Thank you for standing by. My name is Mandeep and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme Fourth 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] 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 fourth quarter and full year 2023 earnings call. Thank you for joining us today. Our earnings release and associated earnings presentation, which we will be referencing during the call, are available on our Investor Relations website at investors.krispykreme.com. Joining me on the call this morning are Josh Charlesworth, Chief Executive 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, or 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 measure can be found in our fourth quarter 2023 earnings press release and Form 8-K filed today with SEC and is also available at our investors.krispykreme.com website. With that, I'll turn the call over to Josh.

Good morning, everyone, and thank you for joining us today. I'm so excited for what is ahead of us at Krispy Kreme. Our strategy is clear to make our fresh doughnuts 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 make great progress on this in 2023 with strong consumer demand and increased access to our fresh doughnuts in both existing and new markets around the world. We also improved profitability as we grew, demonstrating the productivity benefits of our unique Hub and Spoke operating model. As we move forward in 2024, we will continue to offer new and exciting specialty premium doughnuts, upgrade our digital commerce capabilities, and expand the availability of our doughnuts around the world, including in our newer sales channels like club stores and quick service restaurants. We will also increase our efforts to modernize the making and moving of doughnuts to ensure we deliver high quality profitable growth. Let me summarize today's key messages. We continued to deliver double-digit organic revenue growth with all markets and channels growing sales. We expanded profit margins by leveraging existing production hubs to support our growth, especially in the U.S. where operating leverage was strongest. Our ongoing strategy is to scale the business efficiently by adding more fresh points of access. There are now more than 14,100 places where you can buy our melt-in-your-mouth fresh doughnuts in 39 countries. And our focus on operating excellence means that we're building both a bigger and better Krispy Kreme business. And finally, we are introducing our 2024 outlook with organic growth expected to translate into adjusted EBITDA expansion, reflecting our intent to drive increasingly profitable growth. We delivered 13.2% organic revenue growth in the…

Thanks Josh, and good morning, everyone. As Josh mentioned, we reported strong double-digit fourth quarter organic growth and improved profitability for the year, demonstrating the productivity benefits of our Hub and Spoke model. In the fourth quarter, we grew double digit on both the top and bottom line on a percentage basis, resulting in adjusted EBITDA margin expansion of 40 basis points year-over-year to 14.2%. We saw growth in all our markets driven by high impact global brand activations and seasonal offerings, increased points of access and premiumization efforts. Adjusted EBITDA grew 14.7%, outpacing our revenue growth for the second consecutive quarter as we continue to realize cost efficiencies across the global business through both productivity efforts, increased utilization of our hubs. For the full year, the business performed largely aligned with expectations as we delivered 12.2% organic growth, increased adjusted EBITDA by 11% and expanded margins. Organic growth accelerated to 13.2% in the fourth quarter. Notably, we saw growth across all our segments in 2023 on top of strong performance in 2022. In the U.S. segment, organic revenue grew 13.7% in the fourth quarter, driven by record holiday season as specialty doughnut offerings drove incremental sales through all channels, especially DFD, and had positive impact on our sales. We also observed increased transaction values due to growth of our ecommerce channel. All of this was underpinned by our strategy of growing points of access which grew 17.7% year-over-year with more than 300 DFD Doors added in Q4 versus Q3 and over 1,000 Doors added versus 2022. At Insomnia Cookies, we observed strong organic growth of 16.3% as well as sequential margin improvement from Q3. That said, margins in the business remain pressured given the elevated cost of cocoa. The Hub and Spoke model, first established in the UK and…

Thanks Jeremiah. In summary, we are expanding availability by adding high quality productive points of access, driving operating leverage through the efficiency of our operating model, and maximizing capital return both by leveraging existing capacity and making selective investments in geographies which have limited access to Krispy Kreme today. All in I look forward to us building a bigger and better Krispy Kreme in the years ahead. Operator, let's now open it up to Q&A, please.

[Operator Instructions] Our first question comes from the line of Sara Senatore with Bank of America. Please go ahead.

Hi, good morning. This is Jessica Schaefer on for Sara Senatore. Thank you. So for last quarter, you said you were in advanced discussions about expanding the McDonald's partnership and were making investments in the U.S. But it looks like the 160 or so restaurants testing the doughnuts have been unchanged since 3Q. So – and I know that the press release alluded to more growth in the quick service restaurant channel, but I wanted to see if there's any more color you could provide on that agreement? And I do have a couple more questions, but I figure I can ask them one at a time.

Sure. Good morning, Jessica. Yes. Obviously word is out on the success of our delivered fresh daily doughnut program, several customer opportunities in existing and new channels around the world. Regarding quick service restaurants in the U.S. our focus does continue to be on McDonald's. Discussions are ongoing and productive about an expanded partnership, and we'll provide an update on that one when we have it. Okay. What was your second question?

All right. So in the U.S. and international markets revenue growth was slightly less than points of access growth. I know you think in terms of growth in sales per hub, but as we try to forecast sales going forward, how should we think about new points of access? Is it fair to assume that they'll have lower volumes than the existing base of points of access? And if so is that driven by the type of door and will that change if you accelerate expansion into the quick service industry?

Well, it's interesting. Obviously the three international markets there of UK, Australia and Mexico all in different situations. The UK, Australia much more developed in the grocery store customer mix. Mexico really, really starting out with a big opportunity in convenience stores. So you get a constant mix effect there. Underlying performance is good, but you're going to get these mix effects for the forecasting, especially in Mexico with the big opportunity with the Oxxo convenience store chain.

Okay, thank you. And could you remind us how much of your commodity basket you have locked in?

Yes. I can take that, Jessica. And we started to put on cover on commodities early in 2023. We do expect to see mid- to high-single digit inflation overall for 2024. Most of our commodities are now covered, so about 75% of them are covered of the commodities that we actually can cover. As it made sense for us from a pricing perspective or just a security of supply perspective. It's a bit of a mixed bag within that kind of high single digit, mid- to high-single digit inflation number amongst our cost structure as we're forecasting inflation in excess of 20% on things like sugar, where the market remains around ten-year highs, and low-double digit inflation on things like cartons, which is a commodity we can't hedge. But we do expect to see some deflation on key commodities like wheat and edible oils. I think it's important to note out just outside of commodities from a labor perspective we do believe that we'll be subject to the wage increases in California. And as a result we continue to expect to see high-single digit to low-double digit inflation on labor in 2024.

Okay. All right. Thank you so much for your time.

Thank you.

Our next question comes from the line of John Ivankoe with JPMorgan. Please go ahead.

Hey, team; this is Luke Jobe for John Ivankoe. Just wondering if you could give some language around specific changes to kind of the current process or model that we're focused on with specification to modernization of the doughnut making process and kind of especially delivery within that? Thanks.

Sure. Thanks, Luke. I'll take that. Yes, you picked up on our efforts to modernize the way we make and move our doughnuts. That goes all the way from the sort of digitization of the process through to the automation of the doughnut making itself, and then all the way on to upskilling our doughnut transportation. All in, we're working to ensure the freshest doughnuts every time delivered as efficiently as possible. We've shared before the automation efforts. We have a line running in New York, which is now automatically filling, topping and even packing the doughnut. We're looking to perfect that and then roll it out as time goes on. And then regarding the logistics in particular, the rapid expansion of DFD means that we're becoming more – logistics are becoming more and more important. So we announced on today's call that we have a pilot covering select routes in D.C. and LA, and that's expected to take about four to six months. And the purpose of that is to work with a third-party provider to see if we can maintain quality and service whilst being able to access new capabilities that they can bring and over time improve our operations and indeed bring more efficiency. So it's an effort end-to-end to continuously improve doughnut making and moving, and we'll provide updates as we learn more.

Great, thanks.

You bet.

Our next question comes from the line of Bill Chappell with Truist. Please go ahead.

Hi, good morning. This is Davis Holcombe on for Bill Chappelle. Thanks for taking our question. I just wanted to know as we saw that your guidance this year for fiscal year 2024 includes operations from Insomnia Cookies. But we were wanting to know if you could provide a little bit of color on what the sales guide would be without the inclusion of Insomnia cookies.

Yes, I mean, number one, we're pleased with the performance of Insomnia as the business continues to grow profitably and improve sequentially in terms of EBITDA, adjusted EBITDA improvement. We opened a record number of cookie bakeries in 2023. We also talked about the growth rate at Insomnia at 16.3% on the earnings call as well. There continues to be lots of opportunity on this business to expand both the U.S. and internationally. We do expect it to continue to grow double-digit in 2024, but just given the fact that we're in the process. As we said in Q3, we're conducting a strategic review and we look forward to sharing more news about it that we can. I think in the last earnings call, I did let everybody know that we operate or the impact on Insomnia would have a roughly 100 to 200 basis point impact on the top line though.

Excellent, thanks for the color. I'll pass it on.

Our next question comes from the line of Aisling Grueninger with Piper Sandler. Please go ahead.

Hi, good morning. So CapEx came in as a percent of revenue for at – for 2023 at 7.2%. And the new 2024 outlook, you're targeting 7% to 8%. We're just wondering how concrete of a number that is. Does that include any incremental investments you would need to make if, let's say, a QSR partnership was to come to fruition in 2024?

Yes, good morning, Aisling. And so our confidence in the DFD opportunity around the world, and especially in the U.S. including QSR, is such that we have thoughtfully started making additional investments in manufacturing capacity to support it. For example, we've secured new sites in Miami, Twin Cities and LA, all conversions of existing buildings looking to accelerate time to opening to keep up with demand. To clarify though, the investments we're making, they're in broad support of the expansion of DFD overall. So they're not dependent specifically, for example, on McDonald's, but they're investments that we very much believe make a lot of sense for our business going forward in terms of bringing Krispy Kreme to more people in those new channels.

Great, thanks for that. My second question is on, I think we touched on this before, but it's in Slide 18 of your presentation. It's about average revenue per door per week for international. Just what's the dynamics behind, it's been the decrease year-over-year. Is it just opening these DFD doors in less prime locations than the earlier locations? Or just any color would help? Thanks.

Yeah, it's a great question. APDs internationally were impacted in 2002 by the UK regulations that were put in place. It's called HFSS, which required us to move where the locations were in the stores, which had an immediate step down in terms of productivity. Moving forward, the APD per door has been impacted by adding more convenience type locations, which Josh mentioned, around places like Oxxo in Mexico, which on average is smaller footprint, which could be a lower kind of dollar per door. So, overall kind of the mixed effect there will have a pull on. We believe that the APD will remain fairly flat-ish internationally kind of moving forward.

Great.

It's worth clarifying on the U.S., because actually interesting, with APDs growing strongly, we're seeing that we're actually bringing on even more productive new customers and locations, showing that – there is a lot of white space opportunity in the U.S. and it's interesting international. Mexico, an example where we are leaning in on a convenience store, in the US is a lot of grocery stores, mass club stores, for example, big opportunities there. So the APD will evolve over time with different types of customers, but all in we're seeing continuously productive doors ones that support our margin expansion plans.

Great. Thank you so much for that. I'll pass it back.

Thank you.

Again, the floor is now open for your questions. [Operator Instructions] Our next question comes from the line of Dan Guglielmo with Capital One Securities. Please go ahead.

Hey everyone, thank you for taking my questions. Just going back to the U.S. expansion of hubs, you mentioned Minnesota, California, Florida, and I think New England and Upstate New York were also opportunities. So just thinking through kind of those are there certain areas you see as priorities right now? And are there certain markets that you need to get open before doing like a national QSR rollout?

Well, a QSR rollout with a customer like, for example, McDonald’s 13,000, 14,000 restaurants in the U.S. we could cover about 6000 restaurants just with our existing network. So your question goes to the 7,000, 8,000 assuming you're taking McDonald’s as the benchmark that we would need to cover in areas where mostly it’s those areas you described in the country where Krispy Kreme isn't today. Our plans are anyway over time to open up in those places and reference to either Miami, Twin Cities, LA, New England, all the ones you referenced, Upstate New York, they're all in our plans. Naturally those that we have already maxed out capacity or we've identified sites are the ones we're prioritizing in the short term. But they all make sense for us and so we're actually looking across the country in all those locations as we build out our plans for DFD and QSR in the future.

Great, thank you. And then just as a follow-up to that, it's kind of like a modeling question just around the CapEx spend. So the 7% to 8% of revenue guidance for 2024 just thinking about the expansion, I think, you had said $3 million to $6 million for some of those hubs. Is there a cadence we should be thinking about quarter-to-quarter for the year? Is it going to be pretty evenly spread throughout or should it be back weighted, just trying to get some help there. Thank you.

On the CapEx, I mean the hubs themselves are coming online probably a little more back weighted.

Yes.

The CapEx itself though phases differently, doesn't it Jeremiah?

Yes, I mean there is a cash flow from CapEx that will happen here because we've spent or at least decided to deploy capital last year in an effort to [indiscernible] up and running earlier in the year. From a modeling perspective, I mean, for the most part we will follow a fairly uniform spend of CapEx throughout the year as we have in previous years. So, it's a fairly consistent number when you think about percent of revenue that will bounce between 7% and 8% for the quarters, it will just bounce up and down between those numbers, more or less.

Okay, thank you.

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

Thanks. Good morning. First, I wanted to ask about the first quarter sales being below trend and tie that to the year because obviously you are looking for a big rebound to more like 6% to 8% to get to the 5% to 7% for the year, for the Q2 through Q4, a little more in line with what, I think, The Street was expecting. So could you just kind of flesh out a little bit what you're seeing in the quarter? How much you think is pure weather? Is there anything else going on? Do you have sort of non weather impact in markets either in the U.S. or Canada or even the other segments that sort of point to sort of some more normalized growth supporting the rebound for the rest of the year?

Yes, thanks Andrew. I can take that. I think I'll probably start off by just saying we're actually pleased with the fact that we'll continue to post growth in Q1 after a record Q1 in 2023 and 14 consecutive quarters of organic growth. I think the last time we didn't grow in a quarter was during COVID and as a result of some of the UK shutdown or slowdown. Organic growth in the quarter is actually close to 3% to 6% given we'll be lapping the discontinuation of BST. As you mentioned, like many others, we saw harsh weather in broad parts of the U.S. in January, leading to lower revenues and a softer start to the year, which also comes up against the comp of 14.4% last year, but also a couple of one offs to your point. One at Insomnia Cookies, we have a lap against extended delivery zones that will be in our base, which provided some tailwind last year, and then two in market development. We had a one off shift in the timing of some equipment sales in our market development franchise business, which resulted in a higher sales being recognized in 1Q last year. That said, we're excited for Valentine's Day tomorrow, which is one of our biggest sales days of the year, not to mention other key specialty doughnut offerings over the course of the year. We're definitely committed to discipline growth in pursuit of the full year guide that are laid out. And we will when you think about from a cadence point of view, lap some other things as we get into Q2 that may go the other way, most notably the NCR outage that we had in the U.S. in Q2, 2023, which will help us kind of recover back in Q2.

Yes. I'll add is, we're looking forward to quality, sustained growth through 2024. And Q4 showed once again that the consumer just loves our doughnuts, especially for sharing and gifting at special occasions and celebrations like Valentine's that Jeremiah mentioned, even when priced at a premium. And we see that in all sales channels with really quite phenomenal growth recently in ecommerce in particular. So our consumer is engaging with the brand more than ever. And that's the key backdrop to understanding Krispy Kreme.

Okay. And if I can just add another follow-up just related also to sales. Now, I assume for the year you only have the 160 or so McDonald's stores in there. But I guess for the U.S. specifically, is there any less of a push on sales in any way? Whether it's not putting up stores you might have put hubs that you might have put up because you're deferring, and is there any impact on your – what's in the guidance because you're kind of throttling any part of the U.S. operations back in anticipation of either McDonald's or another QSR?

There's no throttling back. It's absolutely the case that the DFD continues to be a core driver of our growth. Indeed, as I mentioned a moment ago, the Q4 addition of Doors around the world, including the U.S. at a time which has traditionally been problematic for our customers, they want to put in other seasonal items. This year, they wanted to put in our items and prioritized listing new Doors for Krispy Kreme. So definitely no throttling back. At the same time, we are very focused on improving the quality of our operations, ensuring high quality, sustainable growth, working as I mentioned, on making moving doughnuts in continuously better ways. So that naturally means we're very thoughtful as we grow to make sure we have the best points of access, strong hubs, making sure they're set up for future growth. As also mentioned, with many of the doughnut shops still heavily underutilized, they're able to make more than twice the amount of doughnuts that they do today most of those lines getting ready for growth with QSR and other new channels is a lift. And so we're making sure that everywhere we grow, it's in a way that ensures high quality doughnuts presented freshly to consumer in every channel, whilst maintaining productivity and efficiency. So yes, we're certainly working hard on the system, but we're not as such throttling back.

Thank you. That's a really helpful color. I'll pass it on. Thank you.

You bet. Thanks, Andrew.

I would now like to turn the call over to Josh Charlesworth for closing remarks.

Well, thank you, everybody. Thank you for your interest in Krispy Kreme today. And of course, thank you to all our Krispy Kremers for their hard work in 2023 and your ongoing commitment to bring joy to our customers through Krispy Kreme. Thank you.

This concludes today's call. You may now disconnect.