Q2 2022 Krispy Kreme Inc Earnings Call

one 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 in VISTA Relations. Please go ahead, sir. All right, also glad to have Rob here.

Thank you.

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 investment 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 bare marks 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 four 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.

Four looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results that are different materially from those containing the need for looking statements.

These factors and other risks and uncertainties are described in detail in the company's 10K.

Board looking statements made today speak only as of today. The company assumes no obligation to publicly update or revise any board looking statements, except this may be required by law.

Additionally, today's call will contain certain non-GAAP financial measures. A 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.christincreen.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 strategy.

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 drives 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 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-imparent 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 we can leverage the economy of scales of our 413 production hubs to deliver suppressed donuts every day.

In fact, total doughnuts sold during the quarter was up 7% globally from a year ago.

We saw strong performance in the US in our hubs with spokes and insomnia cookies, as well as in Mexico, Australia, New Zealand and market development.

including a robust performance in equity-owned Japan.

Additionally, branded sweet treats achieve 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 US.

Growing 5% slower than our hub's width folks.

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 UK as they were re-emerging from COVID in the second quarter of 2021. And in the US from our vaccine promotion and investments in the consumer through brand building promotions.

It's worth pointing out, however, that this level of even thought is still nearly 50% up compared to pre-pandemic and 60% up from 2020.

Pricing accidents 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 US and UK and will continue to review pricing. We took pricing actions early in the third quarter in the US and will continue to review

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 US 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 on the second quarter declined modestly in the US 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 delays 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.

Insomnia 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 insomnia cookies by up to an additional 8 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 cruisers 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. Our international segment had another quarter of strong 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 for hub growth of 23% compared to a year ago on a trailing 12-month basis.

While US 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 when appropriate. Indeed, international, including countries in market development, had an outstanding organic growth across the board. Even the UK had positive organic growth, cycling a tremendous quarter a year ago and with the work...

consumer sentiment there in decades.

In fact, our market development segment performance accelerated in Q2 with organic growth of 90%

and adjusted EBITDA growing 6.5% despite significant FX headwinds.

and franchise acquisitions.

This was led by a robust performance in both our franchise business as well as our equity-owned Japan market, where we are implementing our omni-channel model with the expansion of e-commerce and the launch of DFD.

Krispy Kreme is truly a love global brand. Roughly half of our system wide sales and adjusted EBITDA are outside the US.

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 in 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 treat brand in the world.

Turning to a few other drivers of our growth, e-commerce remains a pillar of our omnichannel 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, 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 successful DFD campaigns for the first time in the US.

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 and 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. We also invested in our consumers in the second quarter with strong promotions and connections

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 promotion.

While our costs 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. Here's what we've spent the most at-risk for during this project miles away,

including our Hubs With Us folks.

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 US 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 with outspokes today.

Some of this optimization may include converting shop types and exiting under performers 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 investment.

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 watch the Q2 financials and our 2022 outlook. Josh. Yes, thank you, Lifeometrybase.

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 to $375 million. That's despite a near 3% negative impact to revenue growth from the stronger US 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 safety 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 and innovation initiatives, this has resulted in more than 20% increase in trading 12-month sales to 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 from sales to the hot light theatres.

So you've had to 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.

Inflation pressures continued in Q2 with pricing actions 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, while negative 2 secs diluted EPS.

compared to a gap net loss of $15 million or negative 13 cents by the DPS 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 for $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 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.

I was actually fat 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 to have in the US and Canada of $4.4 million on a trailing 12 month basis in the second quarter.

as compared to $4 million for 2021 and $3.6 million a year ago.

Hubs with spokes in the US and Canada increased by 2 to 127 as two hubs in California began adding spokes in the quarter.

Hubs without spokes in the US 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 omnichannel model.

Adjusted EBITDA for the US 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 with outspokes due to the benefit of additional off-premise sales through the increase in DFD revenues.

In the third quarter, we have 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 US 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. Hopefully a 98% service level.

A 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 breakeven on profitability for branded sweet treats for the first time in this court.

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 and the face of a very challenging consumer environment. The 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 years to date.

Its 29 cent 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 dollars on a training commitment 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 17.5% 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.

That's 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 on FX headwinds and franchise acquisitions.

In fact, organic growth in the quarter was a very strong 19.2%, with great performances in particular about international franchise markets 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 just a deeper to a larger improvement of over 400 basis points in the course compared to a year ago.

Just as EBITDA in the second quarter for market development increased 6.5%, $10.5 million.

Despite a negative $600,000 impact from head rings.

Ingestity with our margins were approximately flat in the course of 33.9%.

We are updating our 2022 outlook, mostly to reflect FX headwinds, but also the softer UK trading environment and their relative underperformance by US hubs without spokes.

We still believe we will generate 10-12% organic growth in 2022, but are reducing our net revenue expectation to a range of $1.49 to $1.52 billion.

Still means 8 to 10 percent net revenue growth for the year.

Inclusive of an estimated $10 to $12 million impact from FX due to the strengthened US dollar, we now see full year adjusted EBITDA at $189 to $195 million with adjusted EPS of 29 to 32 cents.

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 CAP expense to 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 6 times EBITDA multiple.

This will add 7 profitable shops to the network and the ability to add more than 100 low cost DFD doors in the market.

Eliminate them.

This will moderately increase our leverage while we cycle in this EVIC-DAR into the US which should help bring 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 for the third quarter, with 10% organic growth closer 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 heatwave in the UK.

G3 organic growth continues to also be high in Insomnia cookies, Australia, Mexico, Japan and 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, we have been able to improve our sales and our business. We have been able to improve our sales and our business. We have been able to improve our sales and our business.

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 in our long term growth algorithm of 9-11% annual organic revenue growth.

12-14% annual adjusted EBITDA growth, and 18-22% annual adjusted diluted net income growth despite the net ethics 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 1 1 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 . I'm for John . Maybe just the first question about the...

U.S. Hubs without spokes, what kind of defines the ones that you'll be closing? Is there a location issue or 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. We talked about the transformation in the US, which we really...

It 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.

That can't change over and do that. And that's really the inflationary time 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. orchestral from a

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 US 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...

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, points of access continue to grow, there is pricing. We look at pricing in a very different way, right? We can either be reactive or we can be creative.

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 US or even the UK 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 gravitoid. They're always gonna look at pricing and we're very strategic about it. And our customers will always tell us, is it worth it? Right, 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, thank you.

Clearly we haven't seen the impact from pricing that we've taken. Just to compliment, it's nice to see the US perform well already in the third quarter. Remember traditionally the third quarter is a week a quarter for us, but the pricing that Mike mentioned, our ice cream truck, doughnut, LTO, clearly doing well. The US is still challenged, obviously the UK is still challenged.

Obviously the economic environment there. They've got a heatwave there which certainly isn't ideal for selling donuts. But you know with the pricing, with the momentum we started July , the 10-12% organic growth for the full year and 7-10% 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 John Ivanko with HSB. I'm sorry, with JP Morgan, your line is now open. Hi, thank you. I wanted to talk about DFD in the US. If you can make some comments around kind of DFD sales per door, profit per door, you kind of how the system is evolving from a profitability perspective. And if you have some opportunities, the more experience you have, the more.

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. Take care and bye.

It 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 US 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 tape there and really rise sales. I'll pass it on to Josh, he'll get into a little bit more in the margin. Sure Mike, yeah. So in the US 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 hot light theaters, and the benefit of the operating leverage of adding those profitable sales to fixed costs at the Hot Light Theater Shore store. Typically around 40% margin throw through from adding those doors. And Q1 to Q3 in the US.

It's definitely a time where we're seeing customers keen to take on our deliver 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 a fresh donut, same quality daily in the grocery store that you get in the retail theater. 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...

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. People don't necessarily eat the same number of donuts on Monday morning as they might Saturday or Sunday morning, for example. That's normal. Are you applying that more granular type of approach to managing those accounts, or is it kind of your belief that...

It's important to have availability so consumers know that it's there and I guess the good days will more than offset some of the slower ones.

Yeah, 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. We're adding a driver.

renting 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 the sales per door per week as a guide, that that's something we really want to drive up, and we've still got some

themselves. 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 the sales per door per week as a guide that that's something we really want to drive up and we've still got some plenty of upside there compared to our international markets when you look at what we're doing in the US. 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.

It'd be very disappointing if they're not there. So we definitely want to always be available all times of the 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 in 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 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 when it's accessible.

So that's not just the journey with Josh describing, 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.

Thank you.

Our next question comes from the line of Carlos Oi 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?

what you're expanding into to get the pricing that you need but inflation. And what's your pricing experience in established markets versus new markets? So again, we always look at our brain 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 and 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 low frequency items.

Right, so you got to make sure when people want gifting in those aspects, that's when they engage with our brain. You brought up other countries and said the awareness of Krispy Kreme is...

worldwide, right? There's not a lot of opportunities for you to go in where you open up a Krispy Kreme that you're not aware. Recent openings, for example, that we had in Cairo, they're still at. We can't even manage the capacity that comes out of the shops. Our partner there really looking in, 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.

Hi Bill, can you hear me?

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, it seemed like the model was in place and things were moving pretty well. We're being implemented well and you felt very good about even maybe some upside to the numbers. And then we've had what seems to be weather and economic slowdown and maybe the model's been stress tested. You seem to be talking more about.

strategic tweaks to the model and changes. And so I can understand if 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 US, 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 US. From the UK model, the UK business is a fantastic business, because I think you're 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 moment of growth was in 2000, when on the first day, the top airport company Patriarch

The reason we can do 20% margins is because we have a great hub and 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 in regions. And so when you get the benefit of the hub and spoke to get to more access in a very capital efficient way, we're very bullish on exactly what we're doing.

And I think all that is, you know, we're a global omnichannel business.

The great thing about that, 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, there'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 to not just weather inflation but continue to strengthen compared to the hubs without spokes. It just gets you to really hone in on those 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. 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 US 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. It's a double digit high growth company 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? Or, you know, it is and you really haven't seen any change.

identified around the world as an immediate goal and we're just over 11,000 now. Just hitting 6,000 in the US 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 US 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 at this time, please press star 11.

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 US 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 for 6%, I think that supported, I think until this last quarter, you were running about 10% price in the US. 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 also kind of feeds into that organic growth number. So just want to understand sort of the driver of the deceleration in the US organic growth number and if you're seeing any you know sort of any pushback or softness or weakening in consumer demand trends as the consumer continues to be sort of pressured by the broader macro.

Well, the first thing to say is that stat I just referenced to Bill in terms of 9% volume growth in the US shows that fundamentally we're selling more donuts every quarter than the quarter before in the prior year because we're making it more available. And people, that's the number one reason given why consumers may not play the Krispy Kreme is 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 donuts and growth within the DFD cabinets themselves. We have for example July 4th is 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 dipped 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. We haven't had even faster dip on DFD because we haven't taken pricing there.

Pricing does play a role in the growth, but that volume is the biggest contributor, largely driven by DFT. Growth across e-comm and Sommier as well was pleasing to see in the US. You asked one question about the consumer, and I think one of the big learnings we had was that we can even go to a higher tier of pricing. What we did is we really learned how to grab our cinnamon roll product.

in the US, particularly doing that just on a one-day part, which is on Sunday, and then really getting to what we call our fourth tier pricing. And it actually unlocks a lot of big opportunity that eventually even one day might scale even into the full omnichannel model. If there's no resistance that we've seen from customers, we still try to be very affordable on this, but there's clearly an opportunity continue to...

put premium into our brand while we still try to maintain that base price per dozen and try to drive that across the world.

Thanks for that clarity.

Thanks, John .

Our next question comes from Jafar Mascari with BNP Parabas Xane. Your line is now open. Thank you,

Hi, good morning. I just had a couple of short questions just going back on some of the details of the update in full your guidance. And so if I take the midpoint of IPD-A and revenue, it looks like your 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 margin 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, uh it defines them correctly it is the impact of um 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, why don't we start with the FX detail. Joey, you can't sit 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. Okay, I'm going to leave you this

Sure, sure. Thanks, Jafar. 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 that's because 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. So just to add to your...

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 and pricing and inflation through the year and those hubs without spokes which have not responded as well as our hubs with spokes.

But definitely the way you should think about it is 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'll have Don 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 time of algorithm 9 to 11. It'll be a good year for growth for Krispy Kreme in 2022.

we're happy with the range obviously we've got different countries doing different things through the year but overall 10 to 12 percent organic growth ahead of our long-term algorithm 9 to 11 it'll be a good year for growth for Chris between and time to 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 him 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. Thank you for your participation.

and deliver upon that every day. Thank you all for joining. You now disconnect.