Krispy Kreme, Inc. Q1 FY2023 Earnings Call

Hello. My name is Jean-Louis. Welcome to the Krispy Kreme Q1 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. I will now turn the conference over to Rob Ballew, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Krispy Kreme’s first quarter 2023 earnings call. Thank you for joining us today. Our 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 and Chief Operating Officer; and Jeremiah Ashukian, Chief Financial Officer. After prepared remarks, there will be a question-and-answer session. Before we begin, I’d like to remind you that this call contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events, or future financial performance. 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 Form 10-K filed with the SEC on March 02, 2023. Forward-looking statements made today speak only as of today. The company assumes no obligation to update or revise any forward-looking statements, except as may be required by law. Additionally, today’s call will include certain non-GAAP financial measures. Reconciliation between non-GAAP financial measures and their closest comparable GAAP measures can be found in the company’s first quarter earnings release this morning and is available at investors.krispykreme.com. With that, I’ll now turn the call over to Mike.

Good morning, and thank you, everyone for joining us today. We are pleased to share our first quarter results, marking another period of accelerated organic growth, driven by our continued successful execution of our omni-channel strategy and a robust performance of our premium offerings for celebrations, events and holidays. I want to start today’s call by thanking our Krispy Kremers, our team members for another strong quarter where we once again achieved positive organic growth in every country where we and our partners operate. Thank you. Without your efforts and dedication, this would not be possible. Since 1937, we've been serving our iconic Original Glazed Doughnut, and it’s always been about sharing joyful moments. As an affordable indulgence, we love that more than 80% of our doughnuts are bought to be shared with others. Nearly 40% of our customers buy our doughnuts for a party or a special event in their life, up from just 10% a few years ago. Our customers trust us to be part of their special moments. We don't take that lightly. We are proud to carry on the best of what our founder, Vernon Rudolph, knew. Consumers love fresh doughnuts. We appreciate our history, yet we know we are a doughnut company that is constantly evolving, and freshness is the key attribute our customers want in a sweet treat. We see this in the continued impressive growth of our Delivered Fresh Daily or DFD business. Our ever-increasing confidence in our ability to continue to grow fresh points of access by 10% to 15% a year allowed us to make the decision to exit our start-up CPG business branded Sweet Treats and focus our efforts where our customers want us to—bringing fresh and delicious Krispy Kreme donuts to convenient locations. Our omni-channel strategy, where we provide convenient access to consumers through many channels, is unique in the industry and is fueled by our passion for innovation and our understanding that access to our brand is our biggest opportunity. Through the efficiency of only 400 donut producing hubs worldwide, we know how to think differently and creatively, delivering fresh donuts when and where consumers want them. Thinking differently means that we not only think like an experiential donut company, but also as a donut logistics company, which makes our model very unique. This change in our model and culture enabled us to open and service more than 12,000 points of access daily with a long-term goal of at least 75,000 by growing global points of access by 10% to 15% per year. While those points of access started at grocery and convenience stores, today they include mass merchandisers, restaurants, and drugstores. The uniqueness of our current model allows us to maximize an idea that was once only available at the 400 producing donut hubs, taking it to every potential point of access in our system. Thinking like a donut logistics company with our DFD network truly unlocks the power of our brand and reach. Thinking differently leads directly to the purpose of our company to touch and enhance the lives of others through the joy that is Krispy Kreme. We are committed to positively impacting the world by loving our people, our communities, and our planet. In the first quarter, we donated much of our remaining branded sweet treat donut inventory to food banks across the US. We also saw another strong quarter of community fundraising and local giving across the globe as we donated both to school children, supported the elderly, and held more than 100 acts of joy worldwide. We worked hard to share joy in a way that really connected people to Krispy Kreme. Turning to our results. The first quarter marked a great start to the year for our brand with organic revenue growth accelerating to 14.4% as we had highly successful seasonal global campaigns, including the critically important Valentine's Day with great partnerships with Hershey's, as well as a strong St. Patrick’s Day. This global campaign serves as the playbook moving forward for significant events and holidays as we'll be able to leverage marketing costs, media coverage, and brand partners across many or all of the countries Krispy Kreme and our franchise partners operate, driving increased efficiencies on both the top and bottom line. Also, strengthening our omni-channel capabilities in the first quarter was our e-commerce efforts. In the US, that included expanding the availability of specialty donuts and more targeted marketing efforts. Additionally, Insomnia continues to benefit from the expanded radius of warm cookie delivery of up to 10 miles. These efforts led to a 23% increase in e-commerce revenue in the first quarter compared to a year ago and led to a 220 basis point increase in the sales mix of e-commerce to 19.6% of retail sales for the company during the quarter. This was our strongest quarter ever in e-commerce, both in revenue and percent of retail sales even when you compare that to the height of the pandemic, and we continue to see significant opportunity to grow in this channel. We also continue to execute on our global expansion strategy, with a strong increase in points of access in our market development and International segment, which led to strong organic growth around the world, particularly in our equity-owned Japan and Canada markets and international franchise markets. Since the end of the quarter, a new franchise partner opened for the first time in Chile, which marks one of the highest openings in the company's history. We expect to open in three additional countries during the second quarter, including Switzerland, Costa Rica, and Jamaica. We continue to be on track to open in up to seven new countries this year and expect to sign three to five new development agreements for additional countries to open in 2024, including further locations in Western Europe and South America. Our pipeline of new hubs and fresh shops from our franchise partners is now well over 1,000 shops over the next five years, which will be used to further unlock additional points of access in those markets. We've seen that Insomnia is really working across the entire country, and recent new store openings are performing better than expected. To accelerate that growth, we are investing in capabilities and processes to rapidly expand the number of Insomnia store openings, both in 2023 and longer term, and to launch internationally as they remain on track to open in the UK and Canada later this year. We expect to open nearly double the number of cookie shops this year compared to last year, with further growth to come in 2024 and 2025. As we look ahead, our focus remains relentless on driving the capital-light expansion of our omnichannel model. We continue to see momentum in our hub and spoke model, as well as existing DSD channels, and are excited to grow our fresh business to new channels such as QSR, plug, and drugstores. That's why we have such confidence in our ability to grow to more than 75,000 points of access globally from 12,400 today. In addition to expanding DFD, we will also continue our work to align our specialty donuts across all channels and expand our e-commerce capabilities. Krispy Kreme has great momentum right now, and we remain confident and excited about the long-term 2026 expectations we highlighted at our Investor Day last year, including growing revenue to $2.15 billion and adjusted EBITDA to $215 million. My excitement about the growth of this incredible brand is stronger than ever. I believe that brands with purpose and clear direction thrive even in challenging economic times. We've seen this in the resilience of the Krispy Kreme brand and culture. We have worked diligently over the past six years to transform our business model and operations to give more customers exactly what they want, where they want it, and to provide fresh Krispy Kreme Doughnuts. We have incredible momentum as we continue our journey to become the most loved sweet treat brand in the world. With that, I hand the call over to Josh to give an update on the business and our PSC companies.

Thanks, Mike. In the last few months, we've made great progress around the world with the Fresh Daily Hub and Spoke operating model that we discussed back at our Investor Day last December. This is especially the case in the US, where strong growth across all our sales channels helped us to deliver 16% organic growth and EBITDA margins above 15% when excluding the now discontinued branded sweet treat line. The operating leverage of the model is particularly effective when we generate revenue off-premises by e-commerce or the local point of access, such as grocery stores, all from our existing fresh doughnut production hubs. In the US, upgrades to our web and app, as well as continued expansion of our delivery zones, helped us to generate over 22% of retail sales via e-commerce in the first quarter. And in Delivered Fresh Daily, we added over 350 doors, both to well-established customers like Walmart and Publix, but also with emerging newer customers like Target and Albertsons. We now have over 6,000 DFD doors across the US with average weekly sales up 35% from two years ago to nearly 650 doors. We're also adding larger DFD display cabinets, which add up to 70% of sales per door. 63 of these premium cabinets went into grocery stores in the first quarter, including Kroger's routes division, and a test at Target is expected in the coming months. This off-premises sales growth is benefiting our 137 production hubs in several key US cities, including New York, Dallas, Houston, DC Metro, and L.A., which all saw year-over-year margin growth in the first quarter. Our previously announced U.S. shop network optimization program, which focuses on poorer performing hubs without spokes, which do not benefit from the DFD expansion is also well underway. 29 shops have already closed, all being converted into different shop formats, and as a result, hubs without spokes have seen a 180 basis point margin improvement year-over-year. We expect another five to ten more shops to go through this process through the end of 2023. We're also making improvements to the doughnut shop experience itself, including the addition of new equipment in our drive-thrus, which represent around 60% of retail sales in the US, as well as the introduction of digital kiosks in our lobbies at select locations. These kiosks have already proven popular with our customers, especially at the flagship shop in Times Square, New York. The Fresh Daily Hub-and-Spoke operating model is also showing early success in some newer international markets, including company-owned Canada and Japan, which both saw organic growth above 35% in the first quarter, as well as in international franchise markets, which grew even faster. In Japan specifically, an acquisition we completed at the end of 2020, we have brought back the hotline experience to our doughnut shops, strengthened e-commerce, and added over 160 DFD doors. This omnichannel-led growth is expected to deliver $60 million in revenue for Japan in 2023 at a more than 15% adjusted EBITDA margin. This compares to a loss at the time of the original acquisition. As Mike explained, our long-term global point-of-access goal of 75,000 includes the opportunity to take DFD to new partners in new sales channels. We now have DFD listings in pharmacies through Walgreens in the US; in clubs through Costco in the UK, Canada, and Australia; and in QSR with an expanded test of over 160 McDonald's restaurants in Kentucky, which kicked off at the end of March. We are closely monitoring all of these new channels for quality, from a freshness, service, and of course, performance. Regarding McDonald's, we are happy with our team's ability to service these additional restaurant locations from three of our existing local production hubs, and we have not seen any adverse impact on existing sales at our donut shops or other DFD doors in Kentucky. I'll now happily turn the call over to Jeremiah to give us more detail on our financials, including an update on our balance sheet and our 2023 financial outlook.

Thanks, Josh, and good morning, everyone. We had a great first quarter. The fresh omnichannel model is working, and we are building confidence in our ability to drive both top and bottom line results. Sales per hub in the US increased 9% to $4.6 million, led by both strong points of access growth and record average weekly sales per DFD door. New door productivity is strong and e-commerce revenue saw its highest quarter ever, even higher than the height of the pandemic. In addition to the benefits of the actions Josh outlined a few moments ago, we have also successfully taken pricing to offset significant inflation. Plus, we believe the exit of branded sweet treats will allow us to focus even more on our US fresh business. Aside from the US, we're seeing similarly strong performances in Japan, Canada, and our international franchise segment, and we continue to make great progress on our global expansion plans. Turning to the financials. As Mike said, we saw strong growth across all our reporting segments in the first quarter with net revenue up 12.5% year-over-year to $419 million. Organic revenue, which excludes the impact of acquisitions and changes in foreign currency, grew 14.4% and accelerated from last year, driven by pricing, our premium seasonal innovation, the growth of our Delivered Fresh Daily donuts, including grocery and convenience stores and in e-commerce. We took further pricing in the first quarter in several key markets, including the US and the UK, bringing our effective global pricing to a low double-digit increase and we continue to see lower levels of elasticity, thanks to the frequency of purchases, strong specialty campaigns, and the fact that it remains an affordable indulgence for all income groups. Adjusted EBITDA grew 12.3% in the first quarter to $55 million, or an increase of 16% in constant currency once the $2 million impact of the stronger dollar is considered. Pricing, Hub and Spoke efficiencies, improvements in our US network and labor optimization offset elevated commodity and labor cost inflation, and a negative mix shift to maintain adjusted EBITDA margin levels at 13.1% in the first quarter compared to a year ago. GAAP net income of $1.6 million in the first quarter was negatively impacted by a $13.4 million largely non-cash expense related to the exit of branded sweet treats, partially offset by a $9.7 million gain on the sale leaseback. Adjusted net income for the quarter increased 15.5% to $15.3 million, and adjusted diluted EPS in the first quarter was $0.09, an increase of 13% or 25% in constant currency. The US business segment's total revenue increased 14% in the first quarter to $281 million, and organic revenue growth was also up 14%, despite decreased revenue from branded sweet treats. Growth was driven by sales per hub increases to $4.6 million from $4.3 million a year ago and double-digit same-store sales growth by Insomnia Cookies. E-commerce and DFD revenue were strong in the first quarter, with record revenue for both channels in the US. Adjusted EBITDA for the US segment in the first quarter increased 19% to $39 million, with margins increasing 60 basis points year-over-year to 13.7% and driven by strong performance in our US fresh donut business. We saw EBITDA margins expand 120 basis points. This reflects the successful pricing actions taken in the last nine months, the absorption benefits in our Hubs with Spokes from the growth in DFD off-premise sales, and improved performance in Hubs without Spokes. These factors more than offset double-digit ingredient cost inflation and elevated labor cost growth. International organic revenue growth was 7.3%, with total revenues of $90.3 million while adjusted EBITDA for the quarter declined to $13.6 million. Organic growth was offset by continued softness in DSD in the UK, as well as increased cost of goods sold in logistics in Australia and the UK. However, we are seeing continued strengthening in the retail environment in the UK, and we are making efforts to streamline costs, reduce waste, and will continue to review pricing on a regular basis in all three markets. In the UK, we're also working to expand visibility in the grocery channel, including secondary placement volume product, range pack sizes and grocery, as well as looking at new partners and channels. Market development, which is made up of our franchise businesses around the world and equity-owned Japanese and Canadian markets saw organic growth accelerate to 36%. Total revenue in the first quarter increased 27% to $47.3 million, even with a 9% impact from foreign exchange headwinds and franchise acquisitions. Market development and adjusted EBITDA increased 36% to $17 million despite a $1.3 million negative impact from foreign exchange headwinds. Adjusted EBITDA margins increased 250 basis points to 35.9% in the first quarter compared to the prior year and would have been higher if not for a mix shift due to the very strong organic revenue growth in equity-owned Japan and Canada. The growth in Japan led to adjusted EBITDA margins of over 20%, up nearly 800 basis points from a year ago. During the first quarter, we completed a well-oversubscribed refinancing of our Term Loan A and revolver facilities, extending our maturities at the same terms through March of 2020. Last quarter, I mentioned we would begin efforts to reduce our reliance on vendor financing programs to reduce what has become a more expensive financing vehicle and an increased impact on adjusted EBITDA as these costs do not hit net interest expense. We made progress on that reduction in the first quarter, reducing those levels by over $45 million. We expect this to be a long-term tailwind to our adjusted EBITDA and net income, and we remain on track to be between 2x and 2.5x net leverage in 2026. We are also reaffirming our 2023 guidance. This includes growth of 9% to 11% in organic revenue and 8% to 10% in net revenue, $205 million to $215 million in adjusted EBITDA and between $0.31 to $0.34 adjusted EPS. We continue to expect capital expenditures of $105 million to $115 million or roughly 6.6% of revenue, including opening at least 30 to 40 new Insomnia cookie shops and roughly 10 company-built hubs in 2023. Our 2023 guidance continues to include modest headwinds from foreign exchange rates for the year, which is roughly a negative 1% impact on revenue growth and approximately a $3 million hit to adjusted EBITDA. While the impact for the full year is negative, in the second half of 2023, we'll start to see the benefits year-over-year from foreign exchange at current US dollar rate in the fourth quarter as the dollar peaked in early December 2022. Despite seeing roughly $25 million to $30 million in lower revenue from exiting branded sweet treats for the balance of the year, we remain confident in our guidance range for 2023 and are currently trending towards the middle or higher end of our revenue and adjusted EBITDA ranges. We have good momentum in the business, and I continue to have a high degree of confidence that we can meet or even exceed our long-term outlook for 2026 that we provided at our Investor Day.

We will now begin the question-and-answer session. One moment for your first question. Your first question comes from the line of John Ivankoe of JPMorgan. Please go ahead.

Hi. Thank you. Mike, I like the quote of thinking like a doughnuts logistics company, and obviously, there's a lot of implications in that. So I guess a couple of things. Talk about your intelligence or scale, your capability is probably the best word of really evaluating profitability per DFD account. I mean, is that something particularly in the US that you're specifically honing in on? And maybe a related kind of comment to that. McDonald's was on a demand planning model, which means they order and actually own the product once it goes in the back door. I don't think that's the case in other US accounts. I mean, is that kind of a possibility for you going forward as you maybe reduce some of the risk of your business and have a more predictable profitability of each drop each day to each account.

Hey John, how are you doing? Good morning.

Good morning.

I will start with the McDonald's piece today. I think as you think about the demand planning piece that they do, it's pretty interesting. It's actually something we do in other markets, right? So it's not the first time we've done this. But it's sometimes consumer-centric that really works for them and the unique basically the drop that we're doing today where we still do our own route system and actually drop to each McDonald's individually or you can do a center drop where another logistic team can then do the drop as well. So that opportunity from where they own the demand planning is something that we look for in customers. And we continue to see that as viable options anytime we look at different channels to see if that opportunity exists. Josh, I'll pass it on in terms of you were trying to get into the sophistication of how we're thinking about a logistics company. Anything you'd like to add on that?

Sure. Hi, John. I think that you mentioned the profitability per DFD account and profitability in DFD has obviously significantly improved over the last couple of years as we've gone at selling the same doughnuts in our doughnut shops at the same or very close price point, and that applies across all these channels, including the McDonald's opportunity. From there, the profitability impact by how quickly you can make the delivery, get in and out of the store, whether it's pre-pack doughnuts or a high proportion of loose, which we are selling both in the McDonald's example. And then yes, the sophistication of adding more trucks and routes is why Mike, I think, referenced the logistics company in the earlier remarks because, just take, for example, with the McDonald's and Kentucky test and adding trucks, adding significant production, doubling production in those existing hubs completely changes the context of us becoming much more of an operator behind the scenes as well as, obviously, upfront of the doughnut counter. And we're seeing that with a lot of our DFD partners. Walmart continues to grow, adding new points of access with Target, adding both, pre-pack doughnuts and these cabinets, these bigger, more premium merchandising units that all introduce complexity for us to manage, but we're certainly stepping up to the game right now and seeing that profitability pretty consistent across all those different DFD customers.

There's not another example of a quick service chain that I can think of in the US, maybe I can think hard, that gets seven deliveries a week of a perishable product, which you, as functionally, is because they have to be sold to date that they get it. How is McDonald's, the 170 stores kind of doing with that? I mean, do all 170 stores continue to want to have doughnuts seven days a week? Might it be Friday to Sunday kind of business, or do they want to have products available to customers whenever they order? Just give us a little bit, to whatever extent you're comfortable on this call, give us a little bit more insight. 170 stores is something bigger than just a test. It's like basically a market rollout of how that market experience is going, if we can.

Sure. Well, I mean, as I mentioned earlier, we're really pleased from an operating point of view how it's going. As I mentioned, getting those production hubs to double their production overnight, our Krispy Kreme has really stepped up to the game. We're only six weeks in, though, so it's too early to sort of share too many specific results around it, very specifically about our experience with the McDonald's restaurants. I mean, we're finding that the hours that we're able to operate, often during operating hours, opening hours during the day, actually even complementary to what we do with, for example, our other grocery customers, which often need very early morning drops, and the McDonald's restaurants able to do at other times of the day. So that's working well. We're doing it daily, as you say, and we've been very clear—and actually, McDonald's has been a fantastic partner so far in understanding this is a fresh daily proposition. That's how we see our delivered fresh daily business and channel expanding, whether it's in QSR or some of these other newer channels that I mentioned earlier. So I think that we certainly see it as a fresh daily business. That's how we've built it, providing those amazing doughnuts to folks off-premise in all these more convenient locations because, as you may have heard us say before, the number one reason why somebody might not buy a Krispy Kreme is they didn't come across it. It's not convenient for them, and an opportunity like this, obviously, makes it a lot more convenient for them when they see it.

I'll only add one thing, John: keep in mind as well, it's a different need state when you're looking at the QSR, right? What are they using it for? What type of pack and all those things? So we will always do what we do in our routing system, right, deliver fresh daily. And then you adjust to what need states McDonald's or any other QSR would look at. This is what I need for my customer base.

Thanks. Good morning.

Good morning.

I have a couple of quick questions. First, regarding the discontinuation of Sweet Treats, I wanted to know if there were alternative strategies you considered. For instance, could you have licensed it to keep the product on the shelves or sold the business entirely? Was the decision based on a desire to focus on fresh products and avoid associating the brand with older items, or was it due to fierce competition? I’m interested in understanding what other opportunities you might explore to expand the brand while maintaining a commitment to freshness.

So Bill, it's Mike again. With the amount of growth that we have, not just in the US but in the international markets and even our market development, including Insomnia, but for Krispy Kreme in particular, the fresh business is just absolutely growing significantly. We emphasize making sure that we can look at where we want to allocate resources, where do we want to allocate capital, how do we want to make sure that we can continue to improve the DFD experience. So it was a pretty simple call for us in terms of this is where we should be. What we learned again is that the brand amount does translate in that category. But at this point in time, we're focusing our energy on fresh.

Got it. And then the second, I think you talked about a lot of different opportunities for new door expansion, but you mentioned it was a test at Target. Can you maybe just give us a little more insight, I understand the test on the thought process because, obviously, a lot of Targets don't offer donuts of any store to have a bakery in-store. It's a different customer mix, different kind of look and feel from a grocery or even a club. And so just trying to understand how that works and what's the opportunity behind that. Thanks.

Yeah, sure. In Dallas, we've been able—a few months ago to list in a few targets around 20 with originally our prepackaged range that we typically have seen in other big grocery players. But what's really interesting is that Target has been great to talk to, and they've been asking us how we can present the brand in different ways. We talk to them a lot about our cabinet merchandising units. These premium units that offer both loose and pre-packaged doughnuts alongside each other. The test that we've got running in Dallas is now also—with those five locations doing that. And, of course, they have much higher sales per door for us, and they're really interested in that. We've also talked to them about expanding the pre-packed donuts to the Chicago market as well. So it's early days, but what's really promising is that with us, they're looking for ways to show why Krispy Kreme is a premium differentiated offering, and it's obviously something that has real promise.

Hi, good morning. I would like to compare the sales and profit performance in the US with that of major international markets. I'm looking to understand the differences. It appears that the sales velocities are significantly different at the same locations. You mentioned that cost increases are accelerating in some international markets. Can you break this down for us? Specifically, could you compare it or discuss the international markets in terms of same-store performance, such as the decline in the UK, especially in unit sales? What contributed to this in the last quarter, and what is the outlook for the UK and possibly Australia as well?

I'll kick off, Andrew, by talking a little bit about the international sales, and then I'll hand over to Jeremiah to talk about profit, I think. I mean, all the markets, all the international markets delivered growth with Japan and Canada, as mentioned, being the highest over 35%, Australia you asked about, low double-digit performance from them, UK more mid-single digits. I mean, we're seeing, as we look across the international markets, DFD points of access are a very big driver of pricing, obviously a driver of growth. We've got markets also adding around the world, new DFD doors, like we described and discussed in the US, including the new channels. I mean, Costco in Canada is one of the big drivers of that growth up there, also listed across the UK during the quarter. I mean, overall, on the UK, which we have talked a lot about with the backdrop of some of the economic challenges there, we are seeing retail business in double-digit growth. We can see it's people are still excited to come out to a Doughnut shop for Valentine's event or other sort of celebrations. But in DFD, the supermarket shoppers seem to be a little more careful in the UK with their basket size. So it's not growing as much in DFD. So there are a few ups and downs, but generally, I would say, its good growth, strong performance. And in terms of DFD Doors performance, specifically, we're now seeing that it's still got a way to go, but the US is closing the gap with its growth in DFD Doors weekly sales to get up to some of those international levels, which is also exciting. Jeremiah, do you want to talk about profit a little more?

Yeah. Yeah. Thanks for the question, Andrew. And I think where I'll start is, if you look at a macro level, international margins are slightly accretive to the U.S., despite some of the challenges we're seeing today, they are still quite profitable. And over the medium to longer term, we do expect to generate 20-plus margins in our international equity markets. What I would say is they're going through this challenge at the moment, that's kind of more challenged the most from a margin perspective. The international teams are very focused on driving efficiencies and continue to be very agile on the pricing front. So, the U.K. and Mexico have already taken mid-to-high single-digit pricing in the first quarter, with Australia planning to take price in the high single digits in Q2. The only add is in Australia, in addition to inflation, we're experiencing some kind of cost growing pains as it launches into DFD Doors. And we're still kind of fine-tuning the demand planning models there and seeing a higher level of waste that the team is working on fixing. But again, overall, in the longer term, we continue to expect decent accretive margins in our international current markets.

Okay. So sort of a follow-up, it's kind of my summary takeaway is that, it sounds like the profitability being down in these markets as a total is more regarding rapid cost inflation versus price realization or catching up in price more so than DFD Doors productivity. Is that the right takeaway? How do we think about profitability? And as you're adding, increasing pricing, the profitability will increase since the velocity seems to be not really an issue.

I think that's fairly accurate, Andrew, and I would say the nuance on pricing is we're probably a bit behind in international markets. Now we're catching up for that, so we do expect improvement in the back half.

Thank you. I have a question regarding the DFD Doors in the US. You mentioned an increase in sales per door. Could you clarify if you are seeing any differences as you add more types of doors? Is this change related to our door mix, or is it purely based on sales from existing doors? Also, do you have any insights from your testing with grocery store targets? I recall you mentioned not observing any cannibalization from the McDonald's test, which is a topic that often arises. Can you share anything about the differences in types of end customers and use cases, particularly concerning door density and the number of doors per capita? Any information you can provide to help alleviate concerns about cannibalization while you continue to expand DFD doors would be appreciated. Thank you.

Hi, Sara, a few questions around DFD there. I think I'll start with the trends on weekly sales for DFD, very positive, including on the existing doors. Some of that is just momentum; some of it's pricing. But also, a big part is the specialty doughnuts, more premium priced specialty doughnuts doing really well and helping us deliver record performance weeks when we have Biscoff or Valentine’s or St. Patrick's Day, Spring Minis for Easter in the range. What's really good is even on a day like St. Patrick’s Day or Valentine’s Day, we're putting them on for a couple of weeks in the lead-up, and we're seeing good sales performance throughout those two weeks. So that is helping us a lot with that performance on the existing doors. Interestingly, the new doors, we're finding they are at least as good. In fact, many of the new doors have better sales performance right now. Partly, we think that's because we're expanding with new customers, new channels, and certainly, as we see it right now in the US. And not only do we not see cannibalization, but the incrementality is very clear. I called it out for McDonald's just because that was such a growth in just a couple of cities, and we were curious ourselves—and yes, we haven't seen an impact there. So I don't think we know the full answer about where it is. But do remember that 6,000 doors in the US is still a fraction of all the grocery convenience and actually other places where people are looking to purchase arguably, if you add in QSRs, clubs, and drug, you're getting 0.5 million locations, where people, we now realize could well be looking through the convenience to the opportunity of having a special donut occasion that they will pick up our doughnuts. So cannibalization is just not really on our mind, and in more mature markets like the UK, where you have a lot more points of access, we also have seen the data there that even if the donuts in a Tesco are next to a subway station, they don’t see cannibalization. So it continues to be the case that shoppers go to these locations for different reasons. They're not going to the Target, the Walmart, and McDonald's necessarily for a doughnut; they're going for something else. And once they're there, they say, 'Oh, it's available here; I'll pick it up.' And we're still residing frequent, three times a year even in DFD. So I think that the way we're thinking about it is let's just make it more convenient that get those awesome fresh doughnuts to people where they want to pick them up. And we're just learning as we go, the demand is there in multiple locations.

Yes. The only other thing I'd add, Sara, to your first question: we see one thing when we get the full assortment cabinet in place, the customer really reacts—sometimes we see up to 2x of the sales of what's there in front of it. So they get a broader range; they can see the doughnuts; they can choose to make their own. You get a broader representation of Krispy Kreme. That's a big deal.

Yes, thank you. Good morning, guys. Maybe just first, could you dig into your comments on e-commerce a little bit? Certainly, I'm sure Insomnia has kind of helped there as that's grown quickly. But how about just for the Krispy Kreme brand specifically, has that been driven more by delivery recently, or have you done more to kind of promote online ordering, for example?

Well, yes, I mean definitely, e-commerce has been really, really strong for us in recent times on the Krispy Kreme side and Insomnia side. To your question on the Krispy Kreme side, we've been making improvements to the web and the app experience to literally just make it easier to use and increase the conversion rate from when a customer first goes on the site or the app to making a purchase. We have indeed continuously been looking to add to the delivery areas. We do have some dark shops that we've been adding to the system that helped with that. We've also worked a lot on very much more basic things around ensuring that when people pre-order, the donuts are always there; it sounds obvious, but on these big event days, people want to order Valentine doughnuts or St. Patrick's Day doughnuts. We've really focused on e-commerce because a lot of people are ordering well in advance. They want to be part of that celebratory occasion and guarantee their doughnuts. And we're finding that sometimes it's those most simple operating focus that delivers the growth as much as improving the brand and more happy. We do, as we look ahead, see an opportunity on loyalty to relaunch loyalty, and we'll be looking to do that in the US early next year, really to make it more intuitive and the loyalty program. We have now in the US over 11 million loyalty members, but we really see the opportunity to drive more e-commerce growth with them by relaunching the loyalty program. So yes, it's been really great to see more than 20% growth in e-commerce in the US in the last quarter, and we'll continue to focus on that along with the DFD.

Yes, Brian, I can take that, and thanks for the question. For key commodities like sugar, we edible oils were essentially locked in with low double-digit inflation on average for the year. Higher increases are obviously in the front half of the year, as I think I probably would have talked about in the last call, with a little softening inflation in the second half. We're also starting to look out into 2024 as well as we start to think about the commodity outlook and pictures. With respect to the question around pricing, we have taken additional pricing in several markets year-to-date already, including Mexico, as I mentioned, in the UK, the US also took low double-digit price and we'll continue to be agile as the market unfolds and have planned pricing, as I mentioned, for Australia in Q2, but also Insomnia. What I would say as well, the only other thing that will help with kind of price realization for our business is just a focus on premium specialty campaigns as we obviously have a nice pricing tier when we do those activities.

Just to clarify one thing on the pricing. We've been taking pricing a little more on DFD. So the low double-digit Jeremiah referenced was on DFD; we're taking low single-digit pricing on retail. We just did again, but we're doing it more frequently, as we look to make sure that when the customer sees our doughnuts, they're at a similar price point across all the channels, which is one of our strategic goals.

Thanks, just a couple of questions or follow-ups on the McDonald's stuff. Given the numbers you gave with the doubling of the sales of those hubs in that market would imply something like $200 per day per McDonald's in Krispy Kreme sales, which might be about 2% of the sales of the McDonald's. Is that way off? And if not, I wonder how McDonald's would view that given what they will be putting into this and the incrementality of course, of those sales? Any thoughts on all of that.

It's definitely too early for us to get into the performance measures just six weeks in. My comments focused on the three production hubs that cover a big area across the whole of that Kentucky co-op, and obviously, those hubs have seen an opportunity within them. We actually have a hub without spokes also in Kentucky, so we saw the opportunity there to really ramp up production and support them in the way that's needed. We will continue to partner with them on what's the right way of doing this, what are the right targets, and what are the right measures. They're the experts on the impact on McDonald's. I think we really focus on the things that we can control, which is make sure the doughnuts are there at the right time and that the right level that are ordered by them as was discussed earlier; they're advising us on how many doughnuts they want rather than us guessing it. It's a great partnership. We love the way we're working with them. Obviously, they're being thoughtful about things that are important to them, and we're focusing on the things that we can control.

If any sense of the next steps if this is successful, and if they think that this is a good partnership, what would happen next? And I guess, maybe related to that about your fulfillment of this, if it went national. How many McDonald's within reach of Krispy Kreme’s hubs today as it stands? Thanks.

Yes. I mean, we’ve no plans yet to expand beyond Kentucky or anything like that. We expect to be doing this test with them for months. I'm sure that they will be evaluating all sorts of details that are important to them. Regarding your question, more general question about capacity: if you step back and just—we have been—not with McDonald's, but because of this DFD growth, all these customer types, we have been thinking about the future and what happens if you recall at Investor Day, we said that we thought there was about 15,000 points of access opportunity in the US. That's part of that 75,000 number that I referenced. And so we've been looking at our ability to fulfill that. We have 6,000 points of access today, give or take that we service. We think we can add about 50% of that with adding to production around the system. Once you start getting beyond that, you start to look indeed at our proximity to all our different DFD customers and their locations, both in existing channels and new channels. And so to go beyond that would require us to unlock new capacity in some target locations, and we're starting to look into how we can do that—whether it's at our existing sites, as some of them can be adapted or new ones. For that 15,000 points of access, though, do bear in mind that our production hubs can support a lot of DFD doors, especially when they're designed with that in mind—smaller lobbies, bigger load-out areas, places to put trucks. A lot of our US shops are not set up for that. So, future production hubs that we could invest in will be able to support a lot of doors. So, when you start to do the math, you reach that sort of 15,000 DFD opportunity that we mentioned at the Investor Day for all those DFD customers certainly still about 30 to 40 additional hubs we're talking about to get all the way there. So, we're focused on with McDonald's just on the test, delivering great doughnuts fresh every day. That's what we know how to be an expert on. We're thinking more broadly around growth and fulfilling the 75,000 opportunity around the world with 15,000 in the US, and we'll go from there. Most importantly, those awesome doughnuts.

Great. Maybe just following up to that question. I don't believe the test with McDonald's is exclusive. So, can you talk about your thinking around the US QSR market? Would you wait until the end of the test or trial period with McDonald's before potentially looking at other QSR operators? And then kind of thinking more broadly beyond the US, how should we think about the opportunity outside in some of these international markets where there are plenty of QSR brands that probably would be looking to add some sweet treats to their lineup.

Yes. So, it's Mike again. So when we thought about partnering with McDonald's and you're going to a test, there's a lot of learning's that are going to happen with McDonald's as we start to explore what that means in the QSR space. We're learning—what we're learning is we can deliver to the QSR space. And then when you look at, hey, are you ready to go beyond other partners? We really like the partnership with McDonald's as it stands today. We're going to continue to learn both from each other and see where it grows. If you look outside the world, there are plenty of other spaces and partners out there, but we're going to focus on McDonald's as a partner right now.

Got it. Switching gears a little bit. In terms of the business, I think, Mike, you mentioned in the remarks earlier that about 40% of the business today comes from special events. So I'm curious that outside of these special events—holiday windows, Valentine's Day, St. Patrick's Day—how are you getting consumers to—or what are you doing to try and drive kind of that non-special event window going forward? Is it just expanding points of access or even just at the existing hubs today? What are you doing to try and lift existing sales per box?

Right? So when we referenced the 40%, we referenced it as a product that a dozen that are actually about 40% are gifted, a lot of times. So that's the real big number from, and that gets into people's special occasions, right, not just the Valentine's Day, not just the St. Patrick's state. Those are great; they create a lot of energy. But just the ideation, the premiumization of doughnuts where you've seen an English brand that they brought around the world a few places such as Biscoff, right? So you can see how that can be—as you premiumize the brand and people engage in it, the biggest opportunity still is about access, right? So getting the DFD and growing our business is through the DFD and getting the customers is how they continue to be engaged with Krispy Kreme when we can bring that total donut experience that you can see in the shop and bring it to actually a DFD door; that's when people really start also to connect with the brand because it's clearly an opportunity. On top of that, you can see the growth that's happening in e-commerce, right? We're in the consumers choosing where they want to be and when they want to get the donuts that really matters. So appreciate everybody listening to our story this quarter, and thank you for that. And I really appreciate all the Krispy Kreme's around the world that make this happen every single day. Thank you. See you next quarter.

This concludes today's conference call. You may now disconnect.