Krispy Kreme, Inc. Q1 FY2025 earnings call

• Focus on profitable US expansion and capital-light international franchise growth while prioritizing debt reduction and cash flow.
• Actions to drive consumer relevance: spotlighting original-based doughnuts, new marketing campaigns (e.g., new multimedia original-based campaign on June 6), and adjusting discount strategy to drive demand.
• Expansion availability: working with strategic DFD partners, adding secondary displays, and pausing McDonald's restaurant launches in Q2 to focus on profitable growth.
• Hub and spoke efficiency: outsourcing US logistics, aiming to outsource 100% by mid-next year, and new COO focusing on cost reduction and operational simplification.
• Capital efficiency: evaluating international refranchising to delever balance sheet, retrofitting hubs for cost savings, and advancing capital-light franchise growth internationally.

In Q1, net revenue was $375.2 million. The US segment saw organic revenue decline 2.6% due to consumer softness and reduced discount days, with Adjusted EBITDA at $15.9 million. Equity-owned international markets had organic revenue growth of 1.5%, points of access up 6.3%, and Adjusted EBITDA at $14.9 million with a 12.5% margin. Market development segment had organic revenue growth of 2.7%, but Adjusted EBITDA declined 7.2% with a margin of 58.1%.

• Withdrew prior full-year outlook due to macroeconomic softness and McDonald's uncertainty.
• Q2 guidance: expects revenue of $370 to $385 million and adjusted EBITDA of $30 to $35 million.
• Focus on deleveraging balance sheet, achieving positive cash flow, and profitable growth.

• Macro environment challenges leading to consumer softness.
• Impacts from the 2024 cybersecurity incident, estimated at $5 million in operational inefficiencies.
• Uncertainty around the McDonald's partnership and its impact on growth and profitability.

Q: How are you thinking about the CapEx given the current exercise and capital reallocation?

A: Strengthening balance sheet by reducing debt and focusing on business reinvestment with disciplined capital allocation. Not providing full-year CapEx update but being more strategic.

Q: On the McDonald's decision to pause, was it your decision or the company's?

A: It's a partnership decision. Working with McDonald's to ensure profitable growth before further expansion.

Q: How aggressive do you plan to be around pruning underperforming or inefficient locations in the US?

A: Plan to exit 5 to 10% of US doors to drive profitable growth.

Q: Talk about the refranchising of certain international markets process and proceeds?

A: Refranchising equity-owned international markets to find capital-efficient partners, using proceeds to pay down debt.

Q: Difference in McDonald's demand falloff between test markets and broader rollout?

A: Sales started strong with local marketing but dropped below expectations post-local marketing. Focus on positioning for sustainable profitable growth with McDonald's.

Q: $5 million cybersecurity inefficiencies, expected in guidance and ongoing?

A: Contemplated in Q1 guide, related to labor and materials inefficiencies due to cybersecurity, back of house systems now behind us.

Q: Sales per hub down 2% and impact of McDonald's and convenience stores?

A: US segment net revenue impacted by sale of Insomnia Cookies, consumer softness in retail channel, and reduced discount days leading to organic revenue decline of 2.6%.

Q: McDonald's pause decision and reason for sales falloff?

A: Partnership decision. Sales started strong with local marketing but dropped post-local marketing. Focus on profitable growth before further expansion.

Q: CapEx spend and McDonald's pause impact on projects?

A: Capital allocation remains strategic, with ongoing expansion with scale customers and retrofitting hubs, but rephasing McDonald's launch to adjust spend.