Krispy Kreme, Inc. Q2 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Krispy Kreme Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Rob Ballew, Vice President, Investor Relations. Please, go ahead, sir.

Thank you. Good morning, everyone, and welcome to Krispy Kreme's second quarter 2022 earnings call. Thank you for joining us today. Our second quarter earnings release and accompanying earnings presentation deck are available on the Investor Relations portion of our website at investors.krispykreme.com. Joining me on the call this morning is Mike Tattersfield, President and Chief Executive Officer; Josh Charlesworth, Global President, Chief Operating and Financial Officer; and Joey Pruitt, Chief Accounting Officer. After prepared remarks by Mike and Josh, there will be a question-and-answer session. Before we begin, I would like to remind you that this call contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements of expectations, future events or future financial performances. Forward-looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's 10-K. Forward-looking statements made today speak only as of today. The company assumes no obligation to publicly update or revise any forward-looking statement, except as may be required by law. Additionally, today's call will include certain non-GAAP financial measures. A reconciliation between non-GAAP financial measures and their closest GAAP measures can be found in the company's second quarter 2022 earnings press release and our Form 10-Q, which will be furnished to the SEC and available at investors.krispykreme.com. With that, I'll turn the call over to Mike.

Good morning and thank you, everyone, for joining us today. We are pleased to share our second quarter 2022 results, as we continue to achieve strong organic growth due to the strength of our omnichannel strategy. I want to start today's call by thanking our incredible team members for their continued hard work to create moments of joy for our customers, especially while navigating significant uncertainty across the world. Our people continue to be at the forefront of delivering on our mission of becoming the world's most-loved sweet treat brand. The purpose of our company is to touch and enhance the lives of others through the joy that is Krispy Kreme. The power of our brand allows us to do that in a special way. The second quarter included Mother's Day campaigns around the globe, Platinum Jubilee celebrations in the UK, and the Beat the Pump gas promotion of a dozen doughnuts for the price of a gallon of gas in the US. These campaigns perfectly highlight our key brand values of joy, generosity, and connection with consumers, which we know drives strong brand equity, especially in periods of weaker consumer sentiment. We are proud to be a global company operating in more than 30 countries, and campaigns like these highlight the good we can do and how we genuinely connect with our consumers in an impactful way. Turning to our performance. The continued progress of our long-term strategy to drive our omnichannel model was apparent in the second quarter with an additional 382 fresh points of access during the quarter, the overwhelming majority of which were low capital Delivered Fresh Daily, or DFD Doors. This included strong points of access growth in Australia, South Africa, Japan, and Latin America, as well as new customers like H-E-B in Mexico. This led to global organic revenue growth of roughly 9%, despite a challenging consumer environment. The increase in fresh points of access led to sales per hub growth of more than 20% in both the US and our International markets. This highlights how we can leverage the economies of scale of our 413 production hubs to deliver fresh doughnuts every day. In fact, total doughnuts sold during the quarter was up 7% globally from a year ago. We saw strong performance in the US in our Hubs with Spokes and Insomnia Cookies, as well as in Mexico, Australia, and New Zealand in Market Development, including a robust performance in equity-owned Japan. Additionally, Branded Sweet Treats achieved breakeven adjusted EBITDA in the second quarter for the first time as we continue to improve and refine. On the other hand, the UK has seen a challenged consumer environment in recent months due to soaring energy costs and other inflation, which led to significant declines in general retail and supermarket traffic in the UK. Additionally, Hubs without Spokes underperformed in the US, growing 5% slower than our Hubs with Spokes, which highlights the importance of continuing the transformation of the US to Hub and Spoke. Despite robust organic revenue growth, adjusted EBITDA in the quarter declined modestly to $47.4 million due to significant foreign exchange headwinds of $2.7 million, cycling a very tough margin comparison in the UK. It's worth pointing out, however, that this level of EBITDA is still nearly 50% up compared to pre-pandemic and 60% up from 2020. Pricing actions offset most of our inflation in the quarter, and we continue to look at pricing and promotional activity strategically. We took pricing actions early in the third quarter in the US and UK and will continue to review pricing. Additionally, we expect lower promotional activity after August. In the US and Canada segment, our performance was driven by the strength of our Hubs and Spokes, highlighted by the 22% increase in sales per hub and Insomnia Cookies. Organic revenue grew 6% in the second quarter, while total revenue grew 8.5%. Our DFD business continued to gain momentum, as we added over 100 points of access during the quarter bringing us to more than 6,000 locations in the US and Canada, well on our way to more than 10,000 points of access. We also saw our most successful ever National Doughnut Day in early June. Adjusted EBITDA in the second quarter declined modestly in the US and Canada due to weaker performance in our Hubs without Spokes. However, we see a very bright path forward through innovation, continued DFD expansion, and we are already beginning to see inflation moderating significantly looking ahead into 2023. Insomnia Cookies had another strong quarter growing double-digit organic revenue and adjusted EBITDA. This was driven by same-store sales growth in 22 open cookie shops in the last 12 months. Insomnia has a strong pipeline that we believe will deliver unit growth in the mid-teens percentage each year moving forward. In June, we expanded our delivery zone and are now working with third parties to expand the reach for Insomnia Cookies by up to an additional eight miles. Both of these will drive increased e-commerce sales, which have a higher average transaction value. We see tremendous long-term potential for Insomnia, as it increases its own global total addressable market that continues to grow with recent success beyond college campuses and urban markets and upcoming entry into select suburban locations with continued product innovation. Our start-up Branded Sweet Treats business, quality packaged shelf-stable doughnut pies and mini crullers broke even on adjusted EBITDA for the first time. We continue to see great opportunity for Branded Sweet Treats in the coming years. Our International segment had another quarter of strong organic revenue of 13% led by 28% organic growth in Mexico. We added more than 200 points of access in the quarter to bring us to more than 3,400, bringing our year-to-date total to more than 500 additional points of access. This led to sales per hub growth of 23% compared to a year ago on a trailing 12-month basis. While US dollar strength and inflation present headwinds in the short term internationally, we remain extremely optimistic about our ability to grow revenue and margin through our omnichannel strategy. Indeed, our International segment had outstanding organic growth across the board. Even the UK had positive organic growth, cycling a tremendous quarter a year ago and facing the worst consumer sentiment in decades. In fact, our Market Development segment's performance accelerated in Q2 with organic growth of 19% and adjusted EBITDA growing 6.5% despite significant FX headwinds and franchise acquisitions. This was led by robust performance in both our franchise business as well as our equity-owned Japan market, where we are implementing our omnichannel model with the expansion of e-commerce and the launch of DFD. Krispy Kreme is truly a beloved global brand. Roughly half of our system-wide sales and adjusted EBITDA are outside the US. As you know, our goal is to open up at least three new countries per year going forward. Earlier this year, we announced signed agreements in Switzerland, Jordan, Costa Rica, and Chile. Today I'm pleased to announce the signing of a strong new partner in Turkey with a great new agreement to bring the hub-and-spoke model to Turkey with a proven restaurant operator, one of our largest development deals ever. International interest from our high-quality partners remains very high. With a proven model, we are building a very strong pipeline for new market entries with both existing and new franchise partners, as well as looking at equity stakes in strategic markets. We expect to be able to announce further market entries later this year as we continue our journey to become the most loved sweet treat brand in the world. Turning to a few other drivers of our growth. E-commerce remains a pillar of our omnichannel strategy. In the second quarter, 17.5% of our retail sales came from e-commerce, up from less than 10% pre-pandemic and 17.2% for the full year 2021 with a goal to achieve e-commerce penetration of over 25% globally long-term. We continue to strengthen our capabilities with our mobile app in order to improve the user experience, enhancing our customer targeting to over 13 million loyalty members, a 22% increase from a year ago and continue to expand accessibility with additional third-party partners. Innovation remains a significant driver of frequency, as we create and introduce premium fresh and buzz-worthy offerings to customers across our points of access. We had successful seasonal activations across the globe during the quarter, including Mother's Day and National Doughnut Day, as well as Patriotic July 4th doughnuts that included a successful DFD campaign for the first time in the US. We're also launching a fantastic new fritter that will be available only on Fridays this year and are even testing ice cream and shakes as we think about unique ways to drive additional frequency. Additionally, we expect to launch a fourth price tier later this year for our most premium doughnuts, like the hand-cut cinnamon rolls and these new fritters that will command a higher price. We also invested in our consumers in the second quarter with strong promotions and connections in times of need. Our customers expect this from our brand, and it can truly drive strong brand love. While short-term macro challenges remain, as we look ahead, we see a strong path for success over the coming years, including a robust pipeline of low capital points of access, new cookie shops, a significant number of new market entries, and we will continue to bring consumers along while managing margins. Additionally, in the second quarter, we began the steps for the next evolution of the hub-and-spoke model in the US, including our hubs without spokes, reviewing our overall G&A structure and how we can better leverage our scale with the acquired domestic and international franchisees as well as other considerations. It's no secret that some of our legacy hubs without spokes in the US are underperforming both on the top and bottom line. We knew this when we acquired the system over the last few years in order to control the brand and begin implementing our hub-and-spoke model, and not every shop would remain as it was then, particularly hubs without spokes today. Some of this optimization may include converting shop types and exiting underperformers that are not set up well to support DFD. Earlier this morning, we announced that we will be hosting Investor Day on December 15th here at our headquarters in Charlotte, North Carolina, which will also be webcast where we will outline our strategic vision and financial model through 2025. We will have a number of exciting updates to share with you, including the work I just referenced; automation efforts in 2023 and beyond, how we see a path forward for Insomnia Cookies and Branded Sweet Treats, as well as a number of other strategies underway that give us a very high degree of confidence that we will deliver our long-term growth algorithm with a very high return on our investment. We are very excited about our path in the coming years and looking forward to sharing that full compelling vision with investors in just a few short months. I'll now turn it over to Josh to walk you through the Q2 financials and our 2022 outlook.

Thanks, Mike, and good morning everyone. In the second quarter, our Krispy Kremers have once again shown that our beloved brand and our omnichannel approach drives, even in a challenging consumer environment, with net revenue growing 7.5% year-over-year to $375 million. That's despite a near 3% negative impact on revenue growth from the stronger US dollar. Organic revenue growth was 9% or 31% on a two-year stack basis. During the quarter, we added 382 fresh points of access across the world, mostly in the form of capital-light DFD Doors. We now have more than 11,400 points of access globally, an increase of nearly 1,800 from a year ago. Along with our successful brand activation initiatives, this has resulted in more than a 20% increase in trailing 12-month sales per hub, compared to the prior year, in both our Domestic and International business segments. Adjusted EBITDA was $47.4 million in the second quarter, down 10% from a year ago. This is despite the strong momentum in points of access growth and sales per hub, which we see as leading indicators of higher margins in the future due to the efficiency benefits of adding off-premise sales to the hot light theaters. Three factors explain the lower EBITDA this quarter. In the UK, we lapped a post-pandemic resurgence in 2021, with a much more challenging consumer environment this year. Inflationary pressures continued in Q2, with pricing actions taken in the US and U.K. after the quarter ended. And most significant was the stronger dollar, which alone impacted adjusted EBITDA by $2.7 million in the quarter. In the second quarter, GAAP net loss was $2.4 million or negative $0.02 diluted EPS compared to a GAAP net loss of $15 million or negative $0.13 diluted EPS in the same period a year ago. Impacting GAAP net income this quarter were impairment charges of $1.9 million, as well as a legal settlement of $3.3 million. Without these, GAAP net income would have been positive. Adjusted net income for the quarter was $14.6 million, and adjusted diluted EPS in the second quarter was $0.08, a decline of $0.05. The decrease was due to the increased share count from the IPO, FX headwinds, softness in the UK, and an approximate 20% increase in global input costs. Free cash flow was positive in the quarter, bringing in $3.5 million. In the US and Canada business segment, total revenue increased 8.5% in the second quarter to $251 million, and organic growth was 6%. Revenue growth was driven by a 9% year-over-year increase in sales per DFD Door, as well as a 9% increase in fresh points of access. We added 112 points of access in the second quarter, taking the total to 6,053. We continue to expect to add at least 500 DFD Doors in the US and Canada for the full year of 2022. E-commerce revenue in the US and Canada represented 19.3% of retail sales, roughly flat from a year ago. This is a 250-basis point increase from the back half of 2021, driven by additional loyalty members, which now total 9.5 million in the US and an expanded delivery rider network through partnerships with third-party aggregators and the addition of dark shops. All these factors combined to increase sales per hub in the US and Canada to $4.4 million on a trailing 12-month basis in the second quarter, that compares to the $4 million for 2021 and $3.6 million a year ago. Hubs with Spokes in the US and Canada increased by two to 127, as two hubs in California began adding spokes in the quarter. However, Hubs without Spokes in the US underperformed in the second quarter, with revenue growth in the quarter 5% lower year-over-year than the Hubs with Spokes, thus highlighting the importance of the omnichannel model. Adjusted EBITDA for the US and Canada in the second quarter decreased 8% to $26 million, with margins declining 180 basis points to 10.4% as we cycled a strong quarter from the vaccine promotions from a year ago. Also impacting margins this quarter was the underperformance of Hubs without Spokes. We saw a 400 basis point margin decline year-over-year, driven by inflation and increased promotional activity. In contrast, Hubs with Spokes saw an increase in their margin delta from Hubs without Spokes due to the benefit of additional off-premise sales through the increase in DFD revenues. In the third quarter, we've already increased pricing in our shops by mid-single digits and continue to review pricing opportunities selectively for the balance of the year. Promotional discounts are expected to also slow as we concentrate on our premium seasonal offerings in our stronger fourth quarter. Our digital-first Insomnia Cookies had a strong quarter with double-digit revenue and adjusted EBITDA growth. We opened four new cookie shops in the second quarter and four since the end of the quarter, reaching 225 in total across the US at the end of July. Our start-up Branded Sweet Treats product line saw a 15% increase in scan sales in the quarter compared to a year ago, hopefully, a 98% service level. The continuous improvement in our manufacturing and distribution capabilities helped lower conversion costs, which combined with a double-digit pricing increase earlier in the year helped us achieve breakeven on profitability for Branded Sweet Treats for the first time in this quarter. Moving to our International segment. Net revenue grew 5.2% in the second quarter to $94 million, with FX headwinds a 7.9% drag during the quarter. Organic revenue increased 13%, with excellent performances from Mexico, Australia, and New Zealand. Strong premium product innovations and successful price increases proved particularly successful. In the UK, we also saw organic growth, but at a much lower rate in the face of a very challenging consumer environment. The general supermarket and retail traffic have both declined in recent months compared to a year ago. International points of access expanded by more than 200 in the second quarter and by 500 year-to-date. This 29% increase in international points of access from a year ago allowed us to leverage our 37 international hubs to grow international sales per hub to $9.8 million on a trailing 12 month basis, up from $9.1 million at the end of 2021, and $8 million in 2020, even with the FX headwinds. International adjusted EBITDA for the quarter declined 17.5% to $20 million, as gains in Mexico, Australia, and New Zealand were not enough to offset a decline in the UK. The UK decline was driven by cost increases in labor and commodities. But also remember that we were cycling a surge in spending across the UK economy this time last year following the British reemergence from COVID-19 restrictions. We expect International margins to continue to see some softness in the third quarter due to UK consumer trends, which have been exacerbated by a recent heat wave. However, recent price increases as well as local expense reductions are underway, and we expect to see improvement in Q4. Now to our third business segment, Market Development, which is made up of our franchise business around the world and the equity-owned Japan market. Total revenues in the second quarter increased 6.5% to $30.9 million, even with a 7% impact from FX headwinds and franchise acquisitions. In fact, organic growth in the quarter was a very strong 19.2%, with great performances in particular in our international franchise markets and in Japan, both of which saw organic growth in excess of 25%. In Japan, we continue to make progress on implementing the Hub-and-Spoke model, with more than 100 new fresh points of access added in the last year. This allowed Japan to enjoy adjusted EBITDA margin improvement of over 400 basis points in the quarter compared to a year ago. Adjusted EBITDA in the second quarter for Market Development increased 6.5% to $10.5 million despite a negative $600,000 impact from FX headwinds. Adjusted EBITDA margins were approximately flat in the quarter at 33.9%. We are updating our 2022 outlook, mostly to reflect FX headwinds, but also the softer UK trading environment and the relative underperformance by US Hubs without Spokes. We still believe we will generate 10% to 12% organic growth in 2022 but are reducing our net revenue expectations to a range of $1.49 billion to $1.52 billion, which still means 8% to 10% net revenue growth for the year. Inclusive of an estimated $10 million to $12 million impact from FX due to the strength in US dollar, we now see full year adjusted EBITDA at $189 million to $195 million, with adjusted EPS of $0.29 to $0.32. In general, each 1% move in the US dollar index is approximately $1.3 million in adjusted EBITDA on an annualized basis. After investing $22 million in capital during the second quarter, which represents below 6% of revenue, we do expect annual CapEx to be approximately $10 million lower this year due to a shift to lower capital points of access and benefits from a decrease in spend internationally, due to the dollar strength. This will bring our CapEx spend to 7% of revenue, down from 8.6% in 2021 and 2020. We also announced this morning that we are acquiring a Midwest US franchise later this month for $18.5 million at a below six times EBITDA multiple. This will add seven profitable shops to the network and the ability to add more than 100 low-cost DFD Doors in the market. In the near term, this will moderately increase our leverage while we cycle this EBITDA into the US results, which should help bring leverage down over time. Additionally, we are reviewing poor-performing Hubs without Spokes in the US and expect to close approximately 10 shops in the coming weeks and months. These are margin-dilutive hubs, which cannot be converted to supply off-premise DFD sales. While we don't provide quarterly guidance after softer organic revenue growth in the UK and the US in May and June, we have seen a strong start to the third quarter with 10% organic growth quarter-to-date, helped by recent price increases and strong limited-time offers such as our ice-cream truck doughnuts in the US, which have so far been enough to offset another summer heat wave in the UK. Q3 organic growth continues to also be high in Insomnia Cookies, Australia, Mexico, Japan, and international franchise. Recently, we've seen large decreases in key input costs in the commodities market, particularly on wheat and edible oils, which we've begun to lock in for the first half of 2023. This would lead to a large deceleration of expense growth next year from recent levels with some pricing even lower than our 2022 average if trends continue. At this point, we've locked in approximately 80% of our commodities for the first half of 2023 at mid to high single-digit inflation cut down materially from approximately 20% plus we've seen in the last quarter. Fundamentally, nothing has changed in our ability to continue to thrive. We remain very confident in our ability to deliver strong organic sales and bottom-line growth through expanding our hub-and-spoke model, increasing our points of access, and growing our e-commerce platform, all this while managing margin through pricing and innovation. We also remain very confident in our long-term growth algorithm of 9% to 11% annual organic revenue growth, 12% to 14% annual adjusted EBITDA growth, and 18% to 22% annual adjusted diluted net income growth despite the near-term FX and inflation challenges. Operator, we can open the call up to Q&A now please.

Thank you. Our first question comes from John Glass with Morgan Stanley. Your line is now open.

Hi. Good morning, guys. It's Brian on for John. Maybe just the first question about the US Hubs without Spokes. What kind of defines the ones that you'll be closing? Is there a location issue, or what would you observe about those locations as they've evolved out of COVID over the last 1.5 years?

Good morning. This is Mike. We've talked about the transformation in the US, which we really started to focus on last year. We just finalized with the Midwest acquisition. When we acquired it, it was to get control of the system including the largest markets. So we knew even then that some of the hubs were underperforming. The whole plan was how do we evolve the system much more to this omnichannel model and the hub-and-spoke. So that's always the lens that's there. The shops that will be closed are the ones that can't convert. They can't change over and adapt. Inflationary times sometimes highlight the gaps that exist, which you can see in the performance.

It's Josh. The only thing I'll add is that actually many of the Hubs without Spokes are strong and profitable and much-loved local community stores. Of the 118 Hubs without Spokes in the US, a significant number are still performing well. However, there is a significant minority, and hence our decision to close approximately 10 that are really not sustainable in the long run. With this context in this environment, the opportunity is to accelerate what would have been inevitable anyway.

Okay. Great. Thank you. And then just on the improvement in organic growth as you went into July, was that primarily due to pricing? Maybe if you could comment just on some of the underlying trends in the on-premise business as well as in the delivery channel. What are the other drivers of that besides pricing?

You've got promotional activity or merchandising mix that works. Points of access continue to grow. There is pricing. We look at pricing in a very strategic way. We're in this business for the long term. We really focus on pricing and learn about the merchandising mix as consumers are challenged because we serve a broad spectrum of consumers. Finding that mix right, along with tweaks to the promotional mix, has helped us open up a new tier which is our customized handmade doughnuts that command a premium price. It's clear that we haven't seen the impact from pricing yet most of our consumer base appreciates the added value.

To complement, the performance well into the third quarter is nice to see because traditionally, it is a weaker quarter for us. The pricing that Mike mentioned, like our ice-cream truck doughnuts, is clearly performing well. While the US still faces challenges, especially in the UK where they are experiencing economic issues, we've seen July's performance indicate that our pricing and limited-time offers have helped.

Thank you.

Thanks.

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

Hi, thank you. I wanted to talk about DFD in the US. If you can make some comments around DFD sales per door, profit per door, and how the system is evolving from a profitability perspective. And if you have some opportunities to sharpen the pencil in terms of looking at profitability per account, especially now given your margins and profits, is it essential to make sure that you're doing business in profitable places?

Hey, John, this is Mike again. The strategic part involves learning from our International businesses about how to drive this omnichannel approach to DFD and ensuring the same doughnut mix found in shops translates over to the DFD doors. This consistency enhances the Krispy Kreme experience, and points of access can be a significant driver of margin and opportunity. We began this approach last year. For example, we activated a July 4th promotion, pushing it into the DFD Doors, which helped sales significantly.

Yes, Mike. In the US, we're continuously adding DFD Doors. We see that adding those profitable sales to fixed costs at the hot light theaters can result in around a 40% margin flow-through. Q1 to Q3 is an optimal time for adding these DFD Doors, as we're seeing demand for our offerings. In terms of optimizing and ensuring we're at the best door locations, we're focusing on sales per door per week, and we still have plenty of upside in terms of our international markets.

Have you gone through the exercise of looking at and making sure every DFD door is profitable, even on a daily basis? It would seem that in some cases the doughnuts are sold out at the end of the day while in other instances there are quite a lot left. Are you applying this more granular approach to managing those accounts?

Yes, we see the opportunity to continuously refine our capabilities on managing this fast-expanding DFD Door network. We have sent our US team to the UK to learn best practices. It's crucial to ensure routes are profitable, as adding a driver incurs additional costs. We also ensure door sizes meet minimum scales, and we use sales per door per week as a key metric to maximize profitability. We desire to ensure doughnuts are always available for evening sales.

The objective is to ensure the consumer has access to it at all times of day. We're constantly balancing through the week and across our doors to optimize pre-sales and regular throughput.

Okay. Thank you.

Thanks, John.

Our next question comes from the line of Carlos Laboy with HSBC. Your line is open.

Yes, good morning everyone. What is the biggest point of resistance that you face for getting pricing in the US to keep revenue pace with or ahead of inflation for real organic growth? And maybe related to that can you comment on brand power in new markets where you're expanding into to achieve the pricing needed with inflation? What's your pricing experience in established markets versus new markets?

We always look at our brand and the opportunity for strategic pricing. It's essential to find a price where customers think it's worth it, and how we can continue to innovate and enhance access. Pricing actions like we took last year are part of this strategic approach. We ensure the experiences align with customer expectations, thereby capturing premium value when appropriate. Awareness of Krispy Kreme is global, and we see high demand in new markets.

Thank you.

Thank you. Our next question comes from the line of Bill Chappell with Truist. Your line is open.

Good morning. Can you hear me?

Yes, we can.

Yes. I guess two questions. One, I'm just trying to understand maybe the change in tone or change in strategy. It seemed like the model was in place and moving well and you felt very good about even some upside to the numbers. Since then, we've had what seems to be weather and economic slowdown, and maybe the model has been stress-tested. Can you help me understand if these are strategic tweaks that were always in the works or if there's more that you feel needs correction?

Nothing has fundamentally changed from the model. The strategic model building and omnichannel business, as we transformed the US, is ongoing. All you're seeing is us moving a bit faster now on a few hubs that don't fit into the system. The UK business is robust; even with the economic challenges, we're still seeing positive margins. It's actually showing the resilience of our brand to grow across all regions we operate in.

The strength of our omnichannel business, which operates globally, allows us to navigate any storm or change in the external environment. Despite currency fluctuations, our long-term algorithm remains unchanged, with revenues continuing to rise. When you look at the EBITDA drop, over half of it comes from the underperforming hubs, indicating our strategy remains solid.

Okay. Well, and just to follow-up on that. I mean, I guess was it not considered on the long-term algorithm? I see this is an unusual year, but there will be other years with macroeconomic changes. Is the 10-12% long-term top line still viable?

Yes, the long-term projection of 10-12% organic growth remains intact. We've seen strong July performance that supports that. Our immediate goal is to increase points of access globally, as we've identified a significant opportunity that can drive growth. Additional volume is important as we anticipate continued improvements on these metrics, thus ensuring the long-term viability of our growth strategy.

Okay. I’ll leave it there. Thanks.

Thank you. Our next question comes from the line of Jared Garber with Goldman Sachs. Your line is now open.

Good morning. Thank you for the question. I wanted to dig into the US organic growth number. Certainly, it's decelerated a bit. You've mentioned running about a 10% price in the US. Can you help me understand the drivers of the deceleration and if you're seeing any signs of softening in consumer demand?

The first thing to say is that our volume growth in the US remains strong. We're selling more doughnuts each quarter than ever, which is contributing positively. The biggest driver of the organic growth is the increase in DFD doors and sales at those locations. We haven't taken pricing in DFD this year, but it will play a role. It's crucial that our available offerings across various markets remain strong.

We have learned that we can even venture into higher tiers of pricing. We've used this to encourage customers to engage with our premium products. We're working to ensure that this added tier resonates positively with our customers, allowing us to maintain a sensible pricing model and value continuum.

Okay. Great. Thanks for the clarity.

Thanks Jared.

Our next question comes from Jaafar Mestari with BNP Paribas Exane. Your line is now open.

Hi, good morning. I just had a couple of forward questions regarding the update in the full year guidance. It appears that your updated guidance is about 100 basis points below what it was before. Are you able to assess how much of the change in margin reflects higher-margin international profits versus other fundamental changes, including inflation?

Certainly. The $10 million to $12 million impact from FX is primarily due to the strength of the US dollar. The impact largely originates from our performance in the UK, Australia, and Japan. It's primarily a translation issue, although there are transactional impacts as well. In overall terms, the reduction in margin guidance reflects a shift due to FX and the UK economic environment rather than any substantial change to our strategy.

So it sounds like it's all FX-related, and the only cost impact in the $10 million to $12 million is your operations purchasing elsewhere?

Yes, some of our commodities are indeed impacted by the dollar strength as they are globally traded. But the majority is from translation adjustments.

Great. And just to close on that, no change to the organic growth guidance range. Is it because we may have ended up at the top end and now likely back towards the low end? Or is it simply that organic growth remains stable and the adjustments are focused on how promotions are delivered versus costs?

We're happy with the range. Numerous factors can affect the organic growth trajectory, but overall, 10% to 12% organic growth ahead of our long-term algorithm in the market will outline a good year for Krispy Kreme in 2022.

All right. Thank you very much.

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Mike Tattersfield for closing remarks.

Thank you everybody for spending some time with us today. I always appreciate our Krispy Kremers. I visited them in the shop today and said hello. I'm looking forward to continuing our journey of building the most-loved sweet treat brand in the world and delivering on that every day. Thank you for your participation.

Thank you all for joining. You may now disconnect.