Earnings Call: Q2 2021

Aug 17, 2021

Thank you for standing by, and welcome to Krispy Kreme's Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host, Senior Manager, Communications, Cassie Williams. Thank you, operator. Good morning, and welcome to Christie's Kreen's Q2 2021 earnings call. Thank you for joining us today. Before we begin, I would like to remind you that this call contains forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events or future financial performance. Forward looking statements involve inherent risks and uncertainties, and we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward looking statements. These factors and other risks and uncertainties are described in detail in the company's registration statement on Form 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 GAAP and non GAAP financial measures Required by Regulation G can be found in the company's Q2 2021 earnings press release, which will be furnished to the SEC On Form 8 ks this evening and available at investors. Christykreme.com. For your convenience, today's conference call is being webcast and recorded for replay via our Investor Relations website. Following prepared remarks, CEO, Mike Catterfield CFO and COO, Josh Charlesworth and Chief Accounting Officer, Joey Pruitt will take your questions. And now, Mike will provide an update on Christie Creme's business. Welcome, everyone, and thank you for joining today's call. We're excited to share our progress for the Q2 of 2021, which was the first in our return to the public market and one of the strongest quarters in our 84 year history. Q2's results demonstrate the effectiveness of our global transformation and our continued progress towards becoming the most love sweet treat brand in the world. Our business is strong, healthy and expanding, a direct result of the foundational work we've done to set our omnichannel strategy And deploy our hub and spoke model. We believe that our sustained growth in Q2 shows the resilience of our approach as well as the Ability to adapt to evolving operating environments. Over our 5 year transformation journey, Krispy Kreme has evolved into a truly global business With significant growth opportunities still to come, we have made investments and now own and operate our businesses In the U. K. And Ireland, Australia and New Zealand, Mexico and the recently acquired business in Japan, With partners executing the omni channel strategy in the remaining international markets. The success of Krispy Kreme brand and our omni channel strategy around the world Highlights the global opportunity ahead. We're in early days of our international growth story and we plan to both grow in our current geographic base And expand into new markets. Our focus on driving a high quality donut experience while growing our brand around innovation and celebratory occasion Has taught us how to build a successful global business, enabling us to drive faster growth and stronger performance. In addition to our global story, we see significant growth in the U. S, where we now control 48 of the 50 top markets We continue to build our omnichannel approach. This quarter, that approach in all our core markets Allowed us to grow net revenue 43% to $349,000,000 year over year. Organic revenue grew Positive 23%, which represents one of the best quarters on record. We believe that organic growth is a fundamental indicator of the health of our business. To put this in perspective, on a 2 year stack basis, our organic revenues have grown 16% since 2019, Demonstrating the strength of our performance compared to pre COVID-nineteen results. Make no mistake, This growth is due to the success of our omni channel strategy and our increasing ability to reach customers wherever they are located. As we further implement our hub and spoke model, we see material gains in profitability. Most notably, our adjusted EBITDA grew 78% in Q2 to $52,400,000 and our adjusted net income grew 2 54 percent to 20,500,000 Josh will help unpack these numbers in more detail as we explain what is driving our results at an operational segment level. It is important to note that this growth was ultimately driven by fundamental improvements in the business as we are now lapping the impact of COVID-nineteen in many of our key markets. When we set out our transformation journey, we focused on 3 primary growth levers to drive our expansion. We believe together they drive sustainable value creation and set us on a path to becoming the most loved sweet treat brand in the world. These growth levers are: 1st, Increasing purchase frequency by giving consumers more reason to buy us retreats through new platforms and channels. 2nd, Increasing availability by providing consumers with more convenient ways to buy our sweet treats and third, Increasing profitability by implementing a hub and spoke business model that allows us to efficiently supply our expanding points of access with high quality sweet treats. I'll explain those in a bit more detail. 1st, increasing purchase frequency. When a consumer chooses to indulge in a sweet treat, we want them to choose Krispy Kreme or Insomnia Cookies. Building out our e commerce capability is a primary means for driving frequency. And in the first half of the year, 19% of our global retail sales were from e commerce, a proportion we expect to keep growing. The power of e commerce is clear. In the full year 2020, 82% of U. S. E commerce delivery transactions We're incremental to sales and e commerce transaction values have increased as we expand our offerings into new areas like catering, gifting and dark kitchen expansion. We've also increased purchase frequency through product innovation By constantly evolving our core offering and regularly introducing new products, we provide customers with more reasons to choose Krispy Kreme more often. Our occasions based innovation, which focuses on holiday and major celebratory moments, creates a steady drumbeat of reasons for consumers to purchase Donuts in shareable formats of a dozen or more. Our brand is powered by highly efficient marketing that keeps Krispy Kreme top of mind. By heavily leveraging social media, we can increase our cultural relevance and keep emotionally connected to consumers at low cost. In addition to formal marketing activities, we also engage our passionate consumers through memorable, cultural and community shareable moments, Our acts of joy, which fuel love for our brand. Year to date, we have generated more than 16,300,000,000 media impressions, largely driven by the success of our vaccine program and the innovative product rollouts. Our second driver, Expanding availability is focused on building new ways for consumers to access our sweet treats. Notably, Immediately after our Q2 close and for the first time ever, 100% of our donuts served in the U. S. And Canada were delivered fresh, no matter where they were purchased. Creating more ways for consumers to engage with Krispy Kreme is fundamental to our growth story, whether they access through our shops, e commerce, our delivered fresh daily cabinets or our branded sweet treat line. In the first half of twenty twenty one, we added 1300 new global points of access, the majority in the form of new DFD doors, as we complete the transformation of that business in the U. S. And Canada. We remain committed to expanding consumer access to our sweet treats for consumers, and we plan to add approximately 800 to 1,000 points of access per year Globally, as we continue to execute our transformation. Further, since we launched our branded sweet treat line last year in 4,700 Walmart stores, We have expanded this consumer packaged goods offering to several new U. S. Retailers, including Albertsons, one of the largest grocery chains in America With multiple banners. While early in its evolution, we believe the Sweet Treat line is scalable and will allow us to push toward wide distribution through grocery stores and convenience Our 3rd growth driver is increasing profitability. Over the past 2 years, we have strategically acquired franchisees, allowing us to take control of operations and drive efficiencies. As of the end of Q2, we control and operate 85% of the system in the U. S. And Canada and 73% globally. To continue driving margins and profitability, we are expanding our hub and spoke manufacturing and distribution model, which enables us to efficiently execute our omni channel strategy while increasing operating leverage and improving our bottom line. In deploying our hub and spoke model, we invest in a limited set of fresh donuts manufacturing hubs, primarily our Hot Light Theater Shops, and use those hubs to supply additional points of access. Each new point of access within the hub and spoke network Leverage is an investment already made in the manufacturing hub, increasing efficiencies as new spokes are added. We believe that this model is vital to continued And you can see this demonstrated clearly in the Q2 performance of our international segment, where the hub and spoke model is more mature. In the near term, we expect to further deploying our hub and spoke model in the U. S. Will incur some additional costs in the form of labor and training and route expansion, was a key component of our outstanding Q2 growth. A proven winner and has clearly grown beyond its college campus origins, The Q2 saw Insomnia continue to deliver in digital innovation, new product development and operations excellence, Including the opening of the 200th Cookie Shop in Westchester, Pennsylvania. Overall, our omni channel strategy is working And our global expansion continues to capture more and more of our worldwide market opportunity. We are implementing our hub and spoke model globally and are seeing significant growth and increasing profitability as a result. With that, I'll turn it over to Joss for a deeper dive into our performance and some operational developments in the Thanks, Mike, and hello, everyone. As Mike said, we are pleased to report an excellent Q2 With net revenue growth of 43%, organic revenue growth of 23% and adjusted EBITDA growth of 78%. Although our operations in several markets were impacted by COVID last year, our strong performance this quarter Also reflects the underlying strength of our omni channel business with revenue growth of 50% and adjusted EBITDA growth of 65% when compared to Q2 The difference between the quarter's 43% revenue growth and 23% organic sales growth It's explained mostly by franchisee acquisitions made in the last 12 months. These include Japan, which we successfully integrated in December 2020, as well as franchisees in 12 U. S. Cities, including San Francisco and Miami, which we acquired in Q1. We made no franchisee acquisitions in Q2. All our business segments saw positive organic growth in the quarter With the International segment comprised of our fully owned and operated businesses in the UK and Ireland, Australia, New Zealand and Mexico leading the way with 126% growth. At the height of COVID restrictions last year, Approximately 30% of our shops around the world closed. However, demand for our sweet treats remained strong, and we were able to quickly reopen in the back half of twenty twenty. While lapping the effects of COVID explains much of the international segment's Q2 growth, We are very pleased to see that these businesses where our signature hub and spoke operating model is most mature have come back stronger than ever. For example, the U. K. And Ireland market, which makes the majority of its sales outside the brick and mortar donut shops, Deliver Q2 net revenue growth of 37% versus 2019. Points of access to fresh donuts have increased by over 40 in the last 12 months in the U. K. And Ireland, driven mostly by additional delivered fresh daily doors at leading national supermarkets, Tesco, Sainsbury's and Asda. UK and Ireland spokes per hub are now 74 and sales per hub are $7,600,000 explaining why the UK achieved EBITDA margin in excess of 30% in Q2. The International segment helped drive overall consolidated adjusted EBITDA margin up 300 basis points versus last year to 14.7% year to date, higher than we expected at this point in the year. Looking to the consolidated P and L, product and distribution costs declined 380 basis points, mostly due to the international segment's rebound. We're also lapping startup expenses incurred in launching the U. S. Branded Sweet Treats business last year. We do see significant commodity cost pressure, particularly from edible oils. However, in Q2, we continue to benefit from forward contracts insulating us from this effect. Moving forward, we will use pricing to compensate for this headwind. Operating expenses rose 270 basis points, largely due to the acquisition and conversion of franchisees, which add their operating costs to our P and L. Our existing controlled businesses saw some increased costs With occupancy lease expenses rising on the expiration of temporary savings arrangements negotiated with landlords during the height of COVID. We also saw U. S. Costs rise as we invest in deploying the hub and spoke system there. SG and A rose 50 basis points, inflated by IPO related expenses of $6,700,000 Excluding these, we would have seen 140 basis point reduction in SG and A, reflecting the benefits of scale from our revenue growth. On the bottom line, we saw a $15,000,000 GAAP net loss driven by multiple onetime items, including interest related to our short term dividend recap loan and related party interests, One time income tax adjustments such as nondeductible public company executive compensation and the announced corporate tax rate increase in the UK. Without these one time items, GAAP net income will be positive. Adjusted net income, which also adds back stock based comp, Acquisition, amortization and other nonrecurring expenses was up to $20,500,000 Before reviewing the performance of our business segments individually, I wanted to update you on our consolidated net debt and leverage position as we made a few significant cash and debt movements early in Q3. These include the proceeds from our IPO And the repayment of a $500,000,000 loan. As of August 8, we have $118,700,000 of cash and net debt of $646,000,000 Now with all IPO related transactions complete, Our total net leverage stands at 3.6 times using our Q2 trailing adjusted EBITDA, which is in line with our expectation Turning to our results at the segment level. In the U. S. And Canada, where our deployment of the hub and spoke model is ongoing, we delivered our 8th consecutive quarter of positive organic sales growth. Net revenue grew in line with expectations, rising 25 percent to $231,000,000 from $184,000,000 the previous year On a combination of franchisee acquisitions and organic growth of 3.9%, in turn driven By delivered fresh daily donuts sold in grocery and convenience stores, our new branded sweet treats line and Insomnia Cookies. Notably, the segment's 2 year organic growth stack is now 14.3% with sales proving resilient last year despite COVID. DFD doors now exceed 5,000 compared to just 2,000 in Q2 2020. We've also seen average weekly sales per door Increased more than 30% over this time, reflecting the success of our transition to earning fresh donuts at a price consistent with menus at our donut shops. Excluding the impact of exiting our legacy wholesale business, the U. S. And Canada segment Would have recognized organic sales growth of nearly 19%, highlighting the underlying performance of the business Bolstering our confidence in organic growth acceleration for the segment going forward. Looking to profitability. U. S. And Canada adjusted EBITDA Grew to $28,000,000 from $27,600,000 the previous year, with DSD efficiencies, improving New York traffic And insomnia cookies all contributing to the bottom line. U. S. And Canada EBITDA margin this quarter was 12.2%, in line with the prior quarter's 12.4%. This result reflects both efficiencies from implementing our hub and spoke model and the fact that we are still early in its deployment in the segment. We continue to invest in the new operating model. We hired more Krispy Kremeers than ever before this past quarter as we integrated newly acquired shops, added hub and spoke routes I made the transition to DFD in major markets, including Dallas, Houston and San Francisco. A temporary increase in training costs and associated overtime, thus increased wage inflation pressures are impacting short term margin growth. However, we expect to mitigate these increases As well as commodity inflation with a price increase in September. We are aware But compared to Q2 2020, EBITDA margin has declined from that quarter's 15.0%. That was the highest the company had seen in recent years and is partly explained by a reduction in labor costs at the time as sales shifted to pickup and drive through while our shop lobbies were closed in the face of COVID safety measures. Turning to our CBG offering, our branded sweet treats line gained momentum in the quarter as we brought to market 3 new varieties, S'mores Bites, Key Lime Crullers and Chocolate Crullers. The range is expanding with our launch customer Walmart undertaking a shelf reset Give us more space and Albertsons, one of the largest grocery chains in the U. S, becoming our 2nd largest customer. Today, the line is already available At approximately 6,300 locations across the U. S. Across 17 different retailers. To feed our branded Sweet Tweets expansion, we undertook during Q2 an investment in 3 new production lines across our factory network, which will increase capacity by over 200%. By leveraging existing infrastructure, we will require less than $2,000,000 in capital investments to do so. We expect Branded Sweet Treats to be profitable by the end of 2021. And overall, in the U. S. And Canada, we expect to see branded sweet treats, the New York market and the whole system at large to see margin improvements over time as we continue to deploy the hub and spoke model. Moving to the International segment. We grew net revenue 159 to $89,000,000 from $34,000,000 the prior year, with organic revenue growth of 126% year over year, driven by increased foot traffic and in shop dining following the lifting of COVID-nineteen restrictions. We grew international points of access by 600 versus the same quarter last year, helping the segment to 28% organic growth versus Q2 2019 and demonstrating the strength of the omni channel strategy. In addition, e commerce is now well established in the segment representing 15% of Q2 retail sales. Looking to profitability, International's Q2 adjusted EBITDA grew to $24,000,000 from $1,600,000 driven by strong revenue growth and COVID recovery. Profitability continued to benefit from the robustness of our hub and spoke model, which is most mature in this segment. Overall, international's markets rebounded to match or exceed their performance prior to the pandemic, and we expect the segment to continue to contribute to strong EBITDA performance in the future. Now turning to the Market Development segment. Net revenue grew to $29,000,000 from $26,000,000 year over year with 17% organic growth driven by overseas franchise markets. Despite continued COVID-nineteen restrictions in certain segment markets, we continue to see growth with revenue exceeding pre pandemic levels. Further, we saw the addition of 92 new points of access across the segment as well as strong e commerce performance. In our newly acquired Japan business, e commerce and our recently launched DoD program continue to drive growth even despite Government imposed state of emergency measures. Overall, performance in the segment resulted in market developments adjusted EBITDA growing to $10,000,000 from $8,000,000 representing 25 percent year on year growth. Looking forward, we expect the segment to continue to deliver strong organic growth as we have more points of access to the world across the world, including our upcoming new market entry in Egypt. As Mike explained, Our hub and spoke operating model is key to the execution of our omnichannel strategy. And as referred to earlier when discussing the UK and Ireland, we track Three metrics to measure progress in the implementation of the hub and spoke model: points of access, spokes per hub And sales per hub with spokes. As of the end of Q2, we have 9,575 points of access, A near 70% gain over this time last year. These points of access include 7,849 DFD doors With 5,067 in the U. S. And Canada, 2,264 in the international segment and 518 in market development. This represents a global net increase of 1261 doors from the end of 2020. Year to date, we have added 9 30 DFD doors in the U. S, with the largest games in Dallas, Chicago and Houston. In brick and mortar, we now have 1726 Krispy Kreme and Insomnia Cookies branded shops, an increase of 39 since the beginning of the year. We see significant white space opportunity to continue to grow our points of access with the potential to add more than 2,900 points of access within the U. S. And Canada segment and an additional 2,800 points of access in the international segment. 1700 of these rest in the top U. S. Markets, which are New York, Los Angeles, Chicago, Philadelphia, Dallas, San Francisco, Houston, Washington, D. C, Atlanta and Boston. As we expand into these white spaces, We are aiming for an annual global development goal of 800 to 1000 new points of access. Looking to hubs. As of Q2, we have 413 production facilities around the world, an increase of 5 since this quarter last year. Our strategy is to selectively add around 10 new production hubs per year. Much of our focus is on leveraging capacity at our existing hubs by adding new points of access. To that end, we have increased the number of hubs with spokes in the U. S. And Canada segment to 114 From 88, 1 year ago, mostly by converting legacy hotline daily shops. With the additional points of access, We have increased average spokes per hub in the U. S. And Canada segment to 45 from 37 and in the international segment to 71 from 65 Since the end of 2020. International's higher average reflects the higher proportion of off premise DSD sales in that segment. International's trailing 12 month sales per hub reached $8,000,000 in Q2, up from $6,400,000 in the full year 2020. In the U. S. And Canada segment, average sales per hub reached $3,600,000 up from $3,500,000 in the full year of 2020 and up from $3,200,000 at the beginning of our transformation in 2019. Turning to our expectations for the rest of the year and beyond. Based on the great progress through the first half of the year, we are confident in our ability to continue our momentum and deliver strong growth in 2021. Reflecting this, we are issuing full year 2021 guidance of net revenue of $1,340,000,000 to $1,380,000,000 or growth of 19.4 percent to 23 percent organic revenue growth of 10% to 12% adjusted EBITDA Of $178,000,000 to $185,000,000 or growth of 22.4 percent to 27.2 percent, Adjusted net income of $62,000,000 to $68,000,000 or growth of 46.4 percent to 60.6 percent. Q3, which is typically a seasonally softer quarter, is expected to see increased pressure from wage and commodities inflation, especially in the U. S. However, helped by our September price increase, we remain confident in our ability to deliver on this full year guidance. Further, looking beyond this year, we are also issuing a long term outlook for organic revenue growth of 9% to 11%, Adjusted EBITDA growth of 12% to 14% and adjusted net income growth of 18% to 22% per year. Without the U. S. Legacy wholesale business to lap in 2022, the current momentum in our business means that we expect to exceed this long term outlook next year. In addition, we expect total net leverage to be under 3 in the next 12 months. In accordance with our dividend policy, We expect to pay an initial cash dividend of $0.035 per share for the quarter ending October 3, 2021. Thereafter, we expect to maintain a stable quarterly dividend until we reach our long term net leverage policy of 2. With this, I will now hand it over to Mike for some closing remarks. Thank you very much, everyone. In summary, We're extremely confident about the long term runway to grow Krispy Kreme on our journey to become the most loved sweet treat brand in the world. We are proud of the ongoing transformation in the U. S. And Canada as well as the outstanding performance in international in the quarter. Most importantly, I want to thank our Krispy Kremeers around the world for their continued hard work and always showing up. We look forward to connecting with you all again soon. With that, I'll hand it over to the operator as we would be pleased to answer any questions you may have. Thank you. We ask that you please restrict yourself to one question. Please standby while we compile the Q and A roster. Our first question comes from the line of John Ivankoe of JPMorgan. Your question, please. Hi. Thank you very much. The question is on the U. S. Margins, especially relative to One, I mean, I think the U. S. Margins were a little bit below our expectations. And certainly, I mean, the question that we're going to ask is when you think We can start to see margin growth again in the U. S. You have a specific date in mind. Could that come in the Q4 with additional menu pricing that you've And secondly, as part of the IPO, closing the gap of margins between the U. S. And international It would obviously be a huge opportunity on the income statement. What's kind of your head around that thinking about the long term? How close can those Businesses get you, do you have a number in mind, do you have a time frame in mind? Thank you. Hey, John. Thanks for the questions. Yes, you're right. The first thing to highlight is that in the international businesses, Where we have the mature hub and spoke model, we do drive very high margins. And in Q2, we saw even Higher margins with the additional points of access that we're able to generate there during the COVID disruption. We're implementing the same model in the U. S. And now we are indeed seeing the same benefits as particularly as we add Delivered fresh daily donuts, which are now across all our channels in the U. S, we're able to leverage the fixed cost Back at the production hubs and drive up margins. Now what we're seeing right now is the change is accelerating. We're already at our at the end of Q3, we'd already be at the end our year end goal for DFD Doors of 5,000 300. So in effect, what we're seeing is the transition moving even faster in the U. S. And that means we've hired more Krispy Kremeers than ever before. Actually hired 1700 people in quarter 2 alone. So with this level of change going accelerating even the transition to hub and spoke, We've seen some additional implementation costs. You can imagine more training costs, more overtime as we fill the vacancies. And hence, why the margin, as you point out, a little bit lower in the U. S. But Actually, when you exclude the branded Sweet Treats line, which is a new business that we opened up last year, the entry into New York, which just happened last year, and of course, We have reduced traffic still in the city there and the most recent acquisitions. Our Core fresh donut business is doing already in the U. S. Over 15% EBITDA margin. So We do have line of sight and indeed, many ways, greater confidence in our ability to drive EBITDA margin improvement Now in Q3, we are seeing commodity cost pressure Coming through a little more on wheat, on edible oils and sugar, the markets are all coming strong, hence our decision to take a Price increase in September towards the end of the quarter though. So you're right, quarter 4 is when we will see in the U. S. The benefits Of both that price increase and the efficiencies from the hub and spoke model, which as I said, is going faster than even we expected. You asked about long term. We don't expect to close the gap all the way To those international margins, the international businesses were built effectively greenfield With hub and spoke in mind, whereas in the U. S, we have a legacy business that we're transitioning, there will be production hubs, Hot light theater shops that we never add spokes to, so there is some inherent inefficiency there. We also, as I mentioned, are bringing on businesses like Branded Sweet Treats To become more profitable over time. So the transition will be a multiyear transition, but we will see 15% EBITDA margins in the U. S. In the years to come. Thank you. Our next question comes from John Glass of Morgan Stanley. Your line is open. Yes. Hi. This is Brian on for John. I guess just curious on side of the business. It seems like it was quite strong there. Curious if there was kind of perhaps more pent up demand than you expected that drove some of that. Perhaps in some of the individual countries, what's been stronger than your expectations? And are there any still lagging? And I guess just also on opening new shops, Are there any kind of puts and takes there? Any of you think that are moving faster than expected or any that are still seeing some delays due to COVID? Yes. So we'll take it on. You had 2 questions. So our goal is going to be to open up between 10 15 new hubs In the global business, right, that includes the U. S. And international. You're seeing a focus on the international order Opening up this week, we actually opened up in Egypt, right, which was a population of 100,000,000 in the city of Cairo and 20,000,000. So we can see Opening up that hub there starts to really show how you're going to get the hub and spoke model working. That's one of the goals. In terms of international, Even Josh alluded to it, right? There's as businesses started to recover from COVID, they started to When you have the omnichannel approach and the customer could use the business and where they wanted access, the volume And the frequency of it as we also additionally open up new points of access, you can see the improvement there both Our core in the UK, New Zealand, Australia, Ireland and Mexico as well. Thank you. Our next question comes from Sergio Matsumoto of Citi. Your line is open. Hi, good afternoon and congratulations for your Q1. My question is on the September price hike. If you could give us some color on how what form this will take, whether the rate will increase or there will be By changing how the mix would improve or maybe a more effective use of the promotions, if you Hi, Sergio. You bet. So yes, We are always pursuing positive mix opportunities, because we are continuously innovating with specialty doughnuts We tend to price at premium price points. That is an ongoing part of our strategy. As a fresh donut provider, we're always in a position to do that. People get excited about the innovations we bring to the marketplace. More specifically, in September, what we're talking about is taking up menu prices for our core Doughnut business, our core dozens business, it will vary across the country depending on local market specifics. We're Very thoughtful and targeted as to what is the appropriate price point for different regions, different cities. That price increase It's intended to cover the commodity inflation that I mentioned. Also, we are seeing wage inflation, Typical that you're seeing across the industry and actually in line with our expectations, the commodities are a little bit higher and hence the need to lean in on pricing in September. But as a fresh Only donut business, it's a special occasion, infrequent purchase. We don't we have plenty of ability To bring that pricing, we know people love our dozen doughnuts, and so we have no concern about the ability for that to Yes. I mean, I'll add one piece, which I think is important, which gives you the ability of how why we think we have pricing power, Right, because as we started to discontinue the old wholesale program to the DSD program, we really introduced the exact same pricing structure that we actually have in our shops. And we saw our customers in those locations actually accept it because it's a fresh product, right? So as we continue to become Merchants and look at those different channels and how pricing can affect each unique channel in its own right, we see the opportunity there. It is a dozen business, so you have the ability that it still wants to be accessible, right? So thinking even September was thoughtful about how we think about the business. But you'll see we do believe we'll see that margin continue to flow through. Thank you. Our next question comes from David Palmer of Evercore ISI. Your line is open. Hi. Any maybe you could say this in 1,000,000, in terms of EBITDA, 1,000,000 of How much higher your costs are now versus where they were back in June? I know for everybody They've gone up, but versus your own internal targets, how much have they adjusted and what are the biggest buckets of that? And I have a quick follow-up. So hi, David. So I mean the biggest bucket of increased costs On the P and L is, of course, in our operating expenses. It's Driven by the biggest parts of our P and L, which are labor. As I mentioned before, We're investing in labor in line with the expansion of the system in the U. S. We're investing in labor with the Investment in the growth across the world. We have seen that increase in line with the market. We The next biggest area of increase would definitely be on the product side, and we've seen that Grow a bigger headwind than we expected, but that's as much as I can give. Okay. And with regard to the U. S, there are some markets that are already, If you add back the overhead, it would be at least high teens, if not 20s, in terms of EBITDA margin. You've talked about Southern California and Atlanta. When it comes to improving the U. S. Margin From the 12% towards 15% plus and maybe we can be greedy and think about getting up towards some of your better markets. What is your path to getting there? Is it I mean, clearly, the New York market can improve in profitability on a rebound and perhaps Rather quickly as that New York gets going again. But what is you even talked about reinvesting behind the hub and So I want to be realistic about the path to improving this margin and maybe you can walk us through how that will happen. Sure thing. So I mean, the first thing is goals and targets. And you're right, we have aspirations for high Margins, the reason I gave some specific details earlier on the UK is because even in the most mature hub and spoke Cities there, we can get we can continuously add more points of access and drive even more efficiency. So I mean the first thing to say is Across the whole system, we are looking to leverage the omnichannel model to bring more efficiency. I I mean, we talk a lot about hubs where we have spokes and adding DSD, leveraging the fixed cost there. We're definitely Doing that. But even in hubs without spokes, with e commerce now a permanent change, a permanent Addition to our channels, we're able to drive efficiency by having those transactions, which are highly incremental on top, Flow through at higher average transaction values to the bottom line. So it's a system wide effort. Now There's also a portfolio of cities. You're absolutely right. We have some cities where the hub and spoke model is already a little more advanced, Whether it be somewhere like Atlanta, which just reflects the history and the great heritage of the company, somewhere like Tampa, where we acquired The franchise went from being low single digit margins to low 20% margins in less than 18 months By improving operations, adding spokes and of course, establishing a full omnichannel business in that area. And we'll be doing that across the system. We made acquisitions at the end of last year at Dallas and Houston, which without spokes, with some operating challenges, have been loss making. New York, we entered last year in the midst of a pandemic. We have a lot of confidence there. We're seeing the business strengthen, But it's still heavily diluted to the system as we wait for the full return of traffic and tourists. So it's a combination of Efforts across the board and in targeted cities where we can add particularly deliver fresh daily doors. That's why I talk a lot about The excitement we have right now, with more DFD doors being added to the U. S. System than we even expected And looking at that North Star, somewhere like the UK, where they're able, once they've got the critical mass and the maturity of the hub and spoke model to drive extraordinary EBITDA margins, it's very exciting for us to see that. But the implementation costs are real. Hiring people, Adding drivers, adding routes right now in this tight labor market means that we have To have people working overtime, it means that we're training more people than ever before. That's what we mean by those implementation costs because it's a big transformation and change, and we're in the heart of the implementation of that. Once that settles, The new labor management systems, demand planning systems that we've invested in will really start to help us leverage The efficiency in each of those cities where we're adding these DFD doors, right now, through the implementation, It's natural that we need to invest to make sure we're set up for long term profitable growth. Thank you. Our next question comes from Brian Mullen of Deutsche Bank. Your line is open. Hey, thank you. Just a question on the DFD business in U. S. And Canada. There's now over 5,000 DFD doors today. It's growing quickly. Yes. At the same time, there's something like 150,000 grocery and convenience stores across the two countries. So Question is, when we think about the ultimate long term opportunity for DFD Doors, what's the relevant number of locations you actually think about internally or might actually consider for a cabinet one day. And I ask that understanding that not every single location is going to warrant one of your So just any help on how you think about the long term opportunity? So you directed this this is Mike. You directed this The U. S. And Canada, right? So with 300 current theater shops today, you're still only going to have a certain amount of route Expansion that you have were up 5,000. We think the opportunity in the U. S. Is about another 2,800 to 3,000 I'm outdoors, cabinets that are there and there's potential. As you continue to open up the right hub and spokes so that scarcity matters. So when you're trying to do a model and you're looking at 125,000 locations, we won't be in 125 1,000 locations. In fact, from an ACV perspective, even long term, you could see us somewhere in the range of probably being between 5% 10%, Right. Scarcity is important to Krispy Kreme. It will be following along the hubs that we continue to build and do that exceptionally well. It's not every grocer. And even the grocers that we pick, it's not every one of their shops. So it's again that access because that's how you keep the brand special. That's how the merchandising And being a merchant really will work through. Thank you. Our next question comes from Michael Rothstein of Goldman Sachs. Your line is open. Hi, this is Michael on for Jared Garber. Just want to touch really quickly on the 30% year over year AWS growth, average complete sales growth in the DSDs, and that was really impressive and definitely far outpacing The organic revenue growth rates, can you talk a little bit about what maybe drove that? Maybe are those kind of lower open rates and then they ramp? Or are you guys Making larger cabinets, DSD cabinets versus back then, just trying to kind of figure out what was the key driver of that was? Thanks. Hi. Yes. Thanks, Michael. So I think 2 main drivers I'll point to. The first is, we have, as part of the transformation and learning from international, been really focused on the High quality doors that Mike referenced. Of course, they need to be local to the donut shops, so the donuts are fresh, that But they also need to have the right level of traffic. And so we have been really thoughtful on those doors and have walked away from doors versus Past years where the volume and the traffic doesn't warrant a fresh donut cabinet. And the second one is the nature of the product and the price point. We are now talking only 100% fresh donuts. Would you believe it, but a year ago, 38% of our donuts in the U. S. Were not fresh daily. Now it's 100%. We now sell them always at the same price point as you would get in your local Krispy Kreme Donut shop. So that comparison reflects a combination of better quality doors. There's less of them than we had in that old legacy wholesale business, But there are better doors that we will be more profitable than. And the first thing that drives that profitability It's having a higher price point and that is driving the weekly sales up and we're thrilled to see that across all our customers. Yes. It's a one piece just to augment on what Josh said. That ability to be doing this fresh Really matters for us as a system and that access point when we now start to have the DFD system and having the same donut Where a donut maker doesn't even know where the donut is going, so that quality really matters and you'll be able to get the right pricing structure, Our customers will now say it's Krispy Kreme. And if I want a hot experience, I can go to a theater. If not, I get it to awards, I want it. Thank you. Our next question comes from Jon Tower of Wells Fargo. Your line is open. Great. Thanks for taking the question. Just I'm curious to hear what you're seeing from a competitive response in the indulgent treat category, say, at the grocery channel or At C Stores, as you're rolling the DFD model out to more doors across, especially the United States, are you seeing Really any competitive response from those channels specifically? Yes. So what's really specific, we're a dozens business, Right. So it's pretty unique. There's not a lot of direct competition that's doing a fresh dozens business Across the U. S. In particular, as you called out, when we focus again, the brand tends to focus on occasions And then make sure that the celebratory aspect of the brand is coming through. So from that aspect, We play in a different place of where the consumer is looking at it. So not we don't there's a space for the lower Price point donut that a lot of the grocery stores do, there's actually 2 different sets of how the consumer is making the decision. Thank you. Our next question comes from Todd Brooks of C. L. King and Associates. Your line is open. Hey, thanks for taking my question. If we could spend a minute on branded sweet treats and you talked about adding 3 new lines, capacity up dramatically, Door is up nicely this year. I think you said 6,300 and getting to profitability by the end of 2021. I guess with that capacity that you're adding, how do you see that business growing as you get towards the out years of 2022 and 2023? I know you said you added 3 new SKUs to the offering, but just if you could kind of qualitatively walk us through What you think branded sweet treats becomes for the business 2022 into 2023 and how the profit drag mitigates as the volumes rise? Thanks. So appreciate the question. I'll start and then Josh will unpack a bit more. So if you think about the business, we just talked about the Scarcity value of the fresh donut business, and that's really important for us as we build out the hub and spoke model. As we launched branded Sweet Treat, we saw that as a different I'm going to point that the customer is looking for a different occasion. And as we build that out, we started with Walmart, now I'm opening up to Albertsons, I'm looking at other brand and their banners. We're going to be very disciplined about this. It really does matter how we Build this business, we see it as a really big potential because the occasion is different. It's not about the speed. It's we think about this brand Very much as we think about our hotline experience and how we're going to continue to build it, and we will be able to match that potential. We think it's something that's pretty disruptive in the category. So that from at least a branding perspective, it competes against the occasion of a Krispy Kreme against itself, right? But it's a unique Opportunity. On the occasion usage different from how you see that coming through in margins and that, I'll ask Josh to. Sure thing, Mike. I'll add a couple of data points. So the investment in these production lines is directly a result Our conversations with customers, both our launch customer, Walmart, and other customers in other channels And looking out over the next couple of years what we need to deliver on that. And hence, I referenced a capacity increase of about 200%. And that's in line with how we'd expect to increase the business out to 2023, effectively Up to about a threefold increase in the business, which is exciting, but It would still give us probably only around about a 4% share of the enormous sweet Snacks category, we do believe that with the strength of the Krispy Kreme brand that Mike talks about, that there's room to grow Faster than that and beyond that. But right now, we're focused on the product selection that we have, Adding the new flavors, as I mentioned earlier, and expanding only with the donut like snacks. In terms of profitability, you're right, yes. It has, as we've been subscale and only just now started automating the process Being actually a negative on our bottom line, and it will be dilutive, we think, next year still, But it quickly, because fundamentally, it is a premium priced proposition, be in line or even better Over that time frame from a margin point of view. So we're excited to see the development of the business. Our customer, Walmart, our new customers are also excited to bring it to the market. And so we'll keep investing behind it appropriately. Thank you. Our next question comes from Jafar Mestari BNP Paribas, your line is open. Hi, good afternoon. I just wanted to get an update on more medium term Inflation assumptions, if that's okay. I think at the time of the IPO, you were saying you were budgeting for your wages to increase towards $15 minimum by 2025, if I'm correct. And you're also baking in 5% to 7% Annual inflation on the commodities side, so what you're saying today, are those still reasonable with just a Keep your start in for the 2021 or are you now also budgeting for something a bit worse, maybe in turn, is there any reason for that? Hi, and thanks for staying out with us today. So yes, the Assumptions you mentioned, which are the long term assumptions, are in line with our current expectations as well. The IPO not being that long ago, We already could see the IP the wage pressure and to a certain extent, the commodity pressure as well. I must admit, The commodity pressure in the short term has just been quite extraordinary. And so in the very short term, it's a little bit higher than we expected. But the long term is in line with our expectations. And so all our plans and with the focus on Specialty dozens making sure that we only ever have delivered fresh daily donuts with their price point, The mass premium price point of branded sweet treats and of course, all our businesses across the world offering fresh dozen, We know that we can cover those headwinds on cost, investing in our Krispy Kremeers, Making sure we always have the best quality ingredients and indeed delivering on the bottom line because where we get the biggest benefit So that bottom line is the hub and spoke efficiencies coming through. So these are all things that we're aware of, we're used to dealing with, Hence, why our immediate decision to go to the September price increase, and we remain Confident in our expectations for 2021 and the long term algorithm as well. Thank you. That does conclude Q and A and today's conference call. Thank you for participating. You may now disconnect.