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Dunkin Brands Group Inc. (NASDAQ:DNKN)

Q4 2013 Earnings Conference Call

February 6, 2014 8:00 a.m. ET

Executives

Nigel Travis - Chairman and Chief Executive Officer

John H. Costello - President of Global Marketing & Innovation

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

Stacey Caravella - Director of Investor Relations

Analysts

John Glass – Morgan Stanley

Michael Kelter – Goldman Sachs

John Ivankoe - JPMorgan Chase & Co.

David Tarantino - Robert W. Baird & Company, Inc.

Joseph Buckley – Bank of America Merrill Lynch

Greg Badishkanian – Citigroup

Andrew Barish – Jefferies & Company

Sharon Zackfia – William Blair & Company

Arun Mehra – Barclays Capital

Matthew DiFrisco - Buckingham Research

Operator

Good day, ladies and gentlemen, and welcome to the Dunkin' Brands Inc. Fourth Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer-session and instructions will be given at that time. (Operator Instructions).

I would now like to introduce your host for today's conference, Stacey Caravella of Investor Relations. You may begin.

Stacey Caravella

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

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

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

Nigel Travis

Stacey, thank you, and good morning everyone. We appreciate you joining us for today's call to discuss our fourth quarter and full year 2013 results.

The fourth quarter was strong, capping off a great year in which we set records and achieved major milestones for both Dunkin' Donuts and Baskin-Robbins in a challenging retail and QSR environment. In 2013, we delivered on or exceeded nearly all of the goals we set at the start of the year and returned more than $100 million to shareholders in just our second full year as a public company. For the year, we grew revenues more than 8%. Adjusted operating income increased nearly 11% and adjusted earnings per share grew nearly 20%, which in our view is impressive growth in a multi-place that has been fiercely competitive and also highly choppy on the macroeconomic front.

Let me now review what I consider to be our most impressive 2013 accomplishments. Dunkin' Donuts U.S finished the year with 3.4% comp store sales growth, which on a two year basis marks nearly 8% comp growth. Our product differentiation and limited time offer strategies are working. Simply put, consumers crave, and I really do mean crave. I hear about it all the time, and love our beverages and food. We introduced more than 40 new products in 2013 and our product pipeline is stronger than ever. Certainly Dunkin' Donuts U.S eclipsed the 5% annual net development growth rate. Now if I go back to July 2011 when we had the roadshow for the IPO, we told investors that we may reach 5% net development in five years. Well, we did it in just two and a half years. An additional fact; the 371 new Dunkins that we opened in the U.S in 2013 were the highest number of net openings in five years.

Franchisee profitability is very strong. New Dunkin' Donut stores in the U.S exceeded our internal targets on all of the metrics by which we monitor the health of the new store openings. System wide, franchisees are seeing the highest EBITDA dollars and highest EBITDA percentage on record for traditional Dunkin' Donuts restaurants. We rolled out brand out new store design, Fresh Brew for Dunkin' Donuts U.S and now have more than 600 restaurants in the new model. And our franchisees also invested in nearly 530 remodels in the year.

We began selling franchise agreements in California at the start of 2013 and because of such strong demand, we were able to sell commitments to nearly 100 restaurants in less than 12 months. And now, as of the start of this year, all of California is for sale and we expect the first of these restaurants to open sometime in 2015. We’ve also signed multi store agreements in more than 20 other domestic markets. More importantly, the guest experience in our restaurants is better than ever. Despite our growing menu of products offerings and our growing traffic count, we remain a leader in speed of service in the QSR industry. That’s great credit to our franchisees and operations teams. But it’s not just our speed of service, but our overall service that continues to improve. Dunkin' Donuts U.S ended the year with an average guest satisfaction score five points higher than our average in 2012. And just this week, it was announced that Dunkin' Donuts was ranked number one in the coffee category by the Brand Keys Customer Loyalty Engagement Index. And that’s for the eighth consecutive year.

Baskin-Robbins U.S also had a great year. During our IPO roadshow, I talked about stabilizing Baskin in the U.S. Since that time, the business has not only stabilized, it’s now growing. Baskin-Robbins U.S had positive net developments in 2013, which was the first time since 2006. And to add to that, it was also the third straight year of positive comps for the Baskin U.S brand. And similar to Dunkin' Donuts, Baskin-Robbins guest satisfaction is showing a very strong trend.

Internationally, we added 415 net new restaurants for both brands. But I believe the most important moves for our international business were, firstly, shifting our development efforts to higher GDP which really means higher average weekly sales markets, and a key area for our future growth is Europe. Of particular note is Germany where we now have more than 40 Dunkin' Donuts restaurants and the UK where we opened our first Dunkin' Donut restaurant in London in December. Another one actually opens next week. Secondly, our organization change where we moved to leadership of both brands in Europe and Latin America Paul Twohig, who of course, is the President of Dunkin' Donuts U.S and Canada and the leadership of both brands in Korea, Japan and China, to Bill Mitchell, President of Baskin-Robbins U.S and Canada. In addition, John Varghese who may be a new name to you, but has been with the brand for 20 years, now reports to me and continues to manage our most profitable international markets, the Middle East as well as Southeast Asia and Australia.

I believe we have an incredible opportunity to profitably grow our brands outside of the U.S. However, we needed to do more to unlock our international potential. The change in leadership that I’ve described is enabling us to better and more quickly apply the processes and disciplines we have used successfully in our domestic businesses to our global operations. Having just returned 10 days ago from Japan and China, I’m delighted at how well this new organizational alignment is working. And by the way, on the Baskin-Robbins Japan front, we’ve had a tough year like many brands in the country, but we’re all working hard on turning that around.

We talk now about high GDP markets, but it’s important to summarize where we are in emerging markets, where despite the recent slowdown, growth is roughly three times the rest of the world. We’re rebooting the Dunkin’ brand in China and just signed a deal with an exciting new franchisee in Shanghai. We’re also enthusiastic about the new Baskin-Robbins franchisees in China. Moving to India, Jubilant, our Dunkin’ Donuts franchisee there is doing very well, while we expect to enter Brazil with Dunkin’ this year and later in the year also with Baskin-Robbins we aim to go to South Africa.

Everyone in the Dunkin’ brand system, from our franchisees and licensees to our corporate employers and the crew in our restaurants in my view should be extremely proud of our accomplishments in 2013. Thank you to all of them for all you do for our two brands. But of course, it’s now a new year and the global marketplace has never been more dynamic. That means we must position ourselves to capitalize on changing trends and consumer shifts to continue the incredible growth we’ve experienced over the last several years. In 2014 and beyond, we’ll be doing this by focusing on four key areas. First, we have two brands that are global brand powerhouses.

We now have more than 18,000 restaurants worldwide and the two brands with deep heritage and strong consumer appeal. We’ve had great success in the past leveraging our size and brand power for the national and local branding as well as marketing initiatives. But we now have an opportunity to support our international business model by making this approach more stronger globally. Much of this will come through social media, building on Dunkin’ Donuts’ current 11 million plus global Facebook fans and Baskin-Robbins more than 7 million. Even in Japan, we have 5.5 million on a social network that’s called Line, which is very prominent out in Asia. Another example is our recently announced agreement with Liverpool Football Club.

Secondly, we’re making our brands more accessible to consumers every day. Yes, to enjoy our wonderful products, our guests must come into our restaurants, but that doesn’t mean that the interaction with them begins and ends inside the four walls of a Dunkin’ Donuts or Baskin-Robbins. Our interactions are online for the social and digital channels. they’re mobile for our app, which by the way now has over 5.5 million downloads and is the basis of our Dunkin’ Perks loyalty program, and they are even reflected in our positional advertising through our new marketing campaign #MyDunkin.’ The focus really begun nearly four years ago with the implementation of standardized point of sale systems in our restaurants in the U.S.A for both brands. My challenge for the team and our franchisees at that time was to make us a leader in the QSR industry in using technology to drive sales through initiatives line online take ordering at Baskin-Robbins.

Of course accessibility is more than technology. More than 80% of the Dunkin’ Donuts stores are franchisees built in 2013 as a drive-through, making it even easier for guests to use our brand every day. I’ve already touched on the third area of focus, which is globalizing our U.S disciplines and metrics. Lastly, we’re taking a proactive approach to sustainability. This is increasingly important to our guests. Our focus includes analyzing and improving our environmental footprint by taking a responsible approach to where and how we source our products ingredients, improving restaurant energy efficiency and in improving our product packaging, including finding a viable alternative to our foam cup in the next few years.

Let me now talk about our comp sales performance globally for both brands in the fourth quarter and I'll start with the U.S. The Dunkin' Donuts U.S. business continues to deliver strong results, posting a 3.5% comp store sales increase. Growth was driven by a healthy combination of both traffic and ticket across both morning and afternoon day parts. We saw gains in the number of units sold per transaction and the price per unit sold. Yes, weather impacts all retail businesses in some way. For us, December was unusually cold and snowy, but overall there were healthy gains across the system, with all major markets contributing to growth. Pricing was less than 100 basis points in the quarter as our franchisees continued to focus on delivering great value to our guests at reasonable prices.

Growth for the quarter was broad based across the categories. Iced Coffee, hot and iced espresso, breakfast sandwiches and bakery sandwiches were the key drivers of growth as we continued to focus on the balance of core category momentum and limited time offer driven product news. Dunkin' Donuts card sales were strong for the fourth quarter and the full year. Activations, reloads and redemptions were all up significantly over the last year. In fact, we saw double digit growth the last year and activations in December. Looking forward, we see loyalty as the real catalyst for growth in sales and usage of the Dunkin’ card.

I’m pleased to say that Dunkin' U.S had its third straight year of positive comps, overcoming tough weather and lapping very strong performance last year. This was in 2012 of course. Growth was driven by sales of great holiday flavors across the cups and cones and beverages categories, as well as strong take and take-home ice cream quart sales.

Let’s now look at international. Baskin-Robbins International had a 1.6% comp sales growth for the fourth quarter. Cake innovation also continues to be a major focus for the brand globally, driving incremental occasions to increase sales and profits, and the category is particularly important during the heart of the season. Baskin-Robbins International sold 1 million more cakes in 2013 than 2012, with strong growth coming from Korea, the Middle East, Australia and Columbia.

Dunkin' Donuts International business had a 0.3% comp store sales decline in the fourth quarter. The negative results were driven by our Korean operation, which represents 45% of the segment's sales. If I exclude Korea, comps were in the low single digits. Importantly, our new restaurants in Germany and the UK are seeing average weekly sales on par with new restaurants in the U.S.

Before I turn it over to Paul to discuss our restaurant growth globally and also our financials, I want to close this section by saying I feel very good about the overall strength of the business. Innovative marketing and new product introductions, as well as a focus on delivering a great customer experience, continues to deliver attractive franchisee returns and exceptional results. to Paul?

Paul Carbone

Thanks, Nigel, and good morning, everyone. Earlier this year we announced our impressive 2013 global development results. Dunkin' Donuts’ U.S continuous expansion strategy is working and we are targeting another year of 5% plus net unit development for the business in 2014. In the fourth quarter, our franchisees opened 149 net new Dunkin' Donuts units in the U.S, which was flat to the fourth quarter last year. Nearly 90% of the developments in the quarter was full expression restaurant, and of that, more than 70% had a drive through.

By region, 19% of net development was in the core, 32% in established markets, 34% in emerging markets and 15% in the west. For the full year, 24% of net development was in the core, 33% in established markets, 27% in emerging markets and 16% in the west, which represented the highest number of total stores that we’ve opened in the west in a fiscal year. Established and emerging markets made up the majority of our developments in 2013 and this will be the case in 2014.

I think it is important to note that we believe we still have a 3,000 store opportunity east of the Mississippi River. There’s a tendency for all of us to jump to California when we discuss our long term store expansion plans. It will be many years before California and the west in total makes up a significant portion of our annual development. In fact, in 2014, we expect to established and emerging markets to each contribute between 30% and 35% of Dunkin’ U.S net developments or 60% t0 70% combined. We expect that the core will contribute between 10% and 15% and the west between 15% and 20%.

Our franchisees continued to take advantage of high quality growth opportunities in core markets. While we have a strong penetration in the core market as a whole, nearly one store for every 9,000 people, there are areas in the core such as New York City where there’s still room to grow Dunkin’ and we will continue to drive healthy store growth in these areas. Our franchisees also opened more than 50 non-traditional U.S locations in 2013, at airports and other mass transportation terminals, casinos and resorts, military bases and colleges, and universities around the country.

Now to U.S. development. As Nigel noted earlier, the highlight for the brand in the U.S is that it achieved full year positive net store development, the first time since 2006. In the fourth quarter, there were four net store closures in Baskin U.S. versus 29 net store closures last year. Baskin-Robbins International added 120 net new restaurants versus 89 last year. This growth was primarily in Russia, the UK, China and Japan.

And Dunkin' Donuts International added 44 net new restaurants versus 53 last year. Growth was primarily in the Middle East and Southeast Asia.

So now let’s turn to Dunkin' Brands financial results. Revenues for the fourth quarter increased 13.3% compared to the prior year, primarily from increased royalty income due to the growth in system wide sales, increased franchise fees due to the favorable development mix, and incremental franchisee renewals and increased sales of ice cream products. Remember, the sales of ice cream products, the growth was partially driven by a one-time delay in revenue recognition related to a shift in manufacturing to Dean Foods that impacted the fourth quarter sales of ice cream products last year in 2012.

Operating income for the fourth quarter increased $14.5 million or 21.4% from the prior year, primarily as a result of increases in royalty income, franchise fees, and margin on sale of ice cream products. Adjusted operating income increased $9.4 million or 11.8% from the fourth quarter of 2012 as a result of the increases in royalty income, franchise fees, and offset by a decrease in net income from our joint ventures.

Net income for the fourth quarter increased by $7.7 million or 22.5% compared to the prior year. This was primarily a result of the $14.5 million increase in operating income, and a $2 million decrease in interest expense, offset by an increase in income tax expense and greater losses on foreign currency due to exchange rate fluctuations.

Adjusted net income increased by $9.6 million or 26.3% compared to the fourth quarter of 2012, as a result of the increases in adjusted operating income and a decrease in interest expense, offset by the greater losses on foreign currency. Diluted adjusted earnings per share increased by 26.5% to $0.43 for the fourth quarter of 2013, as a result of the increase in adjusted net income, offset by an increase in shares outstanding. The increase in shares outstanding is due primarily to the exercise of stock options, offset by the repurchase of 648,00 shares during 2013. Of that amount, 230,700 shares were repurchased during the fourth quarter.

Our diluted weighted average shares for the quarter were 108.3 million. And for the year, diluted weighted average were 108.2 million. At the end of the fourth quarter, we had a debt to adjusted EBITDA ratio of 4.6:1. Our effective tax rate for the quarter was 32%. This step down in our tax rate from the third quarter was driven by our international supply chain restructuring. We opened an office in the Middle East to provide logistics and customer support to our Baskin-Robbins International licensees as part of the transition to Dean Foods for the manufacturing of ice cream. We began to see the benefits from this reflected in our effective tax rate in the fourth quarter of this year.

During the quarter, we had $30.2 million in free cash flow. We ended the quarter with $257 million in cash in our balance sheet. And of this $257 million, $134 million represents cash associated with our gift card programs and marketing fund balances. We used $20 million in cash during the quarter to pay our Q4 cash dividend to shareholders. And for the full year, free cash flow was $117 million.

All right, so now let me review our 2014 targets. We expect annual Dunkin’ Donuts U.S comp store sales growth of 3% to 4% and annual Baskin-Robbins comp store sales growth of 1% to 3%. We expect that Dunkin’ Donuts U.S will add between 380 and 410 net new restaurants and expect Baskin-Robbins U.S will add between five and 10 net new restaurants. We expect the Dunkin’ Donuts U.S franchisees to remodel approximately 500 restaurants. Internationally, we’re targeting 300 to 400 net new units across the two brands. This step down in international development from 2013 is driven by two factors and let me share those with you. First, we are being more diligent about the quality of openings, particularly on the Dunkin’ Donuts side. And secondly, we anticipated of aproximately100 closures of small kiosk locations in the Philippines throughout the year. These closures are included in our guidance. Globally, we expect to open between 685 and 800 net new units.

Consistent with our long term guidance, we expect another year of 6% to 8% revenue growth and 10% to 12% adjusted operating income growth. We expect 150 to 200 basis points of adjusted operating income margin expansion this year and we expect G&A to grow 3% to 4% off of our full 2013 adjusted G&A expense of $219.8 million. In 2014, we expect net income from our joint ventures to be approximately $17 million.

As we previously disclosed, we’re seeking to refinance our outstanding debt. Upon the anticipated completion of the transaction, we expect full year 2014 interest expense to be approximately $70 million, representing $10 million in annual interest expense savings and an EPS impact of$0.05 earnings per share in 2014. we expect interest expense for the first quarter to be $18 million and the remaining spread equally between the other three quarters. The anticipated weighted interest rate on our $1.8 billion in outstanding debt will be approximately 3.4%. the refinancing is not yet complete and we will provide further details upon the closing of the transaction.

We expect our effective tax rate will be 37% on a full year basis. This reflects the ongoing benefits from our international supply chain restructuring. 2014 we expect to spend between $25 million and $35 million in capital expenditures. We are targeting 2014 adjusted earnings per share of $1.79 to $1.83 which is based on diluted weighted average shares for the full year of $108.2 million. This EPS guidance is inclusive of the $0.05 from the refinancing, as well as ongoing share repurchases to offset the dilution from the exercising of stock options. This EPS guidance does not include the impact from any potential other stock repurchases or stock repurchase the result of any financing activity.

Our board of directors authorized a new program to repurchase up to an aggregate of 125 million of our outstanding common stock over the next two years. And lastly, our board of directors declared a first quarter cash dividend of $0.23 or greater than 20% increase over the fourth quarter 2013 dividend.

In closing, I’d like to reiterate that our nearly 100% asset-light franchise business model enables us to accelerate our strong restaurant growth rate, while simultaneously returning cash to shareholders, which was underscored by the $100 million that we returned to shareholders in 2013.

Now I’d like to turn the call back over to the operator to explain how we will handle questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions). our first question comes from John Glass of Morgan Stanley. Your line is open.

John Glass – Morgan Stanley

Paul, on the G&A for this fourth quarter, I think you had guided to a slightly higher number, and it came in lower. Can you maybe just explain that variance? And then, in just reading through the commentary in each of your segments, there seems to be little one-time items, and I don't know if they aggregate up to anything. Either things like a one-time fee through termination of an agreement, some refranchising gains. Are those in aggregate, material to the fourth-quarter revenue numbers?

Paul Carbone

Thanks, John. So on the G&A, we did come in slightly lower than we guided on the third quarter call. And I would say really driven by us just reviewing our expenses. I think we are very good at this and there was no big G&A savings that I would point to, but it’s just the rigor that we put around the business, similar to the rigor we put around comps. We do it with expenses as well. On the revenue side, not material overall for the company. Potentially it might be material to a Dunkin’ International piece of it because it’s such a small segment. But we see these things in the past and potentially going forward, either termination fee or new market fees. But on the Dunkin’ Brand, P&L not material.

Operator

Our next question comes from Michael Kelter of Goldman Sachs. Your line is open.

Michael Kelter – Goldman Sachs

Can you talk a bit more about the loyalty program? I know the national program may have only recently launched, but what was your experience in the 300 test locations over time? Were transactions up? Was average ticket up? What other benefits should we be thinking about in those test markets?

Nigel Travis

Firstly Michael, good morning. And I’m delighted we've finally launched the loyalty program. We talked about it and it’s one of the important goals on the way to true one-to-one marketing. So far the launch has gone very successfully. It was actually uploaded onto the app yesterday. So that makes the registration a lot easier. So if you go onto Google Play or the App Store on Apple, you’ll find it’s very easy to go from our app straight into Perks. So the person who is behind all that is John Costello so I’m going to let him talk about it in more detail.

John Costello

Yeah. I would say the test market results were right in line with expectations with very encouraging results as it related to sign ups, transactions, ticket and product mix. in addition to the encouraging customer and sales metrics, we were also very encouraged by the in-store experience and the fact that it did not have an impact on speed of service in our restaurants. So I think through a great team effort with franchisees, operations, training and marketing, we saw very encouraging results across sales operations and guest experience which led us to expand it nationally last week. Certainly too early to draw any conclusions, but the national expansion went very, very smoothly and guests continued to sign up. And as Nigel mentioned, it went live in the Apple App Store and Google Play which will make it even easier for consumers to sign up.

Nigel Travis

And I think one thing that John said there is the theme to everything we do is speed of service. And as I said in my remarks, we think we’re one of the leaders in speed of service and everything we do is totally focused on making sure we maintain that advantage.

John Costello

As we touched on, and as Nigel touched on, one-to-one marketing is a slow build. So we’re not forecasting a material impact in 2014. It’s factored into our guidance, but very encouraged by performance to date.

Operator

Our next question comes from John Ivankoe of JPMorgan. Your line is open.

John Ivankoe - JPMorgan Chase & Co.

First, on the refinancing, if I may. How much, as we go forward, is going to be fixed or floating? Does this I guess new re-pricing on this facility, does it change your flexibility around potentially adding debt in the future? And then I have a follow-up.

Nigel Travis

Good morning, John. So we remain about 50% fixed versus floating, similar to, prior to the transaction. The terms are expected to be relatively the same as the existing. It is -- we are looking to close this in the next one to two business days and we’ll provide you with full details at that time.

John Ivankoe - JPMorgan Chase & Co.

Okay. And secondly, if I may, and I know this warranted a separate press release. I do understand the enthusiasm regarding your partnership, if you will, with Liverpool, and what that might start to mean, especially in important soccer markets like the UK in terms of how -- the UK and Europe overall of how the brand is going to be launched. If you could just give us a little bit more color about what you think your impressions will be, and how that may preclude a rapid ramp in store openings?

Nigel Travis

Okay. So this is one of our ongoing partnerships with various organizations around the world. We have numerous sports partnerships in the U.S have been unbelievably successful. The deal with Liverpool was helped by the fact we have a very successful partnership with the Boston Red Sox. So they have common ownership. Obviously soccer is by far the world’s number one sport. And we identified or to be more accurate, John identified soccer is very popular with millennials and Hispanics in the U.S and around the world of course is as I said the world number one game. It’s particularly strong in Asia and Liverpool’s games are seen live in 200 countries. So this is an opportunity to get our brand out on TV, on the dasher boards that go around the pitch as we say in England or field as we say in the U.S. So that’s good. They have numerous supporters clubs that we can tie into.

A good example, we’ve already tied into the Liverpool Supporters Club for our app here in the U.S and Dunkin’ Perks. But I think we will encourage our franchisees locally to activate on a country by country basis, use the presence of Liverpool. They do tours all over the world. So we can tie in for tickets. I think it’s going to cause the level of enthusiasm for our franchisees. It’s going to bring in more people into our restaurants and I think Liverpool will see this as a way of building their brand as well, which I think is very important. But I want you to think of it as a true global partnership between three great brands, Liverpool, Dunkin’ Donuts and Baskin-Robbins.

Operator

Our next question comes from David Tarantino of Robert W. Baird. Your line is open.

David Tarantino - Robert W. Baird & Company, Inc.

Just maybe one clarification question. Nigel, I think you mentioned the impact of weather in December. So I was wondering if you could comment on whether that actually impacted the overall comp for the quarter in a negative way and what the estimated impact of that was? And then maybe you can comment about what you've seen to date in Q1, and how we should think about the comps in Q1?

Nigel Travis

Okay. So as I look out the window, David, it’s beautiful. It’s white and there’s pounds of snow over the back there. That’s your local weather forecast from Canton, Massachusetts. And obviously the weather does impact all retail oriented businesses. But when we look at what happened in the fourth quarter, we didn’t on a two year basis see a steep drop off in comps in either November or December despite what was unseasonably poor weather, certainly against previous years. And one of the thing that’s happening is we gradually developed our system with balancing out the northeast effect that we used to have. So on a one and two year basis, we don’t think weather affected our comps in a material way. And through the quarter there was consistency month to month which I’ll get to another question you could have asked for both one year and two year comps.

Now, when I look at this quarter, clearly again there’s been some weather challenges, but we’re beginning to realize that weather affects every quarter. We take in stride. We build storms into our plans and full year guidance. If I look at what happened in Q1 2013 versus 2012, we did have 120 basis points of negative impact. Looking back, I think that was mostly in the latter part of the quarter. So you could say there is some positive news there that we’re going against the storms from last year which happened in the back half of the quarter. We’ve got to go through those as yet. So we manage it. we’re very focused as Paul said earlier on comps. The famous stories about me sending nasty emails out at 5:30 are totally true and we do everything we can. But one thing I would say, if I’d written out guidance as we did, three weeks ago it would be the same status it was then. We feel very confident about the year and we build all the weather effects into what we give out as guidance.

Paul Carbone

And David, let me just follow up. I know you guys will ask during follow ups all day today. So a couple of things that Nigel said, let me just reiterate. The first is, throughout the quarter -- we really look at two year comps. Throughout the quarter, it was generally flat on a two-year basis. October was the best month, small kept downs, but then it was flat November and December. So that’s how the quarter played out on a two-year basis. To Nigel’s point, last Q1 we called out weather impact. It was over 120 basis points. We didn’t call it out in Q4. So you can imagine that weather certainly impacted us, but it was less than that amount than we had when we called it out. So less than 100 basis points of impact in the quarter. And then Nigel talked about what we were thinking about on this quarter and that our guidance would be the same for the full year vis-à-vis if it was three weeks ago, four storms ago at this point. So I just wanted to make that clear.

David Tarantino - Robert W. Baird & Company, Inc.

That's helpful. And then if I could squeeze one more in about the comps, and how to think about it. I think you mentioned that the loyalty program so far the sign-ups are going well. But should we think about that as an immediate comps driver, or should that trickle in as you get more sign-ups over the course of the year? Just wondering how we should think about that as a comps driver this year?

John Costello

It’s John. It is not an immediate lift. What will happen is it will drive comps as number one, customers sign up. Two, they take advantages of the offers that we send them. and three, as we accumulate their purchase history, we’ll gain more insight into which offers are most relevant to them and which are most effective as driving profitable sales for our franchisees. So it’s classic one to one marketing that will build consistently as customers sign up and as we have more information on what offers are most responsive to building profitable sales for those customers. There will be some short term benefits as we take advantages of the efficiencies of digital marketing versus other types of marketing. So it enables us to for example communicate new product introductions to our most loyal customers on a very efficient basis. So I think we’d look at it as a consistent build over time.

Operator

Our next question comes from Joseph Buckley of Bank of America Merrill Lynch. Your line is open.

Joseph Buckley – Bank of America Merrill Lynch

Two questions as well. Paul, you described, and I realize the refinancing is not complete yet, but you described the terms as being similar. But definitely got the impression last year that your plans to do a recap were somewhat hindered by the terms of the existing debt. Are those obstacles out of the way, presumably, with the refinancing?

Paul Carbone

Joe, I think you’re talking about the most favored nation clause. And while the transaction hasn’t closed yet, that most favored nation clause is still part of our current credit agreement and expected to be part of a new credit agreement.

Joseph Buckley – Bank of America Merrill Lynch

Okay. Does it change your thinking -- maybe to ask it differently -- update us on your thinking in terms of a recap that would take the debt levels back up again.

Paul Carbone

As I said in the third quarter, we continually looked at both, both a re-lever event and a re-pricing. Where we ended the quarter at the end of the third quarter we had about 4.8x. going up, while the market would let up, we were stretching the loan market and it was getting expensive. So we opted to do the re-pricing. This business will delever naturally a half to three quarters of a turn just based on EBITDA growth and the minimal payments that we have to make. So you could see at the end of this year being in the 4:1 to 4 -- call it 4 to 4:1x EBITDA. And at that point, to relever from 4 to 5 because it’s more in the range of the bank loan market, doesn’t have the added expense to it on that you would pay on rate. So we continue to look at relevering. This business will continue to carry permanent debt, but we look at it when the opportunity strikes. I think the most important thing for all people on the call is the guidance that we provided assumes no relevering event and it assumes an outstanding share count of $108.2 million for the entire year.

Joseph Buckley – Bank of America Merrill Lynch

Okay, thanks for that clarification. On the loyalty program, is it something you can provide globally at this point, or is it US only? How do you think it factors into the global plans for the brand?

John Costello

It's John again. As Nigel mentioned, one of our goals is to leverage marketing and technology globally. So right now the focus is on the U.S where we’re rolling it out. But we would expect mobile marketing, digital marketing and loyalty marketing to become an increasing part of our global efforts. But the focus right now is on rolling it out on Dunkin' Donuts U.S. but our aspirations are clearly global on both brands.

Operator

Our next question comes from Greg Badishkanian of Citigroup. Your line is open.

Greg Badishkanian – Citigroup

First, just wondering if you saw more online shopping this holiday as having any impact on your same-store sales? Some retailers and restaurants have mentioned that. Also, you mentioned that you had under 1% pricing, which led to good value. With coffee prices increasing, how do you think that's going to impact your pricing over the next few quarters, as well as that of your competitors?

Nigel Travis

Okay. So first you’re quite right. Howard talked about online shopping significantly on the Starbucks call. So I think clearly online was a very big trend in the fourth quarter in retail and I think part of that as a personal view was driven by the fact we only had four weekends rather than five between Thanksgiving and Christmas. I don’t think it really impacted at all. people still go out for their cup of Joe. It’s a very ritualistic business. So that’s how we look at it. we do understand the trend will take advantage of the trend. And as I said in my prepared remarks, we will find all kinds of ways for customers in the future to access Dunkin' Donuts and Baskin-Robbins in ways far different from the way they’ve traditionally done it. so I think we’re just at the start of that trend and we’re excited about the movement into loyalty as we said earlier. On coffee prices, we feel very good about this year in terms of coffee pricing.

DCP does a wonderful job of managing that. we work very closely with them. in fact the collaboration with the franchisee on DCP couldn’t be any better than it’s been I think in our history. In fact we had a top to top with them about two weeks ago and there really weren’t too many issues to discuss. So when I look back on my early days here, coffee prices went up and under John Costello’s guidance we guided our franchisees to move pricing on differentiated products rather than products that could be easily compared. That actually worked very well until our franchisees based on what they tell us have got that philosophy ingrained in their mind. So I’m not worried about that. we’ll continue to offer great value on our beverages. And if coffee prices spike, we will once again follow the same approach. And I would remind you that there’s more in a cup of coffee than just coffee.

Paul Carbone

And Greg, just to give a little more color on that, we’ve said this before that our -- to Nigel’s point, franchisee owned purchasing cooperative does a fantastic job. And they have secured coffee and lock-in coffee for most of 2014. In overall what we see from a commodities standpoint for 2014 versus 2013 on the Dunkin' U.S side is flat to a slight pickup really driven by coffee that they’ve been able to lock in. so that’s our commodity outlook for the year.

Greg Badishkanian – Citigroup

Right. And so do you think you're a little bit better positioned than maybe some of your other competitors outside of Starbucks in terms of pricing?

Nigel Travis

I think again we are 99.9% franchised or whatever it is. So we don’t immediately -- it doesn’t affect our P&L directly. But as always, our most important concern is franchisee margins. We’ve said how strong our margins are. We’re in to the third year of flat pricing. We’ll just remind everyone it’s flat pricing for the back of the store from the DCP. So any -- let’s say any adverse P&L impacts are offset by that. we continue to look for other savings. We look at our -- the P&L of our franchisees in both Dunkin' Donuts and Baskin-Robbins on a weekly basis. And when it’s out of line we tackle it. so we’re not concerned about that at all. I think if it was, if we had a much higher percent of company stores and we didn’t have the benefit of flat pricing, we may be concerned about it. we’re not in that situation, but other competitors, maybe.

Greg Badishkanian – Citigroup

Right, exactly. That was my point. Maybe some of your competitors may raise pricing, and it's not going to impact you, and maybe you'll be able to withstand it a little bit better.

Nigel Travis

Yes. But the point I want you to go away with is even though it doesn’t affect us directly, we are 100% aligned with our franchisees in improving their profitability all the time.

Operator

Our next question comes from Andrew Barish of Jefferies. Your line is open.

Andrew Barish – Jefferies & Company

Two quick ones, one on the operations side. Can you give us an update with the standardized POS, what the metrics or opportunities the franchisees are seeing, and where you stand on maybe the sandwich line re-engineering, how that's progressing? And then just one quick financial question on the tax rate assumption we should be thinking about for 2014 given the lower 4Q tax rate?

Nigel Travis

Andy, you did a wonderful job of getting three different questions in one. Okay, so I’ll kick off on POS will answer. So it’s actually three separate questions even though you broke the rules. So firstly, on the standardized POS in Dunkin’ that’s just about 100% apart from some alternative points of distribution such as airports. That’s gone very well. There seems to be total agreement that we went down the right path. We continue to improve it without franchisees we see as a major advantage against other QSRs. And it was that platform as we said earlier that enabled us to get into loyalty, the app, et cetera. And I think other people will struggle unless they do have a standardized POS. and indeed in international, in a couple of countries they don’t have a standardized POS. so we see the disadvantage of that. Paul, anything else on the POS?

Paul Carbone

No. I think there are -- operations continues to look through -- Andy, we’ve talked about this of back office, cash management, labor scheduling, inventory, all made possible through the unified POS, not only because it has those tools, but as we go out and train and teach and coach our franchisees and restaurant managers, we’re training, teaching and coaching on one system across the entire chain which makes it not only easier for us, but it makes it easier for the employee as well.

Nigel Travis

On the sandwich line, a great question. I won’t give you the actual comps, but the comps on sandwiches for the last two years have been spectacular. So as we’ve said on previous calls, that has been a little bit of a love jam. We’re all over it. we’ve actually got two universities working on it. we’ve got internal work dynamic. We’ve got a group of franchisees working with us. We’re totally aligned. I actually saw last week some models of some new setups that we think could work more efficiently. The aim of course is to put more capacity into the family station. I think our guests like seeing our sandwiches made fresh. A lot of people don’t make it in the same way as we do. but we think that’s a benefit. We also as you know have large numbers of carriers. So we have a very large variety of sandwiches which we also think works very well for giving our customers what they want. So you’re going to see continual progress there. No big announcement. I don’t think there’ll ever be a big announcement. We’ll just correctly work with our franchisees and the stores remodel or fill their capacity. We will change the sandwich station. And in terms of tax rate, that’s beyond my pay grade.

Paul Carbone

Yeah, I should probably take that one. So on the tax rate, there’s really two things that happened in 2013. There were some tax reserve releases, et cetera which a lot of times we backed out of EPS. That was a step down and then another step down for the international supply chain that -- the configuration that we made. So in 2014 you should think about the tax rate at 37%. And the way we look at that is I am guiding you to the tax rate that is inclusive of the supply chain savings, but doesn’t have any one time reserve releases in there because as you know those things are -- it’s just impossible to plan for. So you should think about it at 37% for 2014. Thanks, Andy.

Operator

Our next question comes from Sharon Zackfia of William Blair. Your line is open.

Sharon Zackfia – William Blair & Company

I actually had a follow-up on the sandwich question. It's been incredible how you've diversified the breakfast sandwich menu, and moved into the afternoon. And I guess as you've done that, I'm curious to know what permission the customer has given you in terms of where you can go with food and how far you think you can stretch that? And if you could foresee a grab-and-go component to the Business as a more material factor at some point, just to figure out the sustainability of that food contribution to comp.

John Costello

Hi Sharon. It’s John. We have learned that the Dunkin’ brand has permission to go into almost any category as long as it falls into being great food at a great value in a fast, friendly and convenient environment. So we see opportunities to continue to expand the breakfast platform. We think there are significant opportunities to expand the PM platform on the -- in sandwiches. But we also think that there are, to your point, opportunities to expand grab-and-go. All of our foods, starting with our donut heritage is highly portable. Donuts are the ultimate grab and go. But what our research has shown is that we do have broad permission to expand into other day parts as long as ‘ve stated those principles.

We also have a world class culinary team that has the ability to develop those. And then lastly, we work very closely with our operations and franchisee partners to make sure that those products are easy to make and very profitable for our franchisees. So boiling it all down, I’ve been amazed at the extendibility of the Dunkin' Donuts brand. So while for Nigel’s point, we’re seeing significant gains in both the AM and PEM. We would expect that to continue into the years ahead. Our product pipeline is broader than it’s ever been and it includes all those categories you touched on.

Operator

Our next question comes from Jeffrey Bernstein of Barclays. Your line is open.

Arun Mehra – Barclays Capital

This is Arun on for Jeff. Just really quickly, given the importance of westward expansion to your model, I was wondering if you can give us some updates on how new markets are performing, and maybe some of the early learnings as you move into those new markets. Maybe, if you will, perhaps how franchisee profitability compares in new markets versus core at this point? Thanks.

Paul Carbone

Thanks Arun. So we will talk about -- generally we talk about the newest cohort at our investor day because we just need the stores to get some time underneath them. but what I can tell you is certainly the 12 cohort which we’ve already disclosed and early reads on the 13 cohort, they continue to have cash and cash returns north of 25% is number one and you know that’s our benchmark. Secondly, profitability and topline sales, new stores emerging in the west and new stores and established in core are opening about the same. While that’s not maybe on the face of it intuitive, but in our core markets we’re putting in team locations and maybe smaller units versus an emerging in the west we’re doing standalones or end cap with drive through. So we’re very happy with the results of the cash and cash returns across all development geographies. But the west continues to be very strong and north of 25% cash on cash.

Arun Mehra – Barclays Capital

Okay. If I can sneak in one more just on international quickly. Any updated thoughts maybe taking any more equity investments in markets abroad? I don't know if anything's changed from that perspective?

Nigel Travis

Okay. I think we feel we’re getting some traction with the changes we’re making in international. I think one of the best things we did last year despite the write down was our investment in Spain. We feel that helps our supply chain. It also helps if you like get Europe through a tough time in that part of the world. We may. There’s nothing right on the stocks right now, but we’re certainly encouraged by what happened in Spain. We’re also encouraged by the results of the same approach that we took in the U.S when we bought back the Dallas stores, the Las Vegas stores, the Buffalo stores, and then lastly Atlanta where we really stimulated development. We think this is a strategy that does help development. Sometimes there's not the right franchisee to go in and pick out a problem and we go in, we fix it and then move it on to the franchisee. So I wouldn’t rule it out. There’s nothing on the stocks right now. But it’s part of our arsenal of strategies to move the business forward.

Operator

Our next question comes from Matthew DiFrisco of Buckingham Research. Your line is open.

Matthew DiFrisco - Buckingham Research

Just a follow-up on some of those questions about the investment in some of the potential for remodels. I was just curious if you could comment on the scale that your franchisees will be investing say in 2014 versus 2013? Do you think the dollar and the amount of investment in things like the improved sandwich preparation sections would be on a higher scale? Just curious, as the menu continues to evolve, and as you continue to see traction, are we getting to a point where they might pick up investment and that it might be more of a catalyst even to speed of service and greater convenience in 2014 and beyond?

Paul Carbone

So let me start, Matthew and then I’ll hand it to Nigel on the family station. So in 2013 approximately 530 remodels. In 2014 we’ve set -- we said in the neighborhood of 500. So from a franchisee CapEx on remodels, you can consider that flat year to year.

Nigel Travis

What I’d say is that our franchisees always amaze me. I’ve got Scott Murphy who is our global supplier sitting opposite me and he works with our franchisees on 100 plus CMLs that we have around the country. And he always comes back saying they want to spend more money rather than less. So I think they like investing money and I think they really understand that good investments improve efficiency and improve their economics ultimately. So they get that. I think they have great confidence in the proposals we make. I think we have a very collaborative approach which helps buy-in. So recognize I read about other franchise systems where people can’t raise money. They’re worried about the P&L. They don’t want to invest. We have none of those problems. 90% of our new stores last year came from existing franchisees. So I don’t think any of the questions or concerns about investment apply to Dunkin' Donuts. Baskin-Robbins obviously we’ve just come out of a tough period, may be slightly more difficult. But I think we always find a way to move forward. So we are very optimistic about what’s going to happen.

And with that, I’ll move into the concluding comments. I’d like to thank everyone for joining us today. We feel we had a great year, a great quarter. And to sum it up, yesterday I met with two groups of franchisees. One was international potential franchisee and one is an existing franchisee. I came away with two thoughts. One is that we’re continuing to bring in better and better franchisees and both groups oozed one thing, operations. And that’s what we’re all about. And my concluding line is, I think after two and a half years as a public company, Dunkin’ Brands truly is an operations company now. So thanks for your time and speak to you soon.

Operator

ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program. You can now disconnect. Everyone, have a great day.

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