DNUT - NASDAQ

Thank you for standing by. My name is Maria and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I would like to just turn the call over to Ms. Eloise Hale, Vice President of Global Corporate Communications. Ms. Hale, please go ahead.

Good morning, everyone and welcome to Krispy Kreme's second quarter 2023 earnings call. Thank you all for joining us today. Our 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 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 on March 02, 2023 and in other filing that we make from time-to-time with the SEC. Forward-looking statements made today speak only as of today. The company assumes no obligation to publically 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 the company’s second quarter 2023 earnings release and Form 8-K filed today. Both are 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. I’m pleased to report our fourth consecutive quarter of double digit organic revenue growth evidencing the strength of our Omni-channel strategy. Our second quarter performance was bolstered by our continued focus on expanding our hub-and-spoke model as we leaned heavily into our Omni-channel, delivered fresh daily or DFD capabilities as well as our international expansion strategy. Our focused strategy delivered 9% net revenue and 3% EBITDA growth in line with our expectations. We also remain concentrated on strategic execution of premium product sales and thoughtful timing of selective pricing while driving high levels of consumer demand. I want to extend thanks to our Krispy Kremers, our team members, for another fantastic quarter. Every day we aim to touch and enhance lives through the joy that is Krispy Kreme. Without your continued efforts and dedication to our brand and purpose, this would not be possible. Our doughnuts continue to be loved across all the countries we operate in everyday, and we understand that access to our brand is our biggest opportunity. Ultimately, our aim is to continue expanding points of access and driving further availability of our doughnuts. We have learned that different channels play different roles in satisfying our customers globally through our Omni channel system. These supplemental channels will help us reach our long term goal of 75,000 points of access. This quarter, our points of access grew nearly 13% globally year-over-year and we were particularly pleased with the momentum we saw in the U.S. Our global points of access now stand at 12,872 and we continue to be confident in our ability to achieve our annual goal of 10% to 15% growth. Our U.S. fresh doughnut business led the way as our focus on increasing access helped drive another quarter of continued improvement in our largest market via maximizing our existing hub-and-spoke infrastructure. Our continued momentum driven by the expansion of our DFD strategy gives us confidence in our plan to expand into new channels like QSR, drug and club while building on our existing customer base. For example, our current test with McDonald’s which Josh will talk about further has been a fantastic learning experience thus far and has enhanced our belief that the QSR channel is a significant growth opportunity not just in the U.S. market but globally. In our Market Development and International segments we continue to see tremendous performance in Japan and Canada. We are also starting to see some stability in our core equity international markets as pricing and inflation become more balanced. The growth potential in our international markets remain significant as our Omni-channel and DFD model further unlocks new points of access, channels and customers. I'm excited about the progress we've made on our global expansion strategy with new openings in Chile, Costa Rica and Jamaica, all performing well. We remain on track to meet our goal of opening in seven new countries this year, with three to five countries to follow in 2024. In addition, our signed pipeline of new hubs and Fresh Shops through our existing franchise partners is already well over 1000 shops. At Insomnia Cookies, we are ramping up our development efforts to get the 30 to 40 new bakeries this year, including international expansion in the back half of 2023, starting in Canada and the UK. In addition, we are focused on meaningful innovation, including opening our Innovation Center in Philadelphia in Q3. Insomnia Cookies continues to evolve into a more mature growth business, underpinned by exciting plans to gain additional share within the global addressable market of over 4000 bakeries. As we continue to grow globally, we continue finding moments of joy to share with our colleagues and our guests. In Q2, we celebrated National Doughnut Day, which has truly become Global Doughnut Day for us. It was the strongest and largest doughnut day in Krispy Kreme’s history further cementing the importance of access to our guests. It wasn't only about actual doughnut sales that day, but also about gifting every customer one of our signature Original Glazed doughnuts just because they took the time to visit us. This single event generated over 3 billion social media impressions and we're just getting started as we will move from a dozen countries participating to every country in which we have a presence by 2026. As we start the third quarter, we have seen continued organic revenue momentum from our second quarter. Our strategic priorities remain unchanged as we continue to drive capital light expansion of our Omni-channel model and grow points of access and lean into new and existing channels. With this momentum, we remain confident in our 2023 outlook and ability to achieve our long term 2026 targets that we highlighted at our Investor Day last year, including growing revenue to $2.15 billion and adjusted EBITDA up to $315 million. My excitement and enthusiasm for all this brand has to offer continues to grow. We have the team, the culture, the brand and the strategy to execute on many opportunities for growth on our journey to becoming the most loved sweet treat brand in the world. With that, I'll hand the call over to Josh. Josh?

Thanks, Mike. Our Omni-channel system continues to deliver robust growth around the world with our fresh U.S. doughnut business delivering double digit organic sales growth in the quarter once again. We saw strong performances in the U.S. across all of our sales channels, thanks in large part to our specialty doughnuts including Cookie Blast, Fan Faves and Minis for Mom, which all proved popular in the quarter. Selling the same fresh Doughnuts that we make in our production hubs through more points of access is at the heart of our unique hub-and-spoke operating model, making Krispy Kreme more accessible and convenient to more consumers. And during the second quarter, we added 462 new points of access globally, including six new hot light theater shops, 45 Fresh Shops and 406 DFD doors. This means that we remain on track to grow points of access by 10% to 15% this year. In the U.S., we added another 239 DFD doors in the quarter, led by expansion with Kroger which now carries Krispy Kreme in more than 1000 locations across the country. All in, we now have over 6300 DFD doors in the U.S. with average weekly sales up 16% year-over-year in the second quarter. We also continue to add secondary display cabinets to high traffic grocery doors, which add up to 70% incremental sales to a DFD door. 87 of these premium cabinets have now been added in U.S. grocery stores year-to-date, with a similar number expected for the balance of the year. A new initiative which we just announced with Amazon is a small format Krispy Kreme Fresh Shop located within Amazon Fresh grocery stores. This capital like pilot exemplifies our strategy to make access to our fresh doughnuts more convenient for the consumer and is already underway with the opening of our first two locations in Chicago earlier this month. To support all of this growth, we took the number of production hubs-with-spokes in the U.S. from 137 to 143 during the quarter. These were all conversions of existing hubs-without-spokes, requiring minimal incremental investment. Our trailing twelve month sales per hub KPI was up 9% year-over-year to $4.7 million driving Krispy Kreme’s U.S. Fresh margins up over 150 basis points compared to the same quarter a year ago. With pricing now setting inflation, this improvement is driven by both the productivity benefits of adding sales to the hubs-with-spokes and the results of our previously announced U.S. Shop network optimization program, which focused on the poorer performing hubs-without-spokes. Cities like DC, Miami and Charlotte, which have all seen significant door growth this year are seeing some of our highest margin increases and are now demonstrating that we can deliver 20% plus margins in U.S. cities just like we have seen internationally for several years in places like Sydney, Toronto and London. As we've previously shared, we are also running a DFD test in the QSR channel in Kentucky with McDonald's, which is now in its six month. As a reminder, we are servicing over 160 McDonald's restaurants with fresh doughnuts delivered daily, which they sell on to their customers branded as Krispy Kreme. Although test is still ongoing the results have shown us that the consumers value of Krispy Kreme experience in the QSR channel that these sales are incremental to our existing doughnut shop and DFD sales in the region and that we can successfully serve these points of access from existing hub network in Kentucky. Given all of the expansion opportunities we are seeing across multiple channels and customers, we have taken the opportunity to do a deep dive assessment of our doughnut capacity and capabilities to accelerate expansion of DFD in the U.S. Overall, we are confident that should we need to, we can quickly leverage existing hubs and selectively add new production hubs to support a network even bigger than the 15,000 points of access we set as our long term goal in the U.S. Before I turn the call over to Jeremiah, I want to highlight the progress we're seeing in our UK business, which has seen slower growth since the changes in the macro environment there last spring. Specialty doughnuts targeted at local celebrations including a Royal Dozen range to celebrate the King's coronation contributed to double digit retail sales growth in the quarter. Pricing and cost control initiatives also brought EBITDA margin back above 20%. We've also taken actions on DFD in the UK, including optimization of our price pack architecture, expansion into the club channel and the inclusion of Krispy Kreme in customer loyalty card programs, which are starting to improve our performance. I'll now turn the call over to Jeremiah.

Thanks, Josh, and good morning, everyone. As Josh mentioned, demand remains healthy and while costs remain elevated versus historical levels, we expect to start seeing inflation ease in the back half of this year and some of our unfavorable hedging impacts soften. As Mike said, we saw growth across all of our reporting segments in the second quarter, with net revenue up 9% year-over-year to $409 million. Organic revenue, which excludes the impact of acquisitions and changes in foreign currency, grew 11.4%, an acceleration from last year driven by pricing, premium specialty doughnuts and the growth of DFD in e-commerce. We continue to see low levels of elasticity due to pricing, which we took again during this quarter. As a result, product and distribution cost as a percent of revenue declined 30 basis points year-over-year. This contributed to adjusted EBITDA growth of 3.1% in the second quarter to $49 million or an increase of 4.1% in constant currency. Adjusted to EBITDA margin levels were 11.9% compared to 12.6% one year ago as benefits from pricing and efficiencies in our network driven by our hub-and-spoke evolution in the U.S. was offset by inflation and year-over-year phasing of performance based honest accruals. GAAP net income of $0.1 million in the second quarter was driven by a $4.4 million largely non-cash expense related to the exit of branded sweet treats. Adjusted net income for the quarter decreased 13.1% to $11.4 million and adjusted diluted EPS in the second quarter was $0.7. Turning to our segment results, the U.S. business segment total revenue increased 9.3% in the second quarter to $267 million and organic revenue growth was 12.7%. This was driven by pricing, DFD expansion and e-commerce despite the disruption from a third party POS provider during the first part of the quarter that impacted our ability to execute promotional activity. In addition, we saw strong revenue growth in Insomnia Cookies, which opened 23 new bakeries over the trailing four quarters. Adjusted EBITDA for the U.S. segment was up 16% to $28.1 million, with margin expansion of 60 basis points a year-over-year to 10.5%, driven by strong performance in our U.S. Fresh doughnut business. This reflects the successful pricing actions taken over the last nine months, the efficiency benefits realized from our hubs-with-spokes and the benefits from our U.S. shop network optimization program. This margin expansion was delivered despite the same disruption caused by the third party POS provider that impacted revenue as it also impacted our ability to manage labor efficiently. Impacts from the outage have since been resolved. Insomnia Cookies margins soften in the quarter as elevated input costs outweighed the benefits from pricing actions taken in early Q2. International total revenue increased 4.8% in the second quarter to $98.3 million in organic revenue growth was 3.5% driven by pricing and points of access growth of 7% taking our points of access to 3670. Adjusted EBITDA for the quarter was flat at $19.5 million with adjusted EBITDA margins of 19.8% which was up significantly from the prior quarter as pricing in all markets as well as rationalizing and profitable DFD doors and adding new, more productive doors are having a positive effect on margins. We expect the actions Josh detailed as he spoke about our UK business to positively contribute to margins over the remainder of the year. Market development which is made-up of our franchisee businesses around the world and equity owned Japanese and Canadian markets, our organic growth accelerate to 23%. Total revenues in the second quarter increased 17.4% to $43 million, driven by the strength in Japan, strong performance in our Costco partnership in Canada and new market openings, offset partially by a 5.8% impact from foreign exchange headwinds and franchisee acquisitions. Market development adjusted EBITDA increased 27.3% to $15.7 million despite a roughly $800,000 negative impact from foreign exchange headwinds. Adjusted EBITDA margins increased 290 basis points to 36.5 in the second quarter compared to the prior year. We continue to be very pleased with our performance in Japan and the Canadian markets, which has led to outsized performance in this segment. Turning to the balance sheet, recall that last quarter we successfully refinanced our debt, extending maturities to 2028, enabling our future growth. And we also began efforts to reduce our reliance on vendor financing to normalize terms and reduce what has become a more expensive way to provide financing. As a reminder, expense from vendor financing hits adjusted EBITDA, not net interest expense. We continue to make progress on that reduction in the second quarter and have reduced our reliance on these programs by over $80 million year-to-date, which will have a longer term tailwind to adjusted EBITDA and net income due to lower rates. While we saw our leverage increased to 4.2 times in the quarter, we expect to close the year under four times. Our leverage excluding this shift in vendor financing would have been much closer to 3.8 times and we continue to execute on plans to drive leverage close to two times to two and a half times net leverage by 2026. Free cash flow excluding these efforts was also strong at $14.6 million reflecting the strength of the underlying business fundamentals. In addition, we remain laser focused on deploying our capital to target the highest return opportunities. As we mentioned at our 2022 Investor Day, we expect CapEx as a percentage of revenue to reduce the 6% by the end of 2026 and expect to fall around 6.6% of revenue or between $105 million and $115 million in 2023. This includes the opening of at least 30 to 40 new Insomnia Cookie bakeries and roughly 10 company built hubs in 2023. We are also reaffirming our 2023 guidance and continuing to trend toward the middle to higher end of our revenue and adjusted EBITDA ranges. This includes growth of 9% to 11% in organic revenue and 8% to 10% in net revenue. $205 million to $215 million of adjusted EBITDA in between $0.31 and $0.34 of adjusted EPS. Our 2023 guidance includes modest tailwinds from foreign exchange rates for the year. Based on current exchange rates, each 1% move in the U.S. dollar index is a little over a $1 million impact on adjusted EBITDA on an annualized basis as roughly half of our pre-corporate expense adjusted EBITDA is outside the U.S. We are pleased with our second quarter results that proved the underlying strength of our business, giving us further confidence in our momentum as we enter the second half of 2023. Operator, we can open up the call to Q&A now please.

Thank you. [Operator Instructions] We ask that you please limit yourself to one question and one follow up, then re-enter the queue for any additional questions that you may have. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Sara Senatore, Bank of America. Please go ahead.

Great. Can you hear me?

We can, we can.

Okay, good. Thank you. A little choppy for a minute. I guess a question, a clarification and then a question. In terms of the POS disruption, do you have any sort of estimate of what that might have been in terms of an impact on your revenue or EBITDA, just trying to understand what the disruption might have meant, if you can quantify it? And then the question I had was about the loyalty programs and you mentioned in the UK you’ve seen some success in adding Krispy Kreme loyalty card programs. I know you've talked about re-launching in the U.S. next year. Is there any kind of lessons that you can take away from the UK or maybe that in inform how you're thinking about loyalty programs just given the relatively low frequency nature of the of the Krispy Kreme occasion? Thanks.

Thanks, Sarah. It's a great question. It's Jeremiah here. I'll start off by saying that despite the interruption, we still delivered improved margins, saw strong ecommerce revenue at 18.8%, which is actually up 130 basis points and actually did not see a perceivable decline in customer satisfaction scores. That said, the disruptions caused across the business really manifest itself in two key areas. One was delays in our ability to run and execute promotional activity and LTOs, which had an impact on revenue. And then two, the lack of visibility to real-time information which impacted our ability to manage the labor. I think what I would say is we’re in the midst of insurance recovery right now. So I don't want to kind of quantify and put numbers out there just given that but it's important to note that these issues have been resolved and now behind us.

Thanks.

Yes, hi, Sara. This is Josh. On the loyalty, yes, I mean loyalty is important to us at Krispy Kreme where particularly given the importance of e-commerce and the level of interaction we have the brand -- with the brand. We have 15.5 million loyalty members around the world. That's an increase of 18% year-over-year, including 11.5 million in the U.S. You're right, we're looking to improve the loyalty program even further later this year. Looking to make it more intuitive and easier to track for customers and we'll be testing that later this year in the U.S. In the UK, we have a loyalty program. What I was actually referencing in the call was being a part of customer loyalty programs, grocery stores which have their own loyalty programs and starting to become a part of that. That's something to your question that we do want to do more in the U.S., we haven't done too much of that in the U.S. We are speaking to our, our key account customers about how we can do that. One of the challenges is availability, we are not available in every grocery store in the U.S. with our fresh doughnuts and have much more broad availability in the UK but it's something that we think down the line with DFD will certainly play a role.

Great. Yes, I understood it's a different format. I guess I was just wondering if maybe the higher frequency occasion that comes with the people going to those partners if it changes how you think about loyalty broadly, but it sounds like you think they're complementary and your own partnership, your own loyalty and then these partners.

Yes, definitely, I mean most of our loyalty programs that we manage directly through the retail doughnut shop sales channel, this starts to add that capability through DFD and it gives a lot of visibility as well. The UK supermarkets use it as a way of communicating with their customers extensively and certainly by getting more involved with that, we know, the brand Krispy Kreme becomes more top of mind.

Got it. Thank you so much.

Operator, I think we're good for the next question, please.

Yes. Mr. Joe Evansville, JP Morgan. Please go ahead.

Hi, thank you. How are you? So,

Hi, John.

Very well.

So, in your, Hi. Hi. In your prepared remarks, I mean it was -- looking at the overall footprint, your hub model and just really trying to evaluate how many DFD accounts you could do through existing hubs and I guess there's some thought of maybe putting in some more assets in terms of even expanding DFD accounts beyond 15,000. So, also in that, in those remarks I mean almost kind of dovetailed exactly into McDonald's and the 160 stores or so that you have in Kentucky. So, I guess was there an intention to just kind of tie those two comments together? I mean, in other words, are you looking at your footprint and your capacity now to potentially prepare for a regional or even national expansion into McDonald's?

Yes, so again what we've learned John, it's Mike, among -- we love that the test has allowed us to really get deep knowledge about how the QSR channel is going to actually work. And what that does is just unlock just the opportunity from that need state that the consumer’s looking it's either a single or they're using gifting that they can compound with it, but it really unlocks the convenience right? With the drive-throughs that you see in the QSR chain and we can do that. So what we've really started to look at as the channel is, what's the opportunity in that channel within our existing footprint and how could that work. And then really push on from that.

Yes. And regarding McDonald's itself, John, I mean it's a great business and we're really enjoying working with them. One of the things to remember though is it just behaves like a DFD door for us, similar sales and profit margins. In fact, we're selling a limited selection of doughnuts, but they're the same fresh daily doughnuts we sell anywhere else and there's no sort of, as I mentioned this sort of cannibalization effect. So for us we're thinking about the learning from that. I mean we've learned for example, how to deliver over longer distances from our hubs than we've had to do before whilst maintaining quality and service standards. So it's really proving a valuable test. They're being super collaborative and as I said a moment ago, we're confident we could serve more McDonald's doors, add to your point, but you know, it's obviously up to them. We look forward to hearing from them how they think the test is going. Regarding the more broader point that you're making around hubs and spokes with this level of DFD expansion, it behooves us to start looking ahead to how do we service more and more DFD doors. It's clear with the growth rate we have, whether it's in QSR or other channels in grocery, convenience and indeed more recently club and other opportunities. We need to start planning ahead for greater expansion. So we've taken a lot of the learning from McDonald's and sort of realized that by making changes to operating hours, doughnut processing and packing layouts, delivery windows and the like, we can get even more from our existing hubs than we even thought was possible before. So we serve about 6000 DFD doors today. We think we could get to near 12,000 DFD doors just with the existing hubs. Remember, we have about 225 production hubs in the U.S. that we directly own, but we also have 45 franchise owned hubs that could be a part of that as well. So, all then that that represents a great opportunity for us. And so we're really working on how to how to calculate all that and start to plan for that. And then I mentioned even selectively investing in new hubs. I mean if we wanted to add on top of that 12,000 let's say another 8000 to 10,000 over the years to come as we meet the DFD demand, we think that's still only requires a 10% to 15% increase in production hubs itself because we’re learning how to make production hubs purpose built with automation with more production lines to meet this kind of demand. So it's an exciting time to be thinking ahead and thinking about a hub and network of the future rather than worrying about optimizing the hub-and-spoke network of the past.

Yes, very interesting and the comment about doubling the -- nearly doubling the number of doors served on existing hubs is obviously a very interesting one from just a return on assets perspective. It actually -- the statement reminded me and maybe this [indiscernible] is just going to fade into the past at some point but hubs-with-spokes, hubs-without-spokes, you actually at -- I think I'm looking at 82 hubs-without-spokes. Is there -- what is -- and that number’s obviously been going down both year-over-year and I think over a period of years. What's the current thinking around those? I mean do you want to -- should those hubs actually start to redevelop spokes as you kind of look at markets again and maybe there are some smaller format or convenience or QSR chains that can turn on the delivery light, if you will? That's good. That was an accidental pun. But turn on the delivery of those hubs without spokes? Might be a nice way to add a sales layer that currently doesn't exist.

I mean our hub network was not originally designed for this kind of opportunity. So -- but what we do know how to do is make a lot of doughnuts and so we've been learning how to adapt it for the future model. And so these legacy hubs, these hubs without spokes, we continuously go back to them as you say and say okay, what's the opportunity here?0 Of course we want to invest in new hubs but before you start doing that, what can we do with our existing. And so as you know for the program we described in our Investor Day, in December 2022, since then we've closed 14 of the hubs without spokes and we've converted actually just in the way you describe, 17 hubs without spokes to become hubs-with-spokes. And bear in mind these are ones we didn't necessarily think were going to work, we didn't think we could make the layouts work, the operating procedures work, the economics work, but we're learning more and more that with the level of sales per door and off premise sales we can get from DFD, we can make the economics work. Now, there comes a point where some of these stores are just not in great locations to support DFD rollout but still play a role in the local communities. They're the hot light and the retail business, the experience for families and our customers going to that local doughnut shop still warrants it particularly in the Southeast. So that legacy of hubs without spokes will likely be with us for -- long time to come because they are profitable. Now we've addressed along with the nonprofit ones. All the while you can see that we're adapting our learning and thinking about what's the right kind of hub for this new model. Larger areas at the back of house, even more than one line at the back of house, more logistics areas, maybe even the location of the hub. You don't want it on main and main if you're driving trucks out the back all night and so we're learning and adapting and of course the opportunity for automation technology to be a part of that as well. So all of those mean that -- absolutely the hub is evolving, it's there to support Omni-channel and we're excited about the changes we've made to the legacy and now what we can do to support this growth going forward, I don't know.

John can I just say, if you think about it, the opportunity you were saying, hey, could they build more customers and do that? Our priority is also we've got great customers. We need to continue to figure out how to build out those existing customers. So that's also in balance. How do we do that, right? Because we want to be outstanding to all the customers we serve and that's going to always be one of our priorities as well.

Yes, [indiscernible] McDonald’s but you got the Krogers and Walmarts [indiscernible] fantastic customers already.

Yes, I understood the separate topic if I can, obviously UPS driver strikes really in the news. You know can you in that context or outside of that context, talk about your staffing execution, what you guys are doing to kind of attract and retain on the delivery side specifically for you how we should be thinking about that going forward?

It again -- the difference in our model, right, when we're staffing drivers in our shops, right, it's about four to five drivers to manage the routes. It's not been a challenge for us to be able to attract. I'm going to make sure that we have the right incentive systems, we can compete in that. The uniqueness of the model is that you're coming in through the front door. It's easy for our drivers to interact with the customer and then -- they're done by a certain part of the day, right? So it's a unique approaches to how it works and they can have that. So we haven't seen the challenge on that. We'll continue to be attracted to the space but that's where we continue to see and look at other alternatives as we continue to expand.

Yes, I mean it's not -- things like that are not impacting us significantly today. But again with this level of growth we're planning and thinking ahead most importantly fresh quality, local delivered doughnuts, that's the heart of our DFD model. But as we expand we are going to evaluate alternative models as long as they deliver on these parameters. So, it we will remain flexible, but for now they're Krispy Kreme, they're part of our core and they're doing a great job to get those doughnuts out to all these new locations as well as our existing partners.

Thanks, John. Operator, could we have the next question, please?

Our next question comes from Jon Tower from Citi. Please go ahead.

Great. Thanks for taking the question. I just quick quickly want to get your thoughts on pricing in the back half of the year. I know you had discussed earlier, Jeremiah that there's a little elasticity that you're seeing as you're taking some of the pricing. But we're certainly hearing from other quick service operators that planned for the back half of the year are to take less pricing, if not zero pricing. So curious to get your thoughts on later 2023 and into 2024 how you're thinking about pricing across the different markets and different channels for the brand?

Yes, I'll start and then Jeremiah will just get into probably a little bit more in the detail. We always look at pricing as a strategic piece because we want to be in affordable indulgent treat in all the markets that we serve. We've seen a lot of really not just pricing but the premiumization of the brand is really sticking as we do Fresh either in the DFD business and see our customers continue to migrate towards a better product as well as premeditation from partnerships whether they be the M&M's doughnuts or the Spongebobs and Mexico. What really happens in the pricing strategy is, people migrate because they're getting -- they want to try that new merchant mix, the new products that we have. It allows us to also -- because we're a dozens’ business, have a secondary dozen at a value price. So it really works with us. It's a way of giving back as well that's been fairly consistent as we've really honed in on our dozens model because it capitalizes on gifting and frequency as well.

Yes, Jon, I mean it's a great question. Thank you for the question and for me, price will always play a role in the growth of our portfolio and the way we're evolving our thinking around pricing is it's much broader growth lever than just list price increases. The way we think about it as Mike kind of just referenced the premiumisation of the portfolio through doughnut offerings, price pack architecture as a lever for us then also the way we think about and drive efficiency in our promotional and discounting strategies. And so we tend to think about it more holistically. So to your point we're in the back half of the year as we might come under a bit of pressure around list price increases there's other levers in our portfolio to kind of drive from a pricing realization standpoint. That said we'll continue to evaluate price every quarter globally while ensuring we're providing an attractive offering to our consumers and our strategy is to really take price in line with inflation going forward. So we'll continue to see that play out.

Got it. And just thinking about the inflation, obviously we got another reading this morning, seems like it's softening quite a bit. So is the interpretation there that you guys are looking at core CPI and saying all right, that's easing therefore pricing later this year into 2024, certainly lower than what we've been seeing in past as twelve, twenty four months.

Yeah, I think for us we've locked in a lot of the key commodities for the rest of the year with the low double digit inflation on average for the year, labor's kind of locked in more or less at mid to high single digit inflation. As we look forward to 2024, we are seeing some deflation and we're looking opportunistically to lock in prices at attractive price points. But what I would say is we're still seeing elevated prices and things like sugar, which remain around five year highs and we do expect rough inflation on cartons, in the high double digits next year, which is a commodity we actually can't hedge. So we'll continue to need to be flexible with the way we think about pricing even into 2024.

Got it. Thanks for taking the questions.

Our next question comes from the line of Mr. Brian Mullan from Piper Sandler. Please go ahead.

Thank you. Just a question on the Insomnia business in the U.S. can you just update us on how the business is doing right now, perhaps give some early thoughts on the pace of growth for next year. And then just related to that, as the brand continues to open in a faster clip how would you describe the competitive environment in this in this category? Are you seeing a change in any way? Any thoughts would be great.

You know the brand is now starting to become a more of a mature brand in our business. And they're ramping up as we talked about -- it's about 23 shops in the last twelve months. Our target is to get to 30 or 40 cookie shops and unlocking that on a yearly basis and growing from that. So we've seen that opportunity and see line of sight of that. We continue to invest in our Innovation Center which we will be opening up in Philadelphia that will really helped drive the -- whether it's a limited time offerings or anything from a cookie perspective of what should be or what the consumer is looking for in the dozens business as well, right? So from that aspect we have a unique brand in terms of how we compete in the marketplace, right? It's a late night -- a business started into college and we really try to capitalize that and we continue to grow from that business. So the competitive set we think of ourselves again as a gifting and a snacking opportunity. And what we see in the business is it's not just in the college town anymore. We're able to start to break into the cities and the suburbs and that starts to really target where we think the business can be from a TAM as we've identified even in our Investor Day to get to a 4000 bakeries.

Okay, thank you. And then just a question the DFD business, Mike in the prepared remarks you spoke to the idea that the QSR channel might also work outside the U.S. as well. Are there any markets that you might already have in mind? I would think it would be logical maybe places where you already have hubs, but anyway you could elaborate on that comment or just even how much time you might be spending on this opportunity, just where it lies in the priority list? Any thoughts would be great.

Right. Again, we're in more than 30 markets around the world. Our priority right now is really getting and honing in on the QSR channel using the U.S. as a big test case because the DFD system that we have works around the world. Those would be natural ones once we prove it and run it in the United States. So we'll be very disciplined about how to do that. And then the same logic would work in the DFD system where we have a route where you're managing multiple customers along the route that could be from different channels if it continues, it's going to work in the markets that we're in. But their focus will be on the U.S. All right, thanks Brian.

Our next question will come from the line of Mr. David Palmer from Evercore ISI. Please go ahead.

Thanks, good morning. What was the year-over-year sales growth per U.S. hub in the quarter?

So the sales per hub, the hubs-with-spokes was $4.7 million which was up 9% year-over-year.

Great. I thought I saw that on an LTM basis, but that's up for the quarter. That's what it was.

Yeah, it's a twelve month figure if you recall, so, it's an annualized figure. So we then compare it to the same quarter a year ago, which is again an annualized figure. So it's not a sort of quarter-by-quarter, but $4.7 million would be the annual sales over the last twelve months and it's 9% versus the same time a year ago.

Okay. I'm trying to reconcile things. Is 16% growth in sales and weekly sales per DFD door in the U.S.?

Yes.

And it looks like there was a 14% expansion in the number of DFD doors in the U.S. So what that means that there's about a 30% sales growth in DFD doors per hub?

Yes, in terms of -- if you wanted to calculate what's the growth of DFD itself, sales overall it's about 25% in the quarter. So your math isn't too far off if that's what you were looking for.

Yes. And then you got -- you had about a 7% reduction in the number of hubs?

In terms of the…?

Number of hubs in the U.S. quarter, year-over-year in the quarter?

The -- Because if -- because of the hubs without spokes you're thinking so yes. 225 I think it was and a year ago we had 240. Yes, yes.

So you had maybe over 30% growth in DFD sales per hub in the U.S. if you take the 25 and add the seven right because -- And so I'm just wondering they call it over 30% growth in DFD sales per hub, how much do you think that added to your -- into your sales per U.S. hub, is that essentially -- do you think that equals the nine or is that more -- is there -- how do we kind of think about that as just a pure sales per hub contributor that over 30% growth in DFD sales per hub?

Yes. I know this Omni-channel model can definitely be complicated and forgive us for that. I think that one of the challenges is there's retail sales in there and also the hub reductions are hubs-without-spokes. So the math doesn't quite play out like that. But what we can say is that the expansion of points of access and pricing with the two biggest drivers of that growth, the sales per hub growth that you describe or indeed the overall organic growth of the business. And so I think, that DFD is indeed a big driver of that 9% and indeed the most likely the biggest driver going forward of the sales per hub growth that we'll see. And because it's an average measure as we add spokes to the hubs, particularly some of the hubs-without-spokes that historically we didn't necessarily first go for, we now have learned that we can make them work as well. Some of them only have one or two routes as well, which actually depresses the sales per hub. So it's all about evolving this system to deliver high growth and flow through to the bottom line. And this KPI that you're picking up on that is just one of the ones that we used to say are we doing what we said we're going to do, add points of access to our hub network. So I'm happy to take it offline and go through all the detail on that math, but that's the main headline I'd love you to walk away with.

Our next question comes from the line of Mr. Brian Harbour, Morgan Stanley. Please go ahead.

Yes, thank you. Good morning. Could you talk more about the international segment just because I think that's been the one that's been a little bit slower growing recently and I think just from other companies we've seen probably resilient results in some of those markets, although it certainly varies. What do you think is really still needed there to drive faster growth?

The success of the brand in our Omni-channel business, it continues to play out around the world as Mike said earlier, I mean these specialty doughnut campaigns we're seeing successful across the planet. The points of access expansion of the DFD model is applicable everywhere. And e-commerce is strong everywhere. We're seeing, for example, Mike mentioned, Jeremiah mentioned that Canada and Japan are 30% plus growth actually our international franchise markets on average grew more than 20% last quarter. Company owned Australia and Mexico grew high single digit in the quarter and the UK was flat. So I think your question is largely a UK question. We did actually see really interestingly strong double digit retail sales growth in the UK last quarter, but it was offset by decline in DFD specifically and that's consistent with what we see as sort of an industry wide trend for reduced supermarket visits. Teams are doing a great job though they're adapting to those conditions. As I mentioned a moment ago, they’ve already taken actions to do things like in addition to the loyalty card that came up with Sara's question earlier, we're introducing 9 Packs and minis to bring more choice to the consumer and indeed broaden the value proposition with that changing macro environment. So I mean the headline to the question is we do see strong resilient performance across the world, but like with any portfolio of business, you do have ups and downs from time-to-time that you need to manage. In our case, it's specific to the UK and we're confident around the applicability of the model going forward around the world.

Okay, thanks. Could you comment on like roughly how -- I think guess is the U.S. comment, but how much total price you had in the in the second quarter and how much do you think you're going to have in the second half?

Yes, Brian, I can take that and thanks for the question. We -- As I mentioned we took pricing across all our markets and in the U.S. specifically we took another low single digit price increase in the quarter that leads us to the mid teens on an annualized basis. And as I mentioned before with John's question, we’ll continue to look at inflation and reflect pricing if we need to.

Thank you.

[Operator Instructions] Our next question comes from Mr. Bill Chappell, Truist Securities. Please go ahead.

Thanks. Good morning. Yes, I was.

Good morning.

Wondering, is there a way to quantify the impact of the vendor disruption in the quarter and I assume it was just on U.S. sales?

Yes, I can take that. And I think Sara asked a similar question, so apologies for a bit repeating, but just given we're in the midst of an insurance claim against this, I really don't want to kind of quantify. But the way I would think about it from a modeling perspective it did have an impact in revenue as a result of our inability to run promotional activities and get LTOs out timely and it did have an impact on the EBITDA in the U.S. specifically as we weren't able to see real time information and managed labor efficiently. What I would say is that outage was roughly four to six weeks of pain in the U.S. To give you an idea of what that impact would look like over the quarter.

Yeah. And we still delivered organic growth and on the fresh business so more than 150 basis points of margin increase. So it gives you an idea of what could have been, but yes, we're not able to quantify it right now.

Yeah. And I guess the thought process being that you're now talking about full year guidance at the high end of your range despite that, so I assume that's just us carrying through the next two quarters as if the issue doesn't happen and what you're run rate could have been last quarter, is that a fairway to look at it?

That's exactly how we're thinking about as well. Should current trends persist we do anticipate we’ll land at the mid to high end of our range from a guidance point of view. So that spot on, Bill.

Yes. I mean it's -- the consumer we're seeing as strong particularly in the U.S. where this impact happened. I mean they -- as we talked a lot about the convenience of DFD, e-commerce and the love of these specialty doughnuts. We've seen that trend continue into July. If you saw our M&M's doughnut range, which even included a special premium price doughnut filled with mini M&M's really popular, again, we're seeing that growth is driven by quite interestingly the 18 to 24 year old demographic a very healthy part of the consumer base now represents 28% of our sales. And these sweet treat loving, heavy QSR spending digital natives, they've got a lot of confidence in the brand and that's why I think we talk about momentum on the brand even now.

Got it. And then just also a follow up on the pricing, you talked about, mid single digit pricing going forward. Is that kind of a net number because you also especially talked about Europe and more multipacks and promotions and stuff like that to address the consumer there. Is that a net or we give some of that back with kind of promotions just particularly in Europe?

Yeah, No, I mean the single digit pricing in the quarter was relative to the U.S. specifically. We're not expecting to give much of that pricing back and if we think about more from a price realization perspective, it's more of a kind of a profit impact than you'll see in kind of list price changes with things like price pack architecture just changing in the discounting kind of strategies that we have.

Got it. Thank you.

Our next question comes from the line of Mr. Andrew Wolf from CL King. Please go ahead.

Thank you. I have a follow up on pricing as well just over the geographic segments. Just putting sort of what you've given us about the U.S. pricing and price realization and comparing it to the sales growth versus the EBITDA growth for international market development and the commentary on the release. It seems pretty evident there’s just more pricing power right now in the U.S., certainly that's the way your strategy seems to be rolling out. Could you just give us a flavor for the price increases in international and in the market development segments and why they're different, seems substantially versus the U.S. in terms of the amount of pricing power.

We've actually -- it's a great question. Maybe I can tackle the pricing and then Josh can tackle kind of consumer across the different kind of markets that we see. We have seen aggressive pricing across all of our markets in the second quarter and kind of the high single digit, low double digit range. So actually feel very good about our ability to navigate price increases while still offering value to our consumers and that's kind of the feedback we've been getting so far in the markets that we have taken price in markets like the UK. Cut to Josh, I don't know if you have any comments.

Well, the one things I’ll say the macro environment is interesting around the world but only moderately so. By that I mean I talked a bit about M&M's and the success there, but also we've been deploying that specialty doughnut strategy around the world and in fact the UK saw double digit organic growth in the retail business after a variety of engaging specialty doughnut programs like the Royal Dozen one I mentioned on the call earlier. It really reflects that when we get our execution right, when we excite the customer in this low frequency business, it's still an affordable treat even in the context of price increases. I mean an OG doughnut still costs $1.79 in the U.S. So, you're talking about -- what’s most important is to make sure that people have access and convenience to the brand and are excited about the innovative products we're selling. And we're seeing that work across the world and sometimes to extraordinary levels like we just mentioned in Japan and Canada. And we don't see the whether or not pricing was taken in one market versus another as the driver of that success. It's more implementation of the strategy. We've got great hot light execution that's really brought alive the business in Japan, we're doing really well with Costco and Club in Canada. So slightly different reasons, but we don't see pricing power variation as a driver of performance. But overall, your overall general point that in the U.S. when it's worth it, when the programs are exciting, when we bring meaningful innovation and notoriety to the brand, we are able to pass on the pricing we must given the inflationary environment in our commodity group. And so, we appreciate that our customers see the value in what we’re selling.

Yes, the only other thing I'd add is the gifting and the sharing is a global piece. So when people are using that for our brand, it's just a different occasion, right? So, and whether it's Mother's Day, whether it's Father's Day and whatever was happening around the world, that's a great gift that's shared by families, right? So the mindset in our markets is the same. How do we do the dozens? How do we build that? How do you premiumize? How do you make it affordable, still the sweet treat? How do you then compliment it? It really is about that discipline of how do you make sure the frequency is driven by gifting et cetera and then match it up, which just great partners.

Okay. And just last bit of a follow up. Which is sort of also an open question is, given your answer, clearly -- I was trying to use one or two statistics to say, hey, this is your competitive set go into the CPI and look at like baked goods and donuts or something like that or QSR away from home, seems to be pretty far off. I mean it sounds like you're competing against the Divas of the world and various things. So how -- could you just kind of -- I mean you've mentioned this from time-to-time, but just how do you look at the competitive set for the -- as you said for this sort of infrequent occasion of the kind of indulgence that you guys are bringing to market?

So again, we do look at the competitive set as a broad sweet treat. Our direction is to be the most loved sweet treat brand in the world, right? So the opportunity, if you look specifically at the donut category, right? We don't really focus our energy on a single serve, we actually focus our energy on the dozens business. We do that and we bring either premiumization with. We do that and we bring either premiumization with partners with recent with M&M's for example, and the mindset is you can capitalize on occasions, which is -- then where gifting really happens or unique events like Halloween and holidays or you can just really unlock because your partner is -- they're craving that desire. So when you have an M&M's doughnut that might be broken in half and these little mini M&M's come out, people want to try that, right? So you end up trying to say, how do I maximize that opportunity? And it is about -- people will still have the sweet treat. We just want to be in our affordable indulgence space, sweet treat space. We want to be there when they're making that decision.

Thank you.

All right, thank you.

I will now turn the call over to Mr. Mike Tattersfield for closing remarks. Please go ahead.

Appreciate everybody being on the call. Always want to talk and thank our Krispy Kremers for doing an incredible job. And I also want to be a little bit of reflection and make sure that folks keep their thoughts and minds on their folks in Maui and any of our Krispy Kreme family that might have been impacted there and see what type of support Krispy Kreme might be able to do. Thank you.