Thank you for standing by. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Ms. Stephanie Daukus, Vice President of Investor Relations. Ms. Daukus, please go ahead.

Thank you. Good morning, everyone, and welcome to Krispy Kreme's third quarter 2023 earnings call. Thank you for joining us today. Our earnings release and associated earnings presentation are available on our Investor Relations website at investors.krispykreme.com. Joining me on the call this morning are Mike Tattersfield, President and Chief Executive Officer; Josh Charlesworth, Global President and Chief Operating Officer; and Jeremiah Ashukian, Chief Financial Officer. After prepared remarks, 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 and Litigation Reform Act of 1995, including statements of expectations, future events and future financial performance. 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 than those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail in the company’s Form 10-K filed with the SEC for the year ended January 1, 2023, and in the other filings we make from time to time with the SEC. Forward-looking statements made today are 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 comparable GAAP measures can be found in our third quarter 2023 earnings press release and Form 8-K filed today and is also available at investors.krispykreme.com. With that, I'll now turn the call over to Mike.

Thank you, Stephanie. Good morning, and thank you, everyone, for joining us today. We had quite a bit of news this quarter at Krispy Kreme with our upcoming CEO succession and our exploration of strategic alternatives for Insomnia Cookies. To frame the call, I want to talk about our history. Afterwards, I'll pass the mic to Josh to dive into our strategy and Jeremiah to cover our financial results and outlook for the remainder of the year. Krispy Kreme has been a loved sweet treat brand since Vernel Rudolph first started making donuts in 1937. Since joining the company in 2016, we've taken Krispy Kreme on a transformation to become focused as a donut company, always creating fricken also donuts. Vernon's recipe and his hot-fresh donuts is how he built the brand. We further developed the brand unlocking the power of a truly omni-channel brand. And importantly, we now deliver 100% of our donuts fresh daily, up from 50% since 2016. Also since 2016, we've nearly tripled the number of access points where consumers can buy fresh donuts daily and increase the geographies where we operate by roughly 50% as we are now in 37 countries. We learned that we need to be where consumers want us and develop our points of access beyond the fresh and theater shops to include delivery fresh daily to grocer, convenience, and we are now unlocking new channels, such as club and quick service restaurants. We have profitably reshaped our global ownership network via our hub-and-spoke model and also acquired Insomnia Cookies five years ago to help us strengthen our e-commerce and digital platform. Digital orders now represent approximately 20% of consolidated retail sales. Finally, we have continuously invested in innovation and focus the brand on gifting, sharing and premiumization for our consumers worldwide.…

Thanks, Mike. It's such a privilege and honor to be asked to lead this great team that you brought together to represent this incredible brand, which means so much to so many people and above all, to support all our Krispy Kremers around the world as we seek to firmly establish Krispy Kreme as the world's most loved sweet treat. And on a more personal note, thank you, Mike, for the many years of support you've given me, including this period of CEO transition and I'm very pleased that you'll be staying on as a member of the Krispy Kreme Board. I'm so excited for what is ahead of us at Krispy Kreme. Our strategy is clear, make our fresh donuts available in more places and keep reminding people of the joy that is Krispy Kreme, not just to eat, but to share and give to others. We have made so much progress in leveraging the power of the Krispy Kreme brand under Mike's leadership, now selling over 1.6 billion fresh donuts a year in over 13,000 points of access around the world. And yet, we have so much further to go. Our existing points of access represent less than 1% of the places a customer could in theory by Krispy Kreme donuts and our purchase frequency is less than three times a year despite the many occasions and celebrations where our consumers can and do enjoy our donuts. We've laid out a great strategy, and we will remain focused on maximizing our global growth opportunity, leveraging our profitable omni-channel fresh donut business. The key elements being; one, expand availability of fresh donuts through more points of access in both new countries and new sales channels, such as quick service restaurants; two, increased purchase frequency by continuing to strengthen our…

Thanks, Josh and good morning, everyone. The third quarter finished in line with our expectations as we delivered growth on both the top line, and adjusted EBITDA with improved performance throughout the business. We delivered our strongest third quarter adjusted EBITDA growth, since our return to the public markets. And if trends maintain, we continue to track toward the mid to high-end of our full year revenue and adjusted EBITDA guidance. Net revenue grew 7.9% to $407.4 million driven by successful execution of marketing activations, pricing actions and further expansion of our omnichannel approach globally and across all segments. Organic revenue grew 9.6% to $400.3 million. As a reminder, organic revenue excludes impacts of acquisitions, foreign currency and the branded sweet treats business. Growth, pricing and the shift away from branded sweet treats resulted in product and distribution costs decreasing by 230 basis points year-over-year. GAAP net loss was $40.3 million in the quarter due to the forecasted effective tax rate and attributable noncash income tax expense. Importantly, we continue to expect an adjusted tax rate of between 24.5% and 26% for the full year 2023. Adjusted EBITDA grew 13.5% year-over-year to $43.7 million exceeding the revenue growth rate. In turn, adjusted EBITDA margins expanded across all reportable segments increasing 50 basis points year-over-year to 10.7%, demonstrating our ability to improve operating leverage through pricing and productivity initiatives. Diluted adjusted net income declined 3.6% year-over-year to $4.4 million. Adjusted EPS remained flat compared to last year at $0.03 and despite net interest expense increasing 44% to $3.9 million. The increase was primarily driven by higher benchmark interest as well as reducing our reliance on vendor financing. Turning to the segment results. In the US segment, organic revenue grew 10.2% to $258.6 million, driven by effective premiumization opportunities and decreased discounting…

Your first question is from the line of John Ivankoe with JPMorgan. Please go ahead.

Hi, thank you. The question is on US margins. And I know in the past we've talked about DFD profitability really being looked at a market level. And I wonder if there's any more intelligence or thinking around doing it at a root level or count level or even day of the week level. If there's an opportunity for you to actually drive some margin maybe beyond what we saw in the third quarter out of that business in general? And secondly, I think there's been some illusion that Krispy Kreme may use, potentially use third-party delivery into some DFD accounts as opposed to using your trucks and your drivers. And is that an initiative that is currently being tested or explored or something that we could talk about on this call? Thank you.

Yeah. Thanks, John. Appreciate the question around margins. I'll open up and I'll say we were pleased with kind of what we saw. This quarter with respect to US margins, we were up 30 basis points, obviously, in the US, but the US fresh business up over 100 basis points for the quarter. Really driven by some of that hub and spoke efficiency that you referenced, but also despite needing to absorb performance based accruals. So we still have bonuses this year that we expect to pay where we're declining those bonuses or decreasing those accruals last year. With respect to your question around looking at the business differently, we'll constantly kind of tinker with and explore, looking at different ways to investigate how to view the business. And maybe I'll pass to Josh to kind of elaborate more.

Yeah. I think the primary focus that we look out for the health of the DFD business is the quality of the doors themselves. And then we make sure that the routes that we service them with are as efficient as possible. So the average sales per week of the door, which is over $600 a week, and again this quarter grew 12% after multiple quarters of strong growth demonstrates that we're continuing to add productive doors and keep an eye on the existing base. Generally, it's scale and density in a city that drives the profitability of the DFD routes. Routes that do 15 plus stops, get in, get out quickly, high quality doors, short driving times is the focus. In terms of between different customers and what have you, we do see C-store be a little higher margin than grocery, but that's more reflecting the product portfolio. There's more loose donuts that we sell in the C-stores. And actually, in grocery stores at the moment, we have an initiative to add more cabinets that create greater display of those loose donuts. We've added over 120 this year. We see that as an opportunity to even improve the margin in the grocery stores. So we do a lot of analysis around it and that's how we think about it. But the real quality of the doors and those routes is the primary thing across the different cities.

And in terms of perhaps considering a different route or style of distribution versus doing it in-house than potentially using the existing distribution capabilities of a third-party for example in various markets is that an opportunity?

It could be. The routes that we have today are all run by ourselves. As we've built out this model over the last couple of years, we've wanted to move quickly. We've wanted to protect quality. The most important thing is these doughnuts, which obviously fresh daily always displayed in the highest best way and then drive the profitability through the high-quality doors and the efficient routing. But that doesn't say that looking forward third party couldn't play a role, particularly as we look to scale DFD in the US. The quick service restaurant opportunity is clearly significant. And to scale at that magnitude we will need to be flexible in different models. But right now we're focused on our in-house logistics model and making sure that those doughnuts are amazing, well served high service levels and the system remains strong throughout.

Sounds good.

Your next question is from the line of Sara Senatore with Bank of America. Please go ahead.

Great. Thank you. Hopefully, you can hear me. I have a question about the McDonald's announcement. It's twofold. One is, is that the CapEx increase? Is that the sort of reason for that? Or are there other initiatives that you're also supporting? And maybe you could give a little color on that. And then with respect to McDonald's, are there findings that you can share about things like pack size or loose doughnuts, what you know about the customers per your earlier comments about the relative profitability of different DFD doors. Just wondering if there's anything – any insights that you can share from the early test. Thanks.

Yes. Thanks, Sara. Maybe I'll address the CapEx question and I'll flip it to Josh to address the McDonald's question. Obviously, we continue to focus our spend on the highest returns. CapEx did tick up this quarter to about 8.4%, as we continue to invest behind growth and expansion of our US DFD network. But we also saw in our experience in the impact of foreign exchange rates on international investments in the quarter and obviously on a year-to-date basis which also contributed to some of the tick-up this quarter. Josh, do you want to cover the McDonald's DFD?

Sure, thing Jeremiah. HI, Sarah. Yes, regarding McDonald's itself nothing has been finalized but the opportunity to expand DFD through existing and new channels including QSR is clear. And we are discussing the potential for an expanded partnership with McDonald's in the US. The learning has been very interesting through the pilot that we've done with them throughout the year in Kentucky and that is the nature of a lot of the discussions with McDonald's right now, ongoing analysis and discussion with them, covering the operational execution, making sure the doughnuts are always arrive at the right time, right quality, understanding then indeed are the requirements that would be needed to scale beyond Kentucky and of course, commercial viability of the whole thing. I mean our confidence in the US DFD opportunity including now QSR is what's grown. It's such that we've decided to thoughtfully start making additional investments. We're just getting going, but those investments will be about -- around manufacturing capacity to support scale growth because to your point around what have we learned from it what we've learned is that these QSR outlets behave in a very similar way from our point of view to a DFD door. We're able to provide a fresh donut experience. The portfolio is relatively limited, but that doesn't mean it couldn't be added to over time. We've seen that both the loose donuts and the pre-packed donuts are well-received. And so from our point of view it's behaving very well and substantiates the brand as we scale it. And as I've mentioned before we don't see sort of cannibalization of our base business in other DFD doors or indeed in our retail locations. And we're excited for it. Our confidence has clearly grown enough to really start thinking about where we'd invest to support that kind of scale.

Thank you.

Your next question is from the line of Brian Mullan with Piper Sandler. Please go ahead.

Hey. Thank you. Just a question on Insomnia. I believe you're expecting about $230 million of revenue from that business this year. How should we think about the store level margins associated with that revenue? And related to that maybe what's a good way to think about the G&A and the D&A allocation we can try to come up with a good sense of adjusted EBITDA? If you'd be willing to share any color that would be great.

Yes, Brian, I can take that question. Look number one we're super pleased with the business performance as it continues to grow and the profitability is improving sequentially. There also continues to be a lot of opportunities for growth expansion both in the US and internationally as we're seeing great engagement early on in both Canada and the UK in the early stages. I don't want to kind of speculate too much or at least kind of share too much just given the fact that we're in a process right now and some of the other questions around financials and I'll probably leave it at that.

Okay, understood. Thank you. Just to follow-up just related to the potential or not the potential, but you're going to be expanding production capacity in the US. I think In the past you said it's a 10% to 15% increase in hubs to be able to serve an additional 8,000 to 10,000 DFD doors on top of the capacity you have. So just how do you want us thinking about the cost to build each additional new hub? Maybe how long would it take you to build? And how many hubs are you thinking you can get to next year in your planning?

Okay. I'll take that. Hi, Brian. Yes actually just stepping back a moment as it relates to supporting the whole DFD opportunity in the US, including QSR, we can add about 6000 points of access from the existing production hubs with minimal investment. You're just talking trucks, drivers that kind of thing. But clearly we want to go beyond that which is what you're talking about. We want to start investing and increase capacity in underserved markets around the country as well. That can be new markets like New England or Upstate New York Minnesota, but also markets where we're near full capacity with very strong businesses like California and Florida. So, yes, as you talked about going beyond the 12,000 points of access that we can do from our existing hubs we would add about 10% to 15% of hubs on top of our existing network and that would serve about another 8000 points of access. So 20,000 points of access all in obviously exciting opportunity. Now it's interesting these production hubs in the future we'll be building them to support more off-premise DFD sales than the hubs that we have today. So they're going to have additional donut making lines. They'll have larger load-out logistics areas. So, we're going to evolve to support what is clearly a rapidly growing DFD opportunity for us. And with 10% to 15% more hubs works out at about 25 35 new hubs over the next few years about $3 million to $6 million a hub. Timing depends on a number of factors. As I said there's nothing finalized with McDonald's so we'll continue to update you on our plans as we have more information.

Okay. Thank you very much.

Your next question is from the line of Andrew Wolf with C.L. King. Please go ahead.

Great. Thank you. I just wanted to ask the restaurant industry at large generally had a weak summer especially August and September and then it bounced back in October. Was the cadence of sales certainly within the shops and the hubs was that similar? And was and also how was the DFD? Was there any similarity to sort of the restaurant industry at large in your sales cadence?

Yes. Thanks Andrew. Seasonally, Q3 is actually one of our softest periods traditionally and Q4 is one of our strongest. So we're kind of seeing that cadence right in line with our expectations. So growth obviously in the quarter was right in line with what we'd expected it to be. In the US specifically we are pleased with the growth we're seeing in the US and how the underlying business is holding up given some of the price we've taken as it grew double-digits for the fourth consecutive quarter. With respect to DFD all of our channels grew DFD being one of the largest growth contributors at over 20% in Q3. Of that growth in DFD half was driven by points of access and half was driven by price and premiumization and bringing specialty donuts into the channel. And we're actually maintaining productivity in existing doors which is a good sign for us as well.

It's really interesting the seasonality of us versus the industry you referenced. Obviously to the earlier question we're learning about QSR restaurants and the way they behave this year. And obviously the summer season and the ones we've been servicing is quite big. It's a big part of the year for us. It can be a low obviously related to weather factors and what have you and less holidays during that period. It was actually really exciting that we're able to bring a lot of excitement around the brand in the low season with M&Ms. Pumpkin spice was a fantastic promotion in the US and I mentioned the Hailey Bieber influence strawberry glaze promotion as well. So, to be able to create that excitement at this premium specialty donuts in the low season was great. And that applied to the donut shops e-commerce in particular and DFD where we supplied those specialty donuts across all three. Now, looking ahead, of course, we've got more holidays more excitement around the brand to think about our high season. And hence the good start with Halloween was really good to see as well.

Great. Just one follow-up on the comments on the maintenance of sales productivity at DFD doors. It's good to hear. Is that on a dollar basis or on a unit basis? I guess what I'm specifically asking about it sounds like the premiumization is going well but is there like an elasticity issue at all? Or is it about what you expect? And so I guess it would end up being the same. Would it translate to any change in shrink in terms of product that didn't get bought?

Yes, I think so. I can take that Andrew. And as I mentioned half of the growth was driven by price. And when you look at the existing doors they're maintaining that productivity on a unit basis. So, we're not seeing significant elasticities and they're definitely in line with what we would have expected to see.

And the specialty donuts, there's a lot of demand for them. So in many ways having those become a bigger part of the portfolio is good for productivity because they sell out faster.

Yeah.

Got it. Okay, terrific. Thank you.

[Operator Instructions] Our next question is from the line of Bill Chappell with Truist. Please go ahead.

Thanks. Good morning. Just two questions on Insomnia and the announcement intra-quarter on there. I guess one as you're thinking about potentially strategic alternatives can you maybe quantify what that business did for organic sales in the US for the quarter and what that would mean for the year? And then second, just kind of a little more color behind the thought process of that. And from the IPO on you had been pretty firm about saying it was a key part of the business and it was something that you could really nurture and build. And this seems like the timing in terms of maximizing value for it, when there's a lot of noise about GLPs and what have you is not ideal. So just trying to understand kind of what went behind it. And what your thought process is on, timing and stuff like that as well as kind of what it would take away in terms of the total organic growth. Thanks.

Hey Bill, this is Mike. Five years ago we took on the business of Insomnia. One of the key things that we really looked at is, how do we capitalize on the delivery and e-commerce capability of that brand and then, how do we help that brand start to expand itself and get scaled in the US and potentially outside of the US. So what we've seen and you've seen today, where 20% of our retail sales overall is being driven by delivery we check that box, right? So when you start to see we're there now at a 250 cookie shop basis -- bakery basis in the US. They're starting to unlock in the international both in the Canada and the UK. They have a tremendous growth story. Krispy Kreme has a tremendous growth story in front of us. The reason to look at strategic alternatives is to just explore and enhance that growth potential that we have there. So that's why the timing is the right timing, right now. That's why we chose this today.

Yeah. And let me -- I can pick it up in terms of how we're feeling overall in the top line is I kind of mentioned a few questions ago that again we're super pleased with, how the business is performing both on top line as well on as well as on profitability sequentially and year-over-year. With respect to the process, we're super pleased with the strong level of interest we've seen already from very high-quality parties and remain focused on the transaction which will generate a strong return on investment in the business that we made and realize value for our shareholders. And we'll share more news as we have it with you all. With your question around the overall growth impact, we expect it to have a 100 basis point to 200, basis point overall impact on the total growth of the business. But we feel like the Krispy Kreme business has proven it can accelerate and therefore offset some of that. In terms of GLP question, maybe I'll flip it to Josh, and he can address your GLP concern.

Yeah. The Krispy Kreme consumer remains strong and the trends are strong. We don't see any impact of -- from the use of these drugs that you mentioned. It's not surprising. More than 70% of our donuts are sold in sharing sizes, usually at special occasions and celebrations. They're often given to others. Krispy Kreme is an infrequent purchase. It's typically bought less than three times a year. And actually the majority of our sales are from donuts that are under 200 calories each. So we know our customers well. We actually do conduct regular brand research on the purchase barriers. The latest research just from a couple of weeks ago shows that once again it's actually accessibility that remains the number one barrier to purchase of a Krispy Kreme, the availability and convenience of those donuts for our customers. Health considerations remain a low priority and actually are unchanged from the prior survey. So the consumer remains strong and the trends remain strong for Krispy Kreme. And the growth ambition for Krispy Kreme, as we've talked a lot about today, driven by both points of access expansion in multiple channels and the engagement around the brand such as all these specialty premium donuts that we've seen so much success with recently is why we're not concerned around the impact on the overall performance from taking out Insomnia. In fact, we see the opportunity to reinvest the proceeds behind the growth and drive the brand -- the Krispy Kreme brand on further.

Got it. And maybe I wasn't clear, I was talking more about the GLP concern on the valuation that you might get for Insomnia but so be it. In terms of just clarifying so, if you take out Insomnia and it takes out 100 basis points to 200 basis points of the total company would that mean it's probably about a 300 basis point impact on the US business since it's US? Just trying to understand our numbers as we go forward and kind of the organic growth you're thinking.

Yes, I think it might make sense to take that offline just to debrief in the follow-up conversation. But I think you're probably close-ish in terms of your estimation of the impact on the business in the US.

Great. Thanks so much.

At this time, there appear to be no further questions in the queue. I will now turn the call back to Mike Tattersfield for any closing remarks.

Yes. So thank you everyone for your time. On a personal note, this marks my final earnings call as CEO of Krispy Kreme. As I said before, I couldn't be happier to transition this role to Josh. I love his passion for the brand, our Krispy Kremers and freaking awesome donuts. It just gives me the utmost confidence in our continued success and I look forward to watching how he and the team will accomplish. Again, thank you all for all the investors and your continued support of the company and gracias to all my Krispy Kremers around the world who inspired me throughout my time here. Lots of love. Ciao Mike.

This does conclude the Krispy Kreme third quarter 2023 earnings call. Thank you for your participation. You may now disconnect.