My name is Audra, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Krispy Kreme First Quarter 2024 Earnings Call. I would now like to turn the call over to Alexandre Eldredge, Krispy Kreme Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Welcome to Krispy Kreme's First Quarter 2024 Earnings Call. Thank you for joining us today. We will be referencing our earnings release and presentation during the call. These are available on our Investor Relations website at investors.krispykreme.com. Joining me on the call this morning are President and Chief Executive Officer, Joshua Charlesworth; and Chief Financial Officer, Jeremiah Ashukian. 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 from 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 December 31, 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 our closest comparable GAAP measures can be found in our first quarter 2024 earnings press release and Form 8-K filed today with the SEC and is also available at our investors.krispykreme.com website. Jeremiah will take us through our financial performance in a moment, but first, here's Josh.

Thanks, Andre. Good morning, everyone. Thank you for joining us. We had a strong first quarter. Our strategy of making fresh Krispy Kreme Doughnuts more available around the world is working. Excitement for our fresh Krispy Kreme doughnuts has never been higher. This photo is from our recently opened hot light theater in France, where Parisians lined up some waiting overnight for their first ever hot original glazed doughnut fresh off the line. I was able to join our team members in Paris. We're doing a great job spreading the joy that is Krispy Kreme, not just to eat, but to share and give it to others. I wish to thank all our hard work in Krispy Kreme who get it done every day in now 39 countries around the world. Let me summarize today's key messages. First quarter organic revenue growth exceeded expectations at 6.7% year-over-year with strong consumer demand and increased sales through digital channels fueling the results. We're increasing the pace of expansion as we make our fresh doughnuts more available around the world. In Q1, we grew our points of access for Krispy Kreme fresh doughnuts by 19.4% year-over-year. We recently launched in France, and we've announced our expansion into Brazil and Germany. In the U.S., we expect to add 15,000 points of access by the end of 2026. We're accelerating into more groceries and convenience stores. We're excited about our national rollout with McDonald's, which is expected to add more than 12,000 new points of access alone. And we're reaffirming our guidance for the full year with 6% to 8% organic revenue growth expected to translate into adjusted EBITDA expansion of 8% to 11%. This reflects our intent to drive increasingly profitable growth from our Hub with Spoke operating model. Let's double-click into each of…

Thanks, Josh, and good morning, everyone. I wanted to start by illustrating the anticipated financial impact of adding up to 15,000 points of access to our U.S. business. What you see here on this chart is a range of increases on key financial metrics in the U.S. business on an annualized basis. From a growth perspective, we expect that the addition of 14,000 to 15,000 points of access would result in roughly $340 million to $430 million in annualized incremental revenue and $70 million to $100 million of additional adjusted EBITDA, creating significant operating leverage on the existing business. Now I'll discuss our first quarter results. We outperformed expectations as organic revenue grew 6.7%. Adjusted EBITDA increased 5.9%, and we maintained positive operating leverage in the quarter, holding adjusted EBITDA margin steady at 13.1%. Turning to our U.S. segment results. Organic revenue increased 7.4% despite weather disruptions to the business in January. Additionally, we continue to see strong growth in availability as points of access increased 17.5%. We have also improved the quality of points of access by adding another 96 secondary display cabinets to high-traffic grocery doors. This takes us to 303 total grocery cabinets across the U.S. We have seen these add up to 70% incremental sales to a DFT door. The slight decline in average revenue per door was driven by mix impact of the customer base with smaller grocery customers such as Save Mart being added in the quarter, while underlying door performance remains healthy, helped by the launch of Minis. In turn, this drove a 6.5% increase in sales per hub to $4.9 million, up from $4.6 million in the prior year. This improvement drove increased utilization across the network, which was a key factor in delivering 70 basis points of adjusted EBITDA margin expansion…

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] We'll go first to Sara Senatore at Bank of America.

So I guess I wanted to-- you mentioned McDonald's. I guess I wanted to dive in there a little bit. I have a few questions. So one is, if you could just clarify what impact, if any, you're including from that partnership either on top line? Or as I think about G&A, I think you've invested ahead of that partnership rolling out. how to think about that growth going forward or sort of the big upfront cost behind you? Or how long-- how many quarters perhaps should we expect to see sort of outsized G&A growth ahead of revenue growth. So just a sort of broader view on the McDonald's partnership implications for your P&L?

Yes, I'll take that, Sarah. And thanks for the question. We are collaborating with McDonald's to build a detailed rollout plan and anticipate the launch to start in the tail end of 2024. So from a revenue impact, we do expect that to be fairly minimal this year. What I would say with respect to cost, we are, as you mentioned, in the investment phase now and are incurring start-up costs and SG&A and OpEx. We're not disclosing exactly how much we're spending on that, but we are pleased that we can reaffirm our guidance, assuming those costs are in our business beginning in Q1.

Understood. Okay. And then just the follow-up question on that is I know some of the concerns or some of the questions around McDonald's have to do with sort of overlap with your existing distribution points of access. And can you maybe frame some of those and talk about what, if anything, you saw during your test with respect to cannibalization? I know in the past, I think you said that don't seem to be really an issue because you're sort of underpenetrated. But anything that you saw regarding your existing PLAs in Kentucky and what happened when you launched McDonald's.

Yes. I mean we've done a bit of work around the incrementality of this. And we believe we expect to see strong incrementality of around 85%. It's what you see in kind of the chart we presented this morning reflects that. which will be a mix of higher incrementality in brand-new markets, but obviously a little bit lower incrementality in existing markets.

We'll go next to John Ivankoe at JPMorgan.

A few questions, if I may. First, as you begin to kind of have plans for overall relatively national penetration, are you beginning to have conversation with taking various major grocery and other types of national accounts on a national basis? In other words, as you begin to have the capacity to go into McDonald's, do you expect it to have a number of different simultaneous agreements with other national type both larger and smaller format retailers.

John. Yes, by distributing to almost every McDonald's in the country, this does indeed give us the opportunity to profitably add distribution with other major customers, both existing customers that we are underpenetrated in and indeed new ones. And I think the conversations that we've had with them since the announcement have largely been positive because they can see that we're able to build out our operating model on a national scale and therefore, serve them nationally. I mean, it's going to be really exciting to bring Krispy Kreme to Minneapolis, for example, the Home Target or to bring Krispy Kreme to Walmart in Arkansas. So these are things we haven't done up to now and we're really excited to do that. And so yes, the data that we shared today and our goal of getting to 15,000 points of access in the U.S. by 2026, obviously includes expansion beyond McDonald's as a result.

And it does remind me-- I actually have 2 more questions. As you guys kind of think about the overall size of the doughnut market or tweet treat market, I mean, you obviously have a lot of interesting insights, both at your current employer and also previous employers. But how big of a price do you think the U.S. Krispy Kreme market really is? I mean you can obviously-- if you look at it as a percentage of doughnut sales, you could argue that Krispy Kreme share gets to be very, very high kind of in the out years, but is the price something materially bigger than doughnut sales? How are you defining the overall TAM at this point?

Well, I think today, we brought really good insight on the incremental revenue we expect out to 2026, Jeremiah shared $340 million to $430 million revenue, reflecting 15,000 points of access goal. We actually following the announcement of McDonald's that gave us insight on the QSR opportunity overall. We've continued to appreciate the opportunity to access these national accounts you referenced at the beginning of this discussion. So we say we believe we can get about 30,000 points of access in the long run. Regarding the share of market and what have you, we're still actually a relatively small player with share in the low teens in grocery stores today. And so there's plenty of upside for us because we are the best doughnuts in the market. It's an awesome experience for constantly innovating, constantly bringing excitement to the brand. And we're fresh, fresh daily. It's a really unique positioning. So yes, absolutely, we want to take share from those who aren't able to bring such an exciting brand and product to the consumer.

Understood. And I apologize if I missed that. It was a little slightly delayed getting on. Did you address kind of the current test and experience with Ryder handling your last mile distribution, I think it's in D.C. and L.A. kind of positives and negatives, and I guess, at this point, what would keep you to perhaps making that an overall system-wide decision.

No, it's a good question. Actually, I was just up with the Krispy Kreme's and the Ryder team in D.C. myself riding in the route. And what I could see was that the service level and the quality of the doughnuts is being maintained, which is the primary focus of the test right now and make sure that those Krispy Kreme do not show up in the way we would expect. And the partnership with rider has been great so far. Really, we now, therefore, need to move into more analysis and understanding of what this could look like in terms of our economics and how it could support the rollout. We are looking to add another city to the test. And indeed, we're also talking to other providers. It's really important that the doughnuts and the delivery show up as it was Krispy Kreme, they're dedicated trucks. The drivers were in Krispy Kreme uniforms and presenting themselves in a really positive way, and it looks really promising. But we'll provide updates as we know more about the opportunity to extend that as we support the rollout nationally towards this 15,000 goal by 2026.

We'll move next to Aisling Grueninger at Piper Sandler.

You've mentioned in the past you're focused around automating the doughnut production. Just wondering if you have any updates around this. I know in the international segment, some of your production facilities use automation. Just wondering about the opportunity this presents for the U.S. market and just how this could help with the rollout of McDonald's?

It's a great question. We continue to work on the opportunity to modernize the making and indeed the moving of doughnut to the earlier question. There are transformational improvements we can make and are making with automation. It's still proportionately a relatively small percentage of the business that we're applying this to largely are non-consumer-facing doughnut factories. We have a line, a fully automated line running in our Bronx facility, for example, in New York, where we're topping and filling even picking the doughnut off the line automatically. But at this stage, that's still work that's ongoing. We're actually also finding ways to modernize production lines by improving yield and reducing waste by digitizing the lines and monitoring those variables in that way as well. So it is an opportunity. We definitely think that this is an area that can help us scale and help us be more efficient but with the acceleration of points of access growth, we also need to support capacity expansion, particularly across the U.S. So we're being thoughtful how we bring in new technology as we also expand.

Our next question comes from Bill Chappell at Truist Securities.

In your comments, you kind of talked about some recent softness around the category and kind of consumers pulling back. Just maybe a little more color on that. I mean it's not unique, but I think we've seen kind of slowing volumes throughout all of packaged food over the past few months. And just anything more you can talk about that and if you think there are any other things that were impacting that?

Actually, Bill, although we're mindful of the consumer environment, we actually see the brand being really healthy with people looking to Krispy Kreme as an affordable sweet treat for those special celebratory occasions. We mentioned earlier Valentine's being the biggest sales day in history of the company, I mean earlier this month even in April, we saw tremendous engagement with our total Solar Eclipse doughnut. And so although we're mindful of the consumer environment, particularly on the international side, the brand is really healthy. Plenty of consumer engagement. And I think it's because of the unique role that Krispy Kreme plays as an occasional sweet treat for special occasions and celebrations.

So-- I'm sorry, you're not seeing any softness. I may have missed that comment, sorry.

No, I think the softness that we would have talked about would have been in January just due to weather in the United States, but not necessarily broader kind of consumer.

Okay. And then just to the McDonald's, I guess, 2 questions that I hear most often. One, trying to understand kind of the level of commitment on McDonald's and the franchisees down the road, I mean, you say you're going to, I think, 12,000 out of 13,000 doors. I mean is there-- and you're obviously spending a lot of money behind it. Is there any way McDonald's can say 1 year, 1.5 years into this, this isn't working or this doesn't work for certain franchises or and that changes that? Or is it full ahead, everybody is fully committed to going to that 12,000 through 2026.

McDonald's has been a great partner so far. We've really enjoyed the collaboration. The agreement last 1 year after the last rollout in 2026 and of course, can be renewed after that. So look, we've already announced our share from partnership with McDonald's. And it is about rolling out through to the end of 2026, and the intent is more than 12,000 restaurants, and that is the phased rollout plan that we're working on with McDonald's. We don't expect it to start until the tail end of the year, but it's really thoughtful. We'll obviously naturally prioritize places where we, at Krispy Kreme can provide availability faster. But the partnership is going really great so far after what was obviously a great Kentucky test and very thorough test that demonstrated that consumer demand outstripped both theirs and our expectations.

Got it. And then I'll squeeze one more in on, and this is kind of a follow-up from an earlier one on the incrementality, I'm just trying to understand-- I understand how it maybe interacts with your stores, but how it does when there's a Dunkin' store next buy or convenience store of the sales doughnuts or stuff like that? I'm just trying to understand how it expands the overall doughnut market in the same way and kind of what your test showed from that standpoint.

Well, we know that we create buzzing demand when we come to a new market. We've seen that again and again, when it comes to existing markets, obviously, had a prolonged period of time with the Kentucky test to see the impact of that incrementality. But also bear in mind, we have many parts of the country where we already have good availability, taken Atlanta take areas of the Carolinas, places where there may even be in the town, more of the other doughnut shop to your reference, but they're not really doughnut shops. They're generally beverage focused, sandwich focused. We are the ones who offer a unique awesome fresh doughnut experience, Minis for Mom this week, constantly bringing excitement and headlines to the category. So that doesn't surprise us. But yes, we've done the analysis and the numbers that are in the incrementality that Jeremiah shared today was based off a very thoughtful analysis.

We'll take our next question from Andrew Wolf at CL King.

I just had a couple of follow-ups. First on McDonald's. Do you expect the rollout just in terms of stores where it's rolled into overtime, be kind of linear? Or is there an exponential build or even a front-end loaded build, I would think more exponential. But just sort of the timing between now and 2026?

I'd describe it as balanced. It's balanced around where we have availability today balanced around where we can bring on new capacity quickly. And then, of course, there are parts of the country where our development pipeline means it's going to take a little while to launch. And McDonald's conversation has been fantastic as we share with them our development plans, and they've taken through with us how they want to run it. And so it will be balanced and thoughtful over the period from the tail end of this year up to the end of 2026.

And to the McDonald's franchisee relationship, I mean, what is your role? Is it more training? Or is it kind of getting them excited about it? And I'm sure McDonald's is kind of-- you're collaborating with them and how you're going to interact with the franchisees. But what is going to be Krispy Kreme interaction with the franchisees to help make us successful?

Our focus is awesome doughnuts every time, every day, delivered at the right time as agreed with the customer, perfect service level. So really, we're really focused on strengthening our operations right now, talked a lot about modernizing and improving how we make a move doughnuts. And I think all our customers expect that, whether it's a McDonald's franchisee, Walmart, Kroger are indeed our international partners with that our primary focus, that's where our Krispy Kreme excel. I mean, obviously, it's up to McDonald's themselves to manage their own relationships. We trust them. We've got a great relationship with them, and we'll take their guide and provide any insights to them. But do remember, it's a very simple operations activity, which is we're bringing folks doughnuts already made. They just need to be taken from the tray, put in a bag or even a 6-count box handed over to the customer. So it should be a relatively easy activity for the McDonald's Crew and the franchisees. So the real focus is just great doughnuts.

Fair enough. And if I could just ask one follow-up. I was distracted away from the call for a minute, so you might have talked about this, but could you elaborate on the big increase in the digital sales and penetration in the U.S. and the sustainability of that?

Well, the customers looking, as we've said before, for us to provide a more convenient way to access Krispy Kreme, #1 reason why somebody still gives us that name they may not purchase Krispy Kreme. It's just not convenient to them. And so it's been great, both through our own app and partnering with third parties to grow the digital channel. And it's becoming a significant channel and a big growth driver indeed. I mean in terms of going forward, we actually just relaunched our loyalty program, and we're seeing tremendous response there, tremendous engagement there, energizing both existing loyalty members and new ones. So we actually expect to drive future sales growth with that loyalty program. So digital is here to stay in the modern world for sure. And Krispy Kreme, we're really leveraging that.

We'll take our next question from Daniel Guglielmo at Capital One Securities.

The International segment has continued to perform well and now own Japan and Canada in there. I just want to dig into the point of access mix. It seems like there are a lot more fresh shops there relative to the U.S. segment. And would you ever think about adding more fresh shops into the U.S.? It seems like the logistics and volume of doughnuts that will be delivered to McDonald's would be similar to what you would get at a fresh shop?

The higher rate of fresh shops international reflects a number of local conditions, including local labor cost, the size of the big metro cities. One of the great things about the Krispy Kreme model as you can adapt to the different environment. Yes, we have a number of fresh shops in the U.S. in some of the big cities they make sense. But with the vast opportunity of deliver fresh daily with these great national partners, we're focusing our attention in the U.S. on what is a very capital-efficient model and leveraging the excess capacity of the production hubs through these off-premise DFD doors, which remember, typically cross between $1,000 and maybe $3,000 to set up if it's one of the more premium cabinets. So that-- it's such a good capital return. We've got the excess capacity in the U.S. That's our focus rather than the fresh shops.

Great. I appreciate the detail. And then just one more on McDonald's. In the history of McDonald's, do they have a partnership like this in the past? I'm just curious if there's like a playbook you all are going off of or if it's kind of a new playbook that you all are putting together?

One thing I've learned about Krispy Kreme is every day is a new thing. There's so much opportunity here. And I think McDonald's came to us thinking about doing something different, doing something different with the breakfast approach do something different with a partner with Sweet Treats. So I think certainly, from our point of view, it feels pioneering, but it's a great question.

[Operator Instructions] And at this time, there are no further questions. And that concludes our Q&A session. I will now turn the conference back over to Josh Charlesworth for closing remarks.

Well, thank you, everybody. Thanks for your interest in Krispy Kreme today. And of course, thank you to all our Krispy Kremers for your ongoing commitment to bring joy to our customers through Krispy Kreme. Have a good day. Take care.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.