Q3 2020 Dunkin' Brands Group Inc Earnings Call

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I would now like to hand, the conference over to your speaker today to Stacey Caravella Senior director of Investor Relations. Thank you. Please go ahead.

Thank you operator, and good morning, everyone speaking.

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 Josh.

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 the call.

Our release can be found on our website investor Dot Dunkin' brands Dotcom, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures.

Before I turn the call over to Dave I'd like to note that we will not be conducting a Q and a session today.

Now today.

Thanks, Stacy and thanks, everyone for joining today.

Before we get to Q3 results as we stated in our press release on October 25th we have held preliminary discussions to be acquired by inspire brands.

There is no certainty that any agreement will be reached however, given the ongoing discussions the board of directors has taken no action with respect to a cash dividend.

We will not comment further on the discussions unless and until a transaction has agreed to.

Or discussions or terminated.

Alright no.

Now on to our third quarter results.

The World has faced challenges in 2020 that collectively we could never have imagined and our thoughts and prayers are with all of those who have been impacted by this global pandemic and global unrest.

The pandemic is also challenged the U.S. economy in particular small businesses, including restaurants. However.

However through tight alignment with our franchisees and licensees, we quickly adapted our brands to anticipate the changing consumer landscape and achieved low single digit growth across key financial metrics of revenue.

Operating income.

Importantly, we had positive same store sales in the U.S. for both Dunkin' and Baskin Robbins.

For Dunkin' U.S. the segment responsible for more than 80% of our operating income.

<unk> third quarter performance as a result of the initiatives we have put in place over the past two years under our strategic plan the blueprint for growth.

Speed and convenience have long been the hallmarks of our brand and great coffee fast is our guest promise.

But under our blueprint, we have been working to make dunkin' faster and even more convenient for our guests.

Duncan U.S. is a high frequency low touch affordable ticket business and that plays well in any environment, including today's.

Over the past few years, we've made smart strategic investments, both direct and indirect into the Dunkin' U.S. business.

The first was menu simplification.

Well this resulted in some near term reduction to same store sales at the outset.

We knew it was the right thing to do to enable strategic product innovation.

In future sales growth.

Next we co invested along with our franchisees and new espresso equipment and drive through tools focused on speed and capacity.

And finally, we made the investment to bring our digital lab in house as well.

Let me describe how each of these strategic moves delivered returns during kobin.

First in regard to menu innovation.

America's morning ritual has been up ended with customers working and children attending school from home.

As a result, they began visiting Dunkin' later in the day and we needed to respond with food and beverages that were suited for morning and afternoon Dayparts.

Because we simplified our menu weaker.

We created room for growth for all day product innovation.

We were able to quickly expand our menu with easy to execute handheld snacking items, such as bagel minis that complement premium beverages like our signature lotteries.

For more than a year now our franchisees and crew have been delivering a premium espresso experience to our guests enabled by our newest bresseau equipment.

And these products.

These are products that you know you can't be easily made and replicated at home as well.

Without this I can tell you we wouldn't have had the permission to stretch into Maki autos Camacho spilled milk lotteries as well.

Next we focused on improving the guest expectation through a better digital experience.

As I said earlier speed and convenience are core to Duncan and digital is a key enabler of both.

During the first quarter, we completed the lift and shift to bring in house, the intellectual property running our Dunkin' App.

This gave us the ability to make two and a half times the number of updates than we previously would have been able to.

These enhancements that clearly resonated with guests as we surpassed 21% of sales through our digital assets in the third quarter.

Value is also taking on greater importance for our guests during kobin.

This is driven enrollment and active participation in our loyalty program, we're learning more about our guests purchasing behaviors than ever before clearly paving the way for a loyalty transformation next year.

Among our achievements this quarter.

The proudest.

Proudest of the grit and determination displayed by our DB I family and our great great franchisees, who kept their restaurants open.

And safe their crews employed and their communities running on Duncan.

The also held the line on pricing through cobot, all with the goal.

Of doing the right thing.

By our guests.

And now I'll turn it over to Scott.

To cover the rest of Duncan U.S.

Got it thanks.

Thanks, Dave.

As Dave mentioned earlier Duncan U.S. delivered positive same store sales in the third.

0.9%.

Sales continued to improve sequentially each month with July down low single digits August turning positive and then an acceleration in September.

Through the week ended October 24th same store sales were low single digits.

We came into co bid with a strong foundation, having worked our blueprint for growth for multiple years with our franchisees.

As a reminder, our blueprint is centered around menu evolution digital transformation and convenience and accessibility.

Let me go through each pillar the blueprint as it relates to our Q3 results and I'll start with menu evolution.

We transformed our innovation to market process and are taking calculated risks on products to move faster than ever before.

Pink Velvet Macchiato much a lotta is Duncan refreshers old milk and try LATISSE were.

We are building equity with premium priced beverages, and expanding our menu sweet spot beyond hot drip coffee.

And importantly, we're talking to a new consumer who visits US later in the day.

We're drawing attention to both new and existing products through non traditional marketing.

The Charlie is a great example.

It's simply cold brew with caramel milk promoted by Charlie Demilio 16 year old tick tock sensation, who genuinely loves Duncan.

We took an existing product renamed it after her and positioned it to appeal to a younger consumer.

And we did this through a highly relevant social media channel keeping Duncan in the forefront of the American dialogue.

We also launched our fall menu products, such as our pumpkin Spice signature latte and pumpkin, an Apple cider Donuts in August earlier than ever because we knew that guests were craving the comfort of autumn.

This drove record average weekly sales for spread so in a significant increase in donut sales.

Looking ahead, we will continue to emphasize quality customization and flavor we're.

We're tapping into a younger consumer by leveraging our leadership in iced beverages and bring in color and texture to our lineup.

We're engaging them and driving awareness and adoption across all touch points advertising in store and social.

We will balance our product innovation with operational simplicity, which is always a top priority.

We will continue to roll out easy to execute snacking products like our bagel minis, croissant, stuffers and roll ups apparel, well with our beverages.

Well also bring news to existing products like highlighting hash Browns and our snacking menu.

Our beverage innovation and snacking options are a powerful combination.

We're building, an all day sales opportunity and bigger and more profitable transactions.

Value is also a critical part of our plan going forward.

For example, the two dollar Duncan refresher introductory offer.

While the rollout of Duncan Refreshers was already in our product plans prior to coated the value offer it was not.

But by working with our franchisees, we quickly implemented across the country, resulting in the most successful beverage LTO launch in our brand history.

While our menus evolving with a focus on specialty beverages, we're not walking away from our heritage as a hot drip coffee business.

Continuing our high volume smart Brewer installations, and expect to have those completely rolled out 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, enhance our quality and consistency across the system.

Lastly on menu, we are truly an omnichannel brand.

Consumers continue to look for trusted brands in the retail space and we're seeing strong sales across all our CPG products up 19% in the third quarter. According to IRA.

Sales of our K cups, and retail channels were up approximately 28% or nearly three times the category trend.

Between our CPG and in restaurant business, we're selling more drip coffee than ever before.

Cobot accelerated many of our blueprint initiatives, most notably our digital transformation.

We want guest visits to Dunkin' to be the easiest most convenient part of their day.

In Q3, we eclipsed $5.4 million 90 day active perks users a more than 30% increase over Q2 and more than 55% increase versus last year.

Growth was driven by offers like free coffee Monday, requiring a food purchase and free donut Friday, requiring a beverage purchase.

Both drove incremental sales net margin and an increase in transactions.

We have the strongest active DD perks enrollment on record during the three weeks. These offers were available.

And on the launch day of the Charlie Tick Tock partnership we hit a new record for daily active App users.

More than one in five Duncan transactions is now through a digital channel mode.

Mobile ordering delivery and curbside growth have increased exponentially as customers demand contact was purchasing and easier accessibility to the brands They love.

On the go mobile ordering now represent 8% of our transactions and we continue to push this consumer convenience by pulsing in bonus point offers as well as launching new features in the App like quick ordering.

We've also made the on the go pick up area larger and a more prominent fixture in our next Gen restaurant design.

In existing restaurants were adding more permanent visuals and expanded shelving to the pickup area.

In Q3 delivery average weekly sales grew nearly 2.5 times versus Q2.

They were fueled by our expanding our us footprint to 6500 restaurants in partnership with Grubhub door Dash 10, new breeds.

As well as offering compelling national promotions, such as door dashes free 25, count Munchkins and free delivery on orders greater than $10.

As for Curbside, it's now available in approximately 1500 restaurants.

Non drive thru locations with curbside are significantly outperforming the rest of the non drive thru sites, we're continuing to work with our franchisees to activate more restaurants, and particularly in our core markets where drive through may not be an option.

Finally, let me touch on store development.

As we announced in Q2, we are working with our franchisees to scrub our asset base by eliminating low volume low profit restaurants.

Year to date, our field teams along with our franchisees have made great progress closing 687, Duncan U.S. locations, including 447 Speedway self service service kiosks.

For many franchisees closing these restaurants will enable them to redeploy capital into the brand whether through next Gen. Remodels building, new restaurants, or relocating restaurants to higher traffic areas, where they can add a drive through.

Specifically in the third quarter Dunkin' U.S franchisees opened 80 gross new units.

For a total of net negative 41 units, excluding the speedway closures.

In keeping with our development focus on quality over quantity year to date, our 2020 gross openings are exceeding our initial targets for new first year sales.

So while our franchisees are opening fewer units this year dirt due to coated the ones. They are opening are generating higher sales per restaurant.

Franchisees also completed 60 remodels during the third quarter, bringing our total number of nexgen restaurants, both new and remodeled to more than 800.

Leveraging our learnings from cobot, we now have a next gen remodel that is quote low contact and includes options such as removable seeding no touch faucets, a walk up window and a reconfigured frontline to further encourage social distancing for customers in the queue.

Of all the lessons, we learned during Cove and the power of the drive thru was overwhelmingly evident.

Our drive thru locations, approximately 70% of our traditional portfolio and more than 90% of our restaurants in newer markets had double digit same store sales growth in Q3.

We have accelerated various drive through technology tests, including adding more outdoor digital menu boards line busting handheld tablets, and a new high definition speaker system.

We're also working with our franchisees to test exterior first three models and to incorporate select safety features such as the low contract options in existing restaurants.

Our performance in newer markets, where we have the most significant growth potential continues to be a highlight during the pandemic.

With other concepts closed new guests discovered our innovative everyday value price specialty beverages, and our low contact service options.

And they're making us part of their everyday ritual.

In the West and southwest markets Q3 saw double digit comps positive traffic strong beverage sales and rapid digital adoption.

Supporting not only franchisee enthusiasm, but strong cash on cash returns.

Our field teams are working closely with franchisees to turn the enthusiasm into additional new restaurants.

We've never been more excited about the performance in our newer markets.

And we're seeing increased interest in our brand from sophisticated and well capitalized operators and were recently named the top franchise brand by entrepreneur magazine.

We believe that the long term potential for Dunkin' restaurant expansion is unchanged, we are still a growth brand.

With our focus on great coffee fast Duncan is thriving in a co bid world and we are excited about the future.

Our partnership with the franchisees is strong.

That relationship remains our biggest asset and I know it will serve us well as we emerge from this pandemic.

And with that I'll turn it back to Dave to cover Baskin U.S and international.

Okay. Okay. Thanks, Scott Baskin Robbins U.S had another impressive impressive quarter delivering positive same store sales growth of 6.5%.

This is a sequential improvement from Q2 and was achieved despite rolling over the traffic driving stranger things promotion last year.

Performance was driven by the launch of our new creature creations program, which captured consumers' imaginations and provide a families with a fun escape, but during these trying times.

Baskin as a brand known for bringing people, particularly families together, which has been especially true during cobin.

Online sales of cakes courts, and take home items were up more than 100% versus last year as consumers were looking for more options for at home consumption.

And delivery sales through door dash were up more than 200% during the quarter, we added briefs as a delivery partner and approximately 1100, Dunkin' and Baskin restaurants in total delivery is now available in more than 90% of our us system.

Consumers are going to brands, They trust and with our 75 years of brand Heritage Baskin continues to resonate with customers in this environment.

Okay now on to international.

In Q3, both brands saw sequential improvement in same store sales.

Baskin Robbins is proving resilient during the pandemic in our international markets as well.

Hi value strategic partnerships, such as the collaboration in Korea, with K pop sensation Bts as well as menu innovation with nutella in the Middle East are driving global awareness engagement and of course sales.

Digital plays a critical role in our international plans and co bid has accelerated our use of digital assets to improve easy access to our brands offerings in Q3 ice cream cake sales were up 30% versus the prior year as Baskin Robbins offered cakes through diller delivery and curbside pickup.

As well.

Digital transformation continues to spread across our international markets as we recently partnered with our Malaysian licensee Golden Scoop to stand up a local lab and 10 weeks.

And as we discussed last quarter, many of our international franchisees and licensees are performing a realistic.

Testament similar to what Scott referenced earlier for Dunkin' us.

Our international franchisees and licensees close 212 of the anticipated 350 restaurant closures in the third quarter.

Again, these are low volume sales locations, which had been unprofitable for our franchisees and licensees and not representative of our true brand expression.

Globally, both brands have stood tall through co bid all of our strategic grown work over the past few years in conjunction with our franchisees and licensees is really paying off and.

So with that I'll turn it over to Kate to cover our financials Kate.

Thanks, Dave.

We are very pleased with the faster than expected recovery of the Dunkin' us business.

Getting to positive same store sales for Dunkin' us in Q3 was a major milestone.

Its impact was reflected in our solid revenue and operating income growth given our 100% franchise asset light business model.

And our continued ability to leverage our DNA.

As a result of the positive comp, we now expect 2020, Dunkin' us franchisee cash flow.

When factoring in the Paycheck protection program could be positive and will likely exceed our initial expectation of 80% of where we thought it would be coming into the year.

Keep in mind. This is an average and we expect year over year cash flow will be negative and harder hit urban areas, such as New York City.

We still have a small population of restaurants that we're closely monitoring the performance of.

Including many in New York City, as well as other urban markets like Boston, where many corporate offices have yet to return to fully open.

We have seen slight sales and traffic improvements on a week to week basis, and many of them, but they are still not close to early first quarter levels.

Therefore, we are extending financial support primarily with royalty relief through the end of the calendar year to help stabilize franchisee cash flow during their recovery period.

Our goal remains to reinforce the financial stability of our franchisee networks in these hard hit areas to ensure that they remain well positioned for when traffic returns.

Now to our third quarter financial results.

Revenues for the third quarter increased $5.7 million or 1.6% compared to the prior year period.

This was primarily due to an increase in franchise fees as a result of the deferred revenue recognized due to the strategic closure of restaurants, including Speedway.

And an increase in advertising fees and related income.

This was offset by a decrease in variable rental income as a result of a decline in sales at our lease location.

Operating income and adjusted operating income for the third quarter increased $7.6 million or 6.2%.

$7.5 million or 6%, respectively compared to the prior year period.

This was it was as a result of the increase and franchise fees as well as an increase in ice cream margin and a decrease in DNA expenses, resulting from reduced spending due to covance.

Net income and adjusted net income for the third quarter increased by $1.6 million or 2.2%.

And $1.6 million or 2.1% compared to the same period last year.

This was primarily a result of the increases in operating income and adjusted operating income offset by an increase in income tax expense and a decrease in interest income earned on our cash balances.

Income tax expense was up driven primarily by the increase in income in the current year.

As well as excess tax benefits from share based compensation of $1.8 million in the prior year period, compared Q point $5 million in the current year period.

Third quarter tax expense also reflects a benefit of approximately $1.3 million related to foreign income and foreign tax credits upon filing our fiscal 2019 tax return.

Diluted earnings per share and diluted adjusted earnings per share for Q3 increased by 3.5% to 89 cents and 3.3% to 93 cents, respectively compared to the prior year period as a result of the increases in net income and adjusted net income respectively.

Okay, and a decrease in shares outstanding.

Excluding the impact of recognized excess tax benefit both.

Both diluted earnings per share and diluted adjusted earnings per share would have been lower by approximately one penny and two pennies for the third quarter of fiscal years, 2020, and 2019, respectively.

Excluding cash reserved for gift cards and advertising funds of $239 million. We ended the third quarter with $341 million and unrestricted cash held domestically and $33 million held in accounts outside of the United States.

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

As required under our debt agreements our restricted cash reserve of 90 million includes approximately three months of debt service amounts include.

Including principal and interest.

Moving to our leverage.

We ended the third quarter with a debt to adjusted EBITDA ratio of 5.1 to one.

Although we don't have any debt maturities until fiscal 2024.

Our prepayment penalty on those maturities goes away in November of 2021.

On two of our tranches and so we continue to monitor the debt markets Accordingly.

In closing I'd like to reiterate the quarter to date domestic sales information in this morning's release as well as to highlight some other Q4 financial consideration.

As of the week ended October 24th.

Quarter to date same store sales were low single digit positive for open stores for Dunkin' U.S.

And high single digit positive for Baskin Robbins U.S.

As a result of continued depressed sales in certain urban market. We anticipate we will provide our most impacted network relief of up to $4 million, which will reduce Q4 royalty income.

While we remain down on a year over year basis in GNS, given significantly reduced travel and other corporate expenses.

We expect Q4 DNA to be in line with this third quarter.

As business continues to recover we have resumed certain projects made contributions to expedite digital technologies and we have reinstituted employee benefit that were put on hold at the onset of Cove. It.

We expect net interest expense for Q4 to be in line with Q3.

And for tax we expect our Q4 tax rate to be approximately 26.5%.

As a result of anticipated favorability relative to our foreign income.

Now I will turn the call back over to Dave.

Okay. Thanks Kate.

Over the past several years, we have accomplished much to be proud of including the creation elaboration and execution of strategic plans for our three business segments that led to the transformation of our two well known brands.

Not to mention the iconic rebranding of Duncan.

We stood tall during cobot and supported our franchisees who in turn had the backs of their crews their guests and their communities.

Our guiding principle was people over profits and resulted in strong topline and bottomline results proving proving that the two are.

Not mutually exclusive.

None of this would have been possible without our strong unique relationship with our world class group of franchisees licensees suppliers and employees.

So on behalf of our Dbi family. Thank you.

Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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