Krispy Kreme Inc (DNUT) 2023 Q2 法說會逐字稿

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's remarks, there will be a question-and-answer session. (Operator Instructions) I would like to 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 2, 2023 and in other filings 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 publicly update or revise any forward-looking statements except as may be required by law. Additionally, today's call will include certain non-GAAP financial measures. A reconciliation between non-GAAP financial measures and their closest comparable GAAP measures can be found in the company's second quarter 2023 earnings press 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 am pleased to report our fourth consecutive quarter of double-digit organic revenue growth, evidencing the strength of our omnichannel strategy. Our second quarter performance was bolstered by our continued focus on expanding our hub-and-spoke model as we leaned heavily in our omnichannel delivered for us 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 every day, 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 omnichannel 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, 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 remains significant as our omnichannel 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 7 new countries this year, with 3 to 5 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 1,000 shops.

At Insomnia Cookies, we are ramping up our development efforts to get to 30 to 40 new bakeries this year, including international expansion in the back half of 2023, starting in Canada and the U.K. 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 4,000 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 omnichannel 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 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 omnichannel 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 Favs, 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 6 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, thereby expanding with Kroger, which now carries Krispy Kreme in more than 1,000 locations across the country.

All in, we now have over 6,300 DFD doors in the U.S. with average weekly sales up 16% year-over-year in the second quarter. We also continued 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-light 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 2 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 12-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 D.C., Miami, and Charlotte, which have all seen significant door growth this year and 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 6 months. As a reminder, we are servicing over 160 McDonald's restaurants with fresh doughnuts delivered daily, which they sell to their customers, branded as Krispy Kreme. While the test is still ongoing, the results have shown us that the consumers value a 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 the 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 U.K. business, which has seen slower growth since the changes in the macro environment there last spring. Specialty doughnuts targeted local celebrations, including a royal doesn't 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 U.K., including optimization of our price pack architecture, expansion into the club channel, and the inclusion of Krispy Kreme and 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 as some of our unfavorable hedging impacts often. 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 and 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 costs 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 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 bonus accruals.

GAAP net income of $0.1 million in the second quarter was driven by a $4.4 million largely noncash expense related to the exit of Brandon Sweet Treats. Adjusted net income for the quarter decreased 13.1% to $11.4 million, and adjusted diluted EPS in the second quarter was $0.07. Turning to our segment results. The U.S. business segment's 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 disruption from third-party POS providers during the first part of the quarter that impacted our ability to execute promotional activity. In addition, we saw strong revenue growth in Sammie cookies, which opened 23 new bakeries over the trailing 4 quarters.

Adjusted EBITDA for the U.S. segment was up 16% to $28.1 million, with margin expansion of 60 basis points 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 9 months, the efficiency benefits realized from our hubs with folks, 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 softened 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, and organic revenue growth was 3.5%, driven by pricing and points of access growth of 7%, taking our points of access to 3,670. 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 unprofitable DFD doors and adding new, more productive doors are having a positive effect on margins. We expect the actions Josh detailed as we spoke about our U.K. 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, organic growth accelerated 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 an 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 normalized terms and reduce what has become a more expensive way to provide financing. As a reminder, expenses from vendor financing hit 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 increase to 4.2x in the quarter, we expect to close the year under 4x. Our leverage, excluding this shift in vendor financing, would have been much closer to 3.8x, and we continue to execute plans to drive leverage closer to 2x to 2.5x 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 to 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're also reaffirming our 2023 guidance and continue to trend toward the middle to the 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, and 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 $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 prove 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) Your first question comes from the line of Sarah Senatore, Bank of America.

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 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 loyalty programs, and you mentioned in the U.K., you've seen some success in adding Krispy Kreme to the loyalty card program. I know you've talked about relaunching in the U.S. next year. Is there any kind of lessons that you can take away from the U.K. or maybe that inform how you're thinking about loyalty programs, just given the relatively low-frequency nature of the Krispy Kreme occasion?

I'll start off by saying that despite the interruption, we still delivered improved margins, a strong e-commerce 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 disruption has caused across the business really manifests itself in 2 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 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 are now behind us.

Sara, this is Josh. On loyalty, yes, I mean, loyalty is important to us at Krispy Kreme, particularly given the importance of e-commerce and the level of interaction we have 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 U.K., 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 start 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 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 U.K. But it's something that we think down the line with DFD will certainly play a role.

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

Yes, definitely. I mean most of our loyalty programs 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 U.K. supermarkets use it as a way of communicating with our customers extensively, and certainly, by getting more involved with that, we know we -- the brand Krispy Kreme become more top of mind.

Mr. John Ivankoe, JPMorgan.

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 kind of tie those 2 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. We love that the test has allowed us to really get deep knowledge of 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 is 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-thrus 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, with similar sales and profit margins. I mean, 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, the sort of cannibalization effect. So for us, we're thinking about 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've been super collaborative. And as I said a moment ago, we're confident we could serve more McDonald's stores to your point. But it's obviously up to them. We look forward to hearing from them about 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 realize 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 6,000 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 in, that represents a great opportunity for us. And so we're really working on 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 8,000 to 10,000 over the years to come as we meet the DFD demand, we think that 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 -- 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 vernacular is just going to fade into the past at some point, but hubs with spokes, hubs without spokes, you actually -- I think I'm looking at 82 hubs without spokes. Is there -- what is -- and that number has 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 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, but what we do know how to do is make a lot of hats. 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? Of course, we want to invest in new hubs. But before we 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 described, 17 hubs without spokes to become hubs with spokes.

And bear in mind, these are ones we didn't necessarily think we're 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, 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 a long time to come because they are profitable. Now we've addressed a lot of 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 the house, even more than one line at the back of the 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 of 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 omnichannel, 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.

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, you go on McDonald's, but you've got the Kroger and Walmart has some fantastic customers already.

Yes. Understood. A separate topic, if I can, obviously, UPS driver strike really in the news. 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 of how we should be thinking about that going forward?

Again, the difference in our model, right, when we're staffing drivers in our shops, right? It's about 4 to 5 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 approach as to how it works and they can have that. So we haven't seen the challenge on that. We'll continue to be attractive 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 need to evaluate alternative models as long as they deliver on these parameters. So we will remain flexible. But for now, they're Krispy Kreme, they're part of our core and doing a great job to get those doughnut out to all these new locations as well as our existing partners.

Our next question comes from Jon Tower from Citi.

I just quickly wanted to get your thoughts on pricing in the back half of the year. I know you had discussed earlier, Jeremiah, that there's 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 plans for the back half of the year are to take less pricing, if not 0 pricing. So curious to get your thoughts on later 2023 and into '24, how you're thinking about pricing across the different markets and the different channels for the brand?

Yes, I'll start and then Jeremiah will just get into probably a little bit more in detail. We always look at pricing as a strategic piece because we want to be an 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 seeing our customers continue to migrate towards a better product as well as premiumization from partnerships, whether they be the M&M doughnut or the Spongebobs in Mexico. What really happens in the pricing strategy is as 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 dozen businesses, 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 buses model because it capitalizes on gifting and frequency as well.

Yes, John. 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 a much broader growth lever than just list price increases. The way we think about it, as Mike kind of just referenced, the premiumization of the portfolio through doughnut offerings, price pack architecture as a lever for us. And then also why 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, 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 prices 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 you'll continue to see that play out.

Got it. And just thinking about the inflation, obviously, you've got another reading this morning. It 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 '24, certainly lower than what we've been seeing in last 12, 24 months?

Yes. I think for us, we've locked in a lot of the key commodities for the rest of the year with low double-digit inflation on average for the year. Labor is kind of locked in more or less that 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 in things like sugar, which remain around 5-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.

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

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 at a faster clip, how would you describe the competitive environment in this category? Are you seeing a change in any way? Any thoughts would be great.

So the brand is now starting to become more of a mature brand in our business. And they're ramping up, as we talked about, there's about 23 shops in the last 12 months. Our target is to get to 30 or 40 cookie shops and unlock that on a yearly basis and growing from that. So we've seen that opportunity and see a line of sight of that. We continue to invest in our innovation center, which we will be opening up in Philadelphia.

That will really help drive whether it's a limited time offering 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 business started in the college, and we really try to capitalize on 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 4,000 bakeries.

And then just a question on 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 on 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 a 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 the focus will be on the U.S.

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

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 for the quarter, that's what it was.

Yes. It's a 12-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 would be the annual sales over the last 12 months, and it's 9% versus the same time a year ago.

Okay. I'm trying to reconcile things. 16% growth in sales and weekly sales per DFD door in the U.S. And it looks like there was a 14% expansion in the number of DFD doors in the U.S. So does that mean 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 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.

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 7, right? Because -- and so I'm just wondering that, call it, over 30% growth in DFD sales per hub, how much do you think that added to your to your sales per U.S. hub, is that essentially -- do you think that equals the 9%? Is that more? Is there -- how do we kind of think about that as to just a pure sales per hub contributor that over 30% growth in DFD sales per hub?

Yes. No, this omnichannel 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 or 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 2 biggest drivers of that growth. The sales per hub growth that you described 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, most likely the biggest driver going forward of the sales behold growth that we'll see. I mean 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 1 or 2 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.

Yes. Can 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 omnichannel business, it continues to play out around the world, as Mike said earlier. I mean, these are specialty doughnut campaigns, we're seeing successful across the planet. The point of access, expansion of the DFD model is applicable everywhere. And e-commerce is strong everywhere. We're seeing -- for example, Mike mentioned -- Joy mentioned that Canada and Japan, a 30%-plus growth. Actually, our international franchise markets, on average, grew more than 20% last quarter. Company-owned Australia and Mexico grew high single digits in the quarter, and the U.K. was flat. So I think your question is largely a U.K. question. We did actually see really interestingly strong double-digit retail sales growth in the U.K. last quarter, but it was offset by a decline in DFD specifically.

That's consistent with what we see as sort of industry-wide trend for reduced supermarket visits. The team is doing a great job there. They're adapting to those conditions. As I mentioned a moment ago, already taken actions to do things 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 some time to time that you need to manage. In our case, it's specific to the U.K., and we're confident around the applicability of the model going forward around the world.

Okay. Could you comment on like roughly -- I think I guess this is a U.S. comment, but how much total price you had 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. As I mentioned, we took pricing across all our markets. 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.

(Operator Instructions). Our next question comes from Mr. Bill Chappell, Choice Securities.

I was 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 if I'm 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. 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 to manage labor efficiently. What I would say is that outage was roughly 4 to 6 weeks of pain in the U.S. To give you an idea of what that impact would look like over the quarter.

Yes, 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.

Yes. 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 2 quarters as the issue doesn't happen and what your run rate could have been last quarter. Is that a fair way to look at it?

That's exactly how we're thinking about it 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's spot on, Bill.

Yes. I mean it's -- the consumer we're seeing is strong, particularly in the U.S. where this impact happened. I mean we talked a lot about the convenience of DFD e-commerce and the love of the specialty doughnuts. We've seen that trend continue into July. If you saw our M&Ms doughnut range, which even includes a special premium price, doughnuts filled with many M&Ms 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 the sweet treat loving heavy QSR spend in 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 will you give some of that back with kind of step-up promotions, particularly in Europe?

Yes. 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 as we think about it more from a price realization perspective, it's more of a kind of profit impact than you'll see in kind of list price changes with things like price pack architecture just changing the discounting kind of strategies that we have.

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

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 in 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 kinds 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 we actually feel very good about our ability to navigate price increases. We're 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 U.K. So Josh, I don't know if you have any...

Well, 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&Ms and the success there, but also that we've been deploying that specialty doughnut strategy around the world. And in fact, the U.K. saw double-digit organic growth in the retail business after a variety of engaging specialty doughnut programs like the Royal 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, that work across the world and sometimes to extraordinary levels like we just mentioned in Japan and Canada. And we don't see that whether or not pricing was taken in one market versus another is the driver of that success. It's more the implementation of the strategy. We've got a great hot light execution that's really brought alive the business in Japan. We're doing really well with Costco and the 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 in the sharing is a global piece. So when people are using that for our brand, it's just a different location, right? So 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 to the sweet treatment? How do you then complement it? It really is about that discipline of how you make sure the frequency is driven by gifting, et cetera, and then match it over just great partners.

Okay. And just a last bit of a follow-up, which is sort of also an open question is, given your answer, clearly, I was trying to use 1 or 2 statistics to say, "Hey, this is your competitive set going to the CPI and look at like baked goods and doughnuts 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 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 the 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 opportunities, if you look specifically at the doughnut category, right, we don't really focus our energy on a single serve. We actually focus our energy on the dozens of business. We do that and we bring either premiumization with partners recently with M&Ms for example. And the mindset is you can capitalize on occasions, which is the gifting really happens or unique events like Halloween and the holidays or you can just really unlock because your partners have -- they're creating that desire. So when you have an M&M doughnut, that might be broken in half and these will -- many M&Ms 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 a sweet treat. We just want to be in our affordable indulgent space, sweet treat space. We want to be there when they're making that decision.

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. I always want to talk and thank our Krispy Kremers have been 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 the 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.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.