Krispy Kreme, Inc. (DNUT) Q4 2021 Earnings Report, Transcript and Summary

Hello, and thank you for standing by. Welcome to the Krispy Kreme Q4 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. [Operator instructions]. Please be advised that today's conference may be recorded. [Operator instructions]. I would now like to hand the conference over to your speaker today, Rob Ballew, Vice President of Investor Relations. Please go ahead.

Good morning, everyone and welcome to Krispy Kreme's fourth-quarter 2021 Earnings Call. Thank you for joining us today. Our fourth-quarter earnings release and an accompanying earnings presentation deck are available on the Investor Relations portion of our website at investors.krispykreme.com. Joining me on the call this morning is Mike Tattersfield, President and Chief Executive Officer, Josh Charlesworth, Chief Operating and Financial Officer, and Joey Pruitt, Chief Accounting Officer. After prepared remarks by Mike and Josh, there will be a question and answer session. Before we begin, I would like to remind you that this call will contain 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 a number of inherent risks and uncertainties, and we caution investors that these risks and called actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are detailed in the company's registration statement on Form S-1. Forward-looking statements made today speak only as of today. The company assumes no obligation to publicly update or revise any forward-looking statements, except as may be required by law. Additionally, today's call will include certain non-GAAP financial measures, a reconciliation between non-GAAP financial measures, and their closest GAAP measures can be found on the Company's first quarter earnings press release, which is available at investors.krispykreme.com. With that, I will now turn the call over to Mike.

Good morning, and thank you everyone for joining us today. We're pleased to review our fourth quarter and full-year 2021 results, and share more today about the continued advancements we're making here at Krispy Kreme on our journey to becoming the most-loved sweet treat brand in the world. I want to start by thanking our amazing group of Krispy Kremer's, our team members, for their dedication to our business and our customers each and every day. Their efforts have enabled us to produce strong results, and we've worked to transform our business over the past five years. Notably, they've done this during a very difficult and complicated time globally. We will continue to take care of our Krispy Kremers, which is central to our mission. This allows us to attract quality people, which in turn helps us to mitigate the impact of this challenging labor and operating environment. The purpose of our company is to enhance the lives of others through the joy that's Krispy Kreme; our Krispy Kremers truly make this happen. Because of the excellent work they do every day, we're able to give back to our communities around the world. Before I became the CEO, I would have never imagined how a doughnut company could become such a powerful force of positive change. For example, last year our community fundraising program helped generate more than $30 million for local communities around the world. Additionally, we have implemented timely promotions that allow and encourage our customers to choose to make a positive impact in their communities. Last month, we partnered with the American Red Cross to raise awareness for the nationwide blood shortage by giving a free Original Glazed Dozen to anyone who donated blood. Giving back to the community rewards us with very positive feedback, including two billion impressions globally from this campaign, and allows our customers to connect to the brand in a positive and powerful manner. We are proud to be a global company operating in more than 30 countries and incredibly strong [Indiscernible] brand. We also have a proven strategy that gives us a very clear path to significant growth in the coming years. Turning to our performance in 2021, our progress on our long-term objectives was evidenced by our strong financial and operating performance in the fourth quarter and the full year. We produced results which were at or above the top-end of our expectations and guidance range. Our hub and spoke model, where we leverage our hubs to increase points of access in a capital efficient matter, supported by world-class omni-channel strategy and e-commerce capabilities are the core of our fresh doughnut business. Every day, these assets help us deliver millions of doughnuts to people around the world. The hub and spoke model combined with buzz-worthy, season unlimited time offerings of fresh doughnut with limited purchase frequency, gives us strong ability on pricing, including several price increases in the U.S. and across our global markets in 2021. While Josh will go into more detail on our results in a few minutes, I wanted to highlight a few key metrics from an outstanding year. In 2021, we grew our global points of access by more than 2,000 to over 10,400; a 25% increase over 2020 with strong growth in our points across the globe. Growing our presence allows us to increase organic revenue by 12.5% for the year, or 21.4% excluding the exit of our legacy wholesale business. The increased revenue and the efficiency of our hub and spoke model was also demonstrated on the bottom line, as we grew adjusted EBITDA by 29% to $187.9 million, and increased our adjusted EBITDA margin by 60 basis points to 13.6 for the year. In the US and Canada segment, we were pleased with our fourth quarter and full-year performance, driven by the strength of our fresh business and Insomnia Cookies. Organic revenue grew 9.1% for the fourth quarter, and 5.5% for the full year. Excluding the legacy wholesale exit, U.S., Canada organically grew 17.3% and 18.3%, respectively, for those time periods. Our DFD business continued to gain momentum as we added over 1,000 points of access for the year, bringing us roughly to 5,700 in the U.S. and Canada. The Hub & Spoke model allowed us to expand adjusted EBITDA margins by 290 basis points in the fourth quarter. We made significant progress on the branded sweet treats in the quarter where we improved fulfillment rates from 65% in the third quarter to over 85% in the fourth quarter thanks to the efforts of our new global supply chain TIF and his team. This led to December being the highest month of scan sales since launching in 2020 at Walmart. These products continue to resonate with our consumers and we expect to see notable improvement in revenue and profitability from branded sweet treats in 2022. We now have more than 15,000 distribution ports for branded sweet treats and expect this to grow in 2022. Turning to Insomnia Cookies, our digital first cookie company, which completed another fantastic year. Revenue for Insomnia for 2021 increased by more than 30% and by nearly 20%, excluding new store revenue. We continue to see incredible opportunities for the brand as we are well on our way to over 600 locations domestically, with plans to grow internationally over time. Our international segment performed exceptionally well in the quarter and this past year. It is truly an outstanding business, which continues to grow and strengthen the worldwide appeal of our brand. Organic revenue growth for the year was 37% and the segment grew 19% on a two-year stack basis, highlighting our ability to grow significantly beyond pre -pandemic levels. We see a significant runway for growth across the entirety of our international segment. Let's talk about a few more exciting initiatives. The proven and high-growth hub and spoke model is the primary driver of our international segment performance. We added more than 500 doors for the year, bringing us to approximately 2,900 total points of access without adding a single hub. Sales per hub internationally grew from $6.4 million in 2020, to $9.1 million in 2021. And with each hub leveraging roughly 80 fresh points of access on average, we're able to achieve 25% adjusted EBITDA margins. We saw a strong growth in all of our international equity markets, each of which put up another quarter of more than 25% organic revenue growth. Krispy Kreme, today is truly a loved global brand. Roughly half of our system sales are outside of the U.S. and more than 50% of our adjusted EBITDA comes from our international market development segment. Going forward, we expect to open at least three new countries per year. Highlighting this opportunity, I am very pleased to announce that we are now adding two new franchise venture partners for us in Europe and South America. More specifically, later this year, we will open up Krispy Kreme hubs in Switzerland and Chile. In addition, our existing partners have direct line of sight to enter into new countries, now that we have a strong proven expansion model. We expect to announce further country entries in the coming months. Overall, we see a great deal of runway for international growth and are working to expand efficiently, particularly in neighboring markets where we can both leverage existing core equity markets and franchise partnerships. This balanced approach wants your quality is not compromised while opening up access to more consumers. This will also allow us to realize economies of scale, and as a result, increase total company profitability and brand reach. Turning to a few other drivers of our growth, e-commerce is a core pillar of our omni-channel strategy. In 2021, 17% of our retail sales came from e-commerce, up from less than 10% pre -pandemic with a global goal to achieve e-commerce penetration of over 25% over the long term. We benefit from the fact that the majority of our e-commerce business comes from directly through our own channels, and we continue to strengthen our capabilities, exemplified by our recent Day of Dozens in December as promotional activity on our e-commerce channel drove a 50% increase in sales that day from the prior year. In addition to e-commerce, innovation, branding and marketing, our key capabilities that drive our business segments and keep us relevant across the consumer touch points and our omni -channel model. The appropriate blending of these unique capabilities combined with operational rigor, support the global growth of our brand and products. Innovation remains a significant driver of frequency as we create and introduce premium, fresh, and buzz-worthy offerings to customers across our points of access. We had extremely successful seasonal activations across the globe in 2021, including our most recent Halloween and winter holiday assortments in the fourth quarter. In general, our teams rally around seasonal events, which is when branded sweet treats really matter, such as Valentine's Day, which happens to be one of the top events for Krispy Kreme across the globe. Chinese New Year would be another example of a growing, gifting celebratory event. The product, the packaging, the emotional storyline connection really matter for our customer. In 2021, 30% of guest purchases were to celebrate special occasion and events. All these initiatives driven by innovation and premiumization give us strong pricing power, sometimes up to 50% more per individual item than our original glazed doughnut, and continue to be scalable opportunities for our business. These also hit right in our sweet spot of gifting and purchasing treats in larger quantities for sharing and celebrating, which we see significant opportunity for growth with e-commerce leading the way. Finally, we completed our shift in early 2021 to 100% fresh model, which increases pricing power and purchase frequency. Our customers have told us that the most important attribute for a sweet treat purchase is freshness; in fact, it's twice as important to our customers versus just the price. Krispy Kreme today utilizing its proven hub and spoke model is able to be delivering freshness with significant scale daily across the globe. Looking at 2022 and beyond, we see significant upside opportunity. We operate in the sweet indulgent category, which is currently a $650 billion global industry and growing. Today. We have just over 10,000 points of access but we expect to grow to more than 50,000 points of access in just our existing and target countries over the coming years, or a 5x increase. We're confident we can grow our points of access by at least 10% annually, or more than 1,000 a year in a capital efficient way. Those 50,000 points of access that we're targeting are just a fraction of the 1.3 million grocery and convenience stores in the countries we currently operate or with current plans to enter. We plan on opening at least three countries on an annual basis from now forward. The increase in points of access when combined with e-commerce growth, will allow us to significantly increase our sales per hub while driving efficiency in profitability. We'll continue to drive purchase frequency by increasing our points of access, growing our e-commerce capabilities and innovation. A key focus for driving frequency will be maximizing special sweet treat occasions and gifting. In addition, new doughnut fresh LTOs will drive brand engagement and premiumization. We are also exploring new access points for delivery coverage. After a successful pilot in the U.K, where we have achieved national delivery coverage with more than 50 dark shops, we are now building up capabilities into the U.S. and the Mexico markets in 2022. This will allow us to expand our e-commerce capabilities in a capital efficient manner from our existing hubs. Our dark shops will piggy back on existing spoke routes, which ensures of fresh doughnut distribution daily and opens up further access to more customers. We believe these initiatives will generate double-digit organic revenue growth this year. Combined with our hub and spoke model efficiency and strong flexibility on pricing, will allow us to offset inflation, labor challenges, and continued COVID challenges while expanding margins. Before I wrap up, I want to once again state how enthusiastic we are about the growth in our business, and reiterate our confidence in advancing our omni-channel model. Particularly as we build new hubs and spokes globally, and continue to transform our U.S. operations. The transformation over the last five years, accentuated by the strong performance we achieved in 2021, show that our strategy is working and we're excited to continue in our journey to become the most loved sweet treat brand in the world. Ill now turn it over to Josh to walk you through the financials and our 2022 outlook. Josh.

Thanks, Mike. Good morning, everyone. I'll start by echoing Mike's comments on how pleased we are with the strong results in 2021, and on the progress we've made on our strategic initiatives thanks to the hard work of our Krispy Kremers. In the fourth quarter, net revenue grew 13.8% year-over-year to $371 million or 21.5% growth, excluding the impact of an additional 53rd week in 2020. For the full year, net revenue grew 23.4% to $1.38 billion. We saw a strong growth across the world in 2021, in our doughnut and cookie shops through e-commerce, and most of all from fresh daily doughnut deliveries to local grocery and convenience stores. Organic revenue for the fourth quarter grew a robust 13.9% or 19.6%, excluding the legacy wholesale exit we made in 2020. Although we saw Omicron disrupt operations in December, the impact on our revenue was not significant, with demand remaining strong across all our sales channels. For the full year, organic revenue grew 12.5% or 13.7% on a two-year stack basis. Excluding the legacy wholesale exit, organic revenue for the full year grew 21.4%. Our strong performance during the quarter and the year was driven by the strength of our capital efficient hub and spoke model. In the fourth quarter, we increased global points of access by 386 to 10,427. For the full year, this means that we increased points of access by more than 2,000. Going forward, we expect to add at least 10% more points of access each year, primarily through adding low cost deliver fresh daily doughs. These fresh doughnut merchandising units in grocery and convenience stores typically cost only $2,000 to $10,000 per dough and are enabling us to drive economies of scale from our 411 local production hubs around the world, most of which are experiential Hot Light Theater shops. In the fourth quarter, adjusted EBITDA increased 14.4% to $47.7 million, which is above our expectations. Hub and spoke efficiencies and price increases in September and November, more than offset labor and commodity cost increases, as well as increased corporate overhead driven by public company costs and short-term incentive compensation. Adjusted EBITDA margins in the quarter rose 10 basis points to 12.9%. We believe that recent pricing actions will allow us to offset inflation, and we will continue to review pricing if inflation increases more than expected. For the full year, adjusted EBITDA increased 29.2% to $187.9 million with margins increasing 60 basis points to 13.6%. As a reminder, we expect to achieve 15% company-wide margins in 2023. In the fourth quarter, GAAP net income was $4.3 million or $0.01 diluted EPS compared to a GAAP net loss of $24.8 million or negative $0.21 diluted EPS in the same period a year ago. Adjusted net income for the quarter was $16 million, a 17% year-over-year increase. Adjusted diluted EPS in the fourth quarter was $0.08, a decline of 20% due to the increased share count from the IPO. Weighted average diluted shares outstanding for the quarter were $169 million. For the full year, GAAP net loss declined 76% to $14.8 million, which was impacted by $15 million of IPO cost during the year. Adjusted diluted EPS for 2021 was $0.37, an increase of 23% compared to 2020. We were cash positive again in the fourth quarter, delivering $6.4 million free cash flow, helping us to finish the year with a net debt leverage of 3.6 times, which is a reduction versus the prior quarter. In the U.S. and Canada segment, total revenues in the fourth quarter increased 10.5% to $249 million, or 18.8% excluding the impact of the additional 53rd week. Organic growth in the fourth quarter increased 9.1% or 17.3%, excluding the exit of our legacy wholesale business. We saw all our product lines and sales channels performed well in the quarter. And our September and November price increases proved successful, demonstrating the strength of our fresh daily doughnut business. Organic growth was also a robust 17.3% on a two year stack basis for the quarter. For the full year, total revenues grew 18.6% in the U.S and Canada, to $928 million with 5.5% organic growth or 18.3% organic growth excluding the exit of our legacy wholesale business. Organic growth two year stack, was 15.4%. And e-commerce revenue for 2021 was $134 million, an increase of 15% compared to 2020. Adjusted EBITDA for the U.S and Canada in the fourth quarter increased 42% to $31.8 million, with margins expanding 290 basis points to 12.8%. The increase in margins, was driven by strong revenue growth in our fresh doughnut business. Especially sales per DFD door, with pricing offsetting wage and commodity inflation. In November, I highlighted that U.S. cities that have fully implemented the change from legacy wholesale to deliver fresh daily are seeing a 300 to 400 basis points benefit to margins, which continued in the fourth quarter. This is due to the higher price points achieved with these fresh daily doughnuts and the efficiency benefits of a local delivery model, especially in covering fixed costs back of the production hubs. I gave the example then of the Tampa market, which has seen local EBITDA margins grow to over 20%. This time, I will showcase the Albuquerque market, which has increased revenue per hub by 29% year-over-year to $5.7 million, driven by a 350% increase in DFD revenue year-over-year. This has led to a 700 basis point increase in local EBITDA margins, which were over 20% in the fourth quarter. Both of these cities are former franchisee markets, which we previously acquired on a now showing how implementing the hub and spoke model proven in international markets also works in the U.S. The success there, and the strategy in other U.S. cities, explains our high level of confidence in the U.S. and Canada segment going forward. And our ability to achieve our goal of 15% adjusted - EBITDA margin for the segment within three years. Revenue per hub in the U.S and Canada, increased to $4.0 million in the fourth quarter, compared to $3.8 million in the previous quarter and $3.5 million a year ago. The biggest driver at the fourth-quarter growth was a 55% year-over-year increase in sales per DFD door, which averaged more than $600 per door per week for the first time. Points of access in the U.S. and Canada increased by more than 1000 in 2021 to 5,723, driven by DFD door expansion. We expect to add about 150 fresh points of access in the first quarter of 2022 in the U.S. and 500 for the full year as we expand our program in both existing and new cities. Hubs and spokes in the U.S. and Canada increased by five during the fourth quarter to 126. One milestone this quarter came from our digital Insomnia Cookies business, which now for the first time has adjusted EBITDA margins on par with our U.S. doughnut business. We continue to see tremendous potential for this rapidly growing brand. We also saw good progress on profitability in our startup business, branded sweet treats, in the fourth quarter whereas more than doubled our production capacity this year, which in turn has helped us to reduce our cost per unit. While branded sweet treats are not yet profitable in the fourth quarter, the losses reduced considerably, and we remain on track to be profitable by the middle of 2022 as demand continues to grow. Net revenue in our international segment, which consists of our equity markets in the UK, Ireland, Australia, New Zealand, and Mexico grew 26% in the fourth quarter to $90 million, while organic revenue grew 31%. Organic revenue growth on a two-year stack basis was 22%. For the full-year net revenue grew 45% to $333 million, while organic revenue grew 37% or 19% on a two-year stack basis. International adjusted EBITDA for the fourth quarter grew 25% to $20.7 million on margins of 23%, in line with the prior year. For the full year, adjusted EBITDA grew 83% to $81 million, driven by the strong performance of our omni-channel model across all of our international markets. Adjusted EBITDA margins for the year expanded 510 basis points to 24.5%, driven by the efficiencies gained from the strong performance of our hub and spoke model. International sales per hub increased from $6.4 million in 2020 to $9.1 million in 2021. Leveraging the 36 existing hubs, to deliver doughnuts to more fresh points of access. 518 points of access more for the year and 82 more for the quarter. Revenue per DFD door, was over $1,000 which explains the high levels of profitability in our international segment. Turning now to our market development segment, which is made up of our franchise business and equity owned Japan market. Total revenues in the fourth quarter grew 9.9% to $31.4 million, while organic revenue grew 8.8%. Strong performance in Japan, and our franchise markets was partially offset by franchise acquisitions. For the year, market development revenue increased 12.7% to $123 million, while organic revenue for the year grew 11%. Adjusted EBITDA in the full quarter for market development was flat at $11 million, but grew 4.5% for the year to $41 million. We continue to be very optimistic about our growth potential, which is reflected in our 2022 outlook. For 2022, we expect revenue growth between 11% and 13%, and organic growth between 10% and 12%, which is above our long-term guidance of nine to 11%. We expect all three reporting segments to contribute to this growth. And as a reminder, we will no longer be lapping the exit of our legacy wholesale business in 2020. We plan to have more than 1,000 points of access in 2022, mostly DFD doors. We expect adjusted - EBITDA to grow faster than sales in 2022. Up 12 to 16% to between $210 and $219 million with margin expansion in both the U.S. and Canada, and international segments. We anticipate an income tax rate between 23% and 25%, and adjusted net income diluted a $65 to $69 million, an increase of 18% to 24%. We expect adjusted diluted EPS of 38 to $0.41. When comparing EPS in 2022 to last year, it is important to remember that will be impacted by share count dilution from the IPO in the first half of the year. Excluding that impact, adjusted EPS growth will be similar to the adjusted net income diluted growth of 18% to 24%. While we do not provide quarterly guidance, in general, earnings growth will accelerate through the year, as the benefits of our hub and spoke model continued to come through. COVID disruption subsides, full [Indiscernible] traffic in New York increases, the profitability of branded sweet treats improves, and we continue to absorb inflation through pricing as needed. In January, we have seen some operational disruption from Omicron and a higher number of winter weather events than usual, which will only modestly dampen our Q1 results. Demand remains high. For example, we saw good growth for Valentine's Day so I do not believe these to be significant impacts for the full year. In 2021, we spent 8.6% of revenue on capital expenditures; in 2022, that will drop below 8% to around $115 million to $120 million. Our 2022 CapEx includes investing in approximately 15 production hubs, mostly experiential Hot Light shops, as well as more than 30 Insomnia Cookie locations. Every time, we expect CapEx as a percentage of revenue to decline to 6% or below. In 2022, we'll continue to pay down debt and expect to end the year below three times leverage, with a long-term goal of approximately two times. As our balance sheet improves, our EBITDA increases, and our CapEx as a percentage of revenue declines, we expect our free cash flow conversion to also improve from approximately 10% in 2021 to more than 20% in 2022, and over time, grow to 50%. Lastly, we continue to remain confident in our long-term growth algorithm of 9% to 11% annual organic revenue growth, 12% to 14% annual adjusted EBITDA growth, and 18% to 22% annual adjusted diluted net income growth. Operator, we can open the call up to Q&A now, please.

Thank you. [Operator instructions] Our first question comes from John Glass of Morgan Stanley. You may proceed with your question.

Thanks very much. Good morning. First, Josh, just as a high-level question. I think I heard you correctly but correct me if I'm wrong, that the enterprise EBITDA margin for FY '23 should be around 15% if that's correct? I think this year '22, it's maybe 14% plus or minus. So it's a large step-up. Can you just walk through what the -- I understand the efficiencies gained in the business, but is there anything in particular assumed in FY '23 that would drive -- or what are the pieces that I assume in FY '23 that would drive that bigger step-up in EBITDA versus FY '22? Thanks.

Hi, John. Thanks for the question. And you're right. 2022, the guidance we've given implies around about a 50% basis point improvement in margin. And we continue -- we expect they're up to continue to drive up margin as we benefit from the hub and spoke model. I gave examples earlier in the call around cities which are seeing -- deliver fresh daily, add to the margin. On top of that, e-commerce continues to grow strongly, also leveraging the hub and spoke model. And the branded sweet treats business, although small, is going to become profitable this year, as well as markets like New York in the long run. So all those combined to give us that level of confidence in the long-term profitability, the U.S. and Canada segment.

Gotcha. But your -- the 15 was an enterprise goal, correct, in 23? I just want to verify that.

Yeah, absolutely. And I think that the U.S. is the biggest driver of that. We're very pleased with the ongoing momentum and profitability in international and hence you're right, 15 overall.

Thank you. And just finally, what is the full pricing now that you've taken a couple of price increases in the U.S. and Canada? What is that running now? And what is your assumption on overall inflation in the P&L in FY '22 so we can gauge how that offsets that inflation, please?

Yes. Q4 obviously has shown that fresh premium sweet treat business like ourselves, we can manage that inflation environment that you referenced with price increases. After the November 1, we effectively ended the year with double-digit price increase for the year in the U.S., high single-digit on average across the world. The guidance we've given here today does assume that we are able to manage both from that price increase and if we so choose, if needed, further price increases to still grow our margins in 2022. Most specifically to your question, I mean, on wage inflation, we did see it accelerate through 2021; it's more stable now. We're assuming high single-digit for 2022. And on the input cost side, we have a great line of sight of that because we have actually already covered more than half of the year, sugar is fully covered for the year, oil and gasoline through 2023. That means we have a lot of confidence in our ability to deliver on the margin increase that we've been talking about already.

Got it. Thank you.

Thanks, John.

Thank you. Our next question comes from John Ivankoe with JP Morgan. You may proceed with your question.

Hi. Thank you. I noticed that the DFD doors in the U.S. actually kicked down in the fourth quarter relative to the third. I just wanted to see if there is any symbolism in that as you're focusing on fewer higher profit types of accounts if the amount of learning that you have in the DFD segment is kind of increasing your confidence in terms of generating more profitable accounts. And if you can put that decline in the fourth quarter relative to the increase in DFD doors that we're expecting in fiscal '22.

Sure thing. It's always really important for us, to deliver fresh daily doors in high traffic locations, and deliver the margin growth that we expect. And we're going through a transformation in the U.S. We've completely transformed from this legacy wholesale business over the last 18 to 24 months. In international markets that churn on those DFD doors very, very low, less than 1%. As we go through the transition in 2021, we've definitely been learning as we go and have identified doors that aren't as efficient. But overall, the churn is still well below 5% and dropping. Q4 has a lot going on in the grocery stores and the convenience stores, seasonal occasions. And so it was great for me to reference it. We've already got new doors going in, in the New Year for 2022. We expect 150 new DFD doors in the first quarter in the U.S. and around 500 for the full year, over 1,000 across the world. Good momentum with our customers, good momentum across the U.S. cities and internationally on DFD. Key driver of growth and margin progression.

And if I may, and this is just a clarification from the release. There was a fairly sizable sale leaseback gain in the quarter, could you talk about what that was? It does look like it's excluded from your consolidated adjusted EBITDA, but I just wanted to make sure that was the case in the segment levels as well?

Sure. Hi, Charles. I have Joey with me here. Do you want to just reference that, Joey?

Yes. Sure. So we did have a sale leaseback of a few properties in the fourth quarter generated a little over $11 million in cash for us. It was an $8.7 million GAAP gain that we did add back for the adjusted EBITDA. So wanted to make sure that was represented appropriately.

Thank you.

Thanks, Joel.

Thank you. Our next question comes from Sara Senatore with Bank of America. You may proceed with your question.

Okay. Thank you very much. I wanted to ask about maybe some of the underlying dynamics happening in your access point. So you mentioned all product lines and sales channels performed well, but was there any mix benefit you saw, either opening in higher sales volume markets or -- you did say there were some disruption from Omicron, did you see any mix shift to DFD from drive-through or other? Just trying to understand the underlying dynamics there and whether there's any reason to think that either they persist in the coming quarters or maybe there's a bit of a reversal as demand and patterns normalize. And then, I just have a quick follow-up from that.

Yeah. So first off, one of the things that really happened in the quarter, the demand curve that really drove the businesses, particularly around our seasonal approach, so you'll see the Halloween assortment and the holiday assortment really did thrive. They did exceptionally well. When you saw the COVID impact as it moves around, we saw minimal impact on that in the business as a whole, and you just saw the fresh DFD business as it continues its assortment, or you start to see a bit of mix even from holiday. Doughnuts expect to go in there. They also get a pickup as well. So it gives you an idea how that business and how the channels work. We see the same approach even starting the year in January and even parts of February, as you can see, the potential of the DFD is it drives fresh, really drives that DFD business. That's the number one attribute the customers continually ask us all of the time. They value fresh more than anything else of what we do. When we can apply this omni-channel approach into the mix, the pricing potential that you have, because when we get into different assortments [Indiscernible] you can choose the assortment that you want to have inside of the retail, you can choose the assortment you want to have in delivery, you can choose the assortment you want to have in DFD as well.

And [Indiscernible] just to add to Sara. That on the channel perspective. In the U.S., which is obviously a big driver of growth overall, we actually see all the channels growing the biggest though, the biggest contributor to your mix question is delivered fresh daily. But e-commerce, it grew in the fourth quarter. We expect that to accelerate a little bit from a growth versus prior year point of view in 2022, because obviously we are lapping a big, big impact of the pandemic in 2020 and we see the shelf growth coming through, we see the drive-through coming through, we see insomnia coming through. So, it's actually seeing a balance of growth across all those channels in the U.S. and international. So it's quite a balanced profile that we're now selling into. Now, of course in 2022, we will no longer be lapping the exit of our legacy wholesale business, and hence that should be reasonably even through the year as well.

Great. Thank you. Very helpful. And then, just on the margin, you mentioned improved fulfillment rates for sweet treats, which is interesting because most restaurants have difficulty managing supply, could you just talk about whether that had any impact as an offset to the improvements you've made in supply chain, and perhaps talk about what's left to be done to improve fulfillment further? Thank you.

Absolutely. Our branded sweet treats business, which is the products we make on-shelf for Walmart and now increasing to other grocery and convenience stores, the doughnut bites and mini crullers. A launch we'd made -- instead, we're a startup business, less than 5% of U.S. and Canada segment sales. A launch we made in the pandemic, we definitely had fulfillment challenges as it expanded, grew even faster than our supply chain was able to manage in the third quarter, which impacted profitability. In the fourth quarter, thanks to great efforts from our team and we put in additional line -- production lines. We're able to significantly improve that, as Mike referenced, and that reduced the profit impact that we had suffered in Q3. Q4, we're still not profitable on branded sweet treats, as it continues to grow, we'll move into profit by the middle of 2022 and we're keeping up with demand now which is great. Demand as Mike referenced, continues to build record levels with over 15,000 distribution points across the U.S. So we're pleased with that progress and pleased that we are moving towards what will be a margin, maybe potentially even accretive business in the long run.

Great. Thank you.

Thank you.

Your next question comes from David Palmer with Evercore. You may proceed with your question.

Thanks. Question on the sales per hub. You have points of distribution growing per hub, and you have that maybe we can call it out-the-front door sales. How much do you imagine your out-the-front door sales have been hindered, not just in the markets like in New York, but overall by COVID caution? Do you view this as an easy recovery in some percentage points that could come in sales per hub just from the out-the-front door sales?

So David, it's a really good question. When you think about it. We're the business really thrives in particularly around when those seasonal events happen. When Halloween happen, when the holiday assort happen, when Valentine's Day happen, we do not see that impact from COVID. People want to access our brand because of the gifting nature of it. We know right now, just so how you can think about that. 30% of actually every dozen box, that's purchased is actually a gift. You can also see when we actually play in the channels and we did something on 12-12, which we're at this day of the dozens. We did something in the actually delivery channel. We can drive the business sometimes up to 50% increase just in e-commerce. So we have the ability to move around and our customer moves around that. Our number one focus is how do we make sure our Krispy Kremers can be safe every day and we can operate, and we didn't lose a lot of operating days, so they shift around, but I don't see that as a massive change when it opens up because our customers really used to how they want to engage with our brand. Yeah. There's no demand impact that we see even from Omicron recently. When we -- when I referenced Omicron disruption, it's purely Krispy Kremers unfortunately testing positive and just the operational disruption around that. But we've estimated that just for the last week of December and partial in January at less than 2% of sales. So for a double-digit growing business, it's just not a meaningful change for us.

And then, just a follow-up on the points of distribution gains? You talked about double-digit growth on those. One of the feedback that we get on this company in the stock is that there's a lot of moving parts and that people have a hard time being confident about the sources of growth and the points of distribution is a big part of that. Is there any sort of comment that you can make about your pipeline and the visibility you have into that double-digit points of distribution growth? Thanks.

Yes. So if you think about the pipeline today in the U.S. and even in the international markets will return to grow 10% a year. Those are existing customers. We're really comfortable about how that pipeline will grow. We just talked about that you'll have mix shifts sometimes between particular inside of the U.S. and Canada market as they look at a better optimizing that, so there is a clear line of sight. What we really see is that from 10,000 where we are today, is we actually see the 50,000 potential, how to really get into those points of access. And we see that as every single one of our core markets is able to drive, and the U.S. will drive another 10,000 points of access, we see the international markets, which is split between the international segment and the market development segment, another 30,000 points of access. It's the simplicity of the model, which is you get that Hot Light shop and then you leverage, whether it's a 40 or 50 up to even 90 spokes that you apply to that shop, and that a lot will depend on if it's in an urban market, if it's an itself urban market. But the model has proven itself everywhere we are across the country, so we're pretty comfortable what's there. It is different. As people like to have very typical franchise models, which is just to open up shop, run same-store sales, that's not how we want to run a sweet treat shop, which is really about how we maximize the doughnut opportunities, which is around the seasonal part, and then making sure we get to customers where they are through this whole omni-channel and hub and spoke model. That also starts to become simple when we start to say can you execute that consistently. And we've had the privilege of doing this for the past six years, right? The public is now seeing this actually in the past, almost a year as they start to see the hub and spoke model and truly the DFD system come to life.

Thanks, I'll pass it on.

Thanks David.

Your next question comes from Brian Mullen with Deutsche Bank you may proceed to your question.

Thank you. Just question on the Insomnia business. It looks like you added a 26 units last year on a net basis, about 14% growth. Can you just speak to how the business handled that pace of growth last year from an operational perspective, are you pleased with what you saw? And then related what kind of pace of unit development do you think that you could get to over the next several years there is 40 to 50 units, something you think they have the ability to grow into?

Yes, so the pacing as the teams starts to scale, they start to have talent. I know they start to be able to get the right management bench amount. They can manage the growth. In fact, we've seen as they've adjusted, even in their own omni-channel model, because it's not just the shop and the delivery right, there's a gifting business that they've also managed well. We do see that 40 -- 50 cookie shop opportunity continue to be there. Right now, they've looked at their version about how do they think about the business, which is 600 cookie shops, when they think about that as a long-term potential. That's just where they are today. They are defining what's the size of the potential market like that, that will probably continue to grow, as we start to see how these new shops are performing, both in the urban markets as well as the collegiate. You're seeing a bit of a shift that's really starting to maximize the collegiate markets where they grew right now, so you can you can start to see that same opportunity exists in the urban markets. So seeing that potential, very comfortable with how they're managing both the top line of the cookie shops, the margins of the cookie shops as they're able to do that, and then see really how to expand that 40 out of a base of 216, where we are in to the year, is very manageable to them. In fact, they have line of sight to already 85% to 90% of that pipeline, which is great when you start to see how our business will start to develop that.

Okay, thank you for that. And then just question on the balance sheet, capital allocation reference getting leverage below three turns exiting this year, long-term guidance reflects getting leverage of two turns. So can you just talk about what that path down from three turns to two turns looks like? Do you try to go there as fast as you can on a glide path or you perhaps start to explore share repurchases along the way?

When Mike referenced a moment ago, 50000 points of access global opportunity compared to the 10,000 we have today, it's a real reminder of how much growth we have, and with the confidence we have in the returns that we get from investing in that growth. Our primary focus is investing for the future, getting those returns back, and continue to reinvest in the business. To your point around three times to two times. I mean, over the course of 2022, we'll grow our EBITDA 12% to 16% we expect that to continue in the long run. And so, yes, naturally we signal that that will pay down our debt because we're strong free cash flow business.

Your next question comes from Bill Chappell with Truist Securities. You may proceed with your question.

Thanks. Good morning.

Good morning.

I just wanted to -- want to follow up on pricing the outlets this year and this is simplistic, but you're looking for 10 to 12% top-line growth, which is slightly above your long-term algorithm. I think you're implying that at least it's mid-to-high-single-digits benefit from pricing. But in the original algorithm, obviously, I don't think you had that much pricing. So is it an assumption that there is some elasticity this year? Is it just we're only in February and so we're being very conservative on kind of what volumes do, or is it -- or there's some tougher comps that are best offsetting? Just any color of how it would seem to apply that it's a lower-than-average volume growth this year with that pricing to get to your 10% to 12% number. So just help me bridge that would be great. Thanks.

Sure thing. The first thing I want to say is that our expectation for 2022 has not changed. We've come in with a guidance that is above the long-term algorithm, and we start the year very optimistic in terms of being able to deliver that guidance. We can see all segments contributing. Valentine's Day was a nice start and we saw strong demand there. So, nothing has changed on that. We have a number of puts and takes all the time going on in the business. And as we start the year, coming out with a guidance range above the long-term algorithm has been our focus. Pricing and premiumization, as Mike has talked a lot about, with the fresh, sweet treats such as ourselves has always been in our strategy, and we will drive volumes and transactions this year, not just grow from pricing, which you're right is implied at the moment in the high single-digits for 2022, but we'll see how we go. We are also very pleased to, of course, use it to cover that inflation. We will have to adjust accordingly as we see fit. No change to the model.

Okay. And just to, maybe understand as the year progresses, and say, commodities or labor or other things get better, would you make up? Would you offset some of the pricing with more promotions, other things, just to continue to drive volume? I assume you have a lot of arrows in your quiver to attack it?

Yeah. I mean, that's not the first step that we look at if we really look at maximizing again, that seasonal approach, where you get the right assortment, the right packaging, the right story line, that drives Krispy Kreme. And you can see it from our holiday that was volume-driven. The Halloween, that was volume-driven. Josh just mentioned again, Valentine's Day. They're volume-driven when we actually really drive the merchant approach to the business. And it's volume-driven when it's also at a premium, so it's pretty unique. So we continue to do that. We can elevate our brand and get volume and price.

Okay, great, thanks so much.

Thank you, Bill.

Thank you. Our next question comes from Jared Garber, with Goldman Sachs. You may proceed with your question.

Hi. Thanks for the question and all the detail this morning. About, maybe a higher level strategic question as we think about that 50 thousand points of access opportunity. Obviously, you've gone through a period of, I guess, premiumization, I would say, with the fresh doughnut products. How do you balance the brand positioning of that more premium fresh product with the opportunities? Maybe that might -- some might consider maybe down market in terms of convenience store accessibility. And then I just want to follow-up on the commentary on ghost kitchens.

Right. So if you look at the 50,000 we put out there, you still have to do that in fresh spoke -- rough -- Hub & Spoke model. 50,000 to give you another snapshot from the grocer and convenience aspect, its 1.3 million doors, and we're not even getting close to 5%. So access to the fresh product would still be a must scarce. And we look at how you represent the doughnuts, whether it's from cabinets and the display from the merchandising, the DFD that also goes through on top of delivery, etc. is a really big opportunity. Adding on, I know you're going to talk about [Indiscernible] kitchens, but we look at -- we could look at that, but we also look at dark shops, which actually piggyback along where our routes and our spokes are today. We control the quality. What you want to make sure is that the doughnuts are fresh. It's the number one thing that the customer continues to look at. And again, in a space of 1.3 million potential doors, being disciplined about just doing 50,000, which is significant growth, it's a 5X growth story right now. We're pretty comfortable about maintaining that scarcity and the hubs, which really are going to be unique that drive that brand awareness, and you can get all the channel approaches that you want to see.

Great. That's definitely helpful. And yeah, I call them ghost kitchens. I'm not sure if you're look -- you're talking about them as the dark shops. Is that -- I'm not sure if that's exactly the same thing is how we would typically think about it, maybe there's some -- additional clarity there would be helpful, but just wanted to understand the strategy there, I guess. What's the benefit of doing something like that versus just opening up a fresh shop where you also have that consumer access point? Is it really just maybe lower costs shops that can drive that e-com business? Any commentary that would be helpful?

So a ghost kitchen is -- that's not what we're doing today, right? Ghost kitchen is something that exists in the marketplace where they're actually building the kitchen through somebody else and delivering products, right? What we do at dark shops is just another opportunity to get another spoke, which increases the ability of having delivery along the route, which we couldn't do directly from one of just our hubs, for example. So it's a low-cost investment, but it gives you a fresh doughnut drop that can then get to that customer in there and it gives you a delivery radius where people will want to use the e-commerce channel, where you can now get the doughnut s because you're not -- you're 20 minutes away from our shop and you wouldn't be necessarily getting that delivery from the business, and to make sure you can then maximize that, you get to the dark shop which is basically think about as another spoke, that then uses a cabinet that is primarily just for delivery, which is what a dark shop can do.

Yeah, it's like a DFD dual with -- only the Uber driver can go to it so it causes less than $1,000 versus a fresh Schapple (ph) or even a DFD cabinet. So it's a great innovation that we started in the UK, trailing now in the U.S. it looks really promising as a way of getting more access to be in low-cost way. And that's why we're doing [Indiscernible].

You got to deliver fresh. That's what the customers has their expectation, and this is what this hub and spoke system can do, including even including the dart shop in that portfolio.

That's definitely helpful. And then just one more follow-up, if you don't mind. Can you just update us on maybe now that you've gone through the full year of FY '21, where sort of the customer frequency landed? I know as we went through the IPO process, one of the commentary there was on increasing that frequency from about -- I think you said 2.5 times at the end of IPO or so and getting that higher to about four times a year over the longer term, so any update there would be really helpful. Thank you.

Yes. We're still at 2.5, that our customer does that and a heavy user amount of tends to be at four, we'll drive that seasonal piece and we'll start to collect more customers in that space. We can look at our loyalty customers versus just people who shop without a loyalty business. They're probably have about a 20% increase from their frequency. But again, it's still within the below three. If you start thinking about it that way, the big opportunity is continue. How do you continue to drive that premiumization around the seasonal activity of how this brand does a sweet treat business, and then capitalize on that and then people start to think about us always as a gifting occasions that will happen?

I do think there's an opportunity for more gifting opportunities as the world gets back and people start to celebrate a bit more, but we don't build that in, and we just see that as a upside to our frequency.

Great, thanks so much.

Thank you. I don't know if there's no further questions at this time, I would now like to turn the call back over to Mike Tattersfield for any further remarks.

Yes. Thank you, everybody for joining us today. I hope you get a sense from Josh, I, and all the crispy creamers. Tremendous some work they did last year to have just a very successful year, especially as the first-year as a public company. We're not -- we're -- our expectations for FY '22 are exactly where we called them out with. They're still above our long-term algorithm, even in this type of environment which we think our omni-channel model can handle really well. And I'm truly appreciative of all the crispy creamers, is just to an incredible job for a company every day. And thank you for spending some time with us. And I look forward to continue chats throughout the year.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.