Krispy Kreme, Inc.

Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme fourth quarter and full year 2022 earnings call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 once again. Thank you, and I will now turn the conference over to Rob Ballou, Vice President of Investor Relations. You may begin.

Thank you. Good morning, everyone, and welcome to Krispy Kreme's fourth quarter and full year 2022 earnings call. Thank you for joining us today. Our earnings release and accompanying earnings presentation deck are available on the Investor Relations portion of our website at investors.krispykreme.com. Joining me on the call this morning is Mike Tattersfield, President and Chief Executive Officer, Josh Charlesworth, Global President and Chief Operating Officer, and Jeremiah Ashuki, Chief Financial Officer. After prepared remarks, there will be a question and answer session. Before we begin, I'd like to remind you that this call contains four looking statements made pursuant to the Safe Harbor Provision for the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events, and future financial performance. Forward-looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's Form 10-K filed at the SEC on March 11, 2022. Forward-looking statements made today speak only as of today. The company assumes no obligation to update or revise any forward-looking statements, except as may be required by law. Additionally, Today's call will include certain non-GAAP financial measures. Reconciliation between non-GAAP financial measures and their closest comparable GAAP measures can be found in the company's fourth quarter 2022 earnings release in Form 8K filed today. And our Form 10K, which will be filed with the SEC later this month, will also be made available on our website, investors.crispycream.com. With that, I'll now turn the call over to Mike.

Good morning, and thank you, everyone, for joining us today. We are pleased to share our fourth quarter and full year 2022 results as organic growth accelerated from the third quarter driven by our continued successful execution of our omni-channel strategy and strong performance of our premium offerings for celebration events and holidays. I want to start today's call by thanking our Crispy Creamers, our team members, for driving another strong quarter and year of revenue growth. In 2022, we had positive organic growth in every country around the world, despite a turbulent macro environment and double-digit organic growth in all three segments in the fourth quarter. Thank you. Without your efforts and dedication, this would not be possible. Since 1937, we've been serving our iconic Original Blade Donut to customers, and it's always been about sharing moments among friends, family, and community. As an affordable indulgence today, we love the fact that more than 80% of our donuts are bought to be shared with others, including as gifts. In 2022, 36% of our customers bought our donuts for a party or special event in their life, up from just 10% a few years ago. The purpose of our company is to touch and enhance the lives of others through the joy that is Krispy Kreme. We are committed to positively impacting the world by loving our people, our communities, and our planet. In the fourth quarter, we wrapped up another great year for fundraising and in total raised more than $40 million globally in 2022 for local communities, a roughly 25% increase from 2021. Fundraising has long been an integral part of Krispy Kreme's purpose as part of our efforts to give back and support local communities and issues while generating brand love. We also focus on reducing waste and increasing landfill diversion efforts and continue to engage and give back to local communities across the world through volunteering, philanthropy, and creating moments of joy through innovative donuts. We are constantly looking to engage people across the globe in fun, enjoyable ways that really connect people to Krispy Kreme in a powerful way. Turning to 2022, we had a great year on the top line as organic revenue grew over 12%, led by a 14% increase in fresh points of access globally to nearly 12,000 in total at the end of the year. Growth was strong across the world, especially to end the year as we saw double-digit organic revenue growth in all three segments in the fourth quarter with performance accelerated in the U.S. Krispy Kreme business, market development, and retail in the U.K. We sold a record 1.63 billion donuts in 2022. 1.63 billion. That's a lot of donuts. All delivered fresh daily to more than 30 countries around the world. The fourth quarter accentuated a great year for our brand as we had highly successful seasonal global campaigns that drove an increase in volume, especially at Halloween and winter holidays, where we saw very strong performance across the world. These global campaigns show the path forward for significant events and holidays, as we'll be able to leverage marketing costs, media coverage, and brand partners across many or all of the countries Krispy Kreme and our franchise partners operate. driving increased efficiency on both the top and bottom line. For the full year, we earned more than 35 billion media impressions, highlighting the true power of our incredible brain. Also strengthening our omni-channel capabilities in the fourth quarter was our e-commerce efforts. In the U.S., that included expanding availability of specialty donuts and more targeted marketing efforts. Additionally, Insomnium, benefited from the expanded radius of warm cookie delivery of up to 10 miles. These efforts led to more than a 20% increase in e-commerce revenue in the fourth quarter compared to a year ago and led to a 260 basis point increase in sales mix of e-commerce to 18.3% for the company as a whole during the quarter. The fourth quarter was our strongest in e-commerce since the pandemic, and we continue to see significant opportunity grow in this channel. Our performance in the fourth quarter in the U.S. and Canada segment was strong, led by successful premium offerings, effective pricing actions, and higher e-commerce revenue. This quarter in the U.S., for the first time ever, we sold all three seasonal specialty donuts in our DSE doors. This led to record weekly sales in the U.S. of $620 per DSE door. highlighting the benefits of a complete omni-channel model approach. Organic revenue growth for the segment was 12%, and margins expanded 50 basis points to our highest margins during 2022. Insomnia Cookies had another great quarter with 24% revenue growth driven by strong same-shop sales and very high productivity from the 2022 class of new shops. Insomnia's AUVs increased to $850,000, up 8% from the previous year, and we opened more than 20 cookie shops last year. The capital efficiency of an Insomnia cookie shop is fantastic. As Seth, Insomnia's founder and 20-year CEO, highlighted our recent investor day, the payback for these new stores is roughly one year, or around 100% ROIC, thanks to full wall margins approaching 30%. The recent class of new stores has been one of our best return classes ever. We are focused on accelerating Insomnia's growth as we grow from our current 231 shops today to a total addressable market, we believe, of more than 4,000 locations, with the goal to eventually ramp up to nearly 100 new cookie shops per year. We truly believe Insomnia Cookies will be the next Krispy Kreme, and we plan to expand globally this year into the UK and Canada. In our international setting, where our hub and spoke model is more developed, we continue to grow fresh points of access and see significant upside from where we are today. In 2022, we added nearly 600 points of access internationally, with growth across all countries. This led to 18% organic revenue growth in 2022, and sales per hub increased 8% to nearly 10 million, despite significant FX wins from the stronger dollars. We saw strong progress in Mexico, in particular in 2022, where points of access increased by nearly 40% to more than 550. This led to a 24% increase in revenue and more than 100 basis points of adjusted EBITDA margin expansion for Mexico for the year, despite significant inflation. We also signed a record number of international development agreements in 2022, with eight new agreements from both existing and new partners. Interest from high-quality franchise partners remains robust, and we are confident in our ability to sign three to five new countries a year moving forward. We expect to open five to seven new countries in 2023, including in France, bringing our total to more than 35 countries by the end of this year. As we look ahead, our relentless focus on capital-light expansion of our omnichannel model will continue. We continue to gain confidence in our existing DFD channels and are now excited in growing our fresh business to new channels such as QSR, Club, and Drug. That's why we have high conviction in our ability to grow to more than 75,000 points of access globally, an increase from our prior target of 50,000. In addition to expanding DFD, we will also continue our work to align our specialty donors across all channels and expanding our e-commerce capabilities in 2023. And we'll continue to accelerate the growth of Insomnia Cookies. Krispy Kreme has great momentum right now as we enter 2023, and we remain confident in our long-term 2026 expectations we highlighted just a couple months ago at our Investor Day in December. Before turning the call over to Joss, I'd like to welcome Jeremiah Shukian as our new global CFO. who started last month. Jeremiah not only brings with him more than 20 years of financial leadership, including 12 years as CFO, but also global and significant brand and CPG experience, all skills critical to our successful going forward. His appointment allows Josh to fully embrace his role as global president and COO, driving performance in our larger equity markets around the world and operating excellence throughout the company.