Good day and thank you for standing by. Welcome to the Krispy Kreme Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Rob Ballew, Vice President, Investor Relations. Please, go ahead, sir.

Thank you. Good morning, everyone, and welcome to Krispy Kreme second quarter 2022 earnings call. Thank you for joining us today. Our second quarter earnings release and 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, Global President, 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 contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements of expectations, future events or future financial performances. Forward-looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's 10-K. Forward-looking statements made today speak only as of today. The company assumes no obligation to publicly update or revise any forward-looking statement, except as may be required by law. Additionally, today's call will include certain non-GAAP financial measures. A reconciliation between non-GAAP financial measures and their closest GAAP measures can be found in the company's second quarter 2022 earnings press release and our Form 10-Q, which will be furnished to the SEC and available at investors.krispykreme.com. With that, I'll turn the call over to Mike.

Good morning and thank you, everyone, for joining us today. We are pleased to share our second quarter 2022 results, as we continue to put up strong organic growth due to the strength of our omnichannel strategy. I want to start today's call by thanking our amazing group of Krispy Kremers, our team members, for their continued hard work to create moments of joy for our customers, especially, while navigating significant uncertainty across the world. Our people continue to be at the forefront of delivering on our mission of becoming the world's most-loved sweet treat brand. The purpose of our company is to touch and enhance the lives of others through the joy that is Krispy Kreme. The power of our brand allows us to do that in a special way. The second quarter included Mother's Day campaigns around the globe, Platinum Jubilee celebrations in the UK and the Beat the Pump gas promotion of a dozen doughnuts for a price of a gallon of gas in the US. These campaigns perfectly highlight our key brand values of joy, generosity and connection with consumers, which we know drives strong brand well, especially in periods of weaker consumer sentiment. We are proud to be a global company operating in more than 30 countries and campaigns like these highlight the good we can do and how we really drive genuine consumer connections with our brand in an impactful way. Turning to our performance. The continued progress of our long-term strategy to drive our omnichannel model was well and apparent in the second quarter with an additional 382 fresh points of access during the quarter, the overwhelming majority of those were low capital Delivered Fresh Daily, or DFD Doors. This included strong points of access growth in Australia, South Africa, Japan and Latin…

Thanks, Mike and good morning everyone. In the second quarter, our Krispy Kremers have once again shown that our beloved brand and our omnichannel approach drives, even in a challenging consumer environment, with net revenue growing 7.5% year-over-year to $375 million. That's despite a near 3% negative impact to revenue growth from the stronger US dollar. Organic revenue growth was 9% or 31% on a two-year stack basis. During the quarter, we added 382 fresh points of access across the world, mostly in the form of capital-light DFD Doors. We now have more than 11,400 points of access globally, an increase of nearly 1,800 from a year ago. Along with our successful brand activation initiatives, this has resulted in more than 20% increase in trailing 12-month sales per hub, compared to the prior year, in both our Domestic and International business segments. Adjusted EBITDA was $47.4 million in the second quarter, down 10% from a year ago. This is despite the strong momentum in points of access growth and sales per hub, which we see as leading indicators of higher margins in the future, due to the efficiency benefits of adding off-premise sales to the hot light theaters. Three factors explain the lower EBITDA this quarter. In the UK, we lapped a post-pandemic resurgence in 2021, with a much more challenging consumer environment this year. Inflationary pressures continued in Q2, with pricing actions taken in the US and U.K. after the quarter ended. And most significant was the stronger dollar, which alone impacted adjusted EBITDA by $2.7 million in the quarter. In the second quarter, GAAP net loss was $2.4 million or negative $0.02 diluted EPS compared to a GAAP net loss of $15 million or negative $0.13 diluted EPS in the same period a year ago. Impacting GAAP net…

Thank you. [Operator Instructions] Our first question comes from John Glass [ph] with Morgan Stanley. Your line is now open.

Hi. good morning guys. It's Brian on for John. Maybe just the first question about the US Hubs without Spokes. What kind of defines the ones that you'll be closing? Is there a location issue, or what would you observe about those locations as they've kind of evolved out of COVID over the last 1.5 years?

Good morning. This is Mike. We've talked about the transformation in the US, which we really started to close in on last year. We just even finalized with the Midwest acquisition. When we acquired it, it was to get control of the system including the largest markets. So we knew even then that some of the hubs were underperforming. And the whole plan was how do we evolve the system much more to this omni-channel model and the hub-and-spoke. So that's always the lens that's there. So the shops that aren't there are the shops that can't convert. They can't change over and do that. And that's really the inflationary time sometimes will actually highlight the gap that exists because you can see even across the world the Hub-and-Spoke model really allows us to drive our revenue per hub, which you can start to see happen. That gives you one insight.

It's Josh. The only thing I'll add of course is that actually many of the Hubs without Spokes are strong and profitable and much-loved local community stores. There's 118 in the US. Hubs without Spokes. So a significant are still performing well. But there's also a significant minority and hence our decision to close approximately 10 that are really not sustainable in the long run. And now with this context in this environment the opportunity is to accelerate what would have been inevitable anyway.

Okay. Great. Thank you. And then just on the improvement in organic growth as you went into July, was that primarily do you think due to pricing? Maybe if you could comment just on some of the underlying trends in the on-premise business maybe in the delivery channel as well. What are the other drivers of that besides kind of the pricing impact?

So you've got again promotional activity or merchandising mix that works. Points of access continue to grow. There is pricing. We look at pricing in a very different way, right? You can either be reactive or proactive. We're in this business for a long, long term right? So we really look at pricing strategically. We didn't take price in the US or even in the UK in the first half of the year. So we then really started to learn what's the merchandising mix even as consumers are challenged because we serve a broad spectrum of consumers. So then finding that mix right and tweaking not just the promotional mix but we actually were able to open up a new tier, which we do our customized handmade doughnuts, which is they're more expensive. It's a premium price. And you can see the customers are gravid to it. They're always going to look at pricing and we're very strategic about it. And our customers will always tell us is it worth right? And we can see even as we brought fresh doughnuts to the DFD channel, when they can get access to that even across the van they want the fresh doughnut experience. So clearly, we haven't seen the impact from pricing that we take.

Maybe just to complement, it's nice to see the US perform well already in the third quarter. Remember traditionally the third quarter is a seasonally – is a weaker quarter for us but the pricing that Mike mentioned ice-cream truck, doughnuts, LTO clearly doing well. US still challenged. Obviously, the economic the UK is still challenged. Obviously, the economic environment there. They've got a heat wave there, which certainly isn't ideal for selling doughnuts. But with the pricing with the momentum we started in July, the 10% to 12% organic growth for the full year and 7% to 10% constant currency EBITDA for the full year is very much how we see the year.

Thank you.

Thanks,

Thank you. Our next question comes from the line of John Ivankoe with HSBC. I am sorry with JPMorgan. Your line is now open.

Hi, thank you. I wanted to talk about DFD in the US. If you can make some comments around kind of DFD sales per door, profit per door kind of how the system is evolving from a profitability perspective. And if you have some opportunities the more experience you have, the more data you have and what have you maybe to do some portfolio management on the DFD side as you really kind of sharpen the pencil in terms of looking at profitability per account, especially as it's even more important now given your margins and profits of just making sure that you're doing business in all the right profitable places.

Hey, John, this is Mike again. I'll give you at least the strategic part which we really learned from our International businesses right, which is really how do you drive this omnichannel approach to the DFD and actually have the same doughnut mix that you have in the shop, translate over to the DFD doors. So that the Krispy Kreme experience is absolutely the same and the points of access can be a real big driver of margin and opportunity. That really started last year when we had the DFD start. And then you can see now we even tried it for the first time even in the US market, where we were able to activate on a promotion such as a July 4th activity and pushed that into the DFD Doors. So you can see the tape there and really rise sales. I'll pass it on to Josh. He'll get into a little bit more of the margin.

Sure Mike. Yes. So in the US, we're obviously continuously adding DFD Doors. And as we explained before the way we think about the profitability, is the contribution of adding those off-premise sales to our on-premise facilities or hot light theaters and the benefit of the operating leverage of adding those profitable sales, to fix costs at the hot light theater show still typically around 40% margin flow-through, from adding those doors. And Q1 to Q3 in the US is definitely a time where we're seeing customers keen to take on our delivered fresh daily cabinets and merchandising units. In terms of optimizing and making sure we're always at the best doors, we're seeing sales per door continuously grow. Q4 will be a time to optimize as we saw last year, and then we'll continue to add across the country with new customers new cities again in the new year. I mean one thing, to pick up on in terms of global learning, is we are selling a fresh doughnut same quality daily, in the grocery store that you get in the retail theater. So it's really important that we bring news and excitement to it as Mike said. And I think moving forward in the US, we're going to be doing more integrated marketing, making sure that there's plenty of excitement in the grocery store, just like there is in the retail theater. Even if it's not a hot doughnut, that doesn't mean we can't bring more LTOs and special doughnuts to the grocery channel. And that's definitely, an upside for the longer term and what we've seen in UK, Australia and elsewhere in the world.

Have you gone through the exercise of looking at and making sure every DFD door is profitable each of the seven days a week, or even each route is profitable seven days a week? I mean it would seem to me just through my observations in South Florida, for example, in some cases the doughnuts are sold out at the end of the day. In other cases, there's actually quite a lot at the end of the day. I mean not -- people don't necessarily eat the same number of doughnuts on Monday morning, as they might Saturday or Sunday morning for example. I mean that's normal. I mean does it make sense -- I mean, are you I guess kind of applying that I guess more granular type of approach to managing those accounts, or is it kind of your belief, that it's important to have availability to consumers know that it's there. And I guess, the good days will more than offset some of the slower ones?

Yes, actually we definitely see the opportunity to continuously refine our capabilities on managing this fast-expanding DFD Door network. We recently just sent our US team, over to the UK to really look at some of the best practices they've developed over the years. I mean the first highlight is of course the -- it's the routes where the profitability is most important. You're adding a driver running a truck. So you immediately, want to make sure you're covering that incremental cost. So route profitability is a focus of the teams. When it comes to the doors themselves, we've learned that you need a door size and make sure it's a minimum scale. And the team, have certainly learned and we use sales per door per week, as a guide that that's something we really want to drive up, and we still got some plenty of upside there compared to our international markets, when you look at what we're doing in the US and doughnuts to make sure that they're always available for that evening sale, that on-the-way-home commute somebody wants to bring home doughnuts, be very disappointing if they're not there. So we definitely want to always be available all times of day. We know that we will have -- always naturally have returns to bring back and it's a constant balancing act, through the week and across the doors with our customers to make sure we get the optimum level. But the growth is strong, and that's certainly a great place to start as we continue to learn and optimize our capability around delivering to the bottom line.

Yes. One area I just would add on is just the ability, when you start thinking about points of access and how you're talking to our customer base, right, before they were only getting access to Krispy Kreme in the 300 shops, you're now able to talk to them when you get the omnichannel approach and you get the right doughnut mix into the 6,000 doors in the United States with the potential getting of beyond 11,000. You can see then the brand will also start to resonate and the frequency starts to become much clearer and you can communicate about the product and it's accessible there. So, that's not just the journey what Josh describing. It's how you get to the route profitability and door and sizing but how do you make sure the consumer then has access to it and can get to those access.

Okay. Thank you.

Thanks John.

Our next question comes from the line of Carlos Laboy with HSBC. Your line is open.

Yes, good morning everyone. What is the biggest point of resistance that you face for getting pricing in the US to keep revenue pace with or ahead of inflation for real organic growth? And maybe related to that can you comment on brand power? Do you have the brand power in new markets where you're expanding into to get the pricing that you need with inflation? And what's your pricing experience in established markets versus new markets?

So, again, we always look at our brand and the opportunity of how we can price strategically across everything we do. It's really about always finding the price where customers think it's worth it how do you continue to innovate the points of access which gives you more access and frequency. We can take price. We took price in DFD last year. We continue to take price, but we're very strategic about how we do it. And you have to think about even if the innovation that we start to launch and cheering and pricing. So, that's a huge opportunity where you have value and tiering across your customers that there is no barrier today than what you can price right away. We actually just try to really manage that continuously across all of our customer base. And then all of our customer base are always looking for value. They will also look for premium innovation and gifting. The thing that's pretty interesting we have low-frequency items, right? So, you got to make sure when people want gifting in those aspects, that's when they engage with our brand. You brought up other countries and said the awareness of Krispy Kreme is worldwide, right? There's not a lot of opportunities for you to go in or open up the Krispy Kreme that they're not aware. Recent openings, for example, that we had in Cairo, they're still at it. We can't even manage the capacity that comes out of the shops. Our partner they're really looking and figuring out how to get the hub-and-spoke system. So, the uniqueness of the model is how do you drive the business from a traditional doughnut shop, which is what it was in the past through a hub-and-spoke system. And when we do that well and get the access point, we can really drive the business.

Thank you.

Thank you. Our next question comes from the line of Bill Chappell with Truist. Your line is open.

Good morning. Can you hear me?

Yes we can.

Yes. I guess two questions. One, I'm just trying to understand maybe the change in tone or change in strategy. I mean three, six months ago, it seemed like the model was in place and things were moving pretty -- were being implemented well and you felt very good about even maybe some upside to the numbers. And then we've had what seems to be weather and economic slowdown and maybe the model has been stress tested. And you seem to be talking more about strategic tweaks to the model and changes. And so I'm trying to understand that this is something that was always in the works and you're just explaining it a little bit more. Or if you felt like you had to take a little more corrective action after the model has been stress-tested a little bit?

So, nothing has fundamentally changed from the model, right? The strategic model building and omnichannel business and now with the hub-and-spoke is exactly what we've been doing in the US when we're still going through the transformation phase as we just talked about in front which is how do you get to the majority of your business being hub-and-spoke from a system that didn't have that before. And all you're seeing is just us moving a bit faster now on the few hubs that actually don't fit into the system. There was a plan always with them to actually move on some of those hubs and I'm just talking about in the US. From the U.K. model, the UK business is a fantastic business, because I think you're alluding to that business as well. Even under direct with the UK is experiencing as a consumer base today, we still get 20% margins. The reason we can do 20% margins is because we have a great hub-and-spoke and very efficient model. They'll continue to tweak it. The macro environment is challenging customers everywhere in the world. It just shows you the resilience of our brand. It's actually growing in every single one of our countries where we operate today and regions. And so, when you give the benefit of the hub-and-spoke, you get to more access in a very capital-efficient way. We are very bullish on that exactly what we're doing.

The only thing I'll add is we're a global omnichannel business. Great thing about that, with half our system sales and half our EBITDA being international, we're able to weather any storm or change in the external environment. But of course this year, since we -- since our last call, the FX environment has changed a little bit, the stronger dollar. That's a very specific one-off item that doesn't really -- isn't really about our strategy or execution. In fact, when we see the difference between the hubs with spokes and how they are able to not just weather inflation but continue to strengthen compared to the bubs without spoke. It just gets you to really hone in on those hubs without spokes a little faster. When you look at the EBITDA drop in the US in the second quarter, more than half of it comes from those hubs without spokes yet they represent less than a third of the revenue. So, it's more a case of the next phase of the strategy being an opportunity to go after that even faster. And then when you look forward to the future, we've got this strong top line momentum around the world that Mike referenced. We've got reduced commodity inflation already for 2023. We see the profitability in the US hub-and-spoke. We have this premium innovation, which means that you've got a whole bunch of drivers that we feel good about for the longer term. Hence why there's no change to our long-term algorithm to double-digit high-growth company with even faster flow-through to the bottom line.

Okay. Well -- and just to follow-up on that. I mean, I guess was it not considered on the long-term algorithm? I mean I understand this is an unusual year, but it's also unusual in terms of price increases which are driving some of the sales. And there will be other years with macroeconomic changes and heat waves and other things. Does 10% to 12% long-term top line makes sense, or -- and you really haven't seen any change to that outlook?

No, we haven't, and hence why we shared already what we've seen in July. Because the way we see momentum across the whole world, with the additional point of access opportunity, gives us a long runway of expansion. We talked about 50,000 points of access that we've already identified around the world as an immediate goal and we're just over 11,000 now, just hitting 6,000 in the US with an immediate goal of 10,000. So, you quickly get to double-digit growth with that mindset. And you're right pricing and premiumization just come on top of that but there's a fundamental driver in volume. I mean just in the second quarter, we grew volumes of doughnuts sold in the -- around the world 7%, 9% in the US alone. So, we're selling more doughnuts. Growth algorithm remains intact and strong.

Okay. I’ll leave it there. Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Jared Garber with Goldman Sachs. Your line is now open.

Good morning. Thank you for the question. I just wanted to dig into the US organic growth number. Certainly, it's decelerated a bit sort of no matter what stack you look at. And I just wanted to get an understanding so 6%, I think that's supported -- I think you told us last quarter, you were running about 10% price in the US. Correct me if I'm wrong there, but I think that's what I picked up last quarter. Plus you've got, I think sort of high-single-digit points of access growth, which -- if I'm not mistaken, is also kind of feeds into that organic growth number. So, I just want to understand sort of the driver of the deceleration in the US organic growth number. And if you're seeing any -- sort of any pushback or softness or weakening in consumer demand trends as the consumer continues to be sort of pressured by the broader macro.

Well the first thing to say is that, Stat I just referenced to Bill in terms of 9% volume growth in the US shows that fundamentally we're selling more doughnuts every quarter than the quarter before in the prior year because we're making it more available and people -- that's the number one reason given why consumers may not think that at Krispy Kreme they can't get it. So that remains well with this quarter or any quarter with us. When you look at the breakdown of the organic growth to your question the biggest driver is Delivered Fresh Daily. It's adding more points of access to the doughnuts and growth within the DFD cabinets themselves. We have for example July 4th was a real boost in the quarter with a special offering LTO there. You mentioned pricing. We haven't yet taken pricing this year on DFD. We have taken it in Q3 on retail. But you said the double digit is, what we see. Well referencing just retail that would have dipped during the course of the first half of the year into mid to high single digits because we have taken pricing until the third quarter in retail as I said even faster dip on DFD because we haven't taken pricing there. So, pricing does play a role in the growth, but that volume is the biggest contributor largely driven by DFD. Growth across e-com and [indiscernible] as well was pleasing to see in the US.

Jared, you asked one question about the consumer. And I think one of the big learnings we had was that we can even go to even a higher tier of pricing, right? So what we did is we really learned how to grab our cinnamon-rolled product in the U.S. particularly doing that just on one day part amount which is on Sunday and then really getting to what we call our fourth-tier pricing. And it actually unlocks a lot of big opportunity that -- eventually even one day might scale even into the full omnichannel model. If there's no resistance that we're seeing from customers we still try to be very affordable on this, but there's clearly an opportunity to continue to put premium into our brand while we still try to maintain that kind of base price per dozen and try to drive that across the world.

Okay. Great. Thanks for the clarity.

Thanks Jared.

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

Hi, good morning. I just had a couple of forward questions just going back on some of the details of the update in the full year guidance. So, if I take the midpoint of EBITDA and revenue it looks like your updated guidance is something like 100 basis points below what it was before. And obviously international can have higher margins. So, are you able to assess how much of the change in margin is purely translation from higher-margin international profits? And how much would you say is, your other fundamental changes including inflation? And then a similar question on the $10 million to $12 million impact that you're singling out. If I understand correctly, it is the impact of FX translation and FX impact on costs. I just wanted to clarify if that's the case or whether it's FX translation and total cost increases regardless of whether they're currency related. So, if I take $10 million to $12 million and adjust for that am I adjusting for FX in a clean way?

Sure. Why don't we start with the FX detail? Joey if you're kind of sitting next to me. Joey do you want to answer on the FX and then I'll talk a little bit more about the -- how we see margin overall?

Sure. Sure. Thanks, Jaafar. Yes if you think about the $10 million to $12 million of FX impacts certainly there's a few different factors there. We know that the dollar has been strong. The primary impacts for us are in the UK, in Australia and in Japan as well as in our international franchise business. And that -- the $10 million or so assumes that the current rates that are out there will continue. And it does include both some translation or primarily translation, but then some transactional impacts as well.

And so just to add to your broader question, you're referencing the full year shift in margin from our prior guidance. I mean, when you step back we expect U.S. and Canada EBITDA to grow this year overall. And we expect international to dip a bit, reflecting the FX that we just discussed reflecting the challenges in the broader economic environment in the U.K. So the biggest contributor to that change in the guidance on margin is around that FX and that international chip. There is a smaller impact in the U.S. associated with timing of pricing and inflation through the year and those Hubs without Spokes which have not responded as well as our Hubs with Spokes. But definitely the way you should think about it is a lot about FX, a lot about the U.K. versus any change to our fundamental view of the progression and the transformation of the U.S. to this Hub-and-Spoke omnichannel model.

Thank you. That's very clear. So it sounds like, it's all FX related and the only cost impact that's in the $10 million to $12 million is your operations purchasing elsewhere.

Yes some…

And then, when you talk about the Hubs with Spokes. Yeah. Sorry.

Yes some of our commodities are obviously impacted by the strength of the dollar. They're globally traded. And so there is a transaction element to it. But the majority is the translation and about half of it is the pound.

Yeah.

And so we'll have to watch how that plays out.

Great. And then, just to close on that no change to the organic growth guidance range, is it because effectively we may have ended up at the top end and actually it may end-up being at the low end now? Or is it as you just suggested that organic growth remains very similar the difference is what sort of promotions you need to deliver to get there. And how fast you can get some of those costs covered?

Yes, we're happy with the range. Obviously, we've got different countries, doing different things through the year, but overall 10% to 12% organic growth ahead of our long-term algorithm and nine to 11. It will be a good year for growth for Krispy Kreme in 2022.

All right. Thank you very much.

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Mike Tattersfield for closing remarks.

So thank you everybody for spending a little time and learning about our business. I'm always appreciated to all the Krispy Kremers. I actually visited them in the shop today and said hello. I'm really look forward to continuing our journey of building the most-loved sweet treat brand in the world and deliver upon that every day. So thank you for your participation.

Thank you all for joining. You may now disconnect.