Krispy Kreme, Inc.

Good day, and thank you for standing by. Welcome to the Krispy Kreme Q3 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Rob Ballou, Vice President of Investor Relations.

Thank you.

Good afternoon, everyone, and welcome to Krispy Kreme's third quarter 2021 earnings call. Thank you for joining us today. Our third quarter earnings release and accompanying earnings presentation deck are available on our Investor Relations website at investors.krispykreme.com. Joining me on the call this afternoon is Mike Tattersfield, Chief Executive Officer, Josh Charlesworth, Chief Operating and Financial Officer, and Joey Pruitt, Chief Accounting Officer. After prepared remarks by Mike and Josh, there will be a question and answer session. Before we begin, I'd like to remind you that this call contains forward-looking statements made pursuant to the safe harbor provisions of the Private Security 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. The factors and other risks and uncertainties are described in detail in the company's registration statement on our Form S-1. 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 GAAP measures can be found in the company's third quarter 2021 earnings release in our Form 10-Q, which will be filed shortly with the SEC and available at investors.crispycream.com. For your convenience, today's conference call is being webcast and recorded for replay on our investor relations website. With that, I'll now turn the call over to Mike.

Good afternoon, and thank you, everyone, for joining us today. We're pleased to review our third quarter results, and share more today about the continued advancements we are making here at Krispy Kreme on our journey to becoming the most love-sweet-treat brand in the world. That is a bold statement, but the reality is that key countries, including the U.S., U.K., and Australia, have already achieved this milestone. I truly believe it's about our focus on fresh donuts via our omnichannel strategy that effectively and efficiently serves customers with premium and innovative brand initiatives across the globe. We compete in the $650 billion global sweet treat broad category against some of the best known brands across channels. Our focus on fresh donuts and shared dozen occasions is clearly resonating with our customers. I want to emphasize that we are able to produce these results because we have an amazing group of Krispy Kremers, which is what we call our team members. And I want to thank them for their dedication to our business and our customers each and every day. I would also like to welcome our new head of investor relations, Rob Ballou, as we continue to build out our team in this new phase of public life. In the quarter, we continue to clearly demonstrate that our fundamental business is strong. Our hubs and spokes, supported by a world-class omni-channel strategy and e-commerce capabilities, are the core of our fresh donut business. And every day, these assets help us to deliver millions of donuts to people around the world. As we continue to build our momentum globally, we also see opportunities to bring Krispy Kreme to more households through the expansions of our global footprint, which is where we will continue to invest while we maintain focus on delivering our long-term growth algorithm. Turning to our high-level results in the quarter. Excluding the impact of our legacy wholesale business, which we fully exited in the first half of 2021, our organic growth was 14% in the quarter, or an impressive 22% on a two-year stack. Including the legacy wholesale business, total company organic revenue growth was 6%, or 14% on a two-year stack basis. We also surpassed 10,000 points of access in the quarter, a 46% increase year over year. This growth was led by investments made in our U.S. and Canada segment, where we increased our points of access by 75% compared to last year. This is a significant achievement, as we now have the capability to deliver fresh donuts within those points of access daily, which will unlock further growth in a capital-efficient manner. Our international segment performed exceptionally well in the quarter and is truly an amazing business. It continues to grow and strengthen the worldwide appeal of our brand. International's organic revenue growth on a two-year stack basis was 18% in our company-owned channel, and 42% in our franchise channel. This growth, combined with strong profitability, serves as a reminder that having the right business model with the appropriate number of hubs and points of access in the best locations provides an incredible opportunity to unlock future value within the business. Our recovery from the initial impacts of the pandemic accelerated in the quarter, and our international franchise business continues to show growth and adoption of our omnichannel model. Operational safety is our number one priority as markets continue to reopen and ramp to pre-COVID levels. We've also become significantly more efficient than we were pre-pandemic, with greater points of access and higher profitability, driven by the scalability of our hub-and-spoke model and strong omnichannel capabilities. This is clearly evident with many of our international franchise partners across the globe. For example, over the past two years, our South African partner has expanded over 200 doors while leveraging their existing four hubs. This has driven DFD sales growth up 200% over the past two years. In the company-owned and operated markets like Australia and New Zealand, where our hub-and-spoke model has reached scale, we are able to expand efficiently as we continue to grow our operations and sales base. Our omni-channel approach in this market has enabled solid growth, despite the fact that these countries have been under a 200-day lockdown. We have actually grown sales and EBITDA while sustaining margins and adding 100 doors with minimal capital costs, primarily through a partnership with a national grocer. This continued growth has allowed the customers in Australia and New Zealand greater access to fresh donuts in their local neighborhoods, while leveraging our existing eight hubs in these geographies. Overall, our international markets have a proven model for what we envision the rest of our hubs and spokes to be globally once scaled, with an optimal mix led by select experiential hot light shops, widespread delivered fresh daily doors, and e-commerce. Across our operations, the move to deliver fresh daily is resonating with our customers. who demand exceptional quality when opting for a sweet treat occasion. Our focus on driving a dozens business opens up sharing, celebration, and gifting opportunities for our customer, and we are seeing higher purchasing frequency and increased appointments of accessibility improved merchandising. This focus on our model and sweet treat occasion continues to differentiate us from restaurant companies in our industry. Overall, We see a great deal of runway for international growth and are working to expand efficiently. Particularly in neighboring markets, we can both leverage existing core equity markets and franchise partnerships. This balanced approach will maintain our focus on brand quality while opening up access to more customers. This will also allow us to realize economies of scale and as a result, increase total company profitability and brand reach. In the U.S. and Canada segment, we are continuing our hub-and-spoke transformation to emulate the success we've seen in our international segment. As of the end of the quarter, we had over 5,700 points of access and saw sales per hub of 3.8 million on a trailing 12-month basis, up 15% from a year ago. Expansion of this model will enable us to increase our margins and sales per hub. to align more closely to those we see in our international segment at a manageable cost thanks to our capital efficient model. In hubs that we converted in the last two years, we're seeing great success. Deliver Fresh Daily, or DFD, is driving incredibly strong performance with over 100% sales growth compared to our third quarter of 2020. When you look at our growth year over year, our momentum is accelerating. making opening new points of access easier and allowing us to expand into more profitable initiatives, like utilizing limited time offers, such as our pumpkin spice donuts in our DFD channel. We have many large markets in the U.S. to develop and leverage our existing base. One market that is ripe for growth and where we are directing investments is New York City, which we opened in 2020. New York City is a fantastic example of a white space opportunity and a densely populated and premium market. This market specifically is the epitome of what we're trying to do as we build our hub and spoke transformation in the U.S. and Canada and is an excellent example of omni-channel execution. We actually view this market similar to opening an entirely new country. We see that much potential. We see this opportunity as being very similar to our London market where we have five hubs and roughly 600 spokes. We currently operate New York City with one hub and 150 spokes and see a massive opportunity starting to materialize as fresh shops and DFD doors are gaining traction month by month across all the boroughs as people continue to return to the city as restrictions are lifted and vaccination rates increase. It took us 10 years to fully build out the London market, which is our highest margin market. But we think we can do the same kind of expansion in New York in half the time. The majority of our upfront investing is complete, and our profitability will continue to improve as the rest is built out in capital light. We also see an incredible opportunity for growth in Canada. On October 4th, we took majority control of our franchisee operations in Canada and have begun the integration of those former franchise locations into our systems. This means we now control 75% of our operations across our global network. We are also planning to build out our physical presence in Canada, and you will start seeing spoke development next year with a greater number of hubs in place by 2023. To give you some greater perspective, we currently have just 10 points of access, including four hubs, throughout the Ontario and Quebec markets and plan to target 700 and 800 points of access throughout the provinces over the next five years with the expectation that this will mirror a market of similar size like Australia and New Zealand that currently has margins comparable to our international business. We just left our one-year anniversary in the third quarter of launching our branded Sweet Treat line, an opportunity for us to expand the reach of our Love Sweet Treat brand into the category where most Americans shop. In the U.S. market, we continue to be pleased with how the U.S. consumer engages with our brand. Just as importantly, every individual SKU continues to be in the top quartile of the sweet treat category inside of Walmart. We are still in early days of this opportunity as we continue to explore with the appropriate pacing both on investment and consumer reach. Finally, turning to Insomnia Cookies, we are pleased that this brand once again exhibits strong growth in the quarters. We opened seven new shops in the quarter, or 28 since this time last year. Increasing our national presence to 206 shops across the U.S., the Insomnia brand is loved by our customers and recently received incredible attention during our annual PJ party in September as we welcomed college students back to campus. We're so excited to have our students back in person, which is a huge driver for our business. Our team is incredibly excited about the long-term opportunity in building out the Insomnia Cookie business and leveraging our company expertise in the sweet treat category. It is important to highlight that all of our business segments are supported by strong capabilities across e-commerce, innovation, branding, and marketing. These unique capabilities support the global growth of our brand and products in a capital-efficient manner that ultimately drives the value for the business. In the quarter, e-commerce represented roughly 17% of our overall retail sales as we continue to work towards our goal of 25%, which we believe is the optimal mix. Our loyalty programs continue to engage our customers, and our largest market, the U.S., has grown membership by 24% compared to the third quarter of last year, and now has a total of 8 million members. One key driver of frequency across our hub and spoke is creating and introducing fresh and innovative offerings as we continue to deliver premium donuts to our customers. We've had extremely successful seasonal activations across the globe, such as Halloween assortments. And in the UK, we also benefited from a national TV campaign with e-commerce delivery partner, Just Eat. We have also piloted new premium offerings like hand-cut cinnamon rolls, and linked with powerful partners like Xbox, Pokemon, and Minions to drive demand and uniqueness. All of these initiatives give us pricing power, sometimes up to 50% more than per individual item, and continue to be scalable opportunities for our business. These also hit right in our sweet spot of gifting and purchasing sweet treats in larger quantities for sharing and celebrating. According to our annual global brand tracking study conducted by Service Management Group, we have achieved another milestone during the quarter. We have become the number one most loved sweet treat brand in the total category of all sweets and chocolates in the U.S., Australia, and the U.K., and number two in Mexico, Korea, and several others just behind global chocolate brands. our brand love improved year over year by more than 50%. This is significant because it shows the power of our donuts, the omni-channel model led by our experiential hotline shops, and fresh points of access approach that resonates with our customers, and a focused social media strategy to center on what we do every day, create awesome fresh donuts, celebrate, and build communities. all of which have helped us grow donut volumes over 20% year-to-date compared to 2020. Before I turn the call over to Josh, I want to take a moment to look ahead as there are a variety of dynamics at play in the global market, which we are taking into consideration as we move forward. We are excited that snacking trends are strong globally. Consumers desire sweet treats to celebrate with family and friends, and this will continue to be a tailwind for us. We grew and continue to transform our donut company in 2020 during the pandemic to a global omnichannel business. We are better positioned than ever before to take advantage of the increasing foot traffic as the globe begins to open up with over 10,000 points of access, including 381 hot light theater shops worldwide that will have open lobbies and broader access. We're also premiumizing our business in new and exciting ways, which reinforce our strength in the category and give us pricing power. On the flip side, as we mentioned last quarter, we continue to see pressure in commodity costs. Wage inflation is also impacting our costs, as anticipated, along with labor shortages. In particular, we're seeing a lack of available drivers to run routes as we continue to build out our hubs and spokes. As I mentioned earlier in my remarks, we're incredibly grateful for our hardworking Krispy Kremers and recognize our achievements are not possible without them. To that end, we continue to invest in our people, and we're going to do it right. We work every day to ensure Krispy Kreme is competitive in the job market and that we have the right people across all of our operations. It's about ensuring that we have the appropriate rates for role and benefits that fit. More importantly, it's about a company with a great culture, growth, and a place where Krispy Kreme dreams and goals will be met. This will ultimately be a differentiator for us as we constantly find ways to ensure our employees' work is fulfilling, their compensation is appropriate, and personal development is available to take their career and themselves to the next level. To account for these global pressures and investments, we implemented brand price increases in late September, the largest of which was in the U.S. Josh will talk about this more in a moment. but we have experience with inflationary environments given the global nature of our business and take thoughtful and strategic price increases as we deem appropriate. Additionally, as I discussed earlier, we will continue to premiumize our products, feel relevant innovation, and our unique DeliverFresh daily model will continue to position us well, driving incremental efficiency and access. Before I wrap up, I want to once again state how enthusiastic we are about the growth in our business and to reiterate our confidence in advancing our omni-channel model, particularly in new hubs and spokes globally, and the transformation we're continuing in the U.S. October is the strongest month every year, and we have momentum. Our brand is particularly suited to engage with customers during the holiday season, as gifting and sharing occasions are more prevalent, and customers look for a sweet treat. I look forward to sharing more in the coming months. I'll now turn it over to Josh to walk through the financials and our outlook. Josh?

Thanks, Mike, and hello, everyone. As Mike said, we are pleased to report a robust third quarter with net revenue of $343 million, which represents 18% total company growth and 6% organic growth year over year. We are lapping 8% organic growth in the same quarter last year, showing the long-term strength of our powerful brand and the enduring effectiveness of our omni-channel strategy. no matter the macroeconomic environment. Excluding legacy wholesale sales from last year, a business we have now fully exited, our year-over-year organic growth was 14% in the quarter. This growth was driven by the performance and expansion of our capital efficient hub-and-spoke model. As Mike mentioned, we have grown global points of access, which are locations where our fresh donuts can be conveniently purchased by 46% year-over-year to 10,041, significantly increasing the accessibility and availability of Krispy Kreme and surpassing our own expectations for 2021 already. The focus of our growth strategy is capital-like Deliver Fresh daily cabinets and merchandising units placed in grocery and convenience stores, which typically require an investment of less than $5,000. We added nearly 400 of these delivered fresh daily doors globally in the third quarter. And as a reminder, our annual goal is to go at least 800 to 1,000 points of access a year. This network of points of access is supported by our 410 donut production hubs around the world, mostly experiential hot light theater shops. During the third quarter, we added 31 net additional shops globally, including three hot light theater shops in Florida, Mexico, and Egypt. We measure the maturity of the hub and spoke model through our sales per hub KPI. The higher the sales per hub, the more we are leveraging the fixed costs and capital already invested in our production hubs. In the third quarter, we saw international sales per hub growth 31% year over year to $8.6 million, with 9% growth compared to quarter three 2019. We also saw US sales per hub grow 15% in the past year to $3.8 million, with 20% growth compared to Q3 2019. The main reason international sales per hub is much higher is because 45% of our sales are made outside of the donut shop to deliver fresh daily and e-commerce. The growth in the US and Canada segment reflects the transformation of the model to exclusively fresh daily donuts, particularly in the wholesale channel. with 33% of sales now made outside of the donut shop. We expect sales per hub to continue to grow in the US and Canada as we add new fresh points of access and strengthen our e-commerce platform. Globally, e-commerce grew rapidly during 2020 amidst the pandemic. This sales channel is now firmly established, and we again saw e-commerce sales at 17% of retail sales in the third quarter, highlighting the convenience of our digital channels. 75% of these sales in the quarter were via delivery, which past studies have shown is highly incremental to our donut shop sales. Sales are made both directly through our own web app platforms and via third-party aggregators. Total company adjusted EBITDA was $41 million in the third quarter, which represents a 10% increase year over year driven by the accelerated growth of our higher EBITDA margin international businesses, where the proven efficient hub-and-spoke fresh donut model is most mature. Total company third quarter adjusted EBITDA margin was 12.1%, down 90 basis points from a year ago. As I explained in the last earnings call, we are seeing significant commodity inflation across all our major input costs, prompting us to take additional price increases. Our much-loved fresh donuts, which are usually shared and often gifted, with relatively low purchase frequency are largely resilient to pricing actions. We have seen this resilience already in October in the US, following the price increase in September. The margin benefit from pricing was limited in the third quarter, but we expect to see more of an impact in the fourth quarter. On a year-to-date basis, our adjusted EBITDA margin has improved 80 basis points to 13.8% due to the efficiencies of the hub-and-spoke model. Our goal is still to achieve 15% total company adjusted EBITDA margin in 2023, with the growth in our already high margin international businesses and the changes we are making to our US and Canada segment combining to drive margin accretion. As a result of our EBITDA growth and tight working capital management, we generated $42 million in operating cash flow in the third quarter. We invested $31 million in largely growth-oriented capital expenditures primarily building out global markets where we see tremendous opportunity, netting to $11 million of positive free cash flow for the quarter. Turning to our results at the business segment level, international grew net revenue 37% to $87 million in the third quarter, with organic growth up 29% year over year. On a two-year stack, organic growth was 18%. demonstrating how these markets are even stronger following the COVID pandemic. International segment sales growth was particularly robust in the UK and Mexico in the third quarter. In both, we saw successful limited-time brand partnerships, including Microsoft's Xbox, Kellogg's, and Nestle's Toppy Crisp perform well. Points of access have also grown 26% in the international segment in the last year, reflecting the continuing opportunity to increase availability of fresh doughnuts even in more mature hub-and-spoke markets. Points of access grew again in the third quarter by over 150, mostly in new DFD doors across the UK, Australia, and Mexico. In addition, international e-commerce represented 18% of retail sales in the quarter, showing its continued importance even as we emerge from the pandemic. Adjusted EBITDA in the international segment grew 43% to $22 million in the third quarter, and that's 54% when compared to the same quarter in 2019. Our strong adjusted EBITDA growth in international has come even without an increase in the number of production hubs in the last 12 months, showing the financial benefits of leveraging existing production hubs through incremental points of access. International adjusted EBITDA margin was 25% in the third quarter, up 100 basis points versus a year ago, with all markets contributing. even Australia and New Zealand, which, as Mike said, has faced significant COVID restrictions. Drive-thru, DFD and e-commerce all combined to offset the impact of reduced in-shop traffic there, as we have seen throughout the world during the course of the pandemic. Now turning to the US and Canada segment, where the transformation to hub and spoke is well underway, with 100% of our donuts now sold fresh daily. Since 2019, we have converted the number of hubs with spokes that distribute fresh donuts to local points of access from 76 to 121. And this has enabled us to grow delivered fresh daily doors by over 80% year over year to 5,220. The transition to fresh donuts has also led to growth in sales per door by over 50% in the quarter when compared to the prior year. Additionally, e-commerce represented 17% of retail sales in the quarter. All these factors combined to give us confidence in the effectiveness of our business transformation strategy in the U.S. and Canada. U.S. and Canada net revenue grew 12% to $226 million in the quarter, with organic revenue down 2% year-over-year. The two-year stack organic growth was 17%, reflecting the sustained performance and resilience of our brand over the last two years in the U.S., The temporary slight organic growth decline for the quarter is because the growth in fresh daily donut sales was, as expected, offset by the strategic exit from our legacy wholesale business. And the fact that we are lapping a significant pipeline fell from our national launch of the Branded Sweet Treat line with Walmart in the third quarter of 2020. Excluding the impact of exiting the legacy wholesale business, US and Canada organic growth was 9% year over year. On a two-year basis, organic growth was 28%, excluding this now fully exited business. Coming back to branded sweet treats, consumer demand remains healthy, with Nielsen scan sales up 33% in the third quarter versus the second quarter, both due to additional distribution, which reached 9,600 outlets in the quarter, and higher sales velocities, which grew double digits. In the third quarter, Customer order fulfillment was only 65%, as we worked to expand production capacity in a tight labor market. As of the beginning of the fourth quarter, we have added two additional production lines, which are now fully operational, and plan to add a third, allowing us to fulfill over 90% of orders by the end of the fourth quarter. Adjusted EBITDA of $20 million remained consistent in the U.S. and Canada segments. we have seen the efficiency benefits of the fresh hub-and-spoke model following the example of the international segment. As a reminder, all US cities have now transitioned from legacy wholesale to deliver fresh daily. In those US cities where the hub-and-spoke model is more mature, we are already seeing a 300 to 400 basis point benefit to margins in the third quarter. This is due to the higher price points achieved with these fresh daily donuts and the efficiency benefits of a local delivery model, especially in covering fixed costs back at the production hubs. This also explains our confidence in the US and Canada segment going forward, and our goal of 15% adjusted EBITDA margin for the segment within three years. Adjusted EBITDA margin was 9% in the third quarter, a decrease of 110 basis points versus a year ago. The third quarter is seasonally our lowest margin quarter, but as I mentioned earlier, we also faced higher commodity inflation, including in wheat, sugar, edible oils, and gasoline. Our price increase in September is already helping to offset the impact with the full benefit to come in the fourth quarter. Also, in our startup business, Branded Sweet Treats, additional costs were incurred as we worked to build out our production capabilities to meet customer demand. We now expect Branded Sweet Treats to be profitable in the first half of 2022. As Mike said, we also continue to invest in our frontline Krispy Kreme team members. The combination of our rapid expansion and industry trends is now driving wage inflation to high single-digit levels. We will watch this trend closely and are prepared to take further pricing action before the end of the year if needed. Now, a good US example of the benefits of the hub and spoke model is Tampa, Florida. We bought this franchise in August of 2019 for $4 million. Analyzer revenues in 2019 were a little under $8 million, and local market EBITDA margin was under 10%. There was one hot light theater shop and three fresh shops. We have since remodeled the legacy shops, added another hot light theater shop, and 120 new DFD doors. Trading 12-month revenue is already over $12 million for the third quarter and growing quickly, and local market EBITDA margin was over 25%. We have invested just under $4 million of additional capital since the Tampa acquisition, but expect to invest minimum levels moving forward, meaning a rapid payback on our investments overall. Mike also talked earlier about our plans for Canada following the franchisee acquisition there. Our plan is to take what is just under a $20 million annual revenue business today, with EBITDA margins already above 20%, to become a $50 to $60 million business in less than five years. distributing to 700 to 800 points of access from 9 to 11 production hubs across the country. As a benchmark, Australia's revenue is just under $100 million, and we distribute to nearly 1,000 points of access there, so we have a high confidence level in this plan. By using our capital-efficient hub-and-spoke model, we'll also quickly be able to finance this growth within Canada. Moving on to our last segment, market development. Total net revenue grew 23% to $30 million compared to the prior year, driven mainly by the acquisition of Krispy Kreme Japan in the fourth quarter of 2020. Organic revenue grew 18% year over year as a result of improved market conditions for the international franchise locations as restrictions related to COVID-19 continue to lift. Adjusted EBITDA remained flat in the quarter compared to the prior year. Turning now to our GAAP income statement, we continue to see a shift of expenses from product and distribution costs to operating expenses when comparing to the prior year due to our acquisition of franchisees in the back half of 2020 and in early 2021. Operating expenses include items such as shop and delivery labor, distribution costs, and rent expense, all of which increase with our control of the global system. Additionally, we incurred high labor costs in part due to support needed for the hub and spoke model transformation and investments as a result of the current labor markets. This should improve as we see efficiencies from the shift of the hub and spoke model in the US and Canada business, and with the full impact of our recent price increase. SG&A continues to reduce as a percentage of sales as we leverage growth, enough to offset an increase in share-based compensation and public company costs since the IPO. We also saw a substantial reduction in interest expense due to the pay down of debt using IPO proceeds at the beginning of the quarter. On the bottom line, our GAAP net loss for the quarter was $4 million, a significant improvement from last year's loss of $13 million, as acquisition-related expenses have declined and we no longer have related party interest expense. Our GAAP diluted loss per share was $0.04 for the quarter, with adjusted diluted EPS decreasing to $0.06 from $0.08 in the third quarter of 2020 as a result of increased share count following the IPO. Weighted average shares outstanding for the third quarter of 2021 increased to $166 million compared to $125 million in the third quarter of 2020. On our balance sheet, as of October the 3rd, we had $45 million of cash and net debt $681 million, bringing our net leverage ratio to 3.7 times. Our net debt reduced 40% from the end of the second quarter as IPO proceeds were used to pay down our outstanding obligations. Given the impact of the acquisition of our Canadian franchisee in the fourth quarter, our goal is to be under three times the leverage in the next 12 months. Finally, moving to our expectations for the rest of the year. Our business is performing well and we are reaffirming our full year 2021 guidance for net revenue of $1.34 billion to $1.38 billion, or growth of 19% to 23%, organic revenue growth of 10% to 12%, adjusted EBITDA of $178 to $185 million, or growth of 22% to 27%, and adjusted net income of $62 million to $68 million, or growth of 46% to 61%. Additionally, we continue to remain confident in our long-term outlook of organic revenue growth of $9 to 11%, adjusted EBITDA growth of 12% to 14%, and adjusted net income growth of 18% to 22% per year on average. As a reminder, we anticipate we will exceed these targets in 2022, as we will no longer be lapping the exit of our legacy wholesale business in the US and continue to see strong momentum in our international markets. To summarize, we are very pleased with our performance around the world. and the expansion of our capital-efficient hub-and-spoke model. We remain resilient to the changes in the macro environment with the pricing power to manage inflation as needed, and we have a healthy capital structure to support our investments in profitable growth while continuing to pay down debt. With that, I will turn it over to the operator to open the Q&A session.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Glass from Morgan Stanley. Your line is now open.

Thanks very much. Josh, if you just go back to the performance of the U.S. business in the quarter, I think maybe initially you thought organic sales growth might be closer to flat or a little better. Do you think the difference is simply the sweet treats business, or maybe can you talk about the fresh business, the core fresh business, and particularly, you know, you commented internationally on the on-premise business for the shops. How is the on-premise business, since that's still a majority of the U.S. business? Thanks.

Hi, John. Great to hear from you. Yeah. So we saw good sales growth in the fresh donut business across all the channels. Obviously, I've already referenced the Deliver Fresh Daily was was exceptional, but the donut shop, e-commerce, were all growing. Out there, I hear about labor market challenges impacting growth. For us, it was negligible. You reference it going negative. As I mentioned on the call, we had these sort of one-time lapping effects versus last year. But indeed, I also mentioned we had a fulfillment issue on the branded sweet treats. Very strong demand there. We weren't able, with the third-party co-manufacturer on one of our lines, to keep up with the ramp-up in demand with the labor market the way it was there for them. So that was the slight shortfall. But overall, happy with where we finished.

Okay. And can you talk to what the pricing actions were you took in September? What you think those do? Does that cover the inflation you're currently experiencing? Or do you still lag that based on maybe what was inflation in the commodities and labor, just so we understand that dynamic in the third quarter?

Yeah, sure. So we've taken pricing earlier in the year. Low single-digit pricing is what we planned and implemented. But you're right, the commodity inflation has been more than we expected coming into the year, double-digit commodity inflation across a number of our input costs. So we took another low single-digit price increase in the US in September. We are seeing good acceptance of that with customers in October. And it is intended to cover all commodity and indeed wage inflation that we see out there in the market. Mike talked about investing in our Krispy Kremers. But we will keep a close eye on the inflation trends we will and are prepared to take further pricing action if needed to make sure we carry that momentum into next year as well.

Thank you. Our next question comes from the line of Johnny Vanco from J.P. Morgan. Your line is now open.

Hi. The question was your intelligence around you know, managing, you know, DFD, you know, per account and even per day per account. You know, I can imagine, you know, if a store is getting delivered donuts to, you know, seven days a week, I mean, one, it would probably be difficult to measure demand, you know, and if, you know, the donuts are getting removed after 24 hours, you know, just, you know, getting the shrink and overall, you know, having too much, having too little, you know, must be a challenge, especially when, you in a high labor cost environment with drivers and also with obviously fuel costs as well. So where, you know, I guess, are you in terms of, you know, not just talking about, you know, the revenue of DFD, but actually looking at, you know, the profitability of DFD, you know, even getting down to the per door basis or even day per door basis?

Hey, John, it's Mike. One thing I want you to think through, the legacy business that we had before, which was a DSD business, Now we're delivering fresh daily, right? That delivered fresh daily and having those fresh access points has allowed us to take pricing power, which is significant, sometimes up to 50% over what the other DSD business was. So we're able to leverage that. In terms of, you know, this is done on a daily basis, right? So we are able to see the waste and we're getting into demand planning to actually look at what is the appropriate level of drop as well as manage through that. So that will incrementally get better as we continue to look at the business of DFD. This isn't just a learning in the United States. This has been going on in the U.K. in our Tesco business as well as in Australia in our 7-Eleven business where there is exceptional knowledge and discipline about how to manage this per drop, per donut. Sometimes even the DFDs have more than one drop per day. right, so in unique places. So there is that skill set. We will continue to manage. How do you manage the flow through of the DFD business, just given its importance about how we move to the fresh business and really evolving beyond just our singular hotlight donut shops?

So just to add, it's not just a theoretical transformation. We are moving from being a franchisor to an operator We spent a lot of time on operating capabilities in terms of people, processes, and systems to manage those returns you describe about, to manage demand planning and forecasting. And we're starting to see the benefits. It's very important with those higher price points that you can get the efficiency you reference. I mentioned on the call that In the cities where we have made the change from legacy wholesale, we're seeing 300 to 400 basis points improvement. So we're seeing those benefits come through. I referenced Tampa, but Denver is one where we've converted and we've gone from 18% margin last year to 24% margin. Dallas, I see 10 basis points of margin increase where we've introduced DFT for the first time. So we're seeing multiple occasions I know you can't see it in the overall Q3 numbers yet with the number of puts and takes and the commodity inflation and pricing timing that I referenced, but this is a great underlying margin improvement that gives us a lot of confidence so that we can leverage those skills that Mike references from the UK and Australia and elsewhere.

All right. Thank you. And secondly, and I want to go a different direction here, The comments on New York basically being New York City, basically being a country and its owner, interesting. There's actually – I remember, gosh, I don't know, 20-plus years ago, there's actually a very funny Seinfeld episode where Krispy Kreme was featured. So this is a brand that actually got a lot of attention when it first opened in the market. I mean, there were a number of different factory stores. you know, that for a while actually did extremely well. And, you know, obviously, you know, for any number of reasons, you know, the brand went away in that market. Can you, you know, I guess summarize just, you know, kind of a history lesson, just using New York City as a specific example, you know, I mean, I guess what you think went wrong with the brand and, you know, maybe some history lessons that were learned, you know, that will basically maximize your return and minimize your risk, you know, as you penetrate that market going forward.

Well, John, I think you asked a very, very succinct question, which is how will we continue to develop New York? We look at New York very similar to what we've done in London. London today has five hubs and 600 points of access. It really is about doing that omni-channel approach. So you leverage your hotline shops and then you get to the points of access. That drives the margin and the profitability as well as that scarcity of hotline shops and how that channel works. as well as freshness as you get to the 600 points of access. And we think about New York, that is one hub today with 150 points of access. So again, we see this as the investment is starting to be there. It's about developing the additional points of access, which is getting the freshness to where the customers are and then building that up. And it's capital efficient first. So instead of opening up a lot of hot light shops all over New York City, The discipline is actually building the hub, getting the routes. And it's not just New York City, right? Because I talked about this as a different country. And that's the approach that we take on a country-by-country basis across the world. But this will unlock how we do Toronto. This will unlock how we do Mexico City, where you leverage the existing base of the hotline capacity and then build the route system so you get fresh donuts. Then as you start to figure out how we can do additional merchandising or other products that we can bring to those access points, you continue to evolve the business much different than it was in the past.

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

Hi, thanks for the question. I wanted to circle back on the cost side of the business, particularly as it relates to, I mean, I know you're seeing some rising commodity costs, particularly on the sugar and the edible oils, but the labor side, and I think you made a comment earlier that you're finding it somewhat challenging to find delivery drivers, and I think that's kind of a crucial point here as we think about the DFD strategy and that hub-and-spoke strategy. So can you comment on on maybe where you are in terms of those drivers and maybe how understaffed you are. And is there a scenario in which you're not able to sort of effectively deliver donuts on a daily basis, which is obviously a key part of the strategy?

We don't have an issue in the fresh donut business with growth when it comes to labor availability. On drivers, we are expanding and adding new routes in parts of the U.S. And, of course, expanding a business in this labor market is challenging. But thus far, with the level of recruitment and the attraction of coming and working at Krispy Kreme, we hired 2,100 people in the third quarter. It's the highest in our history in the U.S. We're able to match the growth needs that we have.

Okay, and I guess if I think about it, you said I think expanding routes, which would presumably mean hiring more drivers to affect some of those deliveries. Is that correct? And I guess further, I just want to get a sense of maybe how we should be thinking about that operating expense line if there is pressure from incremental drivers and higher wages paid to those drivers.

Yeah, I mean, it's a big number, 2,100, and that's the whole system, including the shops and making sure that we've always got the right number of Krispy Kremers in front of our customers. But when it comes to adding those drivers for new routes, we added just over 150 delivered fresh daily doors last quarter. A driver can cover 15, 14, 15 stops, so you can quickly do the math and realize that that's not that many drivers that we're challenged by to find. And so in terms of our ability to expand, relatively speaking, it's just not a challenge for us even in this marketplace.

I mean, I'd add on one thing that Josh said. Remember, this is a global business, right? So the learning from how we do the drops in the UK, that hasn't appeared to be a challenge as they continue to manage through this. As you have that same approach In Australia, where we do now drops, where we've opened up a new grocery system, we don't have that either. These are built-in. These are a lot of Krispy Kremers that sometimes they might be a driver, but they can also be a processor, right? So you're starting to figure out how to use cross-training and then figure out that's a career path that folks like to see, and they see the opportunity for growth as they want to one day be a manager or something else in the shop. So you've got to give a broader lens, not just a specifically just hiring a driver.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to one question and one follow-up question. Our next question comes from the line of Brian Mullen from Deutsche Bank. Your line is now open.

Hey, thank you. Just a question on the DFD business in the international segment. Had nice sequential DFD door growth in the quarter again. And could you speak to the ultimate DFD expansion opportunity over the next several years, specifically across this current group of company-owned markets? And do you expect additional growth across all the markets, just any color on the ultimate DFD opportunity in that segment relative to the approximately 2,400 doors that you have today? Thank you. Sure.

Again, we've reiterated our long-term growth, and some of those are linked to the points of access. We see point of access growth of 800 to 1,000 on a yearly basis, half of that being outside of the United States, even within the existing countries that we're in today. This does not even include, as we open up and leverage our existing base and new partnership countries start to open up, they will start to think about the points of access approach as well. So there is significant growth inside of international, both of growing points of access, and we continue to see.

Yeah, that 2,800 we have in the company-owned markets within the international segment, the UK is the biggest part of that. really interesting to see the UK continuously adding doors every quarter. It shows how even in a mature market, you can work with different grocers, work with different convenience stores to grow. But most obviously, Mexico seems to be the biggest absolute DFD and points of access opportunity. Well, it's over 100 million of your countrymen, Mike, who love Krispy Kreme and And we know and we see the opportunity to expand access there. So if you say we've got 2,800 a day, you could look at what the UK, Mexico, and Australia have. We'd see about another 3,000 opportunity just in those markets. And it's great to see the momentum sustain. So it could well be more than that. But we're going after that right now.

I mean, the real interesting thing about the DFD will be about even how our franchise partnerships continue to build it out. I gave you that example of South Africa. You start to add up to 200 doors that they've built out within the last year.

Thanks. Just to follow up, keeping to the theme of the white space you have, there's many markets you're not in over the long term. I just want to ask about China. Is that a market where you're devoting any resources to exploring today, or is that perhaps something that you see more feasible several years from now and Any high-level thoughts on what that might look like one day, whether company-owned or if you think a local partner would eventually make sense down the line?

So one of the things that we did when we acquired our six businesses that are the countries that we currently operate from an equity business was to make sure that we could leverage them so they really build a partnership. You specifically mentioned China. There could be other countries like Brazil, countries in Western Europe that will look to develop Whether we choose to do that both on a partnership side or a franchise side, those are things where we see the growth significant. But I see a lot of growth on the franchise side, particularly in international, as that will continue to grow. And we'll look and pace in development, China or other countries, as we see fit. We have a lot of growth to do in the core business that we're in today, not just in international, but as well as the transformation that continues in the United States. And we see continued growth in the for other countries with franchise partners as well.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Mike Tattersfield for closing remarks.

So thanks, operator, and thank you again, everyone, for joining us today. I trust you can hear how excited Joss and I are about the business and our runway for growth. We have a premium, fresh product with exceptional quality, majority control of our operations, and are taking a disciplined approach to increasing points of access in order to maximize profitability. We have momentum and conviction in our story as we continue to advance this iconic Krispy Kreme brand that continues to prove to have long-term potential for growth and expansion over the long term. I once again want to thank all the Krispy Kremers for the incredible work and appreciate you taking time to listen and engage with us.

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