Thank you for standing by and welcome to Krispy Kreme’s Second Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host Senior Manager Communications, Cassie Williams.

Thank you, operator. Good morning and welcome to Krispy Kreme’s Q2, 2021 earnings call. Thank you for joining us today. Before we begin, I would like to remind you that this call contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1995. Including statements of expectations, future events, or future financial performance forward-looking statements involve inherent risks and uncertainties. And we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's registration statement on Form S-1. The company assumes no obligation to publicly update or revise any forward-looking statements accepted may be required by law. Additionally, today's call will include certain non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures required by Regulation G can be found in the company's second quarter 2021 earnings press release, which will be furnished to the SEC on Form 8-K this evening and available at investors.krispykreme.com. For your convenience today's conference call is being webcast and recorded for replay via our Investor Relations’ website. Following prepared remark CEO, Mike Tattersfield, CFO and COO Josh Charlesworth, and Chief Accounting Officer, Joey Pruitt we'll take your question. And now Mike will provide an update on Krispy Kreme’s business.

Welcome, everyone. And thank you for joining today's call. We're excited to share our progress for the second quarter of 2021, which was the first in our return to the public market and one of the strongest quarters in our 84 year history. Q2 results demonstrate the effectiveness of our global transformation, and our continued progress towards becoming the most loved sweet treat brand in the world. Our business is strong, healthy and expanding a direct result of the foundational work we've done to set our omni-channel strategy and deploy our hub and spoke model. We believe that our sustained growth in Q2 shows the resilience of our approach as well as the ability to adapt to evolving operating environments. Over our five-year transformation journey, Krispy Kreme has evolved into a truly global business with significant growth opportunities still to come. We have made investments and now own and operate our businesses in the U.K. and Ireland, Australia and New Zealand, Mexico and the recently acquired business in Japan, with partners executing the omni-channel strategy in the remaining international markets. The success of Krispy Kreme brand and our omni-channel strategy around the world highlights the global opportunity ahead. We're in early days of our international growth story, and we plan to both grow in our current geographic base and expand into new markets. Our focus on driving a high quality donut experience while growing our brand around innovation and celebratory occasion has taught us how to build a successful global business, enabling us to drive faster growth and stronger performance. In addition to our global story, we see significant growth in the U.S. where we now control 48 of the 50 top markets and continue to build our omni-channel approach. This quarter that approach in all our core markets allow…

Thanks, Mike, and hello, everyone. As Mike said, we are pleased to report an excellent Q2 with net revenue growth of 43%, organic revenue growth of 23% and adjusted EBITDA growth of 78%. Although our operations in several markets were impacted by COVID last year, our strong performance this quarter also reflects the underlying strength of our omni-channel business with revenue growth of 50% and adjusted EBITDA growth of 65% when compared to Q2, 2019. The difference between the quarter’s 43% revenue growth and 23% organic sales growth is explained mostly by franchisee acquisitions made in the last 12 months. These include Japan, which we successfully integrated in December 2020, as well as franchisees in 12 U.S. cities, including San Francisco and Miami, which we acquired in Q1. We made no franchisee acquisitions in Q2. All our business segments saw positive organic growth in the quarter with the International segment comprised of our fully-owned and operated businesses in the U.K. and Ireland, Australia, New Zealand and Mexico, leading the way with 126% growth. At the height of COVID restrictions last year, approximately 30% of our shops around the world closed however, demand for our sweet treats remain strong, and we were able to quickly reopen in the back half of 2021. While lapping the effects of COVID explains much of the International segment’s Q2 growth. We are very pleased to see that these businesses where our signature hub and spoke operating model is most mature have come back stronger than ever. For example, the U.K. and Ireland market which makes the majority of its sales outside the brick and mortar donut shops delivered Q2 net revenue growth of 37% versus 2019. Points of access to fresh doughnuts have increased by over 40% in the last 12 months in the U.K.…

Thank you very much everyone. In summary, we're extremely confident about the long-term runway to grow Krispy Kreme on our journey to become the most loved sweet treat brand in the world. We're proud of the ongoing transformation in the U.S. and Canada as well as the outstanding performance in the international in the quarter. Most importantly, I want to thank our Krispy Kreme's around the world for their continued hard work and always showing up. We look forward to connecting with you all again soon. With that, I'll hand it over to the operator as we would be pleased to answer any questions you may have. Thank you.

Thank you. Our first question comes from the line of John Ivankoe of JPMorgan. Your question please.

Hi, thank you very much. The question is on the U.S. margins, especially relative to international. One, I mean, I think, the U.S. margins were a little bit below our expectations than - certainly the question that we're going to ask is, when you think we could start to see margin growth again in the U.S.? Do you have a specific date in mind? Could that come in the fourth quarter with additional menu pricing that you've discussed? And, secondly, as part of the IPO, closing the gap of margins between the U.S. and international would obviously be a huge opportunity on the income statement. What's in kind of your head around that thinking about the long-term? How close can those businesses get to? Do you have a number in mind? Do you have a timeframe in mind? Thank you.

Hi, John. Thanks for the questions. Yes, you're right. The first thing to highlight is that in the international businesses, where we have the material Hub and Spoke model, we do drive very high margins and in Q2 we saw even higher margins with the additional Points of Access that we're able to generate there during the COVID disruption. We're implementing the same model in the U.S. And now, we are indeed seeing the same benefits as particularly as we add Delivered Fresh Daily doughnuts, which are now across all our channels in the U.S. We're able to leverage the fixed costs back at the production hubs and drive up margins. Now, what we're seeing right now is the change is accelerating. We're already at - the end of Q3 would already be the end - our year-end goal for DFD doors of 5,300. So in effect what we're seeing is the transition moving even faster in the U.S. And that means we've hired more Krispy Kreme's than ever before. We actually hired 1,700 people in quarter two alone. So with this level of change going - accelerating even the transition to Hub and Spoke, we've seen some additional implementation costs. You can imagine more training costs, more overtime as we fill the vacancies. And hence why the margin, as you point out, a little bit lower in the U.S., but actually when you exclude the Branded Sweet Treat Line, which is a new business that we opened up last year, the entry into New York, which just happened last year, and of course we have reduced traffic still in the city there. And the most recent acquisitions are caught fresh donut business is doing already in the U.S. over 15% EBITDA margin. So we do have line of sight…

Thank you. Our next question comes from John Glass of Morgan Stanley. Your line is open.

Yes. Hi. This is Brian on for John. I guess just curious on the international side of the business. It seems like it was quite strong there. I am curious if there was kind of perhaps more pent-up demand than you expected the drove some of that. Perhaps in some of the individual countries, what's been stronger than your expectations and are there any still lagging? And I guess just also on opening new shops. Are there any kind of puts and takes there any of you think that are moving faster than expected? Or any that are still seeing some delays due to COVID?

Yes, so, we'll take it on your two questions. So, our goal is going to be to open up between 10 and 15 new hubs in the global business, right, that includes the U.S. and international. And you're seeing that our focus on the international, we're going to opening up this week, we actually opened up in Egypt, right, which with a population of 100 million, in the City of Cairo 20 million. So we can see opening up that hub there starts to really show how you're going to get the Hub and Spoke model working. That's one of the goals. In terms of international, even Josh alluded to it, right. There's - as businesses started to recover from COVID, they started to open up when you have the omni-channel approach, and the customer could use the business and where they wanted access the volume and the frequency of it as we also additionally opened up new points of access, you can see the improvements there both in our core, in the UK, New Zealand, Australia, Ireland and Mexico as well.

Thank you. Our next question comes from Sergio Matsumoto of Citi. Your line is open.

Hi, good afternoon, and congratulations for your first quarter. My question is on the September price hike. If you could give us some color on how - what form this will take whether the rate will increase or there will be a changing - how that mix would be - would improve or maybe a more effective use of the promotions? Can you give us some color on that that would be great? Thanks.

Hi, Sergio. You bet. So, yes, we are always pursuing positive mix opportunities because we are continuously innovating with specialty doughnuts that we tend to price at premium price points. That is an ongoing part of our strategy. As a fresh donut provider, we're always in a position to do that. People get excited about the innovations we bring to the marketplace. More specifically, in September, what we're talking about is taking up menu prices for our core donut business, our core dozens business. It will vary across the country, depending on local market specifics. We're very thoughtful and targeted as to what is the appropriate price point for different regions, different cities. That price increase is intended to cover the commodity inflation that I mentioned. Also we are seeing wage inflation typical that you're seeing across the industry, and actually in line with our expectations. The commodities are a little bit higher, and hence the need to lean in on pricing in September. But as a fresh only donut business to special occasion, infrequent purchase, we don't - we have a plenty of ability to bring that pricing. We know people love our dozen donuts. And so we have no concern about the ability for that to flow through to the bottom line.

Yes, I mean, I will add one piece, which I think is important, which gives you the ability of how - why we think we have pricing power, right. Because as we started to discontinue the old wholesale program to the DFD program, we really introduced the exact same pricing structure that we actually have in our shops. And we saw our customers in those locations actually accept it, because it's a fresh product, right? So as we continue to become a merchants and look at those different channels and how pricing can affect each unique channel and its own, right. And we see the opportunity there. It is a dozen business. So you have the ability that it still wants to be accessible. All right, so thinking even September was thoughtful about how we think about the business. We do believe we'll see that margin continue to flow through.

Thank you. Our next question comes from David Palmer of Evercore ISI. Your line is open.

Hi, maybe you can say this in millions in terms of EBITDA millions of how much higher your costs are now versus where they were back in June. I know for everybody they've gone up, but versus your own internal targets, how much have they adjusted, and what are the biggest buckets of that, and I have a quick follow up?

Hi, David. So I mean, the biggest bucket of increased costs on the P&L is of course in our operating expenses. It's driven by the biggest parts of our P&L, which are labor. As I mentioned, before, we're investing in labor, in line with the expansion of the system in the U.S. We're investing in labor with the investment over in the growth across the world. We have seen that increase in line with the market. The next biggest area of increase would definitely be on the product side. And we've seen that grow a bigger headwind than we expected. But that's as much as I can give.

Okay, and with regard to the U.S., there are some markets that are already if you add back the overhead would be at least high teens, if not 20s in terms of EBITDA margin. You've talked about the Southern California and Atlanta. When it comes to improving that U.S. margin from the 12% towards 15% plus, and maybe we can be greedy and think about getting up towards some of your better markets. What is your path to getting there? Is it - I mean, clearly, the New York market can improve in profitability on a rebound, and perhaps rather quickly as that New York gets going again, but what is - you even talked about reinvesting behind the Hub and Spoke, so I want to be realistic about the past to improving this margin, and maybe you can walk us through how that will happen?

Sure. So I mean the first thing is golf targets. And you're right, we have aspirations for high margins. The reason I gave some specific details earlier on the UK is because even in the most mature Hub and Spoke cities there, we can continuously add more points of access and drive even more efficiency. So I mean the first thing to say is across the whole system, we are looking to leverage the omni-channel model to bring more efficiency. And when we talk a lot about Hubs where we have Spokes and adding DFD, leveraging the fixed cost there, we're definitely doing that. But even in Hubs without Spokes with e-commerce now a permanent change a permanent addition to our channels, we're able to drive efficiency by having those transactions, which are highly incremental on top flow through at higher average transaction values to the bottom line. So it's a system wide effort. Now, there is also a portfolio of cities, you're absolutely right, we have some cities, where the Hub and Spoke model is already a little more advanced, whether it be somewhere like Atlanta, which just reflects the history and the great heritage of the company, somewhere like Tampa, where we acquired the franchise, we went from being low single digit margins to low 20% margins in less than 18 months by improving operations, adding Spokes and of course, establishing a full omni-channel business in that area. And we'll be doing that across the system. We made acquisitions at the end of last year, Dallas and Houston, which without Spokes, with some operating challenges have been lost making, New York we entered last year in the midst of a pandemic, we have a lot of confidence there, we're seeing the business strengthen, but it's still heavily diluted…

Thank you. Our next question comes from Brian Mullen of Deutsche Bank. Your line is open.

Hi, thank you. Just question on the DFD business in U.S. and Canada. There is now over 5000 DFD doors today, it's growing quickly. You know, at the same time, there is something like 150,000 grocery and convenience stores across the two countries. So a question is when we think about the ultimate long-term opportunity for DFD doors. What's the relevant number of vocations you actually think about internally or might actually consider for a cabinet one day, and I asked that understanding that not every single location is going to warrant one of your cabinets. So just any help on how you think about the long-term opportunity.

So you directed. This is Mike. Directed this is the U.S. and Canada, right. So with 300 current Theater shops today, you're still only going to have a certain amount of route that you have 5000, we think the opportunity in the U.S. is about another 2800 to 3000 a month doors, cabinets that are there in its potential, as you continue to open up the right Hub and Spoke, so that scarcity matters. So when you're trying to do a model, and you're looking at 125,000 locations, we won't be in 125,000 locations. In fact, from an ACV perspective, even long-term, you can see a somewhere in the range of probably been between 5% and 10%, right. Scarcity is important to Krispy Kreme. It'll be following along the hubs that we continue to build, and do that exceptionally well. It's not every grocer, and even the groceries that we pick, it's not every one of their shops. So it's again that access because that's how you keep the brand special. That's how the merchandising and being a merchant really will work through.

Thank you. Our next question comes from Michael Rothstein of Goldman Sachs. Your line is open.

Hi, this is on Michael on for Jared Garber. Just want to touch really quickly on the 30% year-over-year AWS growth, a complete sales growth in the DFDs and that was really impressive, definitely far outpacing the organic revenue growth rates. But talk a little bit about what maybe drove that maybe are those kind of lower open rates, and then they ramp or are you guys making larger cabinets, DFD cabinets versus back then just trying to kind of figure out what was the key driver of that was? Thanks.

Hi. Yes, thanks, Michael. So I think two main drivers are point to the first is we have as part of the transformation and learning from international being really focused on the high quality doors that might reference. Of course, they need to be local to the donut shop. So the doughnuts are fresh, but they also need to have the right level of traffic. And so we have been really thoughtful on those doors and have walked away from doors versus past years, where the volume and the traffic doesn't warrant, a fresh donut cabinet. And the second one is the nature of the product, and the price point, we are now talking only what 100% fresh doughnuts, would you believe it, but a year ago 38% of our doughnuts in the U.S. were not fresh daily. Now it's 100%. We now sell them always at the same price point as you would get in your local Krispy Kreme donut shop. So that comparison reflects a combination of better quality doors, there is less of them, and then we had in that old legacy wholesale business. But they're better doors that we will be more profitable then. And the first thing that drives up profitability is having the higher price point and that is driving the weekly sales up. And we're thrilled to see that across all our customers.

It's a one piece just augment on Mr. Josh out ability to be doing the thresh really matters for us as a system and that access point when we now start to have the DFD system and having the same doughnut or a doughnut maker doesn't even know where the doughnuts going. So that quality really matters. And you'll be able to get the right pricing structure, where customers will now say to Krispy Kreme, if I want a hot experience, I can go to a theater or not, I get it towards I want it.

Thank you. Our next question comes from Jon Tower of Wells Fargo. Your line is open.

Great, thanks for taking the question. Just I'm curious to hear what you're seeing from a competitive response in the indulgent treat categories at the grocery channel or at sea stores. As you as you're rolling the DFD model out to more doors across especially the United States, are you seeing really any competitive response from those channels specifically?

So what's really specific were dozens business, right, so it's pretty unique. There's not a lot of direct competition that's doing a fresh dozens business across the U.S. in particular, as you call about. When we focus again, the brand tends to focus on occasions, and then make sure that the celebratory aspect of the brand is coming through. So from that aspect, we play in a different place of where the consumer is looking at it. So there is a space for the lower price point doughnut that a lot of the grocery stores do. There is actually two different sets of how the consumers making a decision.

Thank you. Our next question comes from Todd Brooks of C.L. King & Associates. Your line is open.

Hi, thanks for taking my question. If we could spend a minute on Branded Sweet Treats, and you talked about adding three new lines, capacity up dramatically. Doors up nicely this year. I think you said 6300 and getting to profitability by the end of 2021. I guess with that capacity that you're adding, how do you see that business growing as you get towards the out years of '22 and '23? And they said you added three new skews to the offering. But just if you kind of qualitatively walk us through what you think Branded Sweet Treats becomes for the business '22 and '23 and how the profit drag mitigates as the volumes rise? Thanks.

Appreciate the question, I'll start and then Josh will unpack a bit more. So if you think about the business, we just talked about the scarcity value of the fresh donut business. And that's really important for us as we build out the Hub and Spoke model. As we launched spring and Sweet Treat, we saw that as a different point that the customers looking for a different occasion. And as we build that out, we started with Walmart, we are opening up to Albertsons and looking at other brands and their banners. We're going to be very disciplined about this, it really does matter how we build this business. And we see it as a really big potential because the occasion is different. It's not about the speed, it's we think about this brand, very much as we think about our hotline, experience, and how we're going to continue to build it. And we will be able to match that potential, we think it's something that's pretty disruptive in the category, so that from at least a branding perspective, it competes against the occasion of a Krispy Kreme against itself, right. But it's a unique opportunity. On occasion use is different from how you see that coming through in margins and I’ll add Josh to.

So I think Michael had a couple of data point. So the investment in these production lines is directly a result of conversations with customers, both our launch customer, Walmart, and other customers in other channels. And looking out over the next couple of years what we need to deliver on that and hence I referenced a capacity increase of about 200%. And that's in line with how we would expect to increase the business out to 2023, effectively up to about a threefold increase in the business, which is exciting, but would still give us probably only around about a 4% share of the enormous sweet snacks category. We do believe that with the strength of the Krispy Kreme brand that Mike talks about that there's room to grow faster than that. And beyond that - but right now we're focused on the product selection that we have adding the new flavors as I mentioned earlier, and expanding only with the donut likes - like snacks. In terms of profitability, you're right, yes, it has - as we've been subscale and only just now started automating the process been actually a negative on our bottom line, and it will be dilutive. We think next year still, but it quickly - because fundamentally, it is a premium priced proposition, be in line or even better in - over that timeframe from a margin point of view. So, we're excited to see the development of the business, our customer, Walmart, our new customers are also excited to bring it to the market. And so, we'll keep investing behind it appropriately.

Thank you. Our next question comes from Jaafar Mestari of BNP Paribas. Your line is open.

Hi, good afternoon. I just wanted to get an update on more medium-term inflation assumptions, if that's okay. I think at the time the idea you're saying you're budgeting for your wages to increase towards $15 minimum by 2025, if I'm correct, and you're also baking in 5% to 7% annual inflation on the commodity side. So what you're saying today, are those still reasonable with just a deeper start in for the 2021? Or are you now also budgeting for something a bit worse medium-terms? Is there any reason for that?

Hi, and thanks for staying with us today. So, yes, the assumptions you mentioned, which are the long-term assumptions are in line with our current expectations as well, the IPO not being that long ago. We already could see the IP - the wage pressure and to a certain extent the commodity pressure as well. I must admit the commodity pressure in the short-term has just been quite extraordinary. And so in the very short-term, it's a little bit higher than we expected, but the long-term is in line with our expectations. And so all our plans and - with the focus on specialty dozens, making sure that we only ever have Delivered Fresh Daily doughnuts with their price point, the mass premium price point of Branded Sweet Treat and, of course, all our businesses across the world offering fresh dozen. We know that we can cover those headwinds on cost, investing in our Krispy Kreme, making sure we always have the best quality ingredients, and indeed delivering on the bottom line because the - where we get the biggest benefit to that bottom line is the Hub and Spoke efficiencies coming through. So these are all things that we're aware of. We're used to dealing with hence why our immediate decision to go to the September price increase. And we remain confident in our expectations for 2021 and the long-term algorithm as well.

Thank you. That does conclude Q&A and today's conference call. Thank you for participating. You may now disconnect.