Krispy Kreme, Inc. Q2 FY2023 Earnings Call

Thank you for waiting. My name is Maria and I will be your conference operator today. I would like to welcome everyone to the Krispy Kreme Second Quarter 2023 Earnings Call. All lines have been muted to minimize background noise. After the speaker's remarks, there will be a question-and-answer session. I will now turn the call over to Ms. Eloise Hale, Vice President of Global Corporate Communications. Ms. Hale, please proceed.

Good morning, everyone and welcome to Krispy Kreme's second quarter 2023 earnings call. Thank you all 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 are 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 would 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 and 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 than 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 and in other filings that we make from time to time with the SEC. Forward-looking statements made today speak only as of today. The company assumes no obligation to publicly 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. A reconciliation between non-GAAP financial measures and their closest comparable GAAP measures can be found in the company’s second quarter 2023 earnings release and Form 8-K filed today. Both are 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. I’m pleased to report our fourth consecutive quarter of double-digit organic revenue growth evidencing the strength of our omni-channel strategy. Our second quarter performance was bolstered by our continued focus on expanding our hub-and-spoke model as we leaned heavily into our omni-channel, delivered fresh daily or DFD capabilities as well as our international expansion strategy. Our focused strategy delivered 9% net revenue and 3% EBITDA growth in line with our expectations. We also remain concentrated on strategic execution of premium product sales and thoughtful timing of selective pricing while driving high levels of consumer demand. I want to extend thanks to our Krispy Kremers, our team members, for another fantastic quarter. Every day we aim to touch and enhance lives through the joy that is Krispy Kreme. Without your continued efforts and dedication to our brand and purpose, this would not be possible. Our doughnuts continue to be loved across all the countries we operate in every day, and we understand that access to our brand is our biggest opportunity. Ultimately, our aim is to continue expanding points of access and driving further availability of our doughnuts. We have learned that different channels play different roles in satisfying our customers globally through our omni-channel system. These supplemental channels will help us reach our long-term goal of 75,000 points of access. This quarter, our points of access grew nearly 13% globally year-over-year and we were particularly pleased with the momentum we saw in the U.S. Our global points of access now stand at 12,872 and we continue to be confident in our ability to achieve our annual goal of 10% to 15% growth. Our U.S. fresh doughnut business led the way as our focus on increasing access helped drive another quarter of continued improvement in our largest market via maximizing our existing hub-and-spoke infrastructure. Our continued momentum driven by the expansion of our DFD strategy gives us confidence in our plan to expand into new channels like QSR, drug and club while building on our existing customer base. For example, our current test with McDonald’s, which Josh will talk about further, has been a fantastic learning experience thus far and has enhanced our belief that the QSR channel is a significant growth opportunity not just in the U.S. market but globally. In our Market Development and International segments, we continue to see tremendous performance in Japan and Canada. We are also starting to see some stability in our core equity international markets as pricing and inflation become more balanced. The growth potential in our international markets remains significant as our omni-channel and DFD model further unlocks new points of access, channels and customers. I'm excited about the progress we've made on our global expansion strategy with new openings in Chile, Costa Rica and Jamaica, all performing well. We remain on track to meet our goal of opening in seven new countries this year, with three to five countries to follow in 2024. In addition, our signed pipeline of new hubs and Fresh Shops through our existing franchise partners is already well over 1,000 shops. At Insomnia Cookies, we are ramping up our development efforts to get to 30 to 40 new bakeries this year, including international expansion in the back half of 2023, starting in Canada and the UK. In addition, we are focused on meaningful innovation, including opening our Innovation Center in Philadelphia in Q3. Insomnia Cookies continues to evolve into a more mature growth business, underpinned by exciting plans to gain additional share within the global addressable market of over 4,000 bakeries. As we continue to grow globally, we continue finding moments of joy to share with our colleagues and our guests. In Q2, we celebrated National Doughnut Day, which has truly become Global Doughnut Day for us. It was the strongest and largest doughnut day in Krispy Kreme’s history further cementing the importance of access to our guests. It wasn't only about actual doughnut sales that day, but also about gifting every customer one of our signature Original Glazed doughnuts just because they took the time to visit us. This single event generated over 3 billion social media impressions and we're just getting started as we will move from a dozen countries participating to every country in which we have a presence by 2026. As we start the third quarter, we have seen continued organic revenue momentum from our second quarter. Our strategic priorities remain unchanged as we continue to drive capital-light expansion of our omni-channel model and grow points of access and lean into new and existing channels. With this momentum, we remain confident in our 2023 outlook and ability to achieve our long-term 2026 targets that we highlighted at our Investor Day last year, including growing revenue to $2.15 billion and adjusted EBITDA up to $315 million. My excitement and enthusiasm for all this brand has to offer continues to grow. We have the team, the culture, the brand and the strategy to execute on many opportunities for growth on our journey to becoming the most loved sweet treat brand in the world. With that, I'll hand the call over to Josh.

Thanks, Mike. Our omni-channel system continues to deliver robust growth around the world with our fresh U.S. doughnut business delivering double-digit organic sales growth in the quarter once again. We saw strong performances in the U.S. across all of our sales channels, thanks in large part to our specialty doughnuts including Cookie Blast, Fan Faves and Minis for Mom, which all proved popular in the quarter. Selling the same fresh doughnuts that we make in our production hubs through more points of access is at the heart of our unique hub-and-spoke operating model, making Krispy Kreme more accessible and convenient to more consumers. And during the second quarter, we added 462 new points of access globally, including six new hot light theater shops, 45 Fresh Shops and 406 DFD doors. This means that we remain on track to grow points of access by 10% to 15% this year. In the U.S., we added another 239 DFD doors in the quarter, led by expansion with Kroger which now carries Krispy Kreme in more than 1,000 locations across the country. All in, we now have over 6,300 DFD doors in the U.S. with average weekly sales up 16% year-over-year in the second quarter. We also continue to add secondary display cabinets to high-traffic grocery doors, which add up to 70% incremental sales to a DFD door. 87 of these premium cabinets have now been added in U.S. grocery stores year-to-date, with a similar number expected for the balance of the year. A new initiative which we just announced with Amazon is a small format Krispy Kreme Fresh Shop located within Amazon Fresh grocery stores. This capital-light pilot exemplifies our strategy to make access to our fresh doughnuts more convenient for the consumer and is already underway with the opening of our first two locations in Chicago earlier this month. To support all of this growth, we took the number of production hubs-with-spokes in the U.S. from 137 to 143 during the quarter. These were all conversions of existing hubs-without-spokes, requiring minimal incremental investment. Our trailing twelve month sales per hub KPI was up 9% year-over-year to $4.7 million, driving Krispy Kreme’s U.S. Fresh margins up over 150 basis points compared to the same quarter a year ago. With pricing now setting inflation, this improvement is driven by both the productivity benefits of adding sales to the hubs-with-spokes and the results of our previously announced U.S. Shop network optimization program, which focused on the poorer performing hubs-without-spokes. Cities like D.C., Miami and Charlotte, which have all seen significant door growth this year are seeing some of our highest margin increases and are now demonstrating that we can deliver 20% plus margins in U.S. cities just like we have seen internationally for several years in places like Sydney, Toronto and London. As we've previously shared, we are also running a DFD test in the QSR channel in Kentucky with McDonald's, which is now in its sixth month. As a reminder, we are servicing over 160 McDonald's restaurants with fresh doughnuts delivered daily, which they sell on to their customers branded as Krispy Kreme. Although the test is still ongoing, the results have shown us that the consumers value the Krispy Kreme experience in the QSR channel, that these sales are incremental to our existing doughnut shop and DFD sales in the region and that we can successfully serve these points of access from our existing hub network in Kentucky. Given all of the expansion opportunities we are seeing across multiple channels and customers, we have taken the opportunity to do a deep dive assessment of our doughnut capacity and capabilities to accelerate expansion of DFD in the U.S. Overall, we are confident that should we need to, we can quickly leverage existing hubs and selectively add new production hubs to support a network even bigger than the 15,000 points of access we set as our long-term goal in the U.S. Before I turn the call over to Jeremiah, I want to highlight the progress we're seeing in our UK business, which has seen slower growth since the changes in the macro environment there last spring. Specialty doughnuts targeted at local celebrations, including a Royal Dozen range to celebrate the King's coronation contributed to double-digit retail sales growth in the quarter. Pricing and cost control initiatives also brought EBITDA margin back above 20%. We've also taken actions on DFD in the UK, including optimization of our price pack architecture, expansion into the club channel and the inclusion of Krispy Kreme in customer loyalty card programs, which are starting to improve our performance. I'll now turn the call over to Jeremiah.

Thanks, Josh, and good morning, everyone. As Josh mentioned, demand remains healthy and while costs remain elevated versus historical levels, we expect to start seeing inflation ease in the back half of this year and some of our unfavorable hedging impacts soften. As Mike said, we saw growth across all of our reporting segments in the second quarter, with net revenue up 9% year-over-year to $409 million. Organic revenue, which excludes the impact of acquisitions and changes in foreign currency, grew 11.4%, an acceleration from last year driven by pricing, premium specialty doughnuts and the growth of DFD in e-commerce. We continue to see low levels of elasticity due to pricing, which we took again during this quarter. As a result, product and distribution cost as a percent of revenue declined 30 basis points year-over-year. This contributed to adjusted EBITDA growth of 3.1% in the second quarter to $49 million or an increase of 4.1% in constant currency. Adjusted EBITDA margin levels were 11.9% compared to 12.6% one year ago as benefits from pricing and efficiencies in our network driven by our hub-and-spoke evolution in the U.S. was offset by inflation and year-over-year phasing of performance-based honest accruals. GAAP net income of $0.1 million in the second quarter was driven by a $4.4 million largely non-cash expense related to the exit of branded sweet treats. Adjusted net income for the quarter decreased 13.1% to $11.4 million, and adjusted diluted EPS in the second quarter was $0.7. Turning to our segment results, the U.S. business segment total revenue increased 9.3% in the second quarter to $267 million, and organic revenue growth was 12.7%. This was driven by pricing, DFD expansion, and e-commerce despite the disruption from a third party POS provider during the first part of the quarter that impacted our ability to execute promotional activity. In addition, we saw strong revenue growth in Insomnia Cookies, which opened 23 new bakeries over the trailing four quarters. Adjusted EBITDA for the U.S. segment was up 16% to $28.1 million, with margin expansion of 60 basis points a year-over-year to 10.5%, driven by strong performance in our U.S. Fresh doughnut business. This reflects the successful pricing actions taken over the last nine months, the efficiency benefits realized from our hubs-with-spokes and the benefits from our U.S. shop network optimization program. This margin expansion was delivered despite the same disruption caused by the third-party POS provider that impacted revenue as it also impacted our ability to manage labor efficiently. Impacts from the outage have since been resolved. Insomnia Cookies margins softened in the quarter as elevated input costs outweighed the benefits from pricing actions taken in early Q2. International total revenue increased 4.8% in the second quarter to $98.3 million, and organic revenue growth was 3.5% driven by pricing and points of access growth of 7%, taking our points of access to 3,670. Adjusted EBITDA for the quarter was flat at $19.5 million with adjusted EBITDA margins of 19.8%, which was up significantly from the prior quarter as pricing in all markets as well as rationalizing and profitable DFD doors and adding new, more productive doors are having a positive effect on margins. We expect the actions Josh detailed as he spoke about our UK business to positively contribute to margins over the remainder of the year. Market development, which is made up of our franchisee businesses around the world and equity owned Japanese and Canadian markets, saw our organic growth accelerate to 23%. Total revenues in the second quarter increased 17.4% to $43 million, driven by the strength in Japan, strong performance in our Costco partnership in Canada and new market openings, offset partially by a 5.8% impact from foreign exchange headwinds and franchisee acquisitions. Market development adjusted EBITDA increased 27.3% to $15.7 million despite a roughly $800,000 negative impact from foreign exchange headwinds. Adjusted EBITDA margins increased 290 basis points to 36.5% in the second quarter compared to the prior year. We continue to be very pleased with our performance in Japan and the Canadian markets, which has led to outsized performance in this segment. Turning to the balance sheet, recall that last quarter we successfully refinanced our debt, extending maturities to 2028, enabling our future growth. And we also began efforts to reduce our reliance on vendor financing to normalize terms and reduce what has become a more expensive way to provide financing. As a reminder, expense from vendor financing hits adjusted EBITDA, not net interest expense. We continue to make progress on that reduction in the second quarter and have reduced our reliance on these programs by over $80 million year-to-date, which will have a longer-term tailwind to adjusted EBITDA and net income due to lower rates. While we saw our leverage increase to 4.2 times in the quarter, we expect to close the year under four times. Our leverage excluding this shift in vendor financing would have been much closer to 3.8 times and we continue to execute on plans to drive leverage close to two to two and a half times net leverage by 2026. Free cash flow excluding these efforts was also strong at $14.6 million reflecting the strength of the underlying business fundamentals. In addition, we remain laser-focused on deploying our capital to target the highest return opportunities. As we mentioned at our 2022 Investor Day, we expect CapEx as a percentage of revenue to reduce to 6% by the end of 2026 and expect to fall around 6.6% of revenue or between $105 million and $115 million in 2023. This includes the opening of at least 30 to 40 new Insomnia Cookie bakeries and roughly 10 company built hubs in 2023. We are also reaffirming our 2023 guidance and continuing to trend toward the middle to higher end of our revenue and adjusted EBITDA ranges. This includes growth of 9% to 11% in organic revenue and 8% to 10% in net revenue. $205 million to $215 million of adjusted EBITDA in between $0.31 and $0.34 of adjusted EPS. Our 2023 guidance includes modest tailwinds from foreign exchange rates for the year. Based on current exchange rates, each 1% move in the U.S. dollar index is a little over a $1 million impact on adjusted EBITDA on an annualized basis as roughly half of our pre-corporate expense adjusted EBITDA is outside the U.S. We are pleased with our second quarter results that proved the underlying strength of our business, giving us further confidence in our momentum as we enter the second half of 2023.

Operator, we can open up the call to Q&A now please. Thank you. We ask that you please limit yourself to one question and one follow up, then re-enter the queue for any additional questions you may have. We will pause for a moment to compile the Q&A roster. Your first question comes from Sara Senatore at Bank of America. Please go ahead.

Great. Can you hear me?

We can, we can.

Okay, good. Thank you. A little choppy for a minute. I guess a question, a clarification and then a question. In terms of the POS disruption, do you have any sort of estimate of what that might have been in terms of an impact on your revenue or EBITDA, just trying to understand what the disruption might have meant, if you can quantify it? And then the question I had was about the loyalty programs and you mentioned in the UK you’ve seen some success in adding Krispy Kreme loyalty card programs. I know you've talked about re-launching in the U.S. next year. Is there any kind of lessons that you can take away from the UK or maybe that in inform how you're thinking about loyalty programs just given the relatively low frequency nature of the Krispy Kreme occasion? Thanks.

Thanks, Sara. It's a great question. It's Jeremiah here. I'll start off by saying that despite the interruption, we still delivered improved margins, saw strong e-commerce revenue at 18.8%, which is actually up 130 basis points and actually did not see a perceivable decline in customer satisfaction scores. That said, the disruptions caused across the business really manifest itself in two key areas. One was delays in our ability to run and execute promotional activity and LTOs, which had an impact on revenue. And then two, the lack of visibility to real-time information which impacted our ability to manage the labor. I think what I would say is we’re in the midst of insurance recovery right now. So I don't want to kind of quantify and put numbers out there just given that, but it's important to note that these issues have been resolved and are now behind us.

Thanks.

Yes, hi, Sara. This is Josh. Loyalty is very important to us at Krispy Kreme, especially with the growth of e-commerce and our engagement with the brand. We currently have 15.5 million loyalty members globally, which is an 18% increase year-over-year, including 11.5 million in the U.S. You're correct that we're planning to enhance the loyalty program later this year, making it more intuitive and easier for customers to track. We will conduct tests in the U.S. this year. In the UK, we have a loyalty program as well. What I was referring to in the call was integrating with customer loyalty programs at grocery stores that have their own systems, and we aim to pursue this more in the U.S. We haven't engaged heavily in this area yet. We're in discussions with our key account customers about how to implement it. One challenge we face is availability; our fresh donuts aren’t in every grocery store in the U.S., whereas we have much broader access in the UK. However, we believe that in the future, with DFD, this will be an important aspect.

Great. Yes, I understood it's a different format. I guess I was just wondering if maybe the higher frequency occasion that comes with the people going to those partners if it changes how you think about loyalty broadly, but it sounds like you think they're complementary and your own partnership, your own loyalty and then these partners.

Yes, definitely, I mean most of our loyalty programs that we manage directly through the retail doughnut shop sales channel, this starts to add that capability through DFD and it gives a lot of visibility as well. The UK supermarkets use it as a way of communicating with their customers extensively and certainly by getting more involved with that, we know, the brand Krispy Kreme becomes more top of mind.

Got it. Thank you so much.

Operator, I think we're good for the next question, please.

Yes. Mr. Joe Evansville, JP Morgan. Please go ahead.

Hi, thank you. How are you? So, Michael Tattersfield: Hi, John.

Very well.

In your prepared remarks, you discussed the overall footprint and your hub model, trying to assess how many DFD accounts could be managed through existing hubs. There seems to be a consideration of potentially increasing DFD accounts beyond 15,000. Your remarks appeared to connect with the situation regarding McDonald's and the approximately 160 stores you have in Kentucky. Was there a deliberate intention to link those comments? Are you evaluating your footprint and capacity in preparation for a potential regional or national expansion into McDonald's?

Yes, so what we've learned, John, is that the test has provided us with valuable insights into how the QSR channel operates. This insight reveals the opportunities related to the needs consumers have, whether it's for individual use or for gifting purposes, which enhances convenience. The drive-throughs in the QSR chain support this. We've begun examining the potential within our existing presence in this channel and how we can leverage that, moving forward from there.

Yes. And regarding McDonald's itself, John, I mean it's a great business and we're really enjoying working with them. One of the things to remember though is it just behaves like a DFD door for us, with similar sales and profit margins. In fact, we're selling a limited selection of doughnuts, but they're the same fresh daily doughnuts we sell anywhere else and there's no sort of, as I mentioned this sort of cannibalization effect. So for us we're thinking about the learning from that. I mean, we've learned for example, how to deliver over longer distances from our hubs than we've had to do before whilst maintaining quality and service standards. So it's really proving a valuable test. They're being super collaborative and as I said a moment ago, we're confident we could serve more McDonald's doors, add to your point, but you know, it's obviously up to them. We look forward to hearing from them how they think the test is going. Regarding the broader point that you're making around hubs and spokes with this level of DFD expansion, it behooves us to start looking ahead to how do we service more and more DFD doors. It's clear with the growth rate we have, whether it's in QSR or other channels in grocery, convenience and indeed more recently club and other opportunities. We need to start planning ahead for greater expansion. So we've taken a lot of the learning from McDonald's and realized that by making changes to operating hours, doughnut processing and packing layouts, delivery windows and the like, we can get even more from our existing hubs than we even thought was possible before. So we serve about 6,000 DFD doors today. We think we could get to near 12,000 DFD doors just with the existing hubs. Remember, we have about 225 production hubs in the U.S. that we directly own, but we also have 45 franchise-owned hubs that could be a part of that as well. So, all then that represents a great opportunity for us. And so we're really working on how to calculate all that and start to plan for that. And then I mentioned even selectively investing in new hubs. I mean if we wanted to add on top of that 12,000 let's say another 8,000 to 10,000 over the years to come as we meet the DFD demand, we think that's still only requires a 10% to 15% increase in production hubs itself because we’re learning how to make production hubs purpose-built with automation with more production lines to meet this kind of demand. So it's an exciting time to be thinking ahead and thinking about a hub and network of the future rather than worrying about optimizing the hub-and-spoke network of the past.

Yes, the comment about nearly doubling the number of doors served on existing hubs is very intriguing from a return on assets perspective. It reminds me of hubs-with-spokes and hubs-without-spokes. I believe I'm looking at 82 hubs without spokes, and that number has been declining both year-over-year and over several years. What is the current thinking around those? Should those hubs consider redeveloping spokes as you reassess markets? Perhaps there are smaller format or convenience or QSR chains that could activate the delivery capabilities of those hubs without spokes. That could be an effective way to add a sales layer that currently doesn’t exist.

Our hub network wasn't originally designed for this opportunity. However, we excel at producing doughnuts, and we are learning how to adapt for a future model. We continuously evaluate our legacy hubs that lack spokes to identify opportunities. While we want to invest in new hubs, we also focus on what we can do with our existing ones. Since our Investor Day in December 2022, we've closed 14 hubs without spokes and converted 17 of them into hubs with spokes. Initially, we didn't think these conversions would work, but we're learning that with the sales per door and off-premise sales we can achieve, the economics can be favorable. Some stores may not be in ideal locations for a DFD rollout, but they still serve important roles in their communities, particularly in the Southeast. These legacy hubs will likely remain with us for a long time because they are profitable. We are also looking at the needs of our nonprofit hubs. Our learning is guiding us in defining the right kind of hub for our new model, which may include larger back-of-house areas, multiple lines, and logistics spaces, and we are considering the best locations for these hubs. Automation technology will also play a role. The hub is evolving to support an omni-channel approach, and we are enthusiastic about the changes we've made to our legacy operations and how they will support future growth.

John can I just say, if you think about it, the opportunity you were saying, hey, could they build more customers and do that? Our priority is also we've got great customers. We need to continue to figure out how to build out those existing customers. So that's also in balance. How do we do that, right? Because we want to be outstanding to all the customers we serve and that's going to always be one of our priorities as well.

Yes, McDonald's is an important customer, but Kroger and Walmart are also fantastic customers we already have.

Yes, I understood the separate topic if I can, obviously UPS driver strikes really in the news. You know can you in that context or outside of that context, talk about your staffing execution, what you guys are doing to kind of attract and retain on the delivery side specifically for you how we should be thinking about that going forward?

The difference in our model is that when we're staffing drivers in our shops, it typically requires about four to five drivers to manage the routes. We've not faced challenges in attracting them. We're ensuring that our incentive systems are competitive. The uniqueness of our model allows drivers to enter through the front door, making it easy for them to interact with customers, and they complete their tasks by a certain time of the day. This distinctive approach works well for us, and we haven't encountered any issues in that regard. We will continue to be drawn to this area and explore additional options as we expand.

Yes, things like that are not impacting us significantly today. However, with the level of growth we're planning and considering, the focus on fresh quality, locally delivered doughnuts is central to our DFD model. As we expand, we will assess alternative models as long as they meet these criteria. We will stay flexible, but for now, Krispy Kreme is integral to our core and they are doing an excellent job of delivering those doughnuts to both new locations and our existing partners.

Thanks, John. Operator, could we have the next question, please?

Our next question comes from the line of Jon Tower from Citi. Please go ahead.

Great. Thanks for taking the question. I just quickly want to get your thoughts on pricing in the back half of the year. I know you had discussed earlier, Jeremiah that there's a little elasticity that you're seeing as you're taking some of the pricing. But we're certainly hearing from other quick service operators that planned for the back half of the year are to take less pricing, if not zero pricing. So curious to get your thoughts on later 2023 and into 2024 how you're thinking about pricing across the different markets and different channels for the brand?

I’ll begin, and then Jeremiah can provide more detail. We view pricing as a strategic element because our goal is to be an affordable indulgent treat in all the markets we operate. We've observed that not only pricing but the premiumization of the brand is resonating as we offer Fresh products in the DFD business and see our customers leaning towards better products. Additionally, partnerships, such as with M&M's doughnuts or Spongebobs in Mexico, contribute to this trend. In terms of our pricing strategy, consumers are drawn to the new merchant mix and products we offer. This also allows us to provide a secondary dozen at a value price point because we are primarily a dozen business. This strategy benefits us while also serving as a way to give back. We have consistently focused on our dozens model, which enhances gifting and purchase frequency.

Yes, Jon, I mean it's a great question. Thank you for the question and for me, price will always play a role in the growth of our portfolio and the way we're evolving our thinking around pricing is it's much broader growth lever than just list price increases. The way we think about it as Mike kind of just referenced the premiumization of the portfolio through doughnut offerings, price pack architecture as a lever for us then also the way we think about and drive efficiency in our promotional and discounting strategies. And so we tend to think about it more holistically. So to your point we're in the back half of the year as we might come under a bit of pressure around list price increases, there are other levers in our portfolio to kind of drive from a pricing realization standpoint. That said we'll continue to evaluate price every quarter globally while ensuring we're providing an attractive offering to our consumers and our strategy is to really take price in line with inflation going forward. So, we'll continue to see that play out.

Got it. And just thinking about the inflation, obviously we got another reading this morning, seems like it's softening quite a bit. So is the interpretation there that you guys are looking at core CPI and saying all right, that's easing therefore pricing later this year into 2024, certainly lower than what we've been seeing in past as twelve, twenty-four months?

Yes, I think for us we've locked in a lot of the key commodities for the rest of the year with the low double-digit inflation on average for the year, labor's kind of locked in more or less at mid to high single-digit inflation. As we look forward to 2024, we are seeing some deflation and we're looking opportunistically to lock in prices at attractive price points. But what I would say is we're still seeing elevated prices and things like sugar, which remain around five-year highs and we do expect rough inflation on cartons, in the high double digits next year, which is a commodity we actually can't hedge. So we'll continue to need to be flexible with the way we think about pricing even into 2024.

Got it. Thanks for taking the questions.

Our next question comes from the line of Mr. Brian Mullan from Piper Sandler. Please go ahead.

Thank you. Just a question on the Insomnia business in the U.S. can you just update us on how the business is doing right now, perhaps give some early thoughts on the pace of growth for next year? And then just related to that, as the brand continues to open in a faster clip how would you describe the competitive environment in this category? Are you seeing a change in any way? Any thoughts would be great.

The brand is becoming more established in our business, increasing its presence with around 23 shops opened in the past twelve months. Our goal is to reach 30 to 40 cookie shops and maintain that growth annually. We recognize this opportunity and have a clear vision for it. We are also investing in our Innovation Center, set to open in Philadelphia, which will enhance our offerings, whether through limited-time promotions or cookie-related products that cater to consumer preferences in the treats market. We have a distinct brand that positions us well in the market. Our roots were in college towns, and we are now expanding into urban and suburban areas, which aligns with our assessment of total addressable market potential. We believe we can ultimately reach around 4,000 bakeries.

Okay, thank you. And then just a question on the DFD business, Mike in the prepared remarks you spoke to the idea that the QSR channel might also work outside the U.S. as well. Are there any markets that you might already have in mind? I would think it would be logical maybe places where you already have hubs, but anyway you could elaborate on that comment or just even how much time you might be spending on this opportunity, just where it lies in the priority list? Any thoughts would be great.

Right. Again, we're in more than 30 markets around the world. Our priority right now is really getting and honing in on the QSR channel using the U.S. as a big test case because the DFD system that we have works around the world. Those would be natural ones once we prove it and run it in the United States. So we'll be very disciplined about how to do that. And then the same logic would work in the DFD system where we have a route where you're managing multiple customers along the route that could be from different channels if it continues, it's going to work in the markets that we're in. But our focus will be on the U.S. All right, thanks Brian.

Our next question will come from the line of Mr. David Palmer from Evercore ISI. Please go ahead.

Thanks, good morning. What was the year-over-year sales growth per U.S. hub in the quarter?

So the sales per hub, the hubs-with-spokes was $4.7 million which was up 9% year-over-year.

Great. I thought I saw that on an LTM basis, but that's up for the quarter. That's what it was.

Yeah, it's a twelve month figure if you recall, so it's an annualized figure. So we then compare it to the same quarter a year ago, which is again an annualized figure. So it's not a sort of quarter-by-quarter, but $4.7 million would be the annual sales over the last twelve months and it's 9% versus the same time a year ago.

Okay. I'm trying to reconcile things. Is 16% growth in sales and weekly sales per DFD door in the U.S.?

Yes.

And it looks like there was a 14% expansion in the number of DFD doors in the U.S. So what that means that there's about a 30% sales growth in DFD doors per hub?

Yes, if you want to calculate the growth of DFD itself, overall sales for the quarter are about 25%. So your calculation isn't too far off if that's what you were looking for.

Yes, and there was about a 7% decrease in the number of hubs.

In terms of the…?

Number of hubs in the U.S. quarter, year-over-year in the quarter?

Because of the hubs without spokes, you're thinking correctly. It was 225, and a year ago we had 240. Yes.

You experienced over 30% growth in DFD sales per hub in the U.S. when you combine the 25 with the seven. I'm curious about the impact of this growth on your sales per U.S. hub. Do you believe this growth contributes to the nine, or is it something different? How should we view this in terms of sales per hub contribution?

Yes. I know this omni-channel model can definitely be complicated and forgive us for that. I think that one of the challenges is there's retail sales in there and also the hub reductions are hubs-without-spokes. So the math doesn't quite play out like that. But what we can say is that the expansion of points of access and pricing with the two biggest drivers of that growth, the sales per hub growth that you describe or indeed the overall organic growth of the business. And so I think that DFD is indeed a big driver of that 9% and indeed the most likely the biggest driver going forward of the sales per hub growth that we'll see. And because it's an average measure as we add spokes to the hubs, particularly some of the hubs-without-spokes that historically we didn't necessarily first go for, we now have learned that we can make them work as well. Some of them only have one or two routes as well, which actually depresses the sales per hub. So it's all about evolving this system to deliver high growth and flow through to the bottom line. And this KPI that you're picking up on that is just one of the ones that we used to say are we doing what we said we're going to do, add points of access to our hub network. So I'm happy to take it offline and go through all the detail on that math, but that's the main headline I'd love you to walk away with.

Our next question comes from the line of Mr. Brian Harbour, Morgan Stanley. Please go ahead.

Yes, thank you. Good morning. Could you talk more about the international segment just because I think that's been the one that's been a little bit slower growing recently and I think just from other companies we've seen probably resilient results in some of those markets, although it certainly varies. What do you think is really still needed there to drive faster growth?

The success of the brand in our omni-channel business continues to play out around the world as Mike said earlier, I mean these specialty doughnut campaigns we're seeing successful across the planet. The points of access expansion of the DFD model is applicable everywhere. And e-commerce is strong everywhere. We're seeing, for example, Mike mentioned, Jeremiah mentioned that Canada and Japan are 30% plus growth actually our international franchise markets on average grew more than 20% last quarter. Company owned Australia and Mexico grew high single digits in the quarter and the UK was flat. So I think your question is largely a UK question. We did actually see really interestingly strong double-digit retail sales growth in the UK last quarter, but it was offset by decline in DFD specifically and that's consistent with what we see as sort of an industry-wide trend for reduced supermarket visits. Teams are doing a great job though they're adapting to those conditions. As I mentioned a moment ago, they’ve already taken actions to do things like in addition to the loyalty card that came up with Sara's question earlier, we're introducing 9 Packs and minis to bring more choice to the consumer and indeed broaden the value proposition with that changing macro environment. So I mean the headline to the question is we do see strong resilient performance across the world, but like with any portfolio of business, you do have ups and downs from time to time that you need to manage. In our case, it's specific to the UK and we're confident around the applicability of the model going forward around the world.

Thanks. Could you provide an estimate of the total price you had in the second quarter and what you anticipate for the second half?

Yes, Brian, I can address that. We implemented pricing changes across all our markets, and in the U.S. specifically, we executed a low single-digit price increase this quarter, which brings us to the mid-teens on an annualized basis. As I mentioned earlier in response to John's question, we will continue to monitor inflation and adjust our pricing as necessary.

Thank you.

Our next question comes from Mr. Bill Chappell at Truist Securities. Please go ahead.

Thanks. Good morning. Yes, I was wondering, is there a way to quantify the impact of the vendor disruption in the quarter and I assume it was just on U.S. sales?

Yes, I can take that. And I think Sara asked a similar question, so apologies for a bit repeating, but just given we're in the midst of an insurance claim against this, I really don't want to quantify it. But the way I would think about it from a modeling perspective is it did have an impact on revenue as a result of our inability to run promotional activities and get LTOs out timely and it did have an impact on the EBITDA in the U.S. specifically as we weren't able to see real-time information and manage labor efficiently. What I would say is that outage was roughly four to six weeks of pain in the U.S. To give you an idea of what that impact would look like over the quarter.

Yeah. And we still delivered organic growth and on the fresh business so more than 150 basis points of margin increase. So it gives you an idea of what could have been, but yes, we're not able to quantify it right now.

Yeah. And I guess the thought process being that you're now talking about full year guidance at the high end of your range despite that, so I assume that's just us carrying through the next two quarters as if the issue doesn't happen and what your run rate could have been last quarter, is that a fair way to look at it?

That's exactly how we're thinking about it as well. Should current trends persist, we do anticipate we’ll land at the mid to high end of our range from a guidance point of view. So that spot on, Bill.

Yes, the consumer we are observing is strong, especially in the U.S. where this impact occurred. As we have discussed, the convenience of DFD, e-commerce, and the popularity of our specialty doughnuts have contributed to this. We have seen this trend continue into July. Our M&M's doughnut range, which featured a special premium-priced doughnut filled with mini M&M's, was particularly popular. Notably, growth is being driven by the 18 to 24-year-old demographic, which now accounts for 28% of our sales. These consumers, who love sweet treats and spend heavily at QSRs, are confident in the brand, contributing to the momentum we are experiencing.

Got it. And then just also a follow up on the pricing, you talked about mid-single-digit pricing going forward. Is that kind of a net number because you also especially talked about Europe and more multipacks and promotions and stuff like that to address the consumer there. Is that a net or we give some of that back with kind of promotions just particularly in Europe?

Yeah, No, I mean the single-digit pricing in the quarter was relative to the U.S. specifically. We're not expecting to give much of that pricing back and if we think about more from a price realization perspective, it's more of a kind of a profit impact than you'll see in list price changes with things like price pack architecture just changing in the discounting kind of strategies that we have.

Got it. Thank you.

Our next question comes from Mr. Andrew Wolf from CL King. Please go ahead.

Thank you. I have a follow up on pricing as well just over the geographic segments. Just putting sort of what you've given us about the U.S. pricing and price realization and comparing it to the sales growth versus the EBITDA growth for international market development and the commentary on the release. It seems pretty evident there’s just more pricing power right now in the U.S., certainly that's the way your strategy seems to be rolling out. Could you just give us a flavor for the price increases in international and in the market development segments and why they're different, seems substantially versus the U.S. in terms of the amount of pricing power?

That's a great question. I can address the pricing aspect, and then Josh can discuss consumer trends across different markets. In the second quarter, we've observed aggressive pricing across all our markets, typically in the high single-digit to low double-digit range. We feel confident about our ability to manage price increases while still providing value to our consumers, and we've received positive feedback in markets where we've raised prices, such as the UK. Josh, do you have any comments on this?

The macro environment around the world is interesting, but only to a moderate extent. As I mentioned earlier, we've seen success with M&M's and have been implementing our specialty doughnut strategy globally. For instance, in the UK, we experienced double-digit organic growth in the retail business, thanks to several engaging specialty doughnut programs like the Royal Dozen. This demonstrates that when we execute effectively and excite the customer in this low-frequency business, our products remain an affordable treat even amid price increases. An original doughnut still costs $1.79 in the U.S. It’s crucial that people have access and convenience to our brand and are enthusiastic about the innovative products we offer. We're witnessing this success worldwide, sometimes at extraordinary levels, as seen in Japan and Canada. We don't attribute our success to pricing variations in different markets, but rather to the effective implementation of our strategy. Our hot light execution in Japan has positively impacted the business, and we're thriving with Costco and Club in Canada. The reasons for success may differ slightly, but pricing power isn't a significant performance driver. Overall, in the U.S., when our programs are compelling and we provide significant innovation and recognition for the brand, we can adjust our pricing to address the inflationary pressures in our commodity group. We are grateful that our customers recognize the value in what we offer.

Yes, the only other thing I'd add is the gifting and the sharing is a global piece. So when people are using that for our brand, it's just a different occasion, right? So, and whether it's Mother's Day, whether it's Father's Day and whatever was happening around the world, that's a great gift that's shared by families, right? So the mindset in our markets is the same. How do we do the dozens? How do we build that? How do you premiumize? How do you make it affordable while still being the sweet treat? How do you then complement it? It really is about that discipline of how do you make sure the frequency is driven by gifting etc., and then match it up, which just great partners.

Okay. I have a follow-up question. Based on your previous answer, I was looking for one or two statistics to illustrate your competitive landscape, such as examining categories like baked goods and donuts, or quick-service restaurants. It seems like there might be a significant gap. It appears you're competing with top brands in the industry. Could you elaborate on how you view the competitive landscape for these occasional indulgences that you are offering?

We see the competitive landscape as encompassing a wide range of sweet treats. Our goal is to become the most beloved sweet treat brand globally. In the donut segment, our focus isn't on single servings; instead, we concentrate on bulk offerings. We aim to elevate these through partnerships, such as with M&M's, which allow us to tap into special occasions, like gifting during holidays or unique events like Halloween. These partnerships generate a desire for our products, making people eager to try items like an M&M's donut that features mini M&M's. The challenge is to maximize these opportunities while ensuring we remain a go-to option for affordable indulgence. We want to be top of mind when consumers are choosing their sweet treats.

All right, thank you.

Appreciate everybody being on the call. Always want to talk and thank our Krispy Kremers for doing an incredible job. And I also want to be a little bit of reflection and make sure that folks keep their thoughts and minds on their folks in Maui and any of our Krispy Kreme family that might have been impacted there and see what type of support Krispy Kreme might be able to do. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.