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Dunkin' Brands (NASDAQ:DNKN)

2013 Consumer & Retail Conference

March 12, 2013 11:00 am ET

Executives

Paul C. Carbone - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Bank of America Merrill Lynch's restaurant analyst. I would be very pleased to continue our restaurant sleeve of the consumer conference. And a very good part of the day. We're moving from casual dining to coffee and ice cream, which is always good. So we're very, very pleased to have Dunkin' Brands present today, and I'd like to introduce the CFO of the company, Paul Carbone. Paul, thank you for joining us.

Paul C. Carbone

All right, thanks, Joe. All right, so we're going to go through a few slides, and then we'll open it up for Q&A. So we'll talk about fourth quarter, talk about 2013, how we see the business and kind of what the long-term perspective is for the company. So forward-looking statements. All right. So as we look at our company, we think we're in a unique spot where we have, across both brands, about 60 years of heritage and significant white space, both internationally, but more importantly, domestically. All right. So generally, you see companies with a lot of heritage and not growth or newer companies with a lot of growth and not the heritage. So we have the benefit of having both, really driven then -- driving shareholder value through the 100% franchise, asset-light business model, which we've really concentrated over the last couple of years.

All right. So if you look at it, this is our 4-box strategy, how we think of the business and how we think about growing it long term. So in the top 2 boxes, focus on Dunkin' U.S. So in the top left, growing comp store sales to drive franchisee profitability. As we look at comps, about 50% of every dollar flows to the franchisee's bottom line, so really driving their unit economics and their franchising profitability.

On the top right, this contiguous U.S. development. So think about it, we are basically, most of our restaurants, east of the Mississippi. We have the whole west to go. We just announced California. We're going to open up restaurants in 2015. You'll see restaurants in Denver in 2014, so this contiguous growth, strategic growth across the U.S. Our new unit economics are fantastic. You'll see this in the slide going forward. And really, this is the reason to believe that this is a national brand, not just an East Coast or an east of the Mississippi brand.

In the lower right is driving accelerated international growth. All right. So you'll see this in the Slide 4. This is really Baskin International is growing now. And if we think about Dunkin' International, that's probably more of midterm, long-term to see significant growth out of that business, but we have a significant white space internationally across both brands and can really capture on that going forward.

And then in the bottom left is Baskin U.S. So this is a business that's gone from, prior to the IPO, what we would call a distraction and we would label that negative 6 comps on top of negative 6 comps to, as we went through the IPO, we said to Bill Mitchell, who leads Baskin, "Don't be a distraction. Get us to flat comps." And he's posted now 6 quarters, consecutive quarters of positive comps. As we come into the fourth quarter, last year, we had about 600 basis points of good news from weather, so that's a tough rollover. They posted a plus 9 last year. But this is a business we now see as a slow growth business. Getting to net unit development, maybe next year, it's flat to up slightly positive, and that's 2% to 3% comp growth every single year. So we see this as becoming a slow growth business.

All right. So this is the kind of the horizon I talked about. The bottom 2 arrows relate to the top 2 boxes of the last slide. So growing comps in DD U.S. and growing contiguous development, near-term, medium-term and long-term growth of the business. As you look at the blue driving accelerated international, right, we see that medium- to long-term. If you were to dissect that one layer further, you would see Baskin International growing near-term, medium-term, long-term growth and you would see Dunkin' closer to the longer-term, medium- to longer-term growth. That's how we think about International.

And then the Baskin business that's, over the medium-term, becoming a slow growth business. It's never going to be a powerhouse, that the ice cream business in the U.S. is a very particular business as far as the dynamics with grocery and stuff, but we think we can grow this business so it can add to earnings growth.

All right. So let's go back and look at that top left corner of the 4-box to driving comp store sales. So I believe many of you have seen this. So going into the recession, 45 quarters of positive comp store sales. And the worst of things, we're at negative 1.3. So I think it talks a lot about the brand itself and how it resonates with consumers even during tough, difficult times. And then from a business model standpoint, even in '08 and '09, we grew our EBITDA, all right? So it comes to that top right-hand side of the box of this development. So even during negative comps, we grew our EBITDA. You've seen us since the IPO in '11, very strong performance, capped off with Q4 plus 3.2. So we've seen sequential 2-year comps getting stronger for the last 3 quarters coming out of the second quarter of last year, so a big piece of what drives the business. Now comps, for us, isn't a huge EPS driver, but it's a huge franchisee profitability driver and a huge health of the business.

All right. So how do we drive that through? How do we drive that through the comp store sales? So really, we have a portfolio of high-margin products. We all talk about beverage mix and beverages being the Holy Grail of profitability. Well, I can tell you, our Breakfast Sandwiches are slightly below beverages. They're not at the beverage level, but they're slightly below Beverages, significantly above Bakery, which is donuts and bagels, all right? So when we talk internally, we talk about these high-margin products and high-margin product mix. It's really helped unit economics, especially in our western and emerging markets, because it gives them another weapon of profitability.

And then successful limited time offers, all right? So we have perfected this strategy of 12 LTOs a year. They come in, they go out. In January, we launched the Sausage Breakfast Sandwich, better for you, under 400 calories because it's a turkey sausage. And we went right into February with the heart-shaped brownie batter donuts, so we went from good for you to good -- really good tasting. And then we followed that up in March with the Angus Steak Wrap, which we brought back from last year but changed the egg on it, all right? So it's a different -- same tested product. We knew it was going to be successful, but we were able to change it up a little bit. So the LTO strategy working for both food and Beverages.

All right. So here's 15 years, almost 20 years of innovation. You see us back in '96, Breakfast Sandwich is bagels. The first day we started selling bagels, we were the #1 seller of bagels in the U.S. All the way up through, in 2004, iced lattes. 2008, we introduced DDSMART. So this is our version of healthy choices. So we believe it's important to have that on the menu board so people have that choice. Through Wake-Up Wraps in 2010 and then the launch of, in 2011, of K-Cups, the Big n' Toasted sandwich, and then leading into January's Turkey Sausage Breakfast Sandwich this past January. So very deep pipeline. I've never -- it's never been deeper, and it's both new products and then these -- a twist on some older products, all right? So back in 2010, we launched the Waffle Breakfast Sandwich. At the time, it was our best-selling LTO in history. Today, it's not even in the Top 5, all right? So we just keep launching newer items that continue to take this to the next level.

All right. So contiguous store expansions, they're on the top right-hand side of the 4-box. All right. So what does this look like? We ended the year with about 7,300 stores in the U.S. in Dunkin'. We believe we can get to about 15,000, a little bit north of 15,000. So it's -- that penetration is only 1 in 20,000 across the whole U.S., all right? And where do we see that coming from? So in our core markets, if you think about it, New England, New York, in that area, about another 100 restaurants, all right? In the established markets, so that's down to Philadelphia, most of New Jersey, Florida, about 350. We still have 3,000 in the emerging markets. So that's both east and west of the Mississippi, all right, so 3,000 restaurants. And then clearly, in the West, another 5,000 restaurants to get us to 15,000. This is, long-term, very achievable, we believe, and we are seeing great unit economics on the new builds, which is driving significant demand for the brand as we move west.

All right. So how do we think about our portfolio of restaurants, and this is DD in the U.S., all right? So 50% of the restaurants have a drive-through out of the existing asset base of the 7,300, all right? Drive-throughs are extremely important to us. We push about -- where we have drive-throughs, about 60% of the business goes through the drive-through. So they're very, very important. 70% of new restaurants have drive-throughs, and the way to think about this is, every place we can put a drive-through, we put a drive-through. So that 30% that don't have drive-through is either zoning, it's an in-line location so I don't have an end cap, it might be an urban location where a drive-through doesn't make sense. But every place we can put a drive-through with a new restaurant, we do.

We did 1,700 remodels over the last 3 years. We'll do close to 600 again this year. The average age of the units is less than 5 years of the current image, all right? So we have a new image. It's a young image. People are reacting to it. We're now launching digital menu boards in our restaurants. So you'll see, in the restaurants, as we remodel beginning in the second quarter, you'll see digital menu boards going in all our restaurants, all our remodels and new builds.

We have roughly 2,000 24-hour stores, so we think this is an opportunity in a couple of places. One, how do we get more 24-hour stores, piece number one. Maybe there's another 500, 600 restaurants. Is there something about extended hours, all right? So the hour -- if most restaurants open at 5:00, what we find is if they open up at 4:00, it actually makes the 5:00 hour busier because they're ready, plus they get some business at 4:00, all right? So are there extended hours? And then are there -- both of those on a seasonal basis, all right? So do we do 24-hour stores or extended hours during the summertime or fall depending on where the location is? So I think we attack this in 3 different ways. And then from an existing or where we have our assets, about 85% are traditional stores and 15% what we would call APODs, or alternative points of distribution. So a healthy -- we have a healthy set of restaurants in here in the U.S.

All right. So what does accelerating growth look like? Our long-term guidance on net unit development in the U.S. was accelerating forward -- accelerating to 5%, between 4% and 5%. If you take the high-end of our guidance this year, we're at 5%. So candidly, we got there a little bit faster than we thought 18 months ago when we launched the IPO. And if we get to the end of this year and we're close to that 5%, do I see that long-term guidance inching up some? Yes, I do. Will we open 8% net restaurants? Probably not. I think we've all seen that overdevelopment movie, and it generally doesn't end well. So I think we like that 5%, and it may inch up.

This is our 2011 cohort [ph], so top line of about 860,000. You see the CapEx at 461,000. Cash-on-cash returns, 25% to 30%. And as we've talked to franchisees, that 25% is the magic number for them to keep developing.

As a data point, in 2008, before the current management team, that cash-on-cash returns for emerging and western markets was 5%. So there's no doubt why we weren't developing west back in 2008 with those type of returns.

All right. So I haven't figured out this remote or -- all right. So what's changed '08 to 2011 to get those type of returns? So focus on real estate site selection, all right, where to put the restaurants, how far to put the restaurants together or apart. In New England, when we open up a restaurant in Boston, we can make the consumer take 3 left-hand turns to get in the drive-through. When we open up in Dallas, we can't do that, all right? And that was a learning for us. So real estate site selection.

Secondly, franchisee selection. So years ago, if you showed up with a bag of money, we would sell you a franchisee. Today, you still need the bag of money, but you also need operational experience. So all our new franchisees that are coming into the system are true operators, all right? We have this operations-focused culture. So Paul Twohig, who runs our Dunkin' U.S. business, he's a franchise himself. He owned Burger Kings, he owned Boston Markets, he works at Starbucks. He is operations-focused.

And we have taken our guest satisfaction survey scores, all right? From 2010, we were 8 points below the industry average until we ended last year at 12 points above, all right? And the industry has gotten better as well. We've moved it 20 net points, all right? That's part of, not only is it marketing driving our comps, it is in-store experience that is driving our comp performance, all right?

National media, focused on Beverages. So we'll open up our first restaurant in California in 2015. We've had media on TV since 2010, seeing commercials about Dunkin', seeing commercials about beverage. We have these high-margin items that we've talked about, and flat national cost of goods to the back door of the restaurant by 2015, all right? That's going to improve that western P&L by about 700 basis points over where they were in 2011, again, driving the unit economics and the returns for our franchisees.

All right. So this year, targeting 330 to 360. We get close to that 5% net development. You see where it's coming in. It's only 10% of new restaurants in our core. Remember, long-term, we only had 100-restaurant opportunity there. Established 33, you see the emerging -- so this year we're going to concentrate in emerging, almost 40% of our new development, and the west close to 20%. But what am I selling on? FDA, it's a store development agreement. This is development in '14, '15, '16, '17. Where am I selling those? You'll see the change, right? So west is -- 2/3 of my sales are in those western markets because that's really my growth and that's what I'm selling today, and then the other piece really being in the emerging.

All right. So bottom right, International. So we'll start with Baskin. Baskin International is our second biggest segment in the company, with jewel [ph] in our International business. And think about Baskin International as you think about Dunkin' U.S., all right? It is the driver of profitability in our International segment, all right?

So we have a history of leadership in the ice cream segment. We're a very premium brand internationally, very innovative partner in Korea, is very innovative with ice cream cakes and things of that nature, flavors. We are -- internationally, it's very much an out-of-home occasion. Unlike in the U.S., where most of us eat ice cream at home and buy it in the grocery store, internationally, it's very social. It's out of home. People have smaller houses, smaller refrigerators. And then really, it's about growing high-potential new markets. So we're not in Brazil. We have a lot of growth still left in Russia. We're underrepresented in China, although growing. So we have a lot of markets still to grow. We have a great business in Japan, a great business in the Middle East and Korea.

So Dunkin' International, I talked about longer-term. When I think about this 4 to 5 years before, we see some growth working on solving issues in the supply chain. We have strength in the Asian markets, so we have a lot of stores there. AWS is a little bit lower than we'd like. So how do we drive that AWS? How do we drive the Beverages? It's really about making some key investments. And it's really in people more than anything else, but in operations, in supply chain, things of that nature to help that brand grow internationally. And then the same thing, growing in those strategic markets as we think about -- we haven't -- neither brand is in Brazil. All right, I guess I'm done. Neither brand is in Brazil, small presence in Russia with Dunkin'. So we still have a lot of growth in this brand. We just need to get the unit economics right. And the good news is, attacking this problem is what we did in the U.S. in 2009, 2010. So we have the roadmap of how to fix this. It's just up to us to actually executing on it and doing it.

All right. So BR, all right, so returning it to a slow growth business, 92% aided awareness. So this is a brand that resonates with the consumer in the U.S. We're optimizing the store restaurant base. We think we'll have -- this year, we'll be negative net development. It will be our last year of negative net development. Huge opportunity on flavor equity. We're known for flavors. More flavor, more fun. And then also, cake innovation and how do you drive cakes. And really, again, like DD, driving improved operations, and we've seen that lift in consumer score.

All right. So we have a great asset-light franchisee model you all know about. We don't need a lot of capital. The goal is to return cash to the shareholders, to drive value that way. We will continue to delever based on EBITDA growth. We'll make some minimum pay downs, but this is a story of a company that has what we would call permanent debt on it, delevering 1/2 to 3/4 of return a year, comfortable in that 4.5% to 5.5% range that you've seen us play. And as we get down closer to the 4.5%, you'll see us do a relevering event, return that cash to shareholders through a couple of vehicles, and then delever again with the EBITDA growth. We repurchased $450 million worth of shares in August at $30, and then we raised our dividend in the Q1 dividend from $0.15 to $0.19 a quarter. So again, returning cash back to shareholders.

All right. So 2013 guidance. So in DD U.S., 3% to 4% comps, all right? As you think about that, because of the rollover, think about the beginning half of the year probably less than the average of, call it, 3.5% in the middle left, the back half of the year a little bit more. I'll tell you we're comfortable with this even with all these storms we've seen in our core markets, all right? So unlike last year, where we had no storms, it's every single week it seems like we're getting storms that will impact Q1, but we are comfortable with 3% to 4% comps. And remember what I said earlier, comps don't have a huge impact on EPS, and certainly, inside any quarter, they don't.

330 to 360 net units, new unit development and 450 to 500 remodels. On international, 400 to 500 unit developments. And then Baskin, 1% to 3% comps, all right? Again, they have a big rollover in Q1, and somewhere in the range of 0 to net negative 30 new unit development. So what that translates for the brand, 6 to 8% revenue growth, 10 to 12 on adjusted op income, again, 150 basis points to 200 basis of operating leverage as we leverage SG&A based on the top line growth. And our current guidance is $1.48 to $1.51 of EPS and somewhere in the neighborhood of 125 to 135 of free cash flow.

All right. So in summary, right, we have the ingredients in place. We believe this is a business that can continue to grow, continue to drive shareholder value, return value back to shareholders, all right? We have a unique mix of brands and buzz, all right? This is one of the only brands I've seen that we can come out with a donut and create the amount of PR that we do, all right? We have a track record of strong comps and continue to -- and expect that to continue. Domestic growth, you'll see and have seen. International growth in the Baskin is happening now. Longer-term with Dunkin', really focused on franchisee profitability. It is -- if anything to take away, we want to make our franchisees as profitable as possible because, if you think of the capital they're putting into this business, that is the engine of this business. And then the asset-light model is generating its free -- strong free cash flows and, really, the belief in Dunkin' that we will continue to return that to shareholders. So that, if I'm correct, is it. All right, we'll open this up for questions.

Question-and-Answer Session

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. I'll get the question and answer period going, but I encourage people in the audience to ask questions. So please wait for the microphone to reach you to ask your question. Before, I want to start with 2 questions, one is very broad and then one more narrow. On the broad side, talk about the flat cost of goods sold goal for 2015. I know you're well on your way to achieving that, but talk about it from the franchisee side, the franchisees who invest in the supply chain for Dunkin'. How does that work for them? What was appealing to them about signing on for this?

Paul C. Carbone

Yes. So let me give you a backdrop. So the franchisee -- this is prior to this agreement. The franchisee in Boston was paying the least, and the franchisee in Phoenix was paying the most. And the difference was about 700 basis points. Selling the same mix of goods, all right? So over 3 years, the franchisee in Phoenix will pay the same as the franchisee in Boston, all right? The interesting thing here is, the franchisee in Boston, his cost won't go up. It will actually go down about 20 basis points. So call it over 3 years, de minimis at best, right? But his cost won't go up. He's not subsidizing. The franchisee in the west is going to go down 700 basis points. So where does all that money come from? It comes out of route optimization, combining those 5 DC's, distribution centers, we've combined it into one national organization owned by the franchisee so you can optimize routes, you can optimize both procurement and distribution, they combined support staffs. So they have taken all the cost out of the system to fund this, all right? So that's more fitted, obviously, for the western franchisees. What's in it for the Northeast or the core franchisee is 2 things. One, they get a longer-term agreement to be the sole distributor and procurement on the Dunkin' Donuts, all right, as long as they hit certain performance metrics. And then more importantly, these guys in the northeast, they want to grow and they want -- and they know they have to grow outside of the Northeast, all right? So we had 5 franchisees go from Boston to Milwaukee, all right? They want the cost of goods they had in Boston, all right? So they know their growth is outside of the core, so they're also reaping that benefit. So at 3 years, they're 1/3 into the game, they've delivered about 300 basis points of savings already after the first year to the western franchisee. That was about 10 basis points ahead of plan. So we're well on our way.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay, and then a narrower question. Looks like Mayor Bloomberg's attempt to limit the large beverages in New York has been put on hold, at least temporarily. [indiscernible] was in one of your stores yesterday, and there's a little postcard kind of explaining the law and explaining how some of the beverage offerings would be affected by it. Would've been a self-preparation, which is not typical of Dunkin', but -- and in a couple of instances, just smaller-size beverages. So can you just talk about how you thought about that, what kind of impact you thought it might have? And it's probably still coming, is sort of my expectation, although we have the...

Paul C. Carbone

Yes. Yes, we'll see how it plays out. So here's how we prepared. So the first thing is, we got the franchisees together, about 400 stores. And what does it impact, right? So it impacts a large coffee that we actually put the sugar in, right, which is part of the Dunkin' service model, all right? So on coffee and iced coffee, what we were going to do there is go to condiment stations similar to Starbucks, right? And we had them ordered. They're in the warehouse. We were about to roll them out. And then the other piece it impacted is our Coolatta, so something in a mix that has sugar already added in. And we were just going to a smaller size, all right? What we expected this to have as an impact was very minimal, right? So we get a lot of analysis on we felt that the iced coffee and the coffee, there would be no impact because we can hand the sugar over the counter. We said, "What if we lost all of the larger sizes of our Coolattas?" All right, so no one traded down, they just went away. It would have been an impact to -- a slight impact to the New York DMA itself. No impact on Dunkin' overall. But we've had a task force on this for now, I would say, probably close to a year, and we were ready to roll this out and abide by the law, but we're delighted it didn't get passed. We believe, again, going back to my earlier comments, let the consumer choose. It isn't about dictating what we can sell and what we cannot sell, but we were ready to abide by it.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. A question on -- as you're moving into the west with these strategic development agreements, is the type of franchisee you're recruiting changing? Or the number of stores per franchisee changing? How are you approaching that?

Paul C. Carbone

Yes. So the number of stores, if you look at Denver, for example, Denver is a 60-store market to start with, and we recruited 6 franchisees. So they're generally about 10-store agreements, which, historically, is where we were, and then back in '05 to '08, we were doing 80-, 100-store FDAs. So where we're off of that is big FDAs. Were back to this 10, 15 range. From a franchisee perspective, you have to come to us with operations experience. One of the guys in Denver operates 145 Little Caesars, a handful of Red Robins and some Sizzler restaurants, all right? These guys who we think ooze operations, that's what we want. There's another one that owned about 25 SUBWAYs in the past. So we are looking for true operators of the business that have retail experience, QSR experience, not just financial. So Joe, we wouldn't sell you a franchise.

Unknown Analyst

Can you talk about your smartphone app that recently rolled out and what opportunities that affords you to connect more with your guests?

Paul C. Carbone

Yes, so good question. So we rolled out the app in September. And this is going to take you about a couple of years. So 2 years ago, we rolled out unified POS across all our franchise locations. So if we hadn't done that, the offerings wouldn't have been possible. So we've been thinking about this for a few years, and I believe we're one of the few franchise chains that have a unified POS. So we rolled it out in August. We had over 1 million downloads by the end of the year. What that has done for us is speed of service, right? So you can get your -- you can put your Dunkin' card on there. We can do location-based offers. So the offers that will come though here in New York will be different then if you're in Vegas, right? So it allows us to talk to the consumer more, and then it has -- you can do gifting with it, and then you have store locations, et cetera. What that has done is now set us up for loyalty, and loyalty is the 2013 project. We will roll out a loyalty program this year towards the back half of the year. And loyalty will be focused on 2 things to start with. The first is payment migration, all right? So moving people from Visa, MasterCard to my Dunkin' Card, all right? And what that does is it lowers transaction costs, improves franchisee profitability and I get all the data. So I know when I come in, what I'm buying and what my attachment is to coffee and breakfast sandwiches. And then the second piece is behavior migration. So how do they take that data? And if I come in every day and I buy a breakfast sandwich, how do I do an offer through one-on-one marketing for a beverage? Or if someone only buys a beverage, how do I do an offer for a breakfast sandwich? So you'll see that in 2013. I think there's a lot of opportunity, although there's also challenges in the franchise model, right? So part of loyalty is customer acquisition, all right? So Starbucks offers $5 if you join their loyalty program, all right, because they're a company-owned store chain. It's hard for me to do that because I can't -- as Dunkin' Donuts, I can't pay that $5 because off that sale I'm going to make a quarter, all right? So it's 6% to 5% royalty, 5.9% royalty. And then how do I charge that to the franchisees because it may be franchisee's A store or B store, so we have to figure out that customer acquisition piece in a franchise. And it's probably why there's not a lot of franchise businesses that do loyalty programs. But we are actively working on it, and we'll launch something this year.

Unknown Analyst

Okay. And then in the past, I think you said before that when you enter a new market, usually, they use you primarily as a baked good, as a donut location. How are you able to drive coffee sales in order to increase frequency?

Paul C. Carbone

Yes. So it's a couple of things. The first is -- and that is true. They do use us as a food definition -- destination. The first is it's national media, right? So again, going into California, we'll be on the air for 5 years, and all that marketing will be based on beverages, all right? So that's kind of #1, national media focused on beverages. We do it from training, all right? So when we train new franchisees, the importance of beverages, not just to profitability but to the ritual of people coming back. The queues in the store. So everything from the digital menu board showing a beverage to when a new store opens in Denver and that store manager goes around to visit store -- businesses around them, they used to bring donuts in the past. Now they'll bring beverages. When they open, they'll sample beverages versus sample donuts. So all these different queues, and I don't know -- I couldn't tell you individually how each of those has moved the beverage mix, but I know it's a combined, right? It's moved -- back in '08, my beverage mix in the west was about 35%. It's moved to about 40%. My top line has gone up incrementally, though, '08 to '11, so the 40% is on a much bigger base. So that's kind of -- and it's all about queues and talking about beverages.

Unknown Analyst

My question is more on your international strategy, I guess, more specifically your strategy in India with your new joint venture partner there. And how do you look at the menu pricing, tea versus coffee? It's a whole different market. What about taste preferences? That's a big key to success in India. And what kind of franchisee metrics would you look at to see if that country has been a success or not?

Paul C. Carbone

Yes. So we think we have the best partner in India we could find with Jubilant Group, all right? The Domino's franchisee. We met with these guys 2 weeks ago. We had our international conference in Las Vegas 2 weeks ago, and they were all here, and we had a few hours of meetings with them. So very, very successful. They understand the manufacturing piece. They are focused to start with more on food than the beverage piece, which I think is the right strategy. They see tea as a big item. They also see coffee as the middle-class grows and it becomes more acceptable. As far as what we look for as success, success metrics, it's going to be comps and new unit developments, right? That's really how we look at the health of the business, and then before we get to comps, the new unit openings. So they've opened restaurants, they've opened up very successfully. They haven't opened up big and then fallen off, so these guys know the business, and I think my expectation with them is just what they did in Domino's. They're going to open up stores per the agreement, and they're going to tweak the model to get the unit economics right. And just like they did at Domino's, once they find it, then they're going to just explode development. And I think we'll see some rapid growth out of these guys in the out years.

Unknown Analyst

[indiscernible]

Paul C. Carbone

Well, we don't. The agreement was 500 stores over 15 years, but I think if they get it right, with what we've seen with Domino's is I think they'll outperform that.

Unknown Analyst

Could you just give us a bit more color about Dunkin' overseas? What's the issue with the brand? What do you need to fix, because I know you've given us some color, but a bit more? How long do you think it's going to take before you can push that out?

Paul C. Carbone

Yes. So I don't think it's an issue with the brand because I think the brand travels well. People understand the brand. Our biggest focus right now is on the supply-chain. So -- and we had this issue in the U.S. 8 years ago. So right now, if you were to open up in a new country, the first thing you have to do is build a donut manufacturing location, a commissary to bake fresh goods, all right? And if you're in a country and you're going to open up 20 restaurants over 10 years, you're going to build that commissary, and maybe it's breakeven after 15. And what happens is you open up the first 15 units and that commissary is losing money, so you're distracted. You're thinking about manufacturing. You're not thinking about retail. We have to fix that supply chain, all right? It's what we did in the U.S. It's allowed us to move west. So a couple of things to fix that. The first is a frozen solution. So how do you do a pile [ph] baked, right? And third-party bakers, in-country third-party bakers. So we're exploring both of those. We took an equity stake in our France -- our licensee in Spain, so we're using that market to test these. We've outsourced to a third-party, and that's ongoing. We think we have landed on a frozen solution, certainly for the U.K., and we're going to perfect that. So that's the biggest piece. And then the second piece is, where most of our stores are in Asia, we are a donut specialty occasion business, and we need to change that to a beverage business, right? Again, just where we were 10 years ago in the U.S. We had time to make the donuts in the U.S. Some have asked us if that's ever going to come back. That will never come back. And we all loved Fred the Baker, but we're a beverage company. It's not going to be done to make the donut. We have that persona internationally as a gift-giving donut stop, and we need to get to a beverage business. And that is through menu innovation, location, real estate, fixing the supply chains. I think there are several things. But I think the brand speaks to the consumer and they understand who we are. So I don't think it's a brand. If we're out there for 5 years and we still haven't cracked, if not then we will have to talk about does the brand travel overseas. But where we've been, we are successful. We have over 800 stores in Korea, for instance. So we can do it when we have it right.

Unknown Analyst

I have another. So as you think about the supply chain internationally, would you invest in the supply chains?

Paul C. Carbone

Ideally, no. So yes, I mean, ideally, no. I mean, I'd like to find -- so what we're exploring today has no investment by us, right? Now if I find someone that is a frozen product solution, might I invest in some CapEx in -- I won't produce frozen donuts. So it wouldn't be that type of investment. Might I have to put some capital up for starting up a line to produce for us? Potentially. Nothing has been brought forward. In today's situation with Spain, we don't have to, but that could be something that we may have to do, but the going in proposition is no capital.

Unknown Analyst

Okay. Are you guys seeing any differential impact in your mid-Atlantic or D.C. area from sequestration in the last couple of weeks?

Unknown Executive

No, no. So the biggest impact on Dunkin' in the first quarter is going to be weather. We haven't seen it for that factor. The payroll, we didn't see a big impact in the delayed refund checks. I mean, what has -- what we've seen an impact for is these constant, relatively smaller storms in our core markets that seem to come every single week. But no, we haven't seen any impact in those markets at all.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Paul, we're ticking down and we're out of time. Thank you very much.

Paul C. Carbone

Thank you, everyone.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Thank you for coming.

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