Q2 2025 Krispy Kreme Inc Earnings Call

Hello everyone, and thanks for standing by. My name is Carla and I will be your conference operator today.

At this time, I would like to welcome everyone to the Krispy Kreme second quarter 2025 earnings call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again.

I would now like to turn the call over to Christine McDavid, Krispy Kreme Associate General Counsel. Please go ahead.

Thank you. Good morning everyone. Welcome to Krispy Kremes second quarter, 2025 earnings call. Thank you for joining us today. This morning Krispy Kreme issued is earnings press release for the second quarter of fiscal 2025.

The press release and an accompanying presentation are available on our investor relations website at investors.c.the.

Joining me on the call this morning, our president and chief executive officer Josh Charlesworth

And Chief Financial Officer, Rafael Duvier.

After prepared remarks, there will be a question and answer session.

Before we begin, please note that during this call, we will be making forward-looking statements pursuant to the safe harbor, provisions of the private Securities. Litigation Reform, Act of 1995.

Including statements of expectations, future events, or future financial performance.

Forward-looking statements involve a number of risks assumptions and uncertainties.

And we caution investors that many factors could cause actual results to differ materially from those contained and any forward-looking statements.

These factors and other risks and uncertainties are described in details in the cautionary statements in the company's earnings press release in the company's annual report on form. 10K filed with the SEC and in other filings, the company makes with the FCC from time to time.

For a little statements. Represent the company's expectations, only as of today, and the company assumes. No obligation to publicly update, or revise, any forward-looking statements except as may be required by law.

During this call, we will reference certain non-gaap Financial measures. Please refer to our earnings press release. On our website, for additional information regarding those non-gaap measures, including a Reconciliation to the closest comparable gaap measures

Rafael will take us through the company's financial performance in a moment. But first, here's Josh.

Thank you, Christine and good morning everyone.

We are sharply focused on our 2, biggest opportunities profitable us expansion and capital like International franchise growth.

To achieve these goals, we have implemented a comprehensive turnaround plan to de-lever the balance sheet and deliver sustainable, profitable growth.

Through 1 Refrigeration.

To improving Returns on Capital.

3 exp, margins and 4 driving sustainable profitable us growth.

To deleverage the balance sheet. We have halted, the quarterly cash dividend and completed the sale of our remaining interest in Insomnia, Cookies.

And now we are in active discussions to restructure our well-established joint venture with W, KS Restaurant Group in the western U.S., reducing our ownership stake and deploying the proceeds to further pay down debt.

As you may recall, we have already initiated the process of refraining Select International markets, including Australia, New Zealand, Japan, Mexico, and UK Ireland.

To improve Returns on Capital, we are focused on our Capitol light International franchise model.

Whilst reducing Capital intensity in company owned markets.

We have seen exceptional returns growing Krispy Kremes Presents Across the world with franchise Partners in both well-established markets, like South Korea and the Middle East as well as newer markets like France and Brazil with minimal capital investment from the company.

We expect future International growth to come from franchisees through both new shop openings and fresh delivery door expansions.

Door expansion would be through existing sales channels, like Grocery and convenience as well as in new channels like Club wholesalers and quick service restaurant partners.

for example, our franchisee in the UAE has started selling Krispy Kreme at about 50, KFC, restaurants with plans, for further expansion,

In addition, our pipeline of New Market entries with franchise Partners is strong.

With the first Hot Light, the shop in Spain opening later this year.

In the US, we still plan to open a new production Hub in Minneapolis later this year, which will be the first hotline theater shop in Minnesota.

Aside from this strategic location, we have reduced investment in new capacity in the US preferring to leverage existing excess capacity for growth.

To expand. Margins. We are simplifying, our business model and strengthening operations in the US to reduce costs across the p&l

In support of this, we have already taken the following actions.

First, as announced in June, we have ended our McDonald's USA partnership effective July 2.

Our efforts to bring our costs related to the partnership in line with unit demand. We're unsuccessful making it unsustainable for us.

Second, excluding the exit of McDonald's stores. We also completed a thorough assessment of our us, fresh delivery footprint, and identified approximately 1500 underperforming doors.

We've already exited more than half of these in the first half of the year, with plans to complete the remaining closures by year-end.

More importantly, we expect to replace these with 1100 more profitable high-volume doors this year, of which, more than half are already in place.

This shift improves overall route profitability and operational efficiency and we expect it to be immediately accreted to either Dar margin.

Third, we continue to outsource logistics.

So far, we have transitioned 40% of us fresh donut, deliveries to third-party Logistics partners.

This provides more predictable Logistics costs and allows our crispy creamers to focus more on what they do. Best make fresh donuts and bring joy to our consumers.

We are also strengthening our us operations, under the leadership of our new Chief Operating Officer, Nicholas Steel.

Her Focus includes boosting our demand planning capabilities to improve forecasts and loadouts while optimizing labor and reducing cost and waste.

Driving sales while minimizing product returns.

She is also raising the caliber of our operations leadership, empowering crispy creamers, with better training and Technology, resources and streamlining, the donut manufacturing process.

To drive sustainable profitable growth in the US. Our marketing Focus has shifted to our original glazed doughnut. Our most affordable, most profitable, and most iconic product typically solved by the Dozen,

we launched an all-new multimedia marketing campaign centered on the joy of experiencing a hot fresh original glazed which kicked off on national donut day in June,

Early results are encouraging with the campaign driving incremental sales and renewing excitement. Around our signature core offering

Expansion in the US is focused on growing fresh delivery through profitable, high volume doors, with major customers, like, Costco, Walmart, Target and Kroger, we added over 400 doors with these customers in the second quarter alone, including the promising, new multi-city pilot with Sam's Club.

All of this expansion was complemented by strong digital growth, which increased by double digits, and accounted for more than 20% of us, retail sales during the quarter.

We have also recently been awarded additional sales space at Walmart on top of our existing merchandising towers and cabinets.

We expect this to both increase sales at existing Walmart stores and help us add distribution in new stores.

Today, we are only represented at about 30% of their total domestic footprint.

I have full confidence in our turnaround plan. Not only because of the Bold strategic actions. We are taking but also because of the strength of our leadership team and the talent across the organization.

To drive alignment and execution, we have revised our bonus opportunity for the second half of 2025 to focus on driving adjusted. Eva de and free cash flow.

2 kpis clearly linked to profitable growth and deleveraging our business.

On a topic of talent. We recently promoted Allison holder to Chief brand and product officer and Raphael the vivier to Chief Financial Officer.

Allison has over 25 years of experience with Krispy, Kreme holding leadership roles across, brand marketing, Innovation, research, and development, and Manufacturing Services. We have the utmost confidence in her as she assumes responsibility, for our Global Marketing efforts, focusing on championing, the iconic original glazed and driving sustainable, high-quality growth

Raphael has been with Krispy Kreme for over 6 years and has held multiple leadership roles spanning International Development strategy. Finance and operations is a deep understanding of our business.

Strong financial Acumen and is a trusted partner with a proven track record.

Before I hand the call over to Rafael while we are pleased to have generated quarterly, net revenue above the midpoint of our guidance. And just to leave it dhar was below. Our expectations primarily due to the following factors.

First losses related to our now ended McDonald's. USA partnership were more than originally projected. We're quickly, removing our costs related to the McDonald's partnership and expect to begin recouping profitability in the third quarter.

Second during the quarter we incurred higher Insurance costs related to our own delivery efforts. The transition to outsourced us Logistics is expected to provide greater cost certainty. We are already seeing more predictable Logistics costs for the roots, our source to date.

In summary, while the past several quarters have certainly been challenging, we have pivoted and are executing our comprehensive turnaround plan with the actions we believe necessary to position the business for long-term success.

With that, Raphael will now review our second quarter of financials.

Thank you, Josh. Before we go to the results, I want to take a moment to introduce myself and express how honored I am to take on the CFO role of this beloved brand.

I have been with the queen for over 6 years, leading our International businesses.

Does for sustainable profitable growth, my immediate focus is on 3 things, the leveraging, the business improving processability, in the US during the second half and leading our brief franchising efforts.

We are shifting our Focus to our more capitalized franchise model, which I strongly believe will provide a high return on Capital and profitable predictable growth.

I'm confident that we'll be able to bring in the right franchise Partners to expand the business and continue our development growth.

In the near future. Our Capital Wide International franchise model will make our company look quite different than it does today.

We believe our current liquidity providers with the flexibility to meet both short-term obligations and long-term Investments.

With the amendment of our credit facility. In may, we now have over 200 million dollars of excess liquidity as of the end of Q2.

We expect this to enable the full implementation of our 2025 strategy as we continue to strengthen our balance sheet and deliver the business.

Shifting to the quarter. Net revenue was 379.8 Million, reflecting a 64.2 million dollar reduction related to divert of in cookies in the third quarter last year.

Couple of an organic Revenue decline of 0.8% driven by lower transactions related to Consumer softness.

Adjusted was 20.1 Million down from 54.75%.

Turning the US segment, we encourage the retail transactions, to sequentially improve to the quarter, reflecting our emphasis on the regional glaze.

Despite this expected consumer softness, it still led to a decline in retail transactions compared to last year.

We also continue to strategically close underperforming doors. These 2 factors led to a 3.1% organic, Revenue decline.

Adjusted debt was 9.9. Million dollars down from 32.7 million dollars last year, impacted by the sale of, in cookies. In the third quarter of 2024 an estimated 7 to 9 million dollars in Impact from our now ended MacDonald's, USA partnership and we Dale transaction declined.

Here. Today, the adjusted a do impact related to macdon. USA is an estimated 13 to 15 million dollars.

Within our equity-owned international markets, organic revenue grew by 5.9%, driven by point of access growth in Canada, Mexico, and Japan.

this Market continues to see the benefits of rolling out our Hub and spoke model in a Target fashion gear towards strategic customers and driving expansion with new shop development generating, significant food traffic,

This include Costco and new theaters in Canada as well as new gears in Mexico and Japan.

The growth in organic Revenue was partially upset by 1777, strategic door closures in Japan and Mexico.

Adjusted the V of 18.2 million dollars resulted in the margin rate of 13.7%, as lower transaction volumes impacted operating leverage particularly in the UK.

Importantly, the UK Market improved. Margins sequentially, and we are looking forward to the continued progress from the new leadership team now in place,

In the market development segment, organic Revenue declined 14.2% as growth, in New Markets, such as Brazil and existing markets, like Middle East where offset by the timing of products and equipment sales.

Adjusted Aida was 8.9 million with a margin rate, roughly flat year-over-year at 52.9%.

During the second quarter, we incurred 407 million dollars in non-cash. Impairment charges.

This was made up of the following.

Partial Goodwill, experiment cost, 356 million related to a quantitative assessment of Goodwill triggered. Mainly by the decline in our market cap,

Long Live assets, impairment charges of 22 million dollars and Lead impairment in termination costs of 29 million dollars. This environment will impacted in part by determination of the agreement with MacDonald's USA.

Under that Arrangements.

I just made it up 2 million impacted cash flow. As we use, 32.5 million in cash for operating activities on a year-to-date basis. Our bank leverage ratio was 4.5 at the end of the quarter, which is below the 5, leverage ratio limit in our credit facility.

Our net leverage ratio, which reflects the company's net debt, divided by is trading, 4, quarters adjusted debit up was 7.5 impacted by the Cyber incident for which we have, not yet been fully reimbursed by insurance, as well. As are now ended MacDonald's USA partnership

We are focused on improving profitability to benefit both leverage and cash flow through. Not only operational actions that Josh outside but also driving improvement in working capital and further at GNA savings,

additionally, I have been overseeing the process of different franchising, our International Equity markets,

I believe that is the right way to unlock continued sales growth and unit development in this market.

While allowing us to significantly de Leverage.

We will continue to proceed prudently seeking to refrigerate only with 12, Capital lies to scale The Operators with regional expertise and the capability to thrive continued growth with that. I'll turn it over to Josh for his closing remarks.

Thanks. Raphael in summary. We are highly focused on our comprehensive, turnaround plan to deleverage the balance sheet and deliver sustainable profitable growth.

Through 1, we franchising.

2 improving Returns on Capital.

3, expandable profitable us growth.

With this plan in place, I am confident in our ability to capitalize on the significant growth opportunity, ahead and share the joy of Krispy, Kreme with more people in more places around the world.

Operator, let's now open it up for Q&A, please.

At this time, I would like to remind everyone in order to ask a question. Press star, then the number 1 on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

Your first question comes from, Ry Topol with JP Morgan.

Good morning, guys. Uh, thanks for all the color. Josh Raphael, um, my question is on the DFD doors. I mean, this comes with a significant last mile delivery cost as you guys, uh, know and are there tools to better manage profitability per drop, even when employing the third party strategy and might some of this include in introduction of products with longer shelf stability, which

Yeah, good morning. Yeah, it's important with the DFD model to understand that when the conditions are right.

In high traffic doors. Uh when install visibility is high, you know, the volumes are high and that's when we see uh sustainable profitable sales. And we actually see that with several of our customers already today in the US and and, and are expanding, uh, continue to expand with that. And so that combined with the shift to third-party Logistics means that, we then have predictable costs to go with that. Look, you know, we've obviously uh shifted the business model and implemented this turnaround plan uh that we shared today to ensure sustainable profitable sales. And so, you know, the actions we're taking are all about making sure that we drive profitable sustainable sales and delivery to the company.

Um, going forward.

Thank you. Uh and then of the 2:40 uh Hot Light Theaters or so. In the US, these are often located in the higher cost of retail areas. Can we consider driving more productivity out of the on-site customer visits or to perhaps consolidating more capacity into fewer, uh, stores as we go through this turnaround?

Well, it's definitely an opportunity with the production hubs to make sure that we, we optimize efficiency and, and Nicola our our new Co is very, very, very focused on that. Um, she's identified opportunities definitely within the system as we optimize, the DFD footprint, and then expand, with these high-traffic, DFD Partners to make sure that the, uh, they, they get more efficient over time. So that that's certainly the case.

1 last 1, if I met, um,

I I I I did see the update on the international businesses sundry franchising which we have been discussing for a while. Uh, can you share like how uh, as an organization today? Your handicapping? The duration risk of executing this because there are like, these are like large assets and that spread over multiple geographies how, uh, how quickly for lack of a better term. Can we? Uh, look at executing this in your view?

Hey, how much is repel? Um, thank you. Um, look, we are targeting doing, uh, 1 to 2, uh, deals this year, um, a few culture, uh, about this. We have initiated the process, uh, as I mentioned, uh, on, um, Japan Mexico, um, uh, UK and Australia. And, and we, we use the proceeds to, to The Leverage. Uh, and we pay down our debt.

Thank you guys.

Your next question comes from. Daniel googly Elmo with capital 1 security.

Hi everyone. Thank you for taking my question. Um, I I appreciate the the turnaround plans when when thinking about the 4 compared, are you able to get started on All 4 of those kind of at the the same time or or is 1 kind of more important to get going on first before you can really kind of jump in to the others? Um,

Thanks. Yeah, no. We've um, we've already implemented. Uh, this turnaround plan with those actions are are already underway Rafael referenced. The process for international referencing, we will also share today that we are, inactive discussions with our Western us joint venture partner for them to move to to, to the franchisee model. Um, regarding, you know, the the other activities, you know, such as um, optimizing, the DFD footprint, um, implementing the the third-party Logistics um making the cuts to GNA. These are things that we uh have already put in place. That means we expect to see the benefits already within this year. I mean I would expect the ebit da to be fire in the second half of the year and in the first half I would expect

Cash flow to be positive. So so these are things that are very much already in flight.

Great. Yeah, I appreciate that. That that makes sense. Um, and then I think it was was on the last call. Um, we had talked about potentially rationalizing, I guess.

Um, is that still kind of, uh, number because that go into the kind of.

Unfortunately Daniel. But the the line broke up that you said, uh, we've been talking about rationalizing and they break up. Do you mind repeating please?

Yep. Yep, for sure. Um so so yeah, we had talked about rationalizing, about 5 to 10% of the DFD doors.

Um, and I'm curious is that kind of still in the works? Is that kind of a good? Good number? Um, does it go into the the franchising of of, some of the, um,

Properties that out out west or or or how are you guys thinking about that now?

Well, what we've chosen to do, um, following the exit from, uh, McDonald's. Just look at our whole whole footprint, uh, and we identified 1500 doors, uh, that were below, average, weekly sales so much less profitable. We've already, uh, well, on our way of intervening on those

All at the same time while adding higher weekly sales doors with uh, major customers like Target, where we've seen a lot of growth this year, Walmart uh, with growing in in Costco. So that is that is a shift we're making as part of the turnaround plan going forward, we would expect. Uh, once that is complete, uh uh uh a small amount of turn. Probably around about 5, churn around about 5% a year. But really, uh, this is a decisive intervention to get profitable sales, uh, uh, increased, uh, in the back half of this year, as part of the turnaround.

Great. Thank you. Appreciate all the color.

Your next question comes from Sarah Senator with Bank of America.

Uh, I mean, first the clarification, I'm sorry I came on the call a little bit late. I wanted to understand your thoughts about capex. I know, historically, you kind of guided to percentage of Revenue, um, you know, it's 7 to 8%. Uh, so I wanted to make sure that there is, um, you know, that that's part of the sort of more Capital light approach, uh, you know, sort of bringing that down more in line with perhaps where, um, you know, some of the franchise businesses might might be so that that was 0.1, then I apologize if I missed it. But Point 2, I guess is a bigger question which is feels like some of what you're talking about now is this turnaround is is sort of unraveling what we're initial growth drivers. Like you know I think in sourcing some of the logistics and production or this qsr partnership. So I guess I'm trying to understand like what what a steady state Krispy Kreme should look like, should it is it is it more of a cpg company? Should it be pressed part of a bigger portfolio? Um, I you know, it, it feels

Like the strategy. You know, I shifted a bit and I'm trying to envision, you know, kind of the long-term structure. Thanks.

Hey, how are you? Sorry I'll take the first 1. Um yeah I mean as we think about our new a new and better model, the right our capitalized model uh you you would expect and you should expect lower Capital, higher, individual to cash conversion. Hi, I'm margin and even more important, and more predictable model. So as we move forward, in terms of national, uh, refresh

Efforts you should start seeing capacity as a percentage of Revenue going down. Um, even the second half of this year, uh, as Josh mentioned, we should expect positive cash flow in already a lower Capital than, uh, we had in the first half.

And then uh, sir to to the second question, you know, it is important to understand that Krispy Kreme is primarily a growth story. It's, it's more about how we maximize shareholder value as we take advantage of that opportunity. Uh, the distribution partnership with McDonald's although proved unprofitable hence our decision. Um we saw significant incremental sales, in those geographies, reminding us of uh the fact this is a growth story because people want to access to our our fresh donuts. So it's about the model to get there. Um, it's clear that franchising is a a capital efficient way of doing that. Um, particularly internationally. So that is, you know, clearly going to be the model and, and to the capex point, you know, working with franchisees, uh, to take advantage of that development opportunity. And, and then overall, it's still a multi-channel model. Um, you've got opportunities

Uh, in retail we've seen strong digital growth as we mentioned today. Um, but then of course, expansion, uh, with major national Partners. Um, so the the multiple channels continues to play a role is just the conditions of have to be right. And this turnaround plan is about making sure that with those conditions are right with those DFD accounts in the US or with franchise Partners so that we have sustainable profitable growth and deleveraging the balance sheet as we go.

Thanks.

again, if you would like to ask a question, press star, then the number 1 on your telephone keypad,

There are no further questions at this time, I'll now turn the conference back over to Josh, Charlesworth for closing remarks.

Well, thank you, everybody. You're interested in Christy crane today and and thank you also to our hardworking Krispy Kreme as all over the world.

Uh, we are focused on executing our new business model to maximize shareholder value.

The turnaround plan we share today is in full swing. We are taking the appropriate actions to deliver the balance sheet and drive sustainable profitable growth.

Thank you again.

This concludes today's conference call, you may now disconnect