Krispy Kreme, Inc.

Good day, and thank you for standing by. Welcome to the Krispy Kreme second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Rob Ballou, Vice President, Investor Relations. Please go ahead, sir.

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

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

Thanks, Mike, and good morning, everyone. In the second quarter, our Krispy Kremers have once again shown that our beloved brand and our omni-channel approach thrives. Even in a challenging consumer environment, with net revenue growing 7.5% year-over-year for $375 million, that's despite a near 3% negative impact to revenue growth from the stronger U.S. dollar. Organic revenue growth was 9%, or 31% on a two-year stack basis. During the quarter, we added 382 fresh points of access across the world, mostly in the form of capital-like DFD doors. we now have more than 11,400 points of access globally, an increase of nearly 1,800 from a year ago. Along with our successful brand activation initiatives, this has resulted in more than 20% increase in trading 12-month sales per hub compared to the prior year in both our domestic and international business segments. Adjusted EBITDA was $47.4 million for the second quarter, down 10% from a year ago, This is despite the strong momentum in points of access growth and sales per hop, which we see as leading indicators of higher margins in the future due to the efficiency benefits of adding off-premise sales to the hop-like theatres. Three factors explain the lower EBITDA this quarter. In the UK, we lacked a post-pandemic resurgence in 2021 with a much more challenging consumer environment this year. Inflationary pressures continued in Q2, with pricing action taken in the US and UK after the quarter ended. And most significant was the stronger dollar, which alone impacted adjusted EBITDA by $2.7 million in the quarter. In the second quarter, gap net loss was $2.4 million, or negative two cents diluted EPS, compared to a gap net loss of $15 million, or negative 13 cents diluted EPS, in the same period a year ago. Impacting gap net income this quarter were impairment charges of $1.9 million, as well as a legal settlement of $3.3 million. Without these, gap net income would have been positive. Adjusted net income for the quarter was $14.6 million, and adjusted diluted EPS in the second quarter was $0.08, a decline of $0.05. The decrease was due to the increased share count from the IPO, FX headwinds, toughness in the UK, and an approximate 20% increase in global input costs. Free cash flow was positive in the quarter, bringing in $3.5 million. In the US and Canada business segment, total revenue increased 8.5% in the second quarter to $251 million, and the organic growth was 6%. Revenue growth was driven by a 9% year-over-year increase in sales per DFD door, as well as a 9% increase in fresh points of access. We added 112 points of access in the second quarter, taking the total to 6,053. We continue to expect to add at least 500 DFD doors in the US and Canada for the full year of 2022. E-commerce revenue in the US and Canada represented 19.3% of retail sales, roughly flat from a year ago. This is a 250 basis point increase from the back half of 2021, driven by additional loyalty members, which now total 9.5 million in the US and an expanded delivery radius, through partnerships with third-party aggregators and the addition of dark shops. All these factors combined to increase sales per hub in the US and Canada to $4.4 million on a trailing 12-month basis in the second quarter. That compares to $4 million for 2021 and $3.6 million a year ago. Hubs with spokes in the US and Canada increased by two to 127 as two hubs in California began adding spokes in the quarter. Hubs without spokes in the U.S. underperformed in the second quarter, with revenue growth in the quarter 5% slower year over year than the hubs with spokes, thus highlighting the importance of the omni-channel model. Adjusted EBITDA for the U.S. and Canada in the second quarter decreased 8% to $26 million, with margins declining 180 basis points to 10.4%, as we cycled a strong quarter from the vaccine promotion a year ago. Also impacting margins this quarter was the underperformance of hubs without spokes. We saw a 400 basis point margin decline year over year driven by inflation and increased promotional activity. In contrast, hubs with spokes saw an increase in their margin delta from hubs without spokes due to the benefit of additional off-premise sales through the increase in DFD revenues. In the third quarter, we've already increased pricing in our shops by mid-single digits and continue to review pricing opportunities selectively for the balance of the year. Promotional discounts are expected to also slow as we concentrate on our premium seasonal offerings in our stronger fourth quarter. Our digital-first Insomnia Cookies had a strong quarter with double-digit revenue and adjusted EBITDA growth. We opened four new cookie shops in the second quarter and four since the end of the quarter, reaching 225 in total across the U.S., at the end of July. Our startup, Branded Sweet Treats Product Line, saw a 15% increase in scan sales in the quarter compared to a year ago, helped by a 98% service level. The continuous improvement in our manufacturing and distribution capabilities helped lower conversion costs, which combined with a double-digit pricing increase earlier in the year, helped us achieve break-even on profitability for Branded Sweet Treats for the first time in this quarter. Moving to our international segment, net revenue grew 5.2% in the second quarter to $94 million, with FX headwinds a 7.9% drag during the quarter. Organic revenue increased 13%, with excellent performances from Mexico, Australia, and New Zealand. Strong premium product innovations and successful price increases proved particularly successful. In the UK, we also saw organic growth but at a much lower rate in the face of a very challenging consumer environment with general supermarket and retail traffic both down in recent months compared to a year ago. International points of access expanded by more than 200 in the second quarter and by 500 year to date. This 29% increase in international points of access from a year ago allowed us to leverage our 37 international hubs to grow international sales per hub to $9.8 million on a trailing 12-month basis, up from $9.1 million at the end of 2021 and $8 million in 2020, even with the FX headwinds. International adjusted EBITDA for the quarter declined 79% to $20 million, as gains in Mexico, Australia and New Zealand were not enough to offset a decline in the UK. The UK decline was driven by cost increases in labour and commodities, But also remember that we were cycling a surge in spending across the UK economy this time last year, following the British re-emergence from COVID-19 restrictions. We expect international margins to continue to see some softness in the third quarter due to UK consumer trends, which have been exasperated by a recent heatwave. However, recent price increases as well as local expense reductions are underway, and we expect to see improvement in Q4. Now to our third business segment, market development, which is made up of our franchise business around the world and the equity-owned Japan market. Total revenues in the second quarter increased 6.5% to $30.9 million, even with a 7% impact from FX headwinds and franchise acquisitions. In fact, organic growth in the quarter was a very strong 19.2%, with great performances in particular at our international franchise market and in Japan. both of which saw organic growth in excess of 25%. In Japan, we continue to make progress on implementing the hub-and-spoke model with more than 100 new fresh points of access added in the last year. This allowed Japan to enjoy adjusted EBITDA margin improvement of over 400 basis points in the quarter compared to a year ago. Adjusted EBITDA in the second quarter for market development increased 6.5% to $10.5 million, despite a negative $600,000 impact from FX headwinds. Adjusted EBITDA margins were approximately flat in the quarter at 33.9%. We are updating our 2022 outlook, mostly to reflect FX headwinds, but also the softer UK trading environment and the relative underperformance by US hubs without spokes. We still believe we will generate 10% to 12% organic growth in 2022. But reducing our net revenue expectation to a range of $1.49 to $1.52 billion still means 8% to 10% net revenue growth for the year. Inclusive of an estimated $10 to $12 million impact from FX due to the strength of the US dollar, we now see full year adjusted EBITDA at $189 to $195 million with adjusted EPS of $0.29 to $0.32. In general, Each 1% move in the US index is approximately $1.3 million in adjusted EBITDA on an annualized basis. After investing $22 million in capital during the second quarter, which represents below 6% of revenue, we do expect annual CapEx to be approximately $10 million lower this year due to a shift to lower capital points of access and benefits from a decrease in spend internationally due to the dollar strength. This will bring our CapEx spend 7% of revenue down from 8.6% in 2021 and 2020. We also announced this morning that we are acquiring a Midwest US franchise later this month for $18.5 million at a below six times EBITDA multiple. This will add seven profitable shops to the network and the ability to add more than 100 low-cost DFD doors in the market. In the near term, This will moderately increase our leverage while we cycle in this EBITDA into the US results, which should help bring the leverage down over time. Additionally, we are reviewing poor performing hubs with outspokes in the US and expect to close approximately 10 shops in the coming weeks and months. These are margin dilutive hubs which cannot be converted to supply off-premise DFD sales. While we don't provide quarterly guidance, after softer organic revenue growth in the UK and the US in May and June, we have seen a strong start to the third quarter, with 10% organic growth reported to date, helped by recent price increases, and strong LTOs, such as our ice cream truck donuts in the US, which have so far been enough to offset another summer heat wave in the UK. G3 organic growth continues to also be high in insomnia cookies, Australia, Mexico, Japan, and the international franchise. Recently, we've seen large decreases in key input costs in the commodities market, in particular on wheat and edible oils, which we've begun to lock in for the first half of 2023. This would lead to a large deceleration of expense growth next year from recent levels, with some pricing even lower than our 2022 average if trends continue. At this point, we've locked in approximately 80% of our commodities for the first half of 2023 at mid to high single-digit inflation. That's down materially from the approximately 20% plus we've seen in the last quarter. Fundamentally, nothing has changed in our ability to continue to thrive. We remain very confident in our ability to deliver strong organic sales and bottom-line growth through expanding our hub-and-spoke model, increasing our points of access, and growing our e-commerce platform, all this while managing margins through pricing and innovation. We also remain very confident and a long-term growth algorithm of 9% to 11% annual organic revenue growth, 12% to 14% annual adjusted EBITDA growth, and 18% to 22% annual adjusted diluted net income growth, despite the near-term effects and inflationary challenges. Operator, we can open the call up to Q&A now, please.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by.

Our first question comes from the last with Morgan Stanley. Your line is now open.

Hi, good morning, guys. It's Brian for John. Maybe just the first question about the U.S. hubs without spokes. What kind of defines the ones that, you know, you'll be closing? Is there a location issue or, you know, what would you observe about those locations as they've kind of evolved out of COVID over the last year and a half?

Good morning. This is Mike. You know, we've talked about the transformation in the U.S., which we really, really started to close in on last year. We just even finalized with the Midwest acquisition. When we acquired it, it was to get control of the system and including the largest markets. So we knew even then that some of the hubs were underperforming. And the whole plan was how do we evolve the system much more to this omni-channel model and the hub and spoke. So that's always the lens that's there. So the shops that aren't there are the shops that can't convert, that can't change over and do that And that's really, you know, the inflationary times sometimes will actually highlight the gap that exists because you can see even across the world the hub-and-spoke model really allows us to drive our revenue per hub, which you can start to see happen. That gives you one insight.

And as Josh, the only thing I'll add, of course, is that actually many of the hubs without spokes are strong and profitable and much-loved local community stores. There's 118 in the U.S. hubs without spokes. So a significant are still performing well, but there's also a significant minority and hence our decision to close approximately 10 that are really not sustainable in the long run. And now with this context and this environment, the opportunities to accelerate what would have been inevitable anyway.

Okay, great. Thank you. And then just on, you know, the improvement in organic growth as you went into July, was that primarily, do you think, due to pricing? Maybe if you could comment just on some of the underlying trends in the on-premise business, maybe in the delivery channel as well. You know, what are the other drivers of that besides kind of the pricing impact?

So you've got, again, promotional activity or merchandising mix that works. I'm a Points of access continue to grow. Some others, pricing. We look at pricing in a very different way, right? You can either be reactive or proactive. We're in this business for a long, long term, right? So we really look at pricing strategically. We didn't take pricing in the U.S. or even the U.K. in the first half of the year. So we then really started to learn what's the merchandising mix even if consumers are challenged, because we serve a broad spectrum of consumers. So then finding that mix, right, and tweaking, not just the promotional mix, but we actually were able to open up a new tier, which we do our customized handmade donuts, which they're more expensive. It's a premium price, and you can see the customers are gravitude. They're always going to look at pricing, and we're very strategic about it, and our customers will always tell us, is it worth it? And we can see, even as we brought fresh donuts to the DFD channel, when they can get access to that, even across the band, they want the fresh donut experience. So clearly we haven't seen the impact from pricing that we've taken.

Just a compliment. It's nice to see the U.S. perform well already in the third quarter. Remember, traditionally, the third quarter is a week a quarter for us. The pricing that Mike mentioned, ice cream truck, donut, LTO, clearly doing well. U.S. still challenged. Obviously, the economic... The U.K. is still challenged. Obviously, the economic environment there. They've got a heat wave there, which certainly isn't ideal for selling donuts. But, you know, with the pricing, with the momentum we started July, the 10% to 12% organic growth for the full year and 7% to 10% constant currency EBITDA growth for the full year is very much how we see the year.

Thank you.

Thanks, Brian.

Thank you. Our next question comes from the line of John Ivanko with HSBC. I'm sorry, with JP Morgan. Your line is now open.

Hi, thank you. I wanted to talk about, you know, DFD in the U.S. If you can, you know, make some comments around, you know, kind of DFD sales per door, profit per door, how the system is evolving from a profitability perspective. And if you have some opportunities, the more experience you have, the more data you have and what have you, maybe to do some portfolio management on the DFD side as you really kind of sharpen the pencil in terms of looking at profitability per account, especially as it's even more important now given your margins and profits. you know, just making sure that, you know, you're doing business in all the right profitable places.

John, this is Mike again. I'll give you at least the strategic part, which we really learned from our international businesses, right, which is really how do you drive this omni-channel approach to the DFD and actually have the same donut mix that you have in the shop translate over to the DFD doors So that the Krispy Kreme experience is absolutely the same, and the points of access can be a real big driver of margin and opportunity. That really started last year when we had the DFD start, and then you can see now we even tried it for the first time even in the U.S. market where we were able to activate on a promotion such as a July 4th activity and push that into the DFD door so you can see the take there and really rise sales. passing on to Josh, he'll get into a little bit more of the margin.

Sure, Mike. Yeah, so in the U.S., we're obviously continuously adding DFD doors. And as we explained before, the way we think about the profitability is the contribution of adding those off-premise sales to our on-premise facilities, our hotlight theaters, and the benefit of the operational leverage of adding those profitable sales to fix costs at the Hot Light Theatre Shore store, typically around 40% margin throw-through from adding those doors. And Q1 to Q3 in the US, definitely a time where we're seeing customers keen to take on our delivered fresh daily cabinets and merchandising units. In terms of optimizing and making sure we're always at the best doors, we're saying sales per door continuously grow. Q4 will be a time to optimize, as we saw last year, and then we'll continue to add across the country with new customers, new cities, again in the new year. I mean, one thing to pick up on in terms of global learning is, you know, we are selling fresh donuts, same quality, daily in the grocery store that you get in the retail stores. So it's really important that we bring news and excitement to it, as Mike said. And I think moving forward in the US, we're going to be doing more integrated marketing, making sure that there's plenty of excitement in the grocery store, just like there is in the retail theater. Even if it's not a hot donut, that doesn't mean we can't bring more LTOs and special donuts to the grocery channel. And that's definitely an upside for the longer term and what we've seen in UK, Australia and elsewhere in the world.

Have you gone through the exercise of looking at and making sure every DFG door is profitable each of the seven days a week or even each route is profitable seven days a week? I mean, it would seem to me just through my observations in South Florida, for example, in some cases, the donuts are sold out at the end of the day. In other cases, there's actually quite a lot at the end of the day. I mean, not people... don't necessarily eat the same number of donuts on Monday morning as they might Saturday or Sunday morning, for example. I mean, that's normal. You know, I mean, does it make sense? I mean, are you, I guess, kind of applying that, you know, I guess more, you know, granular type of approach to managing those accounts? Or, you know, is it, you know, kind of your belief that it's important to have availability so consumers know that it's there and, you know, I guess the good days will more than offset some of the slower ones?

Actually, we definitely see the opportunity to continuously refine our capabilities on managing this fast expanding DFD door network. We recently just sent our US team over to the UK to really look at some of the best practices they've developed over the years. I mean, the first highlight is, of course, that it's the routes where the profitability is most important. You're adding a driver running a truck, so you immediately want to make sure you're covering that incremental cost, so route profitability is a focus of the teams. When it comes to the doors themselves, we've learned that you need a door size, make sure it's a minimum scale, and the team have certainly learned, and we use sales per door per week as a guide, that that's something we really want to drive up, and we've still got some We've learned that you need a door size and make sure it's a minimum scale. And the team have certainly learned, and we use sales per door per week as a guide, that that's something we really want to drive up. And we've still got plenty of upside there compared to our international markets when you look at what we're doing in the U.S. Donuts to make sure that they're always available for that evening sale, that on-the-way home commute, somebody wants to bring home donuts. be very disappointing if they're not there. So we definitely want to always be available all times of day. We know that we will have always naturally have returns to bring back, and it's a constant balancing act through the week and across the doors with our customers to make sure we get that optimum level. But the growth is strong, and that's certainly a great place to start as we continue to learn and optimize our capability around delivering to the bottom line.

Yeah, one area I just would add on is just – The ability, when you start thinking about points of access and how you're talking to our customer base, right, before they were only getting access to Krispy Kreme and the 300 shops, you're now able to talk to them when you get the omni-channel approach and get the right donut mix into the 6,000 doors in the United States with the potential of getting beyond 11,000. You can see then the brand will also start to resonate and the frequency starts to become much clearer and you can communicate about the product and it's accessible. So that's not just the journey with Josh described. It's just how to get to the profitability and door and sizing. But how do you make sure the consumer then has access to it and can get to those access points? Okay. Thank you.

Thanks, Jones.

Our next question comes from the line of Carl LaFoy with HSBC. Your line is now open.

Yes. Good morning, everyone. What is the biggest point of resistance that you face for getting pricing in the US to keep revenue pace with or ahead of inflation for real organic growth? And maybe related to that, can you comment on brand power? Do you have the brand power in new markets where you're expanding into to get the pricing that you need with inflation?

know and what's your pricing experience in established markets versus new markets so again we always look at our brand and the opportunity of how we can price strategically across everything we do it's really about always finding the price where customers think it's worth it how you continue to innovate the points of access which gives you more access and frequency We can take price. We took price in DFD last year. We continue to take price, but we're very strategic about how we do it. And you have to think about even through the innovation that we start to launch and cheering in pricing. So that's a huge opportunity where you have value and cheering across your customers that there is no barrier today to what you can price right away. We actually just try to really manage that continuously across all of our customer base. And then All of our customer base are always looking for value. They will also look for premium innovation and gifting. The thing that's pretty interesting, we're a low-frequency item. So you've got to make sure when people want gifting in those aspects, that's when they engage with our brand. You brought up other countries and said the awareness of Krispy Kreme is worldwide. There's not a lot of opportunities where you go in where you open up a Krispy Kreme that they're not aware. Recent openings, for example, that we had in Cairo, They're still at it. We can't even manage the capacity that comes out of the shops. Our partner, they're really looking and figuring out how to get the hub and spoke system. So the uniqueness of the model is how do you drive the business from a traditional donut shop, which is what it was in the past, to a hub and spoke system. And when we do that well and get the access point, we can really drive the business.

Thank you.

Thank you. Our next question comes from the line of Bill Chapel with Truist.

It's open.

Good morning.

Hi, Bill. Can you hear me? Yeah, we can. I guess two questions. One, I'm just trying to understand maybe the change in tone or change in strategy. I mean, three, six months ago, You know, it seemed like the model was in place and things were moving pretty, you know, were being implemented well, and you felt very good about even maybe some upsides of the numbers. And then we've had, you know, what seems to be weather and, you know, economic slowdown, and maybe the model's been stress tested. And you seem to be talking more about strategic tweaks to the model and changes. And so I kind of understand that this is something that was always in the works, and you're just explaining it a little bit more, or... if you felt like you had to take a little more corrective action after the model has been stress tested a little bit?

So nothing has fundamentally changed from the model, right? The strategic model building an omni-channel business with a hub and spoke is exactly what we've been doing. In the U.S., when we're still going through the transformation phase, as we just talked about in front, which is how do you get to the majority of your business being hub and spoke, from a system that didn't have that before. And all you're seeing is just us moving a bit faster now on the few hubs that actually don't fit into the system. There was a plan always with them to actually move on some of those hubs, and I'm just talking about in the U.S. From the U.K. model, you know, the U.K. business is a fantastic business because I think you were alluding to that business as well. Even under duress with the UK's experiences as a consumer base today, we still have the 20% margins. The reason we can do 20% margins is because we have a great oven spoke and very efficient model. They'll continue to tweak it. The macro environment is challenging customers everywhere in the world. It just shows you the resilience of our brand. It's actually growing in every single one of our countries where we operate today and regions. And so when you get the benefit of the hub and spokes, you get to add more access in a very capital efficient way. We are very bullish on that, exactly what we're doing.

Yeah, I think all that is, you know, we're a global omni-channel business. Great thing about that, you know, with half our system sales and half our EBITDA being international, we're able to weather any storm or change in the external environment. But, of course, this year and since our last call, the FX environment has changed a little bit, the stronger dollar. So it's a very specific one-off item that isn't really about our strategy or execution. In fact, when you see the difference between the hubs with spokes and how they are able not just weather inflation but continue to strengthen compared to the hubs without spokes, it just gets you to really hone in on those things. hubs without spokes a little faster. When you look at the EBITDA drop in the US in the second quarter, more than half of it comes from those hubs without spokes, yet they represent less than a third of the revenue. So it's more a case of the next phase of the strategy being an opportunity to go after that even faster. And then when you look forward to the future, You know, we've got this strong top-line momentum around the world that Mike referenced. We've got reduced commodity inflation already for 2023. We see the profitability in the U.S. hub and spokes. We have this premium innovation, which means that you've got a whole bunch of drivers that we feel good about for the longer term, hence why there's no change to our long-term algorithm to double-digit high-growth companies with even faster flow through to the bottom line.

Okay. Well, and just to follow up on that, I mean, I guess, was it not considered on the long-term algorithm? I mean, I understand this is an unusual year, but it's also unusual in terms of price increases, which are driving some of the sales. And there will be other years with macroeconomic changes and heat waves and other things. Does 10% to 12% long-term top line make sense, and you really haven't seen any change to that outlook?

No, we haven't, and hence why we shared already what we've seen in July, because the way we see momentum across the whole world with the additional points of access opportunity gives us a long runway of expansion. We talked about 50,000 points of access that we've already identified around the world as an immediate goal. And we're just over 11,000 now, just hitting 6,000 in the U.S. with an immediate goal of 10,000. So you quickly get to double-digit growth with that mindset. And you're right, pricing and premiumization just come on top of that. But there's a fundamental driver in volume. I mean, just in the second quarter, we grew volumes of donuts sold around the world 7%, 9%. in the U.S. alone. So we're selling more donuts. Growth algorithm remains intact and strong.

Okay. I'll leave it there. Thanks.

Thank you. As a reminder, to ask a question at this time, please press star 1-1. Our next question comes from the line of Jared Garber with Goldman Sachs. Your line is now open.

Good morning. Thank you for the question. I just wanted to dig into the U.S. organic growth number. Certainly it's decelerated a bit, you know, sort of no matter what stack you look at. And I just wanted to get an understanding. So 6%, I think that's supported, I think you told us last quarter you were running about 10% price in the U.S. Correct me if I'm wrong there, but I think that's what I picked up last quarter. Plus you've got, I think, you know, sort of high single digits points of access growth, which if I'm not mistaken, it's also kind of feeds into that organic growth number. So just want to understand sort of the driver of the deceleration in the u.s organic growth number and if you're seeing any um you know sort of any pushback or or softness or weakening in consumer demand trends uh as the consumer continues to be sort of pressured uh by the broader macro well the first thing to say is is is that stat i just referenced a bill uh in terms of nine percent volume growth in the u.s shows that fundamentally we're selling more donuts uh every quarter

than the quarter before in the prior year because we're making it more available and people, number one reason given why consumers may not play the Krispy Kremes, they can't get it. So that remains whether it's this quarter or any quarter with us. When you look at the breakdown of the organic growth to your question, the biggest driver is delivered fresh daily. It's adding more points of access to the doughnuts and growth within the DFD cabinets themselves. We have, for example, July 4th as a real boost in the quarter with a special offering LTO there. You mentioned pricing. We haven't yet taken pricing this year on DFD. We have taken it in Q3 on retail, but you said the double digit is what we see. Well, referencing just retail, that would have ditched during the course of the first half of the year into mid to high single digits because we haven't taken pricing until the third quarter on retail. And as I said, even faster dip on DFD because we haven't taken pricing there. So pricing does play a role in the growth, but that volume is the biggest contributor, largely driven by DFD. Growth across e-com, insomnia as well, was pleasing to see in the U.S.

You asked, Sarah, you asked one question about the consumer. And I think one of the big learnings we had was that we can't even go to even a higher tier of pricing, right? So what we did is we really learned how to grab our cinnamon roll product in the U.S., particularly doing that just on a one-day part, which is on Sunday, and then really getting to what we call our fourth tier of pricing. And it actually unlocks. a lot of big opportunity that, you know, eventually even one day might scale even into the full omni-channel model. If there's no resistance that we've seen from customers, if we still try to be very affordable on this, but there's clearly an opportunity to continue to put premium into our brand while we still try to maintain that kind of base price per dozen and try to drive that across the world.

Okay, great. Thanks for that clarity. Thanks, John.

Thank you. Our next question comes from Jafar Mastari with BNP Paribas Exane. Your line is now open.

Hi. Good morning. I just had a couple of short questions just going back on some of the details of the update in full year guidance. So if I take the midpoint of IPTA and revenue, it looks like you're updated guidance is something like 100 base points below what it was before and obviously international can have higher margins. So are you able to assess how much of the change in margins is purely translation from higher margin international profits and how much would you say is your other fundamental changes including inflation? And then a similar question on the 10 to 12 million impact that you're singling out. If you find them correctly, it is the impact of FX translation and FX impact on costs. I just wanted to clarify if that's the case or whether it's FX translation and total cost increases, regardless of whether they're currency related. So if I take 10 to 12 and adjust for that, am I adjusting for FX in a clean way?

Sure. You know, why don't we start with the FX detail? Joey, Chief Captain, is sitting next to me. Joey, do you want to answer on the FX? And then I'll talk a little bit more about how we see margin overall.

Sure, sure. Thanks, Jafar. Yeah, if you think about the $10 million, $10 to $12 million of FX impacts, certainly There's a few different factors there. We know that the dollar has been strong. The primary impacts for us are in the UK, in Australia, and in Japan, as well as in our international franchise business. And the $10 million or so assumes that the current rates that are out there will continue. And it does include both some translation or primarily translation, but then some transactional impacts as well.

And so just to add to your broader question, you're referencing the full year shift in margin from our prior guidance. I mean, when you step back, we expect US and Canada EBITDA to grow this year overall, and we expect international to dip a bit, reflecting the effects that we just discussed, reflecting the challenges in the broader economic environment in the UK. So the biggest contributor to that change in the guidance on margin is around that FX and that international shift. There is a smaller impact in the US associated with timing of pricing and inflation through the year and those hubs without spokes which have not responded as well as our HODs with spokes. But definitely the way you should think about it is there's a lot about FX, a lot about the UK versus any change to our fundamental view of the progression and the transformation of the US to this hub-and-spoke omnichannel model.

Thank you. That's very clear. So it sounds like it's all FX-related. And the only cost impact that's in the 10 to 12 is your operations purchasing elsewhere. And then when you talk about the hub and spokes. Yeah, sorry.

Yeah, some of our commodities are obviously impacted by the strength of the dollar. They're globally traded. And so there is a transaction element to it. But the majority is the translation. And what about half of it is the pound? So we'll have to watch how that plays out.

Great. And then just to close on that, and I'm done after that, the no change to the organic growth guidance range, is it because effectively we may have ended up at the top end and actually it may end up being at the low end now, or is it, as you just suggested, that organic growth remains Very similar, the difference is what sort of promotion you need to deliver to get there and how fast you can get some of those costs covered.

Yeah, we're happy with the range. Obviously, we've got different countries doing different things through the year, but overall, 10% to 12% organic growth ahead of our long-term algorithm of 9% to 11%. it'll be a good year for growth for Krispy Kreme in 2022. All right.

Thank you very much.

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

So thank you, everybody, for spending a little time and learning about our business. I'm always appreciative to all the Krispy Kremers. I actually visited them in the shop today and just said hello. I really look forward to continuing our journey of building the most low-sweet treat brand in the world and deliver upon that every day. So thank you for your participation.

Thank you all for joining. You may now disconnect.