finishing at 7% of transactions for the system, a 300 basis point increase year over year.

And in non drive through locations it was 14%.

By the end of Q2 curbside ordering represented 2.4% of sales in the approximately 1400 locations that offered it.

Delivery also was on the rise in Q2 led by the expansion of our who breach deal.

We now have approximately 4000 stores live with the rights and 4700 stores on Grubhubs platform.

In total as of the ended June Duncan offer delivery and more than 5700 restaurants nationwide.

During the second quarter, we leaned in on value through our digital channels as well.

Value offers such as free Donut Friday were highly effective in driving perks enrollments reactivation and engagement.

There were also profitable programs for our franchisees since a full price beverage was required for the donor.

In total digital orders inclusive of perks on the go delivery and curbside grew to 18% of sales from 13% a year ago.

We've made great progress I'm excited to welcome fills in the team to take us to even new height.

And finally, the last pillar convenience and accessibility.

We continue to look for ways to make the Duncan brand more convenient and accessible.

Whether that through these digital technologies, our store footprint or our CPG business outside the restaurants.

First let me start with our store footprint.

During Q2, Dunkin' US franchisees opened 42, new units, but close 82 restaurants for a negative net development of 40 restaurants.

This includes the closure of 10 of the previously mentioned speedway self serve locations.

Franchisees also completed 34 remodels during the quarter, bringing our total number of nexgen restaurants to approximately 700.

Kate will add more specifics later on but let me talk for a minute about next gen.

Our next Gen designed with its emphasis on faster contact with service seems tailor made for customers. During this health crisis.

Approximately 90% of new Nexgen locations have a drive through compared to approximately 70% of our existing fleet.

In fact, the power the drive through was never more evident than during Covance.

When we close dine in service, our strong base of restaurants with the drive through both next gen and previous designs.

Continued to deliver at levels, we've never seen before in our system.

Drive-thru significantly outpaced non drive through stores showing mid single digit positive comps in the last two weeks in the quarter.

It's a great example of our operators capitalizing on their biggest asset.

Great coffee fast in a low touch environment.

And we've already made several drive through enhancements to the fleet.

With many more to come.

We're also tweaking the next Gen design as well.

Incorporating many co bid learnings and developing a low contact store design that has options such as removable seeding no touch faucet.

Larger on the go pickup areas a walk up window.

In a reconfigured frontline layout to further encourage social distancing for customers in the Q.

Basically we are not resting and we'll continue to evolve our operations to meet our changing customer needs.

Our strategy to make Duncan more accessible also includes bringing our products to customers outside the four wells in the restaurant.

And I'm pleased to announce that our total CPG business surpassed $1 billion in retail sales in Q2 on a rolling 52 weeks.

We entered into this business 13 years ago, with bagged coffee and have steadily grown it through new product offerings and initiatives, including adding 150 individual skus to our CPG lineup over that period.

Packaged coffee and K Cups continue to lead our CPG business with more than 750 million in total retail sales and had one of the strongest quarters ever during the height of coated.

It's hard to believe it's almost August but I want to publicly thank our franchisees for their tireless efforts during these past several months.

Ensuring the safety of our crew and our customers remain our top priority.

And it's not easy it takes deliberate focus every single day and Thats, what our franchisees are doing across the country as we help America open backup.

So in closing we are strong our franchisees are strong in our model is strong.

During the quarter, we doubled down on the core fundamentals of our blueprint for growth and saw nice sequential recovery to the business.

Together with our franchisees and supplier partners will continue to stay focused on delivering great coffee fast safely reliably and with Duncan pride.

Now I'll turn it back to date to cover Baskin Us and international Alright, Thanks, Scott moving to Baskin Baskin Robbins U.S. showed impressive sequential improvement in Q2 with a negative 6% same store sales performance for the quarter and posted positive comp store sales for the final two months of the.

Quarter.

We'll stay at home advisories widespread during the quarter guest increasingly sought out the convenience of Baskin Robbins delivery and online cakes courts and novelties, we quickly launched at home do it yourself Sunday kits and DIY polar pizza kits as well.

Delivery sales were up more than 250% and online sales of cakes courts, and novelties were up more than 150% versus the prior period.

Online sales were further driven by at home celebrations for mother's day and father's day and there is nothing better for these families celebrations than a baskin Robbins ice cream cake and a do it yourself syndicate.

As with Duncan digital technology is driving the Baskin Robbins business and we expect that trend to only continue which is why digital is a critical part of our Baskin Robbins raising the bar strategy.

And now to international.

Where Q2.

Common theme similar to previous quarters delivery continued to drive growth.

This quarter delivery sales for Baskin, Robbins, and Dunkin' International nearly tripled compared to last year, driven by innovations like social media ordering order ahead and curbside pickup.

Baskin Robbins Korea, a real standout during the crisis had mid single digit same store sales with delivery.

And mobile coupon offers engaging customers in the market.

Cake sales also had an impressive performance in Q2.

Across international similar what we experienced in the U.S. people were staying home to celebrate holidays and Baskin Robbins ice cream cakes made these at home celebrations more festive.

In Saudi Arabia cake sales doubled from 10% pre pandemic to 20% during the pandemic.

And similar to the work we are performing with our domestic franchisees international licensees are also assessing their real estate portfolio and we continue to work with these licensees to upgrade the asset base by closing low sales volume stores and off strategy locations to strengthen the system for future growth.

Yeah.

Strategic Baskin Robbins store closures in Japan, Russia, and India, primarily drove the negative Q2 net development results.

And now I'll turn it over to Kate to cover our financials.

Thanks, Dave.

As Dave mentioned earlier, we're pleased to that our board of directors reinstated our regular dividends program and authorized and declared a quarterly dividend of 40.25 cents per share for the third quarter.

During the second quarter, we also repaid all of the hundred $16 million that we had borrowed under our variable funding notes.

The reinstatement of our dividend and the repayment of the borrowings under the BFN reflects the overall financial health of Dunkin' brands and our commitment to shareholders.

Given the strength and stability of our franchise model.

Franchisees ongoing business recovery and our ability to leverage DNA.

We remain confident in our ability to maintain appropriate liquidity through the current crisis, even if the second wave is to occur.

I'm going to start with the franchisee business health.

We believe based on conversations with franchisees and their attendance on our various webinars that a majority of our you asked franchisees applied for and many received assistance under the cameras Act.

Overall, we still anticipate the average franchisee operating cash flow by the end of fiscal 2022 approximate 80% of where we expected to be at the beginning of the year.

As mentioned last quarter. This 80% reflects a representative estimate for traditional Duncan Standalone restaurant that received government assistance.

We are seeing pockets of strong recovery.

Obviously the impact our franchisees are experiencing has not been spread equally.

But as we discussed earlier, our newer markets such as parts of the Midwest southwest and West are recovering much faster as they have significantly more drive thru and are experiencing strong beverage sales.

Our urban markets like Manhattan in Boston are both still challenged as offices in businesses remain closed.

Sports facilities transportation hubs and college campuses remain closed as well.

Many locations in these downtown and other markets also don't offer the convenience of a drive through.

We continue to closely monitor the performance of the most impacted urban and other markets and remain in regular contact with our franchisees about the economic conditions of their networks in these areas.

We have seen slight sales and traffic and improvements on a week to week basis and many of these markets.

Although sales and most downtown business areas have been flow to return close to pre coverage levels.

We continue to evaluate financial assistance opportunities for select networks and continued to advocate on behalf of this heavily impacted primarily urban franchisee population.

Our goal remains to reinforce the financial stability of our franchisee networks in these markets. So that they are well positioned when traffic returns closer in line with previous levels.

We're always looking for ways to improve our business from corporate to the franchisees.

As Dave mentioned earlier, we decided to take this time to work with our franchisees to assess our real estate portfolio and set the Duncan U.S. system up for continued strong profitable future growth.

Baskin U.S. was already working on a similar portfolio rationalization, there with raising the bar strategy.

For Duncan U.S., we said earlier this year, we expected to close 450 Speedway self serve kiosk locations during fiscal 2020.

Representing less than 0.5% of our system wide sales.

With the temporary closures that we had during the call that crisis, we took the opportunity to accelerate our discussions with our franchisees on whether there are off strategy locations that are either relocate about why should permanently closed.

At this time, including the 450 Speedway closures, we believe there could be approximately 800 low volume locations, primarily alternative points of distribution that may permanently close.

If all 800 of these locations where to close they would represent 8% of the Duncan U.S. total restaurant footprint.

But.

Only around 2% of system wide sales inclusive of the speedway closings.

Most of these locations are also unprofitable for the franchisees with EBITDA margins well below the average for traditional Dunkin' us restaurant and the average weekly sales for the group is approximately one quarter of the average weekly sales of our system.

I want to emphasize these two point these locations are well below average for both sales and profitability.

And more importantly for many of these franchisees closing these restaurants will enable them to do greater reinvestment into the brand whether through next generation Remodels building, new restaurants, and relocating restaurants, the higher traffic areas, where to where they can add a drive through.

We expect most of these closings will take place this year.

We believe these closures position us and our franchisees for on strategy more profitable future growth.

And as Dave mentioned earlier, many of our international franchisees and licensees are also now doing the same assessments, we anticipate that we could see an additional 350 restaurants closed internationally by the end of 2020.

Similar to the closures in the U.S. These are low volume sales locations, which are unprofitable for our franchisees and license.

Now to our second quarter financial results.

Revenues for the second quarter decreased 72 million or 20% compared to the prior year period, due primarily to decreases and royalty income and advertising fees driven by a decline in system wide sales primarily for the Dunkin' Us segment.

Royalty income and Q2 also reflects a reduction of revenue of approximately $8 million related to corporate financial relief provided to franchisees most significantly impacted by the pandemic many of them in the hardest hit urban areas that I previously spoke about.

Also contributing to the decrease in revenues was a 3 million dollar impact from rent waivers provided to our franchisees and a decline in variable rent income due to a decline in system wide sales.

As well as a decrease in sales of ice cream and other products.

I spoke about the rent waivers on our first quarter call, we waived rental payments for up to one month and allowed franchisees to defer rental payments for two months on the approximately 900 properties for which we are the landlords.

Operating income and adjusted operating income for the second quarter decreased 41 million or 33.5% and 40.6 million with 31.9% respectively compared to the prior year period, primarily as a result of the decrease in royalty income and a decrease in rental margin which is.

It's approximately 2 million of unfavorable impact from rent waivers provided to our franchisees.

Net of waivers we received from landlords.

These impacts were offset by a decrease in DNA expenses, including a decrease in incentive compensation meeting and travel expenses and reduce nonessential spending in the current year period as a result, and the cobot 19 pandemic.

Net income and adjusted net income for the second quarter decreased by 23.2 million was 38.9%.

32.3 million or 44.6%, respectively compared to the prior year period primaries, primarily as a result of the decreases in operating income and adjusted operating income as well as the decrease in interest income earned on our cash balances offset by a decrease in income tax expense.

The decrease in income tax expense was driven primarily by the decrease in income in the <unk>.

Offset by excess tax benefits of 1.5 million in the prior year period compared to an immaterial amount recognized in the current year period.

Also offsetting the decrease in operating income was 13.1 million dollar loss on debt extinguishment recorded in the prior year period in conjunction with last year's refinancing transaction.

Diluted earnings per share and diluted adjusted earnings per share for the second quarter decreased by 38% to 44 cents and 43% to 49 cents, respectively compared to the prior year period as a result of the decreases in net income in adjusted net income.

Excluding the impact of recognize excess tax benefits, both diluted earnings per share and diluted adjusted earnings per share would have been lower by approximately two cents for the second quarter of fiscal year 2019.

Recognized excess tax benefits had no per share impact on diluted earnings per share and diluted adjusted earnings per share for the second quarter of fiscal year 2020.

Excluding cash reserves for gift cards and advertising funds of 193 million. We ended the second quarter with 291 million unrestricted cash held domestically and 32 million held in accounts outside of the United States.

As required under our debt agreements are restricted cash reserve of 95 million includes approximately three months of debt service amount, including principal and interest.

We continue to manage our liquidity very closely by controlling our operating and capital expenditures and we continue to control all nonessential spending.

By making smart tactical decisions around reducing our delaying certain expenses, we've been able to significantly reduce our outlay of cash while also managing the business for the long term and ensuring we best position ourselves for the future.

The beauty of our model is our ability to leverage our DNA.

Our average monthly DNA and Capex cash spend prior to the pandemic was approximately 20 to 25 million.

We continue to estimate that our revised average monthly DNA and Capex cash spend will be approximately 15 to 20 million until the business normalizes.

Again that is outgoing funds for DNA and capital expenditures only.

Moving to our leverage we ended the second quarter with a debt to adjusted EBITDA ratio of 5.3 to one.

Based on where our leverage finished for Q1, we were not required to make our Q2 2020 principal payment of approximately $8 million.

We do anticipate making our normally scheduled Q3 2020 principal payment.

We also have $117 million and available capacity under our variable funding notes.

As I noted on our Q1 call the primary financial Covenant under our securitization as a debt service coverage ratio, which is calculated at the end of each quarter on a trailing 12 month basis.

The first covenant trigger a 50% cash trapping event would occur only if our debt service coverage ratio fell below the one 1.75 times.

We finished the second quarter of fiscal 2020 with a debt service coverage ratio of 3.21 time.

In closing I would like to reiterate the quarter to date domestic sales information that was included in our press release this morning.

Duncan you ask comparable store sales have been improving week over week during Q3.

As of the week ended July 25th quarter to date comparable store sales were down low single digits for open stores.

And similar to Duncan Baskin Robbins U.S. comparable store sales quarter to date through week ended July 25th were also down low single digits for open stores.

And now I will turn the call over to the operator for Q anyway.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound key our first question comes from the line of John Ivankoe from JP Morgan Your question. Please.

Thank you so much.

Once the big I guess debates or maybe disagreements are kind of happening across the industry is the effectiveness or even need of kind of resuming television advertising or even having excess.

Television advertising in the effectiveness of that in the context, obviously have covered protests in a elections is very very challenging from a market are really the breakthrough. So can you comment.

On that specifically for the Dunkin' brands kind of how you see the next.

Six to 12 months in terms of overall impressions, both traditional and digital and if we can comment on the need to really re head to rethink you some value messaging at the brand to get people back back into the stores be above and beyond what would've normally in the case for 2020. Thank you.

Yes, Thanks, John good to hear from you.

Look I would say the first thing from a data point, our our brand affinity scores are at an all time high.

I'm really proud of what the team has done on social as you said and that's going to continue to be a big channel for us.

And why we're doubling down on on that with the new digital engagement team, but look I think too early to tell on TV. We still think it has a big role for us.

Going forward and.

Look we've got a really good partnership with our DD one media team over there are publicists that we're working with and so between our team. We're always constantly evaluating that I think you could see us.

Probably go a little quieter and in Q3, I don't think I'm tipping any hand here that the return during election year isn't that great in that October periods. So you could probably see us go a little bit darker, but thats more because of the the cost of the weight and getting bumped rather than TV not being effective its just.

Thanks, Mark media management by our team.

Thanks, John.

And so on anything on the value side that maybe you plan on accelerating over the next.

12 month.

Hey, Scott.

Hey, John It's Scott you anything I'd add to that on the value side as we've seen really good success with refreshers with that to dollar price point that I talked about so that's a great example, where value for trial and getting a new guest.

And getting them into our restaurants trying those products I think you might see more that type of activity from us.

Thank you congratulations.

Thank you. Our next question comes from the line of David Palmer from Evercore ISI. Your question. Please.

Thanks, Congrats on the improvement so far.

Question on on the next Gen program.

How is the crisis change the timetable for those Remodels, how many do you expect in 2020 versus what you had expected pre co bid and indeed, if it's somewhat slower is that largely going to be made up for and 21 is your multi year target to same there. They have a quick follow up.

Sure David It's Scott I'll take next Gen. So we're very happy with Nexgen as a concept like I talked about in my in my comments. Many of the features of Nexgen are perfect for Covidien were even enhancing.

As you might imagine during the quarter franchisee slowed a little bit on their remodels, just with a lot of uncertainty out there and so we've seen that and probably we'll see that for another quarter or so I will say things are starting to pick up as franchisees are understanding that the resilience of the Duncan model, especially with drive-thrus. So I think.

We are optimistic, but we're still working collaboratively with the franchisees and trying to make smart decision.

As Kate mentioned with the strategic closures that should help the profitability of some of their networks to and free up some cash to make remodels and bigger part of the future.

And on those closures I mean did you how did those how's that precipitate did was it.

The the cobot itself, causing revaluation or have you changed your standards at all with regard to the thresholds that you will allow closures for your franchisees.

Yes, David look I I'd say it this way as you know because you've followed us for a long time since this management team.

Took over we have been focused on quality over quantity and repositioning the brand to be beverage led.

These locations weren't part of that future and the crisis allowed us to accelerate the closures and strengthen the portfolio. It was as simple as that they were unprofitable often for the franchisees and they've had middle minimal impact on sales. So we just felt like it was the right management move in collaboration with our franchisees.

Makes sense, thanks very much thanks.

Thank you. Our next question comes in the line of Air Conns Ellis from Keybanc. Your question. Please.

Hey, Thanks, a question just curious can you talk about how your geographic footprint might be a positive or negative in terms of the stores reopening or even workers returns here every day routines clearly there has been reserved in these section rate in southern part of countries, including Florida, which I think maybe your third largest state in terms of penetration. So you could talk about the performance knows.

Markets relative to up north, but perhaps comments in the trajectory of recovery in the south versus in north would be helpful. Thanks.

Yes look I the way I would phrases is.

We have done increasingly well in our non core west emerging markets and I was just looking for the number here it's.

No.

Causative in those markets and its low teens and so very pleased with the performance there very pleased Tonight and what's been.

Really surprising I think sitting back you're watching this is look it's hard to we're very well known in the core markets as you know.

And were known as a beverage brand.

But out West we were very much known as a bakery in a dona brand and so when we were the only operation open and people were looking for their beverage and they discovered us and so they came to us and they discovered our beverage lineup.

And that and when I said in my remarks that look I love Donuts and I'm I love, when we really get on or don't know Mojo, but.

Look we are leaning into beverages in a big way and so I think our consumers out west and in these noncore markets is really discovered that when we say we are great coffee fast were great coffee fast and they have come to reappraise us and so we really like though our franchisees have stepped up.

How the consumers responded to our brand and so it's been a it's been a really good bright spot for us.

During a difficult period. Thank you.

Hey, Thanks for that and then just on the strip quick I could see disciplined.

I understand the shift in habits away from that morning commuter Daypart I'm. Just wondering if you have any evidence to suggest how much of the later in the day traffic you might be will sustain as normal habits resume.

Yes.

So we're not giving total guidance on that but you can have you can imagine that we've we've lost sales from that important six to nine period, but we've gained sales from that tended to I think what what really stands out for us is that.

We can adapt and operated very well outside the commute and.

You are seeing that and so if you step back and you've heard me talk about the plan that we've been driving the blueprint for growth for a number of years, it's built around menu evolution digital transformation convenience next and accessibility on the menu side, our espresso investments continue to pay big dividends.

During this crisis much.

Has been a big hit for us the Duncan Refreshers right now have been a big hit you couple that with snacking.

Beyond sausage Wakeup Rep. We were first probably one of the first big brands of the market with that and that wake up wrap has done really well during this the roll ups or croissant stuffers, all really good attachments to speak to that that second Daypart and then just throwing in our Stephanie Meltzer polls in the room here, but it was throwing in our digital transformation or full so.

We have digital assets.

That we have on locked and there's been many from curbside to multi tender to reduced ordering steps to delivery and four to 5000 locations. So the combination of those two with a brand that was already fast 90% of our transactions pre pandemic were some form of takeaway.

We've been able to give the consumer access to our two the brand on their terms safely and I think that under the umbrella of the blueprint for growth and we're tweaking a few things, but thats really paid off for us. Thank you.

Thanks.

Thank you. Our next question comes the line of John Glass from Morgan Stanley. Your question. Please.

Hey, Thanks, very much first can you just comment on on your assessment of the store portfolio and the closures.

Starbucks is looked at their urban markets. Instead, we just need fewer stores and maybe smaller stores was that part of this assessment or how do you think about your urban slipped print now going forward is that same kind of rationalization potential the future do you think what you've done now is sort of conclusive and you don't need to address those urban markets.

Yes, John Yes, good to hear from you as well.

Look.

We before the pandemic like I said, 90% of our transactions were some form of takeaway. So we were the brand that was good and get underway and.

That has paid paid dividends very well during this pandemic and so look these closures were low volume driven off strategy like some of the gas convenience with speedway as you know.

That was a mutual decision by both brands. So it was really more around that quality over quantity more around some things. We're just not right for our future as we were leaning into beverages and so it was not profitable for the franchisees so as a combination of those.

Versus we're doing a dramatic rethink of.

US remaining in urban there's a great place for us and urban and we're seeing as the economy opens up we're continue to do well in those markets right now so.

This is in terms of a good scrubbing of the portfolio and be an opportunistic. During this time period. We felt like this was the rate move and and we felt like you guys would respond positively to it as well. Thank you.

And just as a follow up how much of the comp recovery has been check let it sounds like later day, it's maybe.

Different beverages, maybe some of you wouldn't have ordered in the morning. This higher food attach a how much the improvements really been checked driven or is this really just people actually higher frequency coming back to the brand and traffic.

A big piece of it has been trek checked driven and we see it and the number of items, but think about agenda and think about your behavior as well like when you are going out you're ordering for probably three or four people in the household and.

We're if they were commuting there were committed a single so.

Right now we're about you were really looking hard at that.

Traffic number as well, but we're pleased with the attachments. We're pleased how the consumers are responding to our offerings that are great in the morning, but a really great in that afternoon day part as well in the snacking items that.

Our being attached so.

We like how we're positioned right now with our menu.

Thats covering.

Two different dayparts.

And so that so I.

I think we're well positioned as we go into the fall here as well. Thank you.

Thanks, Jeff Thank you.

Thank you. Our next question comes from the line of Sharon Zackfia from William Blair. Your question. Please.

Hi, Good morning, I know you mentioned that consumers in the last are discovering the brand and a different way for Dunkin', but I'm also curious during this unique time. If you think your customer funnel is just overall lightening and if so you know if theres any kind of demographic or region, where you.

The new Dunkin' is just outside.

And I know anything at any other color on that I think would be would be very helpful.

Hey, Sharon it's Scott I think you're exactly right I think during this pandemic when we've essentially stayed open throughout this whole thing given our drive thru and our ability to operate through the crisis. So I think we're getting a lot of new consumers that weve never seen before and what we're trying to do with our portfolio of products like Dave mentioned is show the world.

That we've got other products. So when people are coming in that hadn't been to Duncan in awhile and they're seeing we've got great espresso. We've gotten much. We've got these refreshers for maybe a value conscious consumer or that younger female demographic absolutely. The funnel is getting bigger for us and our challenge as a system is how do we retain them.

As other people start to open back up and I think given our repeat purchase that we're seeing on a lot of these products, we've been able to retain them and we're very excited about that.

Do you have any concrete metrics you could share on kind of what the new to Dunkin' or lapse user rate has been recently versus where it was pretty pandemic.

Probably nothing that we'd share today, we are using our our digital details that we have from our perks and loyalty program to look at that but nothing to share today Sharon.

Thank you.

Thank you. Our next question comes from the line of Jeffrey Bernstein from Barclays. Your question. Please.

Great. Thank you very much.

Just a question as I think about the broader category of coffee and breakfast.

It seems like the independents have historically dominated the category in terms of units.

But with that as a backdrop I guess.

Two part question one are you expecting significant industry closures, which would allow you to gain market share and perhaps accelerate unit growth with better real estate. So any color on that and then too.

Let me think of your franchisees independence running just a handful of restaurants. Each I'm. Just wondering why you think there better positioned than maybe true independence or I mean, maybe they're similar which would explain the uptick and closure plans. So just anything you're doing a hope those struggling beyond the other rent waivers you mentioned will be great. Thank you.

Yeah, Hey, Jeffrey Scott I think a couple of things I'd say to that one I do think theres going to be some industry closures, especially from the independence. We've we've all seen in read a lot about that in the news and I think the advantage our franchisees have yes, their local business owners and community averaged seven stores per network, but there.

Connected to a bigger brand right. So they've got the advantage of that national advertising Theyve got the support and infrastructure of an office here with all the safety protocols and being part of that bigger system. I think gives them a lot of the advantages whether that be supply chain access to products, whether that be negotiating better pricing or some of the leverage we've had with landlords and.

And other activities out there to help the PNM also so I believe our Dunkin' franchisees are uniquely positioned.

To have the best of sort of a small business aspect as well as the best of being part of one of the largest coffee companies in the world.

Yes, Jeff and I, if I could just add to that as well.

You know look if you just take a step back and say our brand is a high frequency low touch affordable ticket.

For 70 years, we've positioned ourselves as the get and get out get on your way brand.

And Thats, playing well right now and we weren't of the first brands that flexed into enhanced safety measures and the consumers responding so.

We really like what's going on in terms of.

No.

The call a cooling of the heard.

During all of this yet we are starting to see closures and we're starting to see plame pain points out there and you would expect that there's going to be opportunities for our franchisees.

Two.

Either relos sites take advantage of sites, new store openings et cetera, but.

Too early to give you a sense of how much that's going to impact us, but we are starting to see that out there in the marketplace. Thank you.

Thank you.

Thank you. Our next question comes from the line of David Tarantino from Baird. Your question. Please.

Thing.

I have a question, it's very related to the last one and I guess.

It's about growth in the us and Dave or.

Or whoever wants to take Thats, one can you comment on.

How franchisees are positioning for growth heading into next year. It seems like the environment could be good and just wondering if.

When we get past solved all the potential closures here are we going to see a return to growth as early as next year that getting pushed further out.

Hey, David It's Scott I think Thats certainly our hope we've had a lot of conversations with our franchisees last quarter and probably this quarter. Two is still about reading the tea leaves and letting things settle.

But I would expect franchisees to deliver on exactly what we've talked to them about which is sort of a double barrel to approach, which is the scrubbing of the asset base like Dave mentioned and really preparing that for more efficient profitable growth like Kate mentioned, so cleaning up the portfolio getting the networks more profitable and then looking for those relate those re.

Those those remodels because I think what we saw during Q2 stores with the drive through four times, a better than a non drive through stores. So.

The the desire is out there from our franchisees to get to better.

Paul.

Yes.

Assets to make sure they can perform and David This is Kate just wanted to add one more thing. Unlike the 2008 2009 recessionary period, our franchisees are not having difficulty accessing capital. So lenders are willing to lend, particularly to our system for both remodels and new store openings, so thats an encouraging sign.

David sorry for the three way jump on here, but a recall if you remember in the the memory banks one of the first question you asked when I arrived at Dunkin' was about California in the West and look I.

This pandemic has been awful.

And I wouldn't wishes on any one but if there was a bright spot.

To come out of this it would be our performance out there in those markets and I can't stress that enough.

Positive.

Low teens on same store sales during the quarter and our California franchisees are Texas franchisees are all of them out west in these emerging markets are.

Really.

Foods the enthusiasm is at an all time high and.

I, just know thats going to translate into growth as well. Thank you.

Great. Thank you very much.

Thank you. Our next question comes from the line of Dennis Geiger from you be ask your question. Please.

Great. Thank you could you just talk a bit more about operations the throughput I guess speed of service in the current environment just curious.

And any key metrics on the on that front relative to last year or kind of relative to when this started in March and April I guess trying to just get a sense for how big of but to unlock speed has been to the impressive sales recovery that you've seen and and where are you guys. Thank you can go from there as it relates to throughput of the impact on sales. Thank you.

Yeah, Hey, Dennis it's Scott.

Great question, we've actually seen in improvement throughout the quarter on speed.

The beginning in the quarter, we actually slowed a little bit given the chaos and everything that was happening, but what franchisees were able to figure out is how to better deploy folks on the on the front line and by frontline I mean, the drive through as well so in a lot of cases, when we close dine in a lot of restaurants actually.

Redeploy people exclusively on the drive through and we figured out how to operate more quickly through the drive through with throughput and it happened with without a lot of rocket science. It happened with a lot of sort of brute force and grid. So whether that was lineside lawn signs sort of handmade preview boards products stage in the drive through.

Windows, we did things to make.

The operation more efficient and then we leveraged our digital tools. So on the go ordering through the App traditionally when you place that order through the drive through we Didnt start making the product until you arrived at the speaker posts and we made a strategic technical change early on encoded so that those orders.

Fired automatically and it gave the crew more time to make those products. So they were ready and the we've really speeded up the drive through towards the second half of that transaction. So very happy with the throughput, although I'll say, we're never satisfied and we're continuing to look at additional enhancements for the drive through moving forward, even things like line bust.

In tablets where necessary.

The digital drive through menu boards to high definition headsets, all sorts of elements, including some upselling technology on the screens as well.

Great. Thanks.

Thank you. Our next question comes from the line of Matthew Difrisco from Guggenheim. Your question. Please.

Thank you can you give us an update on the next Gen stores, just what you're seeing as far as I think the 700, how they compare how they compare in a you'd be or potentially be investment to be relative left and then just one of them a little bit of bookkeeping thing here for modeling purposes.

The Boston in New York stores that represent 4% of your footprint that are temporary closed can you put that into terms or percent of system sales. Please. Thanks.

So I'll answer the first one so next gen.

It's a little bit difficult during the quarter for next Gen comparisons only because a lot of the next gens. We're in sort of these core markets like Boston or like New York. So it's a little hard to do that comparison, but I will tell you. The next gens are performing just as well now as they were before which means the economic.

Next on that return are still better than the traditional designs with the franchisee.

So we feel good about the model, but we are continuing to tweak it I talked about the low contact option that we're looking at we're also looking at a couple other next gen.

Design tweaks that maybe are more exterior focused more drive through focused initially to basically double down on the things. We saw that worked during the pandemic and then Kate you want to answer the second question, Yes, I mean, obviously, we have never broken down specific.

Regionally or do you may areas, Boston, and New York, obviously being two of our largest DNA is what I will say without giving direct guide or an answer to that is even though urban stores are down specifically in Manhattan and the downtown Boston area. We have we do believe that many of those sales have shifted from urban to suburb.

And in those markets and so as you can tell by our total comp performance.

Massachusetts, and New York and surrounding markets are still seeing we don't believe we've completely lost that transaction. So I understand where you're trying to go with that but don't want to give specific percentages on the downtown Dms.

Okay, but a 4% of a footprint is that something that we should think about as far as just the lost opportunity as they remain closed on wait for them to reopen.

No I wouldn't think of it that way several of the stores in Manhattan, and Boston elevated location. So you may have a store. If you think about on a block maybe we have forced to whereas in the Boston area on a block maybe we're down to two as opposed to four and maybe the hours are reduced in the afternoon.

Got it.

Hi, Scott.

No I was just going say you've got to you got to remember of 4% a lot of that are what we call alternative points of distribution, which are relatively.

Low volume stores, so probably 70 traditional locations that.

If you think about that impact on the total fleet is not significant.

Makes sense. Thank you, thanks, Matt Hey, Matt.

If I can jump in here and give you the way that I would also think about this and I think all of you should.

Put this and into the model a little bit.

With a dramatically reduce commute.

Limited hours close lobbies and our two largest markets be in New York City in Boston, continuing to emerge slowly and we're hitting negative low single digits.

Month to date in July.

I think that speaks the resiliency of our franchisees are employees and what a great brand. We have so that's how I think about it you look at all those other pieces and how we've been able to navigate beyond just being a commuter brand and how we've been nimble and making great decisions and our franchisees have been.

In the communities doing the right things.

And serving them. This is where franchise system really stands up a 100% franchise system really stands up because you've got.

Real leaders in those many markets today. Thank you.

And David Thanks.

Thank you. Our next question comes in the line. Thank for Gregory from Bank of America. Your question. Please.

That's what I guess for given my last name first but the.

Just just one question I had was it seems like I think.

At the beginning of the pandemic there was a lot of concern on the breakfast category and you guys seem to be outperforming pretty well and I'm curious.

Where do you think the shares coming from is convenient stores, where people might not want it I don't they don't touch kind of the milk canisters or.

You think this is coming from some of the sit down breakfast category players. Just just curious where you may be taking share from even if the categories under pressure.

Yes, I think first off I think the thing that helped us. The most was our accessibility in that we stayed open right. So even at the peak of co bid. It was a small percentage of the total asset base that was closed for short amount of time. So we were an option in many markets. The second was how people could use us right. So through the drive through through paying with there.

On on the go order ahead or curbside or delivery. So we gave them all those options that frankly, a convenient store.

Doesn't have or some of the other chains that closed whole scale markets weren't available. So I think I think that's where we probably took share from and like I said before.

The timing was perfect because as we pivoted and put these new sort of modern products out there whether they were the snacking options or the refreshers or the masha they were exactly what that consumer wanted and it's been a nice match.

Thank thank you.

Thank you. Our next question comes in the line Laurence Silberman from Credit Suisse. Your question. Please.

Thank you highlighted you still expect franchisee cash flow by the end as the year to be that 80% relative to the beginning the year I would've thought maybe topline recovery would it faster than initially expected. So are there any factors to consider there and we'll comp is embedded in that lap outlook, and then any kind of thoughts or commentary on our franchisee margin.

They're trending given recent changes that the limited hours or eliminate operations and it's right there.

Yes, Thanks Lauren.

So we're not going to guide on the comp for the here just given the fact that we know what's happening in the current state and we don't know what's going to happen.

With the pandemic, but.

When we did the initial estimate we had put an assumption for the traditional store.

What we were seeing in our drive through stores as well as what we are seeing for government.

Hey that had come through and as we moved through the second quarter and into the third quarter.

We are seeing a slightly improved and better sales performance than we thought the franchisees are also extending their operating hours and as Scott and Dave mentioned, bringing new innovation.

We had factored in those things that if sales have lifted that we would start to invest back in more into the business. So we still continue to believe that 80% is the right number assuming that assumptions don't change because of the pandemic.

All Muslims that is your stores currently of lobbies open and how are you thinking about that reopening.

Yes. So we have two things I'd say, we've got about 1000 stores that have what we called in and available right now weve paused for a little bit as we've seen cases increase across the country, but we continue to make the right decision in each of the communities and I would just say when we opened the dining room.

Rooms for dine in remember there is still open for on the go for takeout for ordering at the front counter and take away.

But the sit down dine in option Doesnt make a giant difference with a drive through store. It turns out consumers are still preferring to go through that drive thru and frankly per your earlier question.

The profitability for franchisees if they can focus just on that drive through lane may actually be the same or better. So that's how we're looking at it right now we'll pause for a little bit as we watch the case.

The case lift in coated.

Across the country, but about 1000 right now have the dining rooms open for dynamic.

Thanks, so much.

Thank you our final question for today comes from the line of Krisko from RBC capital markets. Your question. Please.

Hi, Thanks, and good morning is so with the reinstatement of the dividend in the repayment of the borrowings under the variable funding notes, how do you think about capital allocation priorities today and would you anticipate potentially resuming share repurchases. This year, just given your strong liquidity position. Thanks.

Hi, Chris This is Kate so obviously, our strategy and our capital policy on returning cash to shareholders hasn't changed.

We certainly are in discussions with our board on how best to use our cash I think at this point, it's safe to say given the uncertainty of how long the pandemic will last and potential needs of cash in the future. We are not currently in the market repurchasing stock and don't anticipate to right now I can't give any future answer on on.

What we will do but I will also say that we mentioned as majority of our franchisees did borrow funds under the carriers Act with the government and although we did not borrow had we borrowed we would be prohibited from repurchasing stock. So it's just something that we keep in mind as a good business practice in our responsible citizens as we.

As we consider those decisions with our board.

Great. Thank you. Thank you.

Thank you and this does conclude the question and answer session of today's program I would like thing and the program back to Dave Hoffman, Chief Executive Officer for any further remarks, yes. Thanks, everyone for again, joining very early here.

Look just in closing.

I think Q2 just speaks to the customer is responded to how we conducted ourselves during this crisis.

And us being our franchisees in the brand choosing people will for profits.

As you've heard me say before doing the right thing and the communities, we serve and smartly adjusting to what we believe are the two biggest forces that the customers are asking for make me feel safe and give me access to your brand of my terms. So we're going to continue to be guided by doing the right thing in the communities, we serve and we think thats going to deliver the right thing for the business as well.

So thank you everyone have a great Dave talked you soon bye bye.

Thank you, ladies and gentlemen for your participation in todays conference. This does conclude the program you may now disconnect good day.

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