Q3 2022 Krispy Kreme Inc Earnings Call
[music].
Okay.
Hello, My name is Lisa and I will be your conference operator today.
At this time I would like to welcome everyone to the Krispy Kreme third quarter earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your registration press star one again.
In the interest of time, we ask that you. Please limit your questions to one and one follow up.
I would now like to turn the call over to Mr. Robin Lu head of Investor Relations. Please go ahead.
Thank you good morning, everyone and welcome to Krispy Kreme third quarter 2022 earnings call. Thank you for joining US. This morning, our third quarter earnings release and accompanying earnings presentation deck are available on the Investor Relations portion of our website at investors day, Krispy Kreme Dot com.
Joining me on the call. This morning is Mike <unk>, President and Chief Executive Officer, Josh Charles Worth Global President Chief operating and financial Officer, Joey Pruitt, Chief Accounting Officer after prepared remarks by Mike Josh There will be a question and answer session.
Before we begin I would like to remind you that this call contains forward looking statements made pursuant to the safe Harbor provision of the private Securities Litigation Reform Act of 995, including statements of expectations future events or future financial performance.
Forward looking statements involve a number of inherent risks and uncertainties and we caution investors that these risks could cause actual results to differ materially from those contained in the forward looking statements.
These factors and other risks and uncertainties are described in detail in the company's Form 10-K filed with the SEC on March 11th of this year.
We're looking statements made today speak only as of today. The company assumes no obligation to publicly update or revise any forward looking statements, except as may be required by law.
Additionally, today's call will include certain non-GAAP financial measures a reconciliation between non-GAAP financial measures and their closest GAAP measures can be found in the company's third quarter 2020 earnings press release, and our Form 10-Q, which will be furnished certainly to the SEC and available at investors that Chris would be green dot com with that I'll turn the call over to Mike.
Good morning, and thank you everyone for joining us today, we're pleased to share our third quarter 2022 results, which were bolstered by accelerating organic growth that was driven by our continued successful execution of our omnichannel strategy.
I want to start today's call by thanking our crispy creamers.
Our team members are driving another strong quarter of revenue growth.
We had positive organic growth in every country around the world Despite a tough macro environment.
Without your efforts and dedication this would not be possible.
Yes.
As you all know the purpose of our company is to touch and enhance the lives of others through the joy that is crispy creamy.
In the third quarter, we celebrated our 85th birthday with Sweet promotions around the globe launched Doggy doughnuts for our four legged friends and help support over a dozen charities around the globe.
<unk> from cleaning up the planet driving blood donations and supporting children and low income communities.
And we've raised more than $30 million to fundraising year to date.
Racing is an integral part to crispy creams purpose and that's been part of our DNA for many years as part of our efforts to get back and support local community initiatives.
We are proud to be a global company operating in over 30 countries and campaigns like these highlight the joy, we helped create and how we can really drive genuine consumer connections with our brand and impactful way.
Turning to our performance.
We made terrific progress on our long term strategy to drive our omni channel model in the third quarter.
Demonstrated by 17% increase in points of access from a year ago.
And this led to global organic revenue growth of roughly 12% over the prior year.
Total donuts sold during the quarter was up 6% globally from a year ago and more than 380 million Donuts.
A lot of donuts.
We saw strong performance in the U S in our hubs spokes and insomnia cookies as well as in Mexico, Australia, and New Zealand and market development.
Including a robust performance in equity on Japan.
In addition, our strong DFT performance much of the growth was also driven by robust E Commerce sales, which represented 18, 5% of retail sales.
Up 170 basis points from a year ago.
The growth was led by insomnia cookies and crispy cream in the U S, which saw E. Commerce mix grew a combined 370 basis points to 27% from a year ago.
E Commerce growth was driven by an expanded delivery radius through partnerships with third party Aggregators. The addition of dark shop and improved availability of our specialty donuts on our mobile app.
While much progress has been made we continue to see significant upside to our e-commerce platform in the coming years.
Our UK market continues to see a challenged consumer environment impacted by soaring energy costs and overall inflationary pressures.
Which led to significantly declines in REIT general retail supermarket traffic in the UK.
Additionally, the strength of the U S. Dollar continues to impact our result, including.
Including reducing our net revenue growth by market.
Sam and reducing our adjusted EBITDA in the quarter by approximately $3 1 million.
Despite strong global organic revenue growth adjusted EBITDA in the quarter declined modestly to $38 5 million.
Due to FX challenges in the UK operating environment.
In the U S. We ran higher promotional activity in the first two months of the quarter, but since September we've significantly reduced our promotional activity without any impact on revenue, which has led to significantly improved gross profit trends.
In the U S and Canada segment, our performance was driven by the strength of our hubs spokes highly.
Highlighting by another increase in sales per hubs and Doug double digit same store sales growth by insomnia cookies led by growth in E Commerce revenue.
Organic revenue grew 9% in the third quarter, while total revenue grew 12%.
Our DSD business continue to gain momentum with the addition of two large regional partners higher points of access and we continue to see strong interest from potential partners.
We also continue to strengthen our omnichannel execution with a successful premium pumpkin Spice LTE on August which was launched simultaneously through DFT retail e-commerce and branded sweet treats.
Since then we've also run our premium price Halloween <unk> across multiple channels and we will be using a similar approach during the Thanksgiving and winter holidays as well.
We continue to premium eyes and innovate.
With the recent successful launch of Frito Fridays to add to our hand cut cinnamon rolls Sundays.
Both of which are in our newer fourth tier premium price point, which can be more than 50% premium to our original glazed Donna.
These <unk>, an innovative products really drive Buzz and brand Love and addition of more profitable sales.
Adjusted EBITDA in the third quarter increased 10% in the U S and Canada with strong organic revenue growth and price increases offsetting higher promotional activity and margin loss in the hubs with us folks and.
In our international market all of our international countries, including those in market development had positive organic growth in the third quarter led by robust performances in Mexico, Australia and Japan.
Additionally, our UK business also had moderate modestly positive organic growth was the successful omnichannel chopper not LTE, despite cycling a tremendous quarter, a year ago and coping with the worst consumer sentiment there in decades.
One thing that gives us confidence with our Omnichannel model is our ability to succeed in challenging markets as we reach consumers wherever they are when you complement that with relevant product strong brand partners and maximizing our celebratory occasions like our recent minions Halloween donuts in most markets across the globe.
Really strong engagement with the brand.
Roughly half of our system wide sales and adjusted EBITDA are outside the U S.
Moving that Krispy Kreme is truly a loved global brand as you know our goal is to open at least three new countries per year going forward.
So far in 2022, we've signed development deals and seven international countries, including announcing Jamaica. This morning, as well as the recently announced joint venture in France for 2023.
Which together represent more than 5000 points of abaxis or nearly 50% of our existing points of access.
France alone has the potential for more than 2000 points of access and we expect to open 500, there in the first five years.
We will enter this market as a minority partner with a very strong operator in <unk>, which operates more than 200, Columbia cafes in France with the right to acquire a majority stake in future years. Additionally, Americana our franchise partner in the Middle East recently opened at <unk>.
And Jordan for the first time and achieved our highest weekly sales ever in the middle East.
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 certain strategic markets.
We expect to be able to announce further market entries over the coming quarters as we continue our journey to become the most loved sweet treat brand in the world.
While our Omnichannel strategy has grown significantly over the last few years lack of access to Krispy Kreme is still by far and away. The number one reason customers do not purchase our product.
Our DSD journey to this point has been led by points of access in grocery and convenience stores. However.
However, we see that spoke strategy evolving over time to more channels.
Recently, we announced an operational test pilot of nine locations in Louisville, Kentucky, and the surrounding area with mcdonalds to serve Krispy Kreme doughnuts.
Bringing together two iconic brands that are so much in common.
Obviously this is a small test partner with a global company, but we think this represents the type of opportunity that shows why we remain very confident in our long term goal of achieving more than 50000 points of access globally.
We believe our strong global partners could be a great fit to significantly grow our DSD business. We continue to look for new partners and channels across the globe as we build out our hub and spoke model to increase access to customers and we look forward to updating you on this journey wrapped.
Wrapping up I'm extremely proud of how the team has had and continues to manage evolve on pricing growing points abaxis with excellent cost discipline as we manage external challenges like inflation and geopolitical pressures.
Short term macro challenges will remain in some markets, but I am confident in our ability to thrive highlighted by the strong organic growth in the third quarter low levels of price elasticity and the continued ability to expand our omnichannel model and new and capital efficient ways.
As I mentioned last quarter, we are very excited to be hosting an investor day on December 15th here at our headquarters in Charlotte, North Carolina, which will also be webcast. It.
At that time, we will provide further detail on our strategic vision and long term growth goals.
We will have a number of exciting updates to share with you at this event and introduced our initial 2023 to 2026 outlook as well I'll now turn it over to John to walk you through our Q3 financials and our outlook for the balance of 2022.
Josh.
Thanks, Mike and good morning, everyone.
In the third quarter, our crispy creams once again showed that our beloved brand and a unique business model combined to deliver growth across all sales channels and across the world.
Sales revenue grew 10% to $378 million with organic growth, which excludes the impact of franchisee acquisitions and changes in foreign currency and even stronger 12%.
During the quarter, we added another 294 French points of access.
In the fall of capital line delivered fresh daily dose, taking us to over 11700 points of access globally.
An increase of nearly 1700 from a year ago.
Along with our successful brand activation and pricing initiatives. This has resulted in a more than 15% increase in 12 month sales per hub compared to the prior year in both our domestic and international business segments.
We see this as a strong indicator of client margins in the future due to the efficiency benefits of adding off premise sales to the hotline faces.
Adjusted EBITDA was $38 5 million for the third quarter down a little from a year ago. It would've been slightly up from $3 $1 million foreign exchange impact.
The benefit to EBITDA of five points of access and further price increases were also partially offset by two additional factors.
First.
High margin U K market was challenged by Germany weak retail traffic in all sectors, reflecting the cost of living crisis that.
Second price promotional activity in the U S remains high for the first two months of the quarter due to a well received <unk> the pump discounts, which run all the way through labor day.
The final period of the quarter, so price promotional activity in the U S returned to normal with no impact on sales.
This along with additional pricing on DSD in September under the final period of the quarter posted significantly higher margins than the prior yet.
In the third quarter GAAP net loss was $11 8 million or.
Negative eight diluted EPS, which includes the impact of 5 million impairment charges related to planned shop closures as part of our strategic review of our hubs without folks in the U S.
Adjusted net income for the quarter was $5 $9 million and adjusted diluted EPS in the third quarter was three.
In the U S and Canada business segment total revenue increased 12% in the third quarter to $253 million and organic growth was 9% and acceleration on our second quarter performance.
Growth was strongest again and deliver fresh daily partly due to a 9% increase in points of access, but we also saw strong growth.
Fiery comments and from insomnia cookies.
We added 206 points of access in the third quarter, taking our total to 6259 in the U S and Canada.
Last year, we do not expect <unk> growth in the fourth quarter in the U S with grocery store customers exiting minimal changes to their floor space during the holidays.
We expect points of access to resume our strong growth again in 2023.
Subsequent spoke to in the U S, which increased by two to 129 during the quarter averaged $4 $5 million sales per hub on a trailing 12 month basis in the third quarter.
Which is up 18% compared to a year ago due to the success of our Omnichannel model and pricing actions.
Our hub and spoke model is working and helped at more than 200 basis points of margin in the quarter, which along with higher pricing.
Significant commodity inflation and elevated labor costs.
In addition to increasing the number of hubs and spokes, we opened six new cookie shops in the third quarter, reaching 227 insomnia cookies shops in total at the end of September .
Last quarter finance the planned closure of approximately 10, Krispy Kreme shops. After a performance review of our shop network in particular, the 118 hubs without spokes, which I'll, let theaters, which do not benefit from off premise points of access expansion.
We closed eight shops during the third quarter. We also identified a further 12 shops, which will close in the coming months.
All of these shops are low revenue and have flat or negative EBITDA margins amongst our hubs without spokes, we could not be converted to produce for DFT.
We believe these 20 locations represent the overwhelming majority of potential closures.
During our review, we also identified additional hubs without spokes, which could either be converted to produce for DSD by closing the lobby area.
It will be converted all the way to spokes, taking in donuts from other production hubs.
Forward to sharing more details on this at our December Investor Day.
Adjusted EBITDA for the U S and Canada in the third quarter increased 10% $22 million.
With margins roughly flat at eight 7% and our seasonally lowest margin quarter of the year.
EBITDA margins did improve as the quarter progressed, reflecting a mid single digit price increase in DSD in September and significantly reduced promotional discounts after labor day.
We took further pricing action in mid October and retail and E Commerce, which brings the total year over year pricing increase to the low double digits.
Overall, we've seen low levels of activity from both the July and October retail price increases.
Price promotional activity to remain at more historical lower levels moving forward.
Now moving to our international segment net revenue grew five 4% in the third quarter to $92 million with.
With FX headwinds, creating attempts at drag during the quarter <unk>.
Organic revenue increased 15, 5% with excellent performances from the Mexico, Australia, and New Zealand, driven by strong premium product innovations and successful price increases.
In the UK and Ireland, we saw organic growth, but at a much lower rate with a continued challenging consumer environment.
International points of access expanded by 14 in the third quarter and by 548 year to date, the 22% 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 $10 million.
On a trailing 12 month basis up 16% from a year ago, even with the FX headwinds.
International adjusted EBITDA for the third quarter declined 15, 7% to $18 million as gains in Mexico, Australia, New Zealand with not enough to offset a decline in the U K.
The UK decline was driven by $1 $6 million of Forex from the weakened pound as well as cost increases in labor and commodities.
We recently took a double digit price increase in retail in the U K and continued to review pricing across our markets as we look to offset expected cost increases in 2023.
Now it's also a business segment market development, which is made up of our franchise businesses around the world and the equity on Japan market.
Total revenues in the third quarter increased 11% to $33 million, even with a 15% impact from FX headwinds and franchise acquisitions.
Organic growth in the quarter was a very strong 26% with great performances in particular in our international franchise markets and in Japan, both of which saw organic growth in excess of 25% for the second quarter in a row.
Adjusted EBITDA in the third quarter for market development increased 15% to $10 4 million.
Despite a negative <unk> 7 million.
From FX headwinds.
Adjusted EBITDA margins increased 100 basis points to 31, 4% in the third quarter compared to the prior year.
Turning to guidance. This morning, we reiterated our 2022 full year guidance, which included 10% to 12% organic revenue growth, 199% to $195 million and adjusted EBITDA and 29% to 32, adjusted EPS with capital expenditures of 105.
<unk> to $110 million.
We guided to $10 million to $12 million in FX headwinds for 2022, but given the continued strengthening of the dollar we expect to come in closer to the $12 million.
We have great top line momentum with a strong performance of Halloween and record results in DSD, which lead us to expect to come in near the top end of our revenue range.
In quarter, four we expect to benefit from our recent pricing actions and reduced discounting through the holiday season, but the FX headwinds and uncertainty in the UK consumer environment leads us to believe that it's more likely will come in at the lower end of our EBITDA guidance.
Commodities are cost locked in for the balance of 2022, we've now also locked in more than 90% of our needs through Q3 2023 at high single digit inflation well below the more than 20% we have seen for 2022.
We remain very confident in our ability to deliver strong organic top and bottomline growth close to near and long term through Omnichannel innovation and marketing the expansion of our hub and spoke model and the growth of E Commerce.
In addition, we using pricing productivity initiatives and the optimization of our hubs without spokes to offset in place pricing pressures and grow margins.
Operator, we can now open the call up to Q&A. Please.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
We ask that you please limit your questions to one and one follow up.
Your first question comes from the line of John <unk> with Jpmorgan.
Hi, Thank you.
I asked some questions about the Mcdonald's partnership, but I'd like to talk about it more strategically if I can.
First.
So I mean, there's a few of us on this call not old enough to remember when Christy Kreme doughnuts for putting to Mcdonald's stores in London, Ontario, 20 years ago.
I don't know if there was a case study that was done on that I mean, what was done correctly, what wasn't done correctly at least from what I remember there just weren't enough donuts sold in a given day for that.
For that program to continue so I just wanted to kind of get some comments of what may have changed versus I think a fairly similar program put in 20 years ago versus today, but certainly educate me on that and then secondly, if I may just like many other broader idea of distributing krispy kreme products to areas where customers.
We're likely to buy one or two or three doughnuts versus the 612 18 24 Thats currently available in grocery stores again. This brand used to be distributed fairly widely in convenience stores. I mean, I think management that was a strategy that you didn't like in that you didn't think it was right for the brand and it really wasn't profitable.
From a DFT perspective, but I wanted to see if what we're seeing with this Mcdonald's test could be.
Development of a much broader single single serve type of DSD occasion, which obviously is very different than what you currently have in most grocery stores that I've seen thanks sure. So John This is Mike how you doing today I'll give you just two questions first about Mcdonald's.
Our long term strategy. We've always said is to get access to our customer base. In fact, we define very clearly long term that we believe there is 60000 points of access it's primarily going to be made up of at that point convenience and grocery stores. We also knew internally that would look.
Paul with other spokes, so when the opportunity came when you have an iconic world class, Brian Mcdonald's, We agreed to do a DST test.
The Louisville, Kentucky, it's an offset today and aligns with our DSD model, it's about fresh donuts to them.
Early days, we just started with us.
We will keep you up on the journey as we move along in terms of the Canada story it wasn't a DFT fresh.
Fresh business model.
They didn't have an integrated system of how to do with daily So anytime that they were trying to do donuts couldnt really figure out the demand pattern. So history gives you a land, but that's very different history in terms of merchandise mix. If you think about the opportunity. If you look at other channels or other partners they will have.
Three pack six pack 12 pack, even single pack, because I don't even exist today in our convenience shops, right, where you can walk in and you can buy singles and people make doughnuts selections do they want a.
They make it themselves thats about putting the cabinet in the locations. So thats the discipline of how we sell we were not really in the business of the single doughnut purchased for what do we do it for our customers and then they maximize their merchandize mix opportunity.
Fresh don't have access to where our customers are and using what we're building today in a DSD system to get there I hope I answered those questions for you.
You did but.
Again.
It's in me being in South, Florida, and seeing Publix and seeing the Donuts I think the smallest package six it might even be 12 at my local store.
Kind of getting back to where you have cases, where customers can buy a single serve donuts at convenience, yes. I mean, there are many convenience stores, where we're customer visitation is highly predictable.
If it makes sense to go into national convenience stores. For example, I mean does the DFT model support relatively relatively small drops versus grocery where presumably youre selling more per store per day I just wanted to get a sense of how flexible that model is.
In terms of.
Delivered fresh daily two accounts that might not sell that many doughnuts in any given day I mean, how much flex there is right.
Alright, so so think through about our route and the flexibility of adding an additional door on an existing route you can get into how the convenience store model works, so that becomes an opportunity for you.
So the grocery stores will continue to evolve from a $12 six to even single serves as well as you've seen Tesco and that ability to want to see what the customer is looking for you actually Matt maximizing merchandising mix by having the cabinet there. So the choice option becomes there it's the same drop than going through a re.
<unk> system and looking at convenience customers you want to pick a few customer brands that matter and then build that same logistics different size different customers, but it's not about growing everywhere. We've said before that we're going to be really disciplined about how we build the route.
Thanks for the patient sits in interesting evolution. Thanks.
Okay.
Next question comes from the line of Sara Senatore with Bank of America.
Hi, This is Jessica fye on for Karen.
Alright. Thanks, so much for taking the question. This is just another one related to the MTB partnership I guess just more generally can you talk about your hard Ben how we could think about how many additional DSD toys you could support in the U S on the existing capacity and how many more you would need to for example, a turbine olive.
The Walmart doors or anything like that.
Butter rollout with Mcdonald.
Hi, Jessica this is Josh.
Yes.
We do have clearly excess capacity across the U S to build out the DSD dual network, whether it's Walmart.
Or others.
We know that the sales hub.
Just four and a half million dollars in the U S compares to.
More than $10 million internationally to give you a good.
<unk> does that track capacity now some of the hubs and not all in optimum locations are all structured and laid out to maximize the opportunity.
Match, the international level, where there is significant room to grow.
Annual guide whether.
A 10% increase.
More DSD dual growth can be supported largely in the U S by our existing hub network.
Currently have plans for five to 10 hubs.
Added in the U S.
And that will be more than enough to support to support that growth going forward. Although indeed as you see in the U S. The growth is strong so we need to continuously look for ways to optimize and improve the operations of our existing hubs and even convert more hubs or announce folks to be able to.
Service the DSD growth.
Given the level of the demand we're seeing in <unk>.
Yeah.
Great. Thank you.
Okay.
Next question comes from the line of John Glass with Morgan Stanley .
Good morning.
Mike just going back to your comments on the reduced promotional activity in the U S and you're not really seeing a diminishing of demand are you rethinking. How you think about promotions price pointed promotions may be in favor of focusing on <unk>.
It's about timing and you just arent going to promote as much just given the holidays, but you might still go back to traditional promotional activity next year.
Yes, Hi, John .
Well Q4, as you will know our big celebration.
The biggest quarter of the year.
So obviously, it's natural that we would be promoting on price.
At this time of year.
More focused on our specialty donuts premium price points and don't necessarily need.
During the holiday season to have the same kind of a price promotion.
So there's certainly an element of timing of that we certainly found the pump promotion really gained a lot of neurons notoriety in the spring.
It was not as successful as it has led through the summer.
It's clear that.
That mechanism isn't as applicable in the fourth quarter. So no major change we want to be able to make sure that we provide value to our consumer but also provide those premiums celebration offerings to them. So recognizing the changing consumer dynamics as we just did a great promotion for veterans day.
One for the election. So we will still continue to do these acts of joy as appropriate.
But this is the this is a big quarter.
For us Halloween the holidays. When there is a lot of a lot of demand and we want to make sure we.
Falling straight to the bottom line on that.
Thanks for that and just as a quick follow up can you just talk about the point of access growth in the international markets there wasn't much on that.
Sure if that had to do with the timing today to your point about the U S retailers don't want a reset in the fourth quarter, maybe thats earlier in the international markets, where there are a number of exits in the UK as a result of through what's happening in the points of access growth.
International, particularly on the DSP.
Thanks.
You may have seen back in the second quarter very very strong growth internationally.
So it's more of a more timing piece.
In the third quarter, we didn't see any any sort of exits or anything like that it's more of the teams are just.
Great gains during during the second quarter.
Okay.
And therefore your view on the fourth quarter that normalize or is that still pull forward from the second quarter. So you don't see as much.
Well, we certainly don't expect a big fourth quarter on points of access growth as is typical around the world.
Those grocers not wanting a lot of change on the floor.
What about the holiday activity. The first quarter next year is when we would expect to go.
Back to that strong expansion growth.
We are continuing to see looking to add but really January as a great opportunity to reset the store in and add new merchandise not just additional points are anxious to continue to improve.
<unk> that we've got or the outlet.
Thank you.
Our next question comes from the line of Andrew Wolf with CL King.
Yeah.
Thanks, Good morning.
Couple of questions on.
The United Kingdom.
On price.
If I got this right you already had about a 5% increase over the summer.
I think you just mentioned a double digit increase so.
If your prices up to the mid to high teens, what does that tell us about commodity inflation I assume its running higher there than it is in other parts of the world and secondly.
Have you had any.
View on the Elasticities, So farm and Thats, a big price hike, particularly in the economy. As you said is next.
Experiencing something of a consumer crisis.
Okay.
Maybe I'll start and we're starting out the first one so on the inflation, we have seen slightly higher inflation in the UK versus the rest of the world and commodity inflation on average this year has been about 2020% between 20% to 22% globally, a little bit higher in the U K.
Not just on commodities, we're also seeing.
Fuel logistics costs, a little bit higher in the U K.
Wage inflation overall about the same as elsewhere, but a little bit higher on drivers. So thats all reflecting of course.
The tough economic conditions there.
John talked about the frame as you're.
Thinking about the pricing to the consumer in general.
We've seen as the consumer and by channel and we get into the right product mix. So we just lost a chopper.
Not a ton.
That did exceptionally well so the consumers will continue to look at that part of the promotional activity that goes through the marketplace. The omnichannel approach to the business also lets us continue to move to where the customer wants to access so they shift around from retail they shipped around the delivery or they become price sensitive to one they have access.
To the channels, so even with that our business is still really solid in the U K and we're pretty comfortable about how we will continue to be able to grow.
Okay.
Yeah.
Great got it and I wanted to also ask about guidance, which you maintained despite.
What's going on in the UK.
And you mentioned you might lower it might be better for EBITDA because of the U K, but should we infer that.
Other regions and segments.
Are kind of outperforming your internal expectations.
Or were you looking for the UK to be about what it is.
Looking forward, we expect the U S. In particular to lead the way in the fourth quarter, Although we actually do see strong performance from many countries around the world.
Within the U K and the U S. Sorry, obviously had a great.
The lean is a big quarter anyway, and we expect to drive volumes.
Particularly with those specialty donuts at the highest price points and flow through as we discussed earlier the discounts.
<unk> lower and on DSD related to pricing right at the end of the third quarter in the U S and so we benefit.
Full quarter on that.
Also earlier in the call I mentioned the.
The continued momentum we have on hubs with folks and flow through and also the optimization program on the hubs without spoke so a number of things happening in the U S that give confidence to both the top and bottom line and then the rest of the world. We're still seeing strong momentum in the hub and spoke Omnichannel model working we just.
Need to be conscious of that FX headwind.
And thoughtful around how we manage the U K through these challenging economic conditions, but overall.
The U S being strong.
<unk> has created that we'll be able to deliver on our guidance.
One thing that should give you a little bit of a support on that as well as all of our countries actually growing top line every single one even the U K right. So it shows you how the consumer and how we can adjust in these environments.
How the Omnichannel model can actually really benefit US right. It's not just one retail access point right. It's a multichannel approach to how to do it. So that's where it's Josh just said, it's going to be led.
This time by the U S, but a lot of the countries will come to anything we saw organic revenue growth in the U K.
Okay.
Got it excuse me thank you.
Thanks, Andrew.
Our next question comes from the line of Brian Mullan with Deutsche Bank.
Thank you just a question on point of access expansion, specifically on the France News I think you mentioned the minority stake, but could you just confirm is that going to sit in your international segment or in your market development segment, and then related if you could just comment how you expect the different types of <unk>.
With access to evolve in that market between the need to build out the hubs and then how quickly you can layer on the spokes just any color on the next steps for that launch would be great.
Yes.
Did do a minority JV in France, it will be in the market development segments.
We will look at it we see a 2000 points of access opportunity that you start with the hub.
And pretty soon after we start building out the spokes that is the strategy. That's what's completely changed about Krispy kreme, it's not about building all the donut shops, and then adding that capacity, it's leveraging the existing hubs. There. So I will start with our one or two hubs in France, and then start building the spoke network appropriately and Youll see that.
Happening starting in 2023, and we expect to potentially open our first hub in France.
Okay. Thanks, and then just follow up just wondering if you could update us on the sweet treats business in the U S. Canada I guess, maybe number one how are you currently thinking about the pace of.
Renewable revenue growth over say the next three to five years and then number two.
Just any way to help us think about the segment EBITDA dollar or margin tailwind that could represent in 2023, just want to confirm you would expect profitability next year and a full year basis that would be a tailwind.
Yes.
Sure the fronted sweet treats.
<unk> saw startup.
In a longer shelf life Sweet treats category continues to mature.
<unk> achieved.
<unk> delivered another quarter of profitability in the third quarter, which we're pleased to see.
That was partly the result of pricing taken earlier in the year and we're continuously optimizing our manufacturing network.
And seeing gains there as well.
We remain confident.
In the long term attention of potential of branded sweet treats.
You asked about 2023.
Broaden that mistras.
Distribution.
But.
To be Frank I think that the delivered fresh daily business.
And spoke model will be the biggest contributor.
Of.
Bottom line performance.
In the coming quarters.
We're happy with long term sensitive Brian Sweet treats but it is still in its startup phase.
Your next question comes from the line of Bill Chappell with tour Securities.
Thanks, Good morning.
Hey, just wanted to better understanding and I know we've discussed this before but just overall pricing that.
In the numbers now I know, it's certainly benefited but I don't know if im looking at the wrong way or like if you look at that.
Global points of access up 16% and then kind of sales per hub up 18%. It would imply if you've taken anything more than 2% price increase that the volumes are actually down year over year. So I'm just trying to understand I mean are we talking 510, 15% pricing and as you look into next year.
Is that a is that a hurdle you have to Uber overcome or do you expect some reacceleration or reacceleration continue even despite pricing comps.
And there's a lot of.
The metrics you mentioned that some of them.
Can't quite add up.
In that way, but maybe just to step back.
Volumes increasing.
Globally.
And in the U S. We're selling more donuts.
Than ever before.
The pricing that we've now taken gets us to low double digit if I stick with the U S for a moment.
In the beginning of the fourth quarter.
And so that's certainly helping drive our strong topline momentum to a point.
That combined with the biggest contributor to the points of access there is a ways whenever you take pricing and modest impacts.
In terms of elasticity, but certainly.
Relatively low and we were pleased with the pricing actions, we've taken one of the reasons the volume.
It is still high and the way you added those numbers.
Is a bit of a mix effect towards the growth agenda, the fresh daily we sell more dozens actually.
That way it skews the volume.
A little bit.
And when you look forward, we expect to continue to drive volume of our doughnuts across the channels and the deep the pricing.
And following a big part of it coming from from a points of access expansion and leveraging knows those hubs spokes in the U S. So those things all combined to.
Explain why the momentum we're seeing in the fourth quarter.
<unk> is what we expect in the long run.
Okay I.
I can follow up and then maybe looking specifically with pricing in the U K.
Are you at and trying to understand the elasticity.
Can you take or you need to take further pricing in the U K and I'm just trying to understand what the.
What's what's the impact of the <unk>.
You haven't been able to take the pricing.
Maybe it holds and thats the elasticity or consumers are.
Reacting to the price points and so it's having lower volumes just trying to understand how that's pretty specific economic pain.
For the for that.
The area I'm, just trying to understand how it's impacting your pricing volumes and outlook. Thanks.
So it's not a elasticity.
<unk> that's going on in the marketplace. Just you can think about when we just launched a new doughnut promotion, which is a premium amortization.
Very successful alright, what it is this channels and channels that where the business is and how the consumers reacting to those channels and in general right. So you've got a significant part of the business in the supermarket trade business and in that channel has shifted just from how consumers are interacting with it.
I see us being able to continue to price and get very thoughtful about how do you partner with those <unk> of the world.
And getting the interaction from our customer because the barrier becomes much more for them and our opportunity in the UK to continue to look at other omni channel partners that we could also continue to grow so the opportunity in the UK is still.
In front of Us and we continue to believe that.
Got it thanks for the color.
Sure.
Next question comes from the line of David Palmer with Evercore ISI.
Thanks, Good morning.
I'm curious about pricing net of commodities when.
When do you expect pricing to catch up to commodity inflation net of your any hedging you are doing.
And how does that differ between the U S and U K for example.
Okay.
So <unk>.
During the third quarter, you sort of take price for the first time in.
In 2022 on retail and earlier in the quarter on DSD later in the quarter in the U S. We also took pricing earlier in the quarter in the UK. Following the U K, we had taken another price increase but quite small at the beginning of the.
Definitely say that that was the beginning of a catch up.
We certainly didn't anticipate the level of food inflation in the U S. So the U K.
At the beginning of the as we saw.
We're pleased with the success of those pricing initiatives. We've then taken further pricing in October in both the UK and the U S. We do find that in this environment.
All of our price increases we can almost instantaneously increase the pricing on retail, but obviously, we need to work with our partners on DSD, So that does lag a little bit behind.
So I would say.
We are working now through the fourth quarter to catch up to the level you were describing.
So it's fair to say that we're very close to that now.
Inflation continues next year, but we have.
A good read on it.
With more than 90% of the commodity requirements that we have in our ingredients already covered which is obviously, we've gone a little further out than in past years in the context of environment and indeed some.
Some favorability on some of those commodities it leads us to be more like high single digits, we do see wage inflation remaining high we want to invest in our crispy creams, but it's slowing a little bit so with all that said, we think with that in terms of your original question about <unk>.
Having the pricing up to the quantities as we stand now here in the fourth quarter, but obviously still a little behind in the third little bit maybe into January .
We make sure the DSD, which kind of like behind as I mentioned earlier stage.
States stays close.
Thank you for that I wonder.
As we're thinking about 2003, I don't know if youre going to be comfortable talking about whether you expect to be at or above your long term algo in terms of EBITDA growth in 'twenty three at this point, but what are some other than its pricing net of commodities. What are some big buckets, you would advise for us to be looking at you talked about non hub.
And clearly theres going to be impact from the trajectory of the U S versus UK in general but.
Maybe those are it but what are some things that you would have.
<unk> be thinking about thank you.
Well.
I will say it wasn't sure what to do what we do know about 2023, and it's clear that we can maintain our growth momentum.
On this.
Economic climate.
Across the World as Mike said, even in the UK, we delivered organic growth in the third quarter, but in the U S and elsewhere, we're seeing very strong topline momentum, it's volume and pricing working.
At the same time plus of course.
More than 10% increase year on the points of access so.
All that supported by.
Modest hub growth.
As a continuing trend that we see.
For many years to come in fact.
Now the next big thing to note on the bottom line is the margin flow through from our hubs spokes, we're seeing more and more cities now benefiting from.
From that model as we add these additional points of access largely to existing hubs and leverage the fixed costs.
And so we expect that benefit to continue the Hudson without spokes.
A portion of them.
Clearly.
In this environment being shown to be less successful and as you mentioned, we're looking to exit the 20 I mentioned earlier.
And they look to change some of the operating characteristics of further hubs and spokes. So a number of things that we can drive.
And the other one of course is that thing.
Isn't entirely within the control of the Krispy Kreme model is as some of the bullet consumer sentiment in the U K and FX trends, we'll manage those.
As best we can but whats great is our model, we're just as confident in it.
This environment as we were when we started on this journey and so our long term plans I've already similar to what we've been talking about before we cant wait to just give you more detail at the Investor day.
In December really want to share some of that points of access.
Expansion is particularly in these new markets question on France, you talk about how we see that playing out in the future years to more of a deep dive on the hub and spoke optimization in the U S. Some of those high level comments I'll make that I think there's a lot.
Rich insight there and then the other one that we haven't talked about on this call. It's all today, but one that's performing very well, particularly on the E. Commerce side is insomnia cookies were not just adding cookie shops, we're seeing very strong growth in the cookie ships. We have today. Thanks loss at HCA continues succession that digital e-commerce side of that business.
And we can't wait to share with you more about that as we look further ahead.
Thank you.
Next question comes from the line of Jared Garber with Goldman Sachs.
Okay.
Good morning. Thank you for thank you for taking the question.
Wanted to get a get a sense of the.
<unk> sort of exit rate on the margins from the third quarter or what youre seeing so far in the fourth quarter, you talked a little bit about the incremental.
Positive trends on the margin line.
Metairie around the top line and the EBITDA for the full year would imply a pretty meaningful step up in EBITDA margins in the fourth quarter. So just wanted to get a sense of maybe I mean that number it looks like it's close to 14%.
Wanted to get a sense of maybe what youre seeing in terms of incremental margins as you flow through the incremental price to date.
And then I have one follow up.
Yes.
And reiterating the guidance that doing the same math you are in terms of the back calculation.
And can see in the U S.
In <unk> nine and <unk> 10.
The pricing is working to reduce discounting is working and the volumes are strong.
Stickier, the specialty donuts, which a premium price point, so all those things combined through the hub and spoke model to deliver.
Confidence in the guidance that we've given the largely from.
What we're doing in the U S internationally, we're seeing good performance as well top and bottom line the market development.
Yeah.
Reporting segment.
Is doing well, even with the FX headwinds in Mexico, and Australia, and we're also seeing good performance from flow through it.
It's just the uncertainty in the UK, although as.
Mike highlights is still.
Growth business so.
Every expectation.
We will deliver on the guidance that we reiterated.
This morning for the bottom line, reflecting that kind of assumption that you made.
Great I guess just following up on that would you expect U S and Canada EBITDA margin to be above last year's rate I think last year was at 12, 8% if we have that correct.
I think this quarter came down a little bit.
Versus last year pretty close, but pretty down maybe 10 basis points I'm just curious maybe how we should be thinking about that.
Okay.
Well, yes.
As I mentioned I think this quarter, the third quarter reflected a lot to do with.
That discounting.
And indeed.
The third quarter is generally.
Although its margin quarter reflect in the in the U S, reflecting the summer months.
100, <unk> <unk> Holly.
Holiday excitement in the fourth quarter for Christy Creamer consumer.
Consumer Krispy Kreme consumer so.
We don't give guidance.
For the individual markets.
But it's clear that the U S will be leading.
The way based on their current performance on the bottom line in the fourth quarter.
Great. Thanks, and then just one more Josh if you don't mind leverage I know you reiterated the guide this morning, which I believe target leverage by the end of the year is $3 six it looks like as of the end of this quarter. You are running about four so just wanted to get a sense of how we should think about that leverage level to end the year, how you get to that three six.
Yes, I can take that this is Joey pruitt.
Hey, Joe.
Yeah, Hey, I was going to add.
Just a couple of things there first of all.
Certainly expect a strong Q4 performance, which you've already been talking about from an EBITDA standpoint that that will certainly be helpful for us.
As we look to reach our guidance range there, but we also have a couple of things that we can do from a cash standpoint working capital.
Is it going to be a little more favorable in the fourth quarter than it was the rest of the year through Q3 as well as some things like another sale leaseback that we can do some things like that that will help us to drive down our debt. In addition to just the higher EBITDA run rate.
Those are the main things.
Looking at loans.
This EBITDA improvement, particularly in the U S and we expect from the benefits of the hub and spoke model.
We also we made an acquisition.
Just a couple of months back of an accretive margin accretive business none of that EBIT.
Just under $20 million, we pay for that in the Midwest, None of our EBITDA as a company is just starting to come through now so that doesn't go into the leverage calculation you made sort of a general EBITDA improvement continues focus on working capital and then the benefits of that acquisition will be coming through.
The coming quarters bear in mind, I mean, let me why do we calculate leverage has all to do with our net debt position, while make sure. We're in a strong position if people ask about interest rates, we were unfortunate position.
Decided company is back to fix our interest rates and more than 75%.
Debt is at fixed rates from before.
<unk> increases all the way through to the middle of 2024.
We obviously look to reduce the leverage drive down.
Our leverage to increase EBITDA and managing our cash position, but it doesn't give us given the fact, the interest payments will increase significantly.
At least through two amendments faithful.
Great. Thank you.
At this time there are no further questions I would like to turn the call back over to Mike <unk> for closing remarks.
I appreciate everybody for listening to the call.
And the growth that we had in the third quarter as well as how we view the end of the year and I want to thank all the Christie Creamers for just doing incredible job for US every day and look forward to seeing everybody that would like to attend the investor day or through the webcast as well and you'll see a lot more detail on how the growth story and how we continue to evolve Krispy kreme. Thank you.
Much.
This concludes today's conference you may now disconnect.
[music].