Krispy Kreme Inc. Q1 2023 Earnings Call

Speaker 2: press the star 1 on your telephone keypad. If you would like to withdraw your question again, press the star 1. I will now turn the conference over to Rob Belew, Vice President of Investment Relations.

Speaker 3: Good morning everyone and welcome to Krispy Kreme's first quarter 2023 earnings call. Thank you for joining us today. Our earnings release and accompanying earnings presentation deck are available on the investor relations portion of our website at investors.krispykreme.com.

Speaker 3: Joining me on the call this morning is Mike Tattersfield, President and Chief Executive Officer, Josh Charlesworth, Global President and Chief Operating Officer, and Jeremiah Shukian, Chief Financial Officer. To prepare remarks there will be a question and answer session.

Speaker 3: 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 performance. Four looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results to differ.

Speaker 3: a public key update or revise any board looking to say that it's accepted maybe you're required by law.

Speaker 3: Additionally, today's call will continue certain non- GAAP financial measures.

Speaker 3: A reconciliation between non-GAF financial measures and their closest comparable GAAP measures can be found in the company's first quarter of earnings release this morning and available at investors.crispycreme.com. With that, I'll turn the call over to Mike.

Speaker 3: Good morning and thank you everyone for joining us today. We have pleased to share our first quarter results, marking another period of accelerated organic growth driven by our continued successful execution of our Omni Channel strategy and a robust performance of our premium offerings for celebration events and holidays.

Speaker 3: I want to start today's call by thanking our Krispy Kremers.

Speaker 3: Our team members.

Speaker 3: for another quarter where we once again achieve positive organic growth in every country we and our partners operate. Thank you. Without your efforts and dedication, this would not be possible.

Speaker 3: And that is important as it is the most important attribute our customers want in a sweet truth. We see this in the continued impressive growth of our delivered breast daily or defty business. Our ever increasing confidence in our ability to continue to grow breast points of access by 10 to 15% a year allowed us to make the decision to exit our start-up CPG business brand and sweet truth. And focus our efforts and capital where our customers want us to.

Speaker 3: Bringing a fresh and delicious Krispy Kreme donut to a convenient location.

Speaker 3: Our omni-channel strategy, where we provide convenient access to consumers through many channels is unique in the industry.

Speaker 3: And it's fueled by our passion for innovation and our understanding that access to our brand is our biggest opportunity.

Speaker 3: Through the efficiency of only 400 donut producing hubs worldwide, we know how to think differently and creatively delivering fresh donuts when and where consumers want them. Thinking differently is meant that we not only think like an experiential donut company, but also a donut logistics company, which makes our model very unique. That change in our model and culture enabled us to open and service more than 12,000 points of access daily, with a long-term goal of at least 75,000.

Speaker 3: by growing global points of access by 10 to 15% per year.

Speaker 3: While those points of access started as grocery and convenience stores,

Speaker 3: Today, they include mass merchandisers, restaurants, and drug stores.

Speaker 3: The uniqueness of our current model allows it to maximize an idea.

Speaker 3: That was once only available at the 400 producing donut hubs, taking it to every potential point of access in our system. Thinking like a donut logistics company with our DFT network truly unlocks the power of our brand and reach.

Speaker 3: and local giving across the globe as we donated book to school children, supported the elderly, and held more than 100 of acts of joy worldwide. We worked hard to share joy in a way that really connected people to Krispy Kreme. Turning to our results. The first quarter marked a great start to the year for our brand with organic revenue growth accelerating to 14.4% as we had highly successful seasonal global campaigns including the critically important Valentine's Day with great partnership to with Hershey's as well as a strong thank-you.

Speaker 3: These global campaigns serve as a playbook moving forward for significant events and holidays.

Speaker 3: As we'll be able to leverage marketing cost

Speaker 3: media coverage, and brain partners across many, or all of the countries Chris McCree and our brain charge partners operate, driving increased efficiencies on both the top and bottom line.

Speaker 3: Also, strengthening our Harmony channel capabilities in the first quarter with our e-commerce efforts.

Speaker 3: In the US, that included expanding availability or specialty donors and more targeted marketing efforts. Additionally, Insomnia continues to benefit from the expanded radius of warm-coody delivery of up to 10 miles.

Speaker 3: These efforts led to a 23% increase in e-commerce revenue in the first quarter compared to a year ago, and led to a 220 point basis increase in sales mix of e-commerce to 19.6% of retail sales for the company during the quarter. This was our strongest quarter ever in e-commerce.

Speaker 3: both in revenue and percent of retail sales.

Speaker 3: Even when you compare that to the height of a pandemic, and we continue to see significant opportunity to grow on this channel.

Speaker 3: We also continue to execute on our global expansion strategy with a strong increase in points of access in a market development and international segment, which led to stronger organic growth around the world, particularly in our equity-owned Japan and Canada markets and international website's markets.

Speaker 3: Since the end of the quarter, a new franchise, partner open for the first time in Chile.

Speaker 3: which Chile is one of the highest openings in the company's history.

Speaker 3: We expect to open in three additional countries during the second quarter, including Switzerland, Portalita and Jamaica.

Speaker 3: We continue to be on track to open in up to seven new countries this year and expect to sign three to five new development agreements for additional countries to open in 2024, including further locations in Western Europe and South America.

Speaker 3: Our pipeline of new hubs and fresh shops from our franchise partners is now well over 1000 shops over the next five years, which will be used to further unlock additional points of access in those markets.

Speaker 3: We've seen that a consultant is really working across the entire country, United States of America, and recent new-store openings are performing better than expected.

Speaker 3: To accelerate their growth, we are investing in capabilities and processes to rapidly expand the number of Moon Somnistore openings both in 2023 and longer term. And to launch internationally.

Speaker 3: as they remain on track to open in the UK and Canada later this year.

Speaker 3: We expect to open nearly double the number of cookie shops this year compared to last year with further growth to come in 2024 and 2025.

Speaker 3: As we look ahead, our focus remains relentless on driving the capital-wide expansion of our Omni Channel model.

Speaker 3: We continue to see momentum in our hub and spoke model as well as existing DSD channels and are now excited to grow our fresh business to new channels such as QSR, flood and drug stores.

Speaker 3: That's why we have such confidence in our ability to grow to more than 75,000 points of access globally from 12,400 today.

Speaker 3: In addition to expanding DFT, we will also continue our work to align our specialty donuts across all channels and expand our e-commerce capabilities. Chris Becreme has great momentum right now, and we remain confident, excited about the long-term 2026 expectations.

Speaker 3: We highlighted our embed through day last year.

Speaker 3: including growing revenue, the 2.15 billion, and adjusted EBITDA to turn in 15 million.

Speaker 3: My excitement about the growth of this incredible brand is stronger than ever. My belief is that brands with a purpose and clear direction will thrive in even challenging economic times.

Speaker 3: We've seen this in the resilience of the Krispy Kreme brand and culture. We have worked diligently over the past six years to transform our business model and in operation to give more customers exactly what they want, what they want it.

Speaker 3: an awesome fresh crispy green doughnut. We have incredible momentum as we continue our journey to become the most love sweet treat brand in the world. With that, I hand the call over to Josh to give an update on the business and our PSC Heavens. Josh, thanks Mike.

Speaker 4: In the last few months we've made great progress around the world with the fresh daily hub and spoke operating model that we discussed back at our investor day last December .

Speaker 4: This is especially the case in the US where strong growth across all our sales channels help us to deliver 16% organic growth and EBITDA margin above 15% when excluding the early end overlaps of some Straßen Spicy

Speaker 4: The operating leverage of the model is particularly effective when we generate revenue off premises by e-commerce or the local points of access such as grocery stores.

Speaker 4: Both of the well-established customers like Walmart and Publix, but also with emerging newer customers like Target and Albertans. We now have over 6,000 DFD doors across the US, with average weekly sales up 35% from two years ago to nearly 650 dollars. We're also adding a large at DFD display cabinets, which add up to 70% sales to a door. 63 of these premium cabinets, when they're to grow three stores in the first quarter, including crocuses, bounce division and a test with Target is more expected in the coming months.

Speaker 4: Its off-premises sales growth is benefiting our 137 production hubs and several key U.S. cities including New York, Dallas, Houston, DC, Metro and L.A., which also year-over-year margin growth in the first quarter.

Speaker 4: are previously announced US Shot Network Optimization Program, which focuses on poorer performing Cubs without folks, which do not benefit from the DSP expansion. It is also well underway.

Speaker 4: 29 shops have now already closed, all being converted into different shop formats. And as a result, pubs without spokes have seen a 180-basis point margin improvement year over year.

Speaker 4: We expect another 5 to 10 more shops to go through this process through the end of 2023.

Speaker 4: We're also making improvements to the donut shop experience itself, including the addition of new equipment in our drive-throughs, which represent around 60% of retail sales in the US.

Speaker 4: As well as the introduction of digital kiosk in our lobbies and select locations across the US.

Speaker 4: These kiosks have already proven popular with our customers, especially at the flagship shop in Times Square New York.

Speaker 4: The French Daily Hub and spoke operating model is also showing early success in some newer international markets, including company owned Canada and Japan, which both saw organic growth above 35% in the first quarter.

Speaker 4: as well as in international franchise markets which group Eden faster.

Speaker 5: In Japan specifically, in that position we completed at the end of 2020, we have brought back the hotline experience to our donut shops.

Speaker 6: Strengthily commerce and added of 160DFD doors.

Speaker 7: This Omni Channel-led Grog is expected to deliver $60 million in revenue for Japan in 2023 at a more than 15th Senate just a EBITDA margin, this compares to a loss at the time of the the original acquisition.

Speaker 8: As Mike explained, a long-term global points of anxious goal of 75,000 include the opportunity to take a deity to new partners in new sales channels.

Speaker 9: We now have DFD listings in drug through Walbrings in the US, in club through Costco and the UK Canada and Australia, and in QSR through an expanded test at over 160 McDonald's restaurants in Kentucky, which kicked off at the end of March.

Speaker 10: We're closely monitoring all of these new channels for quality, product freshness, service, and of course performance.

Speaker 11: We are happy with our team's ability to service these additional restaurant locations.

Speaker 12: from three of our existing local production hubs. And we have not seen any adverse impact on existing sales at our donut shops or other DFT doors in Kentucky.

Speaker 13: I'll now happily turn the call over to Jeremiah to give us more detail on our financials, including an update on our balance sheet and our 2023 financial outlook.

Speaker 14: Thanks Josh and good morning everyone. We had a great first quarter. The fresh on the channel model is working and we are building confidence and our ability to drive both top and bottom line results.

Speaker 15: Sales for HUP in the US increased 9% to $4.6 million, led by both strong points of access growth and record average weekly sales per DSD door.

Speaker 16: New to our productivity is strong and e-commerce revenue saw its highest quarter ever, even higher than the height of the pandemic.

Speaker 17: In addition to the benefits of the actions Josh outlined a few moments ago, we have also successfully taken pricing to offset significant inflation. Plus we believe the exit of branded sweet treats will allow us to focus even more on our US

Speaker 18: As I did US, we're seeing similarly strong performances in Japan, Canada, and our international franchise segment, and continue to make great progress on our global expansion plans.

Speaker 19: Turning to the financials, as Mike said, we saw strong growth across all our reporting segments in the first quarter, net revenue up 12.5 percent year-over-year to $419 million. Net revenue, which excludes the impact of acquisitions and changes in foreign currency.

Speaker 20: Through 14.4% in acceleration from last year, driven by pricing, our premium seasonal innovation, the growth of our delivered fresh daily donuts, solar and grocery and convenience stores, and any commerce.

Speaker 21: We took further pricing in the first quarter in several P markets including the US and the UK bring your effective global pricing to a low double digit increase.

Speaker 22: And we continue to see lower levels of elasticity thanks to the infrequency of purchases, strong specialty campaigns, and the fact that it remains affordable in dollar-gents for all income. The justity but occurs 12.3% in the first quarter to $55 million dollars are an increase with 16% in cost and currency once the $2 million impact of the stronger dollars considered.

Speaker 23: Critering, hub and spoke efficiencies, the improvements in our U.S. network and labor optimization offset elevated commodity and labor cost inflation, and a negative shift to maintain adjusted ubiquitous margin levels at 13.1 percent in the first quarter compared to a year ago.

Speaker 24: Gap net income of $1.6 million in the first quarter was negatively impacted by a $13.4 million largely non-cash expense related to the exit of branded suite treats, partially offset by a $9.7 million gain on the sale lease back. The net income for the quarter increased 15.5%.

Speaker 25: that $15.3 million and adjusted diluted EPS in the first quarter with 9 cents and increase of 13% or 25% in constant currency.

Speaker 26: The US Business Segment Total Revenue increased 14% in the first quarter to $211 million. Organic Revenue Growth was also up 14%, despite decreased revenue from brand-of-sweetillion-time $0,000 million and education decreased--" W??ro

Speaker 27: Growth was driven by sales for hubs increases to $4.6 million from $4.3 million a year ago, and double digits same-store sales growth by Insomniac cookies. E-commerce and DFT revenue were strong in the first quarter with record revenue for both channels in the US. Adjust the DBS EBITDA for the US segment in the first quarter increased 19% to $39 million.

Speaker 28: in TFD off-premise sale and approved performance in hubs that I look for. These factors more than offset double digit and greeting cost inflation and elevated labor cost growth.

Speaker 29: International Organic Revenue Growth was 7.3% of total revenues of $90.3 million. Well, adjust the bidder for the quarter to climb to $13.6 million. Organic Growth was offset by continued softness and DFC in the UK as well as increased cost of goods sold in richest across the Australian UK. However, we are seeing continued strengthening in the retail environment in the UK and we are making

Speaker 30: up our franchise businesses around the world and equity-owned Japanese and Canadian markets. Our organic growth accelerated to 36%.

Speaker 31: Total revenues of the first order increased 27% to $47.3 million, even with a 9% impact from foreign exchange headwinds and franchise acquisitions.

Speaker 32: adjusted even a margin that increased 250 basis points to 35.9% in the first quarter compared to the prior year.

And what have been higher, if not for a mixed shift, do the very strong organic revenue growth in equity on Japan and Canada.

The growth in Japan led to adjusted even a margin of over 20% up nearly 800 basis points from a year ago.

During the first quarter, we completed a well-over-subscribed Black refinancing of our TermLone A and Revolver Facilities, extending our maturities at the same terms through March 20, 28.

Last quarter, I mentioned we would begin efforts to reduce our reliance on vendor financing programs to reduce what has become a more expensive financing vehicle and an increase in pack to adjust the EBITDA as these costs do not hit net interest expense. We made progress on that reduction in the first quarter, reducing those levels by over $45 million.

We expect this to be a long-term tailwind to our adjusted EBITDA and that income and we remain on track to be between two times and two point five times mental purchase in 126.

We are also reaffirming our 2020 regattance.

This includes growth of 9 to 11% in organic revenue and 8 to 10% in net revenue, $205 to $250 million in adjusted EBITDA in between 31 cents to 34 cents of adjusted EPS.

We continue to expect capital expenditures of 105 to $115 million, a roughly 6.6% of revenue, including opening at least 30 to 40 new and family of cookie shops.

and roughly 10 company built hubs in 23.

Our 20-23 guys continue to include modest headwinds from foreign exchange rates for the year, which has roughly negative 1% impact on revenue growth and approximately $3 million hit to adjust the diva. While the impact for the full year is negative, in the second half of 2023, we'll start to see the benefits year-over-year from foreign exchange at current US dollar rates, particularly in the fourth quarter, as the dollar peaked in early December .

new to have a high degree of confidence that we can meet or even exceed our long-term outlook in 2026, and we provided an interim vestor-day operator. We can open up the call to Q&A now, please.

We will now begin the question and answer session. If you have a question, please press star 1 on your telephone keypad. One moment for your first question.

Your first question comes from the line of John Ivan Co. of JP Morgan.

Please go ahead. Hi, thank you. Mike, I like the quote of thinking like a donut logistics company and obviously there's a lot of implications in that. So I guess a couple things. You know, talk about your intelligence or skill, your capabilities, probably best word. You know, really evaluating.

profitability per DFD account. I mean, is that something particularly in the US, you know, that you're specifically honing in on and, you know, and maybe a related kind of comment to that, you know, McDonald's is on a demand planning model, which means they order and actually own the product once it goes in the back door. I don't think that's the case in other.

Hey John , how you doing? I'm good morning. I'll start with McDonald's piece today. I think as you think about the demand planning piece, I'm not that they do. I'm a pretty interesting, it's actually something we do in other markets, right? So it's not the first time we've done this, but it's sometimes consumer centric that really works for them. I'm a unique, this could even be the drop.

that we're doing today where we still do our own route system and actually drop.

to each McDonald's individually, or you can do a center drop where another logistic team can then do the drop as well. So that opportunity from where they own the demand planning is something that we look for in customers. And we continue to see that as viable options anytime we look at different channels to see if that opportunity exists.

Josh Elpacinon in terms of you were trying to get into the sophistication of how we're thinking about a logistics company.

and on in terms of you were trying to get into the sophistication of how we're thinking about a logistics company. Anything you'd like to add on that?

Sure, hi John . I think that you mentioned the profitability for DFD account and profitability and DFD have obviously significantly improved over the last couple of years as we've gone and you're selling the same doughnuts as in our doughnut shop at the same source, but very close price point and that applies across all these channels including.

including the McDonald's opportunity, from there the profitability is impact by how quickly you can make the delivery get in and out of the store, whether it's pre-packed donuts or a high proportion of loose, and we're selling both in McDonald's example, and then yeah, the sophistication of adding more trucks and routes.

is why Mike, I think reference the logistics company in the earlier remarks, because just take, for example, with the McDonald's and Kentucky testing, adding trucks, adding significant production, doubling production and those existing hubs, completely sort of changes the context of us becoming.

much more of an operator behind the scenes as well as obviously upfront of the Donut counter. And that we're seeing with a lot of our DFD partners. Walmart continues to grow, adding new points of access with Target, adding both.

prepacked O-N-UTS and these cabinets, these bigger, more premium merchandise units, all introduces complexity for Oster Manage. But we're certainly stepping up to the game right now and seeing the profitability pretty consistent across all those different T-O-D customers. You know, there's not another example of a quick service chain that I can...

all 170 stores continue to want to have don't have seven days a week. I mean, it might it be a...

Friday, the Sunday kind of business, or what they want to have products available to customers whenever they order. Just give us a little bit to whatever state you're comfortable on this call. Give us a little bit more insight. 170 stores is something bigger than just a test. It's like a basically a market rollout. You know, of how that market experience is going if we can. Sure, well, as I mentioned earlier, we're pretty.

Please form an operating one of the you how it's going, you know, as I mentioned, you know, getting those production hubs to double their production overnight. Our Krispy Kreme has really sort of stepped up to the game. Roney six weeks in though. So it's too early to sort of share too many specific results around it. Very specifically about our experience.

with the Madonna's restaurant, something we're finding that the hours that we're able to operate are often during operating hours, opening hours during the day, actually even complementary to what we do with, for example, our other grocery customers which often need very early morning drops. The Madonna's restaurant is able to do it other times of the day, so that's working well. We're doing it.

So I think that we certainly see it as a fresh daily business. That's how we've built it. Providing those amazing donuts to folks off premise in all these more convenient locations. Because as you may have heard us say before, the number one reason why somebody might not buy Krispy Kreme is...

They didn't come across it. It's not convenient to them. And an opportunity like this obviously makes it a lot more convenient for them when they see it. Now, only I'd want to think John to keep in mind as well. It's a different need states when you're looking at the QSR, right? What are they using it for? What type of pack and all those things? So...

We will always do what we do in our routing system, right? Deliver fresh daily and then you adjust to what needs state click McDonald's or the any other QSR would look at. This is what I need for my customer base. Thank you. Your next question comes from the line of Bill Chappell of TRIS Securities. Please go ahead. Thanks. Good morning.

Good morning. A couple, I guess, quick ones. One, just on the sweet treats discontinuation line, there are many things you could have done with that. I mean, you could have licensed it and just kept the product in the store.

you could have sold the business right, stuff like that. It was the thought that it's really just a focus on fresh and you don't want the name to be attributed with kind of multi-day old type products, or was it too much competition? Just trying to understand as you go forward, what other opportunities you would look at to extend the brand versus.

versus keeping it just all fresh. So you know Bill, it's Mike again, with the amount of growth that we have not just in the US but in the international markets and even our market development including insomnia but for Krispy Kreme in particular, the fresh business is just absolutely...

growing significantly and how to make sure that we can look at where we want to allocate resources, where do we want to allocate capital, how do we want to make sure that we can continue to improve the DFD experience logistic. It was a pretty simple call for us in terms of this is where we should be. What we did learn again is that the brand

does translate in that category, but at this point in time, we're focusing our energy on fresh. Got it. And then the second...

I think you talked about a lot of different opportunities of kind of new door expansion, but why not think you said was a test that target? Can maybe just give us a little more. I understand the test. I'll find the thought process because I'd say a lot of targets don't offer donuts of any sort. I have a bakery in store. It's a different kind of customer mix.

different kind of look and feel from kind of a grocery or even a club. And so just trying to understand how that works and what's kind of the opportunity behind that. Thanks. Yeah, sure. In Dallas, we've been able a few months ago to list in a few targets around 20. Anyway.

with originally our pre-packaged range that we typically have seen in other big grocery players. But what's really interesting is your target has been great to talk to and they've been asking us about, you know, how we can present the brand in different ways and we talked to them a lot about our cabinet merchandising unit.

about expanding the pre-packed doughnuts to Chicago market as well so it's early days but what's really promising is that with us they're looking for ways to show why Krispy Kreme is a premium.

Different shade offering and it's obviously something that has real promise Thank you your next question comes from line of Andrew Wolf of CL King. Please go ahead

French aid offering and it's obviously something that has real promise. Thank you. Your next question comes from the line of Andrew Wolfe of CL King. Please go ahead. Good morning.

Just I kind of want to contrast or ask you to contrast the You know the sales and profit performance in the US versus the major international markets I'm trying to you know frame it in different ways, but it seems like you know the velocities are much different at same doors

I kind of want to contrast or ask you to contrast the sales and profit performance in the US versus the major international markets. I'm trying to frame it in different ways. It seems like the velocities are much different at same doors.

And obviously you referenced that the price, the cost increases are now accelerating in some of these international markets. Could you just unpack some of that? Either by contrasting or just talking about the international markets directly in terms of same store, like the UK being down, obviously, at least in units. And so sort of why it is in the quarter and why the outlook.

What's the outlook in the UK and maybe Australia as well? I'll kick off Andrew by talking a little bit about the international sales and the amount of the Jeremiah talk about profit I think. All the markets, all the international markets deliver growth in Japan and Canada as mentioned being the highest over 35% Australia you asked about.

low double digit performance from them, UK more mid single digits. I mean we're seeing as we look across the international markets, DFD points of access, a very big driver pricing obviously, a driver of growth, that we've got markets also adding around the world, new DFD doors, likely to describe and discuss in the US including with new channels.

Costco and Canter is one of the big drivers of that growth up there. Also listed at Costco in the UK during the quarter. I mean overall on the UK which we have talked a lot about with the backdrop of some of the economic challenges there. We are seeing retail business in double digit growth. We can see it's

is doing it. People are still excited to come out to a donut shop for Valentine's event or other celebrations. But if DFD, the supermarket shoppers seem to be a little more careful in the UK with their basket sides, so it's not growing as much in DFD. So there's a few ups and downs, but generally I would say it's good growth from performance. And in terms of, you know...

DFD DAW performance specifically, we're now seeing that it's still got a way to go, but the US is closing the ground with its growth in DFD DAW weekly sales to get up to some of those international levels, which is also exciting. Jeremiah, do you want to talk about profit a little more? Yeah, yeah, thanks for the question, Andrew, and I think, you know, where I'll start is, you know, you look at a macro level D.

International margins are slightly accretive to the US, but despite some of the challenges we're seeing today, they are still quite profitable, and over the medium to longer term, we do expect to generate 20-plus margins in our international equity markets. What I would say is they're going through a bit of a challenge at the moment. Since we're challenged the most from a margin perspective, the international teams are very focused around...

driving efficiencies and continue to be very agile on the pricing front. So the UK and Mexico have already taken mid to high single digit pricing in the first quarter with Australia planned to take price in the high single digit in Q2. The only thing I'll add is in Australia, in addition to inflation, we're experiencing some cost growing pains as it launches into DFD and Woolworths. And we're still fine tuning the demand and supply planning models there and seeing a higher level of waste that the team is working on fixing. So I'll leave it at that.

Again, overall, in the longer term, we continue to expect decent accretive margins in our international markets. Okay, so sort of a follow-up that's kind of my summary takeaway is that it sounds like the profitability being down in these markets as a total is more...

regarding rapid cost inflation versus price realization or catching up in price more so than DFD store productivity. um is that

The profit is at the right takeaway of how we think about profitability and as you're adding, you know, increasing pricing, you know, the, you know, the profitability will increase since the velocities seem to be not not really an issue.

I think that's fairly accurate. Andrew, and I would say, you know, the new ones on pricing is we were probably a bit behind international markets. And now we're catching up for that. So we do expect improvements in the back half. So.

Thank you. Again, if you would like to ask a question, press star then the number 1 on your telephone keypad. Your next question comes from the line of Sarah Sanatori of Bank of America. Please go ahead.

Thank you. Question on the DFT doors in the U.S. mentioned growth in sales per door. I guess a couple of clarifications. One is, are you seeing any difference as you add any kinds of doors? Is that a reflection on your mix of doors?

or that strictly just existing doors, the same sort of same door sales, if you will. And on that point, do you have any kind of insight you can give as you're testing with grocery stores, Target,

I know you mentioned that you're not seeing any cannibalization from the McDonald's test. That's obviously a question that comes up a lot. Anything you can share about differences in terms of the types of the end customer use cases and sort of just how you think about your density, sort of the number of doors per capita lobarney using the different sizes of

The trends on weekly sales for DFD are very positive, including on the existing doors. Some of that is just momentum, some of it is pricing. But also a big part is the specialty donuts, more premium price specialty donuts, doing really well.

and helping us deliver a record performance weeks when we have a Biscoff or a Valentine's or a St. Patrick's Day, a Spring Minis for Easter in the range. And what's really good is even on a day like a St. Patrick's Day or Valentine's Day, we're putting them on for a couple of weeks in the lead-up and we're seeing good sales performance throughout that.

that two weeks. So that is helping us a lot with with that performance on the existing doors. Interestingly the new doors we're finding they are at least as good. In fact many of the new doors are better sales performance right now. Partly we think that's because we're expanding with new customers, new channels.

And so, certainly, as we see it right now in the US, not only would not see cannibalization, but the infantalities is very, very clear. I called it out for McDonald's just because that was such a growth in just a couple of cities and we were curious ourselves.

and yet we haven't seen it impact there. So I don't think we know the full answer about where it is, but I mean do remember that 6,000 doors in the US is still a fraction of all the grocery convenience and actually other places where people are looking to purchase.

Arguably, if you add in, QSRs, cloud, drug, you know, you're getting a bunch of half a million locations where people we now realise could well be looking through the convenience, through the opportunity of having a special donut occasion that they will pick up our donuts. So, you know, cannibalisation, it's just not really on our mind. A more mature market like the UK where you have a lot more points of access.

We also have seen the data there is even if the donuts are in a Tesco right next to a subway station they don't see cannibalization. So it continues to be the case that shoppers go to these locations for different reasons. They're not going to the Target, the Walmart, McDonald's necessarily for a donut. They're going for something else and whilst they're there they go wow.

the demand is there in multiple locations. Yeah, the only other thing I'd add, Sarah, to your first question, start out with a difference. And we see one thing, when we get the full assortment cabinet in place, the customer really reacts. Sometimes we see up to 2x of the sales.

what's there in front of it. So then they get a broader range, they can see the donuts, they can choose to make your own. You get a broader representation of Krispy Kreme. That's a big deal. Great. Thank you very much. Thank you. Your next question comes from the line of Brian Harper of Morgan Stanley . Please go ahead. Yeah, thank you. Good morning, guys.

Maybe just first, could you dig into your comments on e-commerce a little bit? Certainly I'm sure insomnia has kind of helped there as that's grown quickly, but how about just for the Krispy Kreme brand specifically, has that been driven more by delivery recently, or have you done more to kind of promote online ordering, for example? Well, yeah, I mean definitely...

conversion rate from when a customer first goes on the site or the app to making a purchase. We have indeed continuously been looking to add to the delivery areas. We do have some dark shops that we've been adding to the system that's helped us with that. We've also worked a lot on very much more basic

things around, ensuring that when people pre-order, the donuts are always there. It sounds obvious, but on these big event days, people want to Valentine's donut, since Patrick's Day donut, we've really focused on Oni commerce because a lot of people are ordering well in advance. They want to be part of that celebratory occasion and guarantee their donuts. And we're finding that...

We have now in the US over 11 million loyalty members. We really see the opportunity to drive more e-commerce growth with them by relaunching the loyalty program. So yeah, it's been really great to see more than 20% growth in e-commerce.

in the US in the last quarter and we'll continue to focus on that along with the DFD. Okay, so thanks. And then you know in the past you'd provided comments just on labor cost inflation and also kind of input cost inflation and

and how much of that is contracted. Could you just update us on that if it's changed at all versus kind of your prior comments, and then if you have any more plans for pricing in the US in the near term?

Yeah, Brian , I can take that and thanks for the question. For key commodities like sugar, wheat, edible oils, we're essentially locked in with low double-digit inflation on average for the year. Higher increases obviously in the front half of the year, as I think I probably would have talked about in the last call, with a little softening inflation in the second half. We're also starting to look out into 2024 as well as we start to think about the future.

and have planned pricing as I mentioned for Australia in Q2, but also in Somnia. What I would say as well, the only other thing that will help with kind of price realization for our business is just this focus on premium specialty campaigns as we obviously have a nice pricing tier when we do those activities. Just to clarify one thing on the pricing, we've been taking pricing a little more on DFT, so the low double-digit, the general line reference was on.

was on DFD. We're taking low single-digit pricing on retail, we just did so again, but we're doing it more frequently as we look to make sure that when the customer sees our down-ups it's at a similar price point across all the channels, one of our strategic goals. Thank you, your next question comes from the line.

cream sales which might be about 2% of the sales of a McDonald's is that way off and if not I you know I wonder how McDonald's would view that given you know what they will be putting into this and in the incrementality of course of those sales any thoughts on all of that.

It's definitely too early for us to get into the performance measures, just six weeks in. My comments focused on the three production hubs that cover a big area across the whole of that Kentucky co-op and obviously those hubs, how we saw an opportunity within them. We actually have a hub without spokes also in the...

in Kentucky. So, you know, we saw the opportunity there to really ramp up production and support them in the way that's needed. Now, and we'll continue to partner with them on what's the right way of doing this, what are the right targets, what are the right measures. You know, they're the experts on the impact on what Donald's, I think we really focus on the things that really we can control, which is made.

about things that are important to them and we're focusing on the things that we can control.

If any sense of the next steps, you know, if this is successful, if they think

that this is a good partnership, you know, what would happen next and I guess maybe related to that about your fulfillment of this if it went national, you know, how many McDonald's within reach of Krispy Kreme hubs today as it stands? Thanks. Yeah, I mean we've no plans.

question about capacity. If you step back and just and we have been, not just an instrument, Donald's, but because of this DFD growth of all these customer types, we have been thinking about the future and what happens if you recall the investor day we said that we thought there was about 15,000 points of access opportunity in the US as part of that 75,000 number that Mike.

referenced and so we've been looking at about our ability to fulfill that. We have 6,000 points of access today give or take that we service. We think we can we can add about 50% to that with without adding to production around the system. Once you start getting beyond that you start to look indeed at our proximity to all our different DFD customers and their locations both in existing channels and new channels.

And so to go beyond that would require us to unlock new capacity and some target locations. And we're starting to look into how we can do that. Whether it's at our existing sites, because some of them can be adapted, or new ones. I mean for that 15,000 points of access though, do bear in mind that our production hubs can...

can support a lot of DFD doors, especially when they're designed with that in mind. Smaller lobbies, bigger loadout areas, places to put trucks, a lot of our US shops not set up for that. So, you know, future production hubs that we could invest in will be able to support a lot of doors. So when you start to do the math to get to that sort of 15,000...

DFD opportunity that we mentioned at the investor day for all those DFD customers there's still about 30 to 40 additional hubs we're talking about to get all the way there. So you know we're focused on with McDonald's just on the test delivering great doughnuts fresh every day that's what we know how to be an expert on. We're thinking more broadly around growth and fulfilling the 75,000 opportunity around the world with 15,000.

the US and we'll go from that. Most important is those awesome donuts. Thank you. Your next question comes online of John Tower of Citigroup. Please go ahead. Great thanks. Maybe just following up to that question. I don't believe the test with McDonald's is exclusive. So can you talk about your thinking around the US QSR market and would you wait until the end of the test you

or trial periods with the Donalds before potentially looking at other QSR operators and then thinking more broadly beyond the U.S. how should we think about the opportunity outside in some of these international markets where there are plenty of QSR brands that probably would be looking to add some sweet treats to their lineup. Yeah, so it's Mike again. So when we thought about partnering with McDonalds and you're going to a test, there's a lot of learnings that are going to happen.

partners out there, but we're going to focus on like Donald's as a partner right now. sides.

Got it. Switching gears a little bit, in terms of the business, I think Mike, you mentioned in the remarks earlier that about 40% of the business today comes from special events. So I'm curious, you know, that outside of these special events, Key Holiday windows, you know, Valentine's Day, St. Patrick's Day.

How are you getting consumers to, or what are you doing to try and drive kind of that non-special event window going forward? Is it just expanding points of access, or even just that the existing hubs today, what are you doing to try and lift existing sales per box? When we reference the 40% we...

reference it because the product, the dozens that are actually bought, 40% are gifted a lot of times. So that's the real big number from, and that gets into people's special occasions, right? Not just the Valentine's Day, not just the St. Patrick's Day. Those are great. They create a lot of energy, but just the ideation of premiumization of donuts, you know, where you've seen.

an English brand that they brought around the world to be places such as BISCOF. So you can see how that can, as you pre-memize the brand and people engage in it, the biggest opportunity still is about access. So getting the DFT and growing our business through the DFT and getting the customers is how they continue to be engaged with Krispy Kreme. When we can bring that total donut experience that you can see in a shop and bring it to actually the DFT door, that's when people really start also to connect with the brand because it's...

It's clearly an opportunity. On top of that, you can see the growth that's happening in e-commerce, where consumers are choosing where they want to be and when they want to get the doughnuts. That really matters. Thank you. There are no further questions at this time. We'll turn the call over to Mike Tattersfield, President and Chief Executive Officer, for closing remarks. Please go ahead.

So, appreciate everybody listening to our story this quarter and thank you for that and I really appreciate all the Krispy Kremers around the world that make this happen every single day. Thank you. See you next quarter. Ciao. This concludes today's conference call. You may now disconnect. Alright. Okay.