Krispy Kreme, Inc. Q2 FY2025 earnings call

Key Components of Turnaround Plan

• Deleverage balance sheet: Halted quarterly cash dividend, sold remaining interest in Insomnia Cookies, and in active discussions to restructure joint venture with WKS Restaurant Group.
• Improve returns on capital: Focus on capital-light international franchise model and reducing capital intensity in company-owned markets.
• Expand margins: Simplified business model, ended McDonald's USA partnership, closed underperforming doors, outsourced logistics, reduced G&A roles, and revised bonus opportunity to focus on adjusted EBITDA and free cash flow.
• Drive sustainable, profitable U.S. growth: Shifted marketing focus to Original Glazed doughnut, launched multimedia campaign, expanded fresh delivery with major customers, and saw strong digital growth.

Promotions

• Alison Holder promoted to Chief Brand and Product Officer, Raphael Duvivier promoted to Chief Financial Officer.

The U.S. segment had an organic revenue decline of 3.1%, with adjusted EBITDA at $9.9 million (down from $32.7 million last year). Equity-owned international markets saw organic revenue grow 5.9% due to point of access growth in Canada, Mexico, and Japan, with adjusted EBITDA of $18.2 million (margin rate 13.7%). The Market Development segment had an organic revenue decline of 14.2%, with adjusted EBITDA at $8.9 million (margin rate roughly flat year-over-year at 52.9%).

• Focus on profitable U.S. expansion and capital-light international franchise growth.
• Expect future international growth from franchisees through new shop openings and delivery door expansion.
• Aim to improve profitability in the U.S. second half and continue refranchising efforts.
• Anticipate positive cash flow and lower CapEx as a percentage of revenue as part of the capital-light model.

• Forward-looking statements involve risks, assumptions, and uncertainties, detailed in earnings press release, 10-K, and SEC filings.
• Noncash impairment charges of $407 million in Q2 (partial goodwill impairment, long-lived asset impairment, lease impairment).
• Cyber incidents not yet fully reimbursed by insurance impacting net leverage ratio.

Q: On the DFD doors, are there tools to better manage profitability per drop even when employing a third-party strategy?

A: Important to have high-traffic, high-visibility doors with predictable costs from third-party logistics, driving sustainable profitable sales.

Q: Can we consider driving more productivity out of on-site customer visits or consolidating capacity in Hot Light Theaters?

A: Nicola, the new COO, is focused on optimizing efficiency through production hubs and expanding with high-traffic DFD partners.

Q: How quickly can we expect international refranchising to be executed?

A: Targeting one to two deals this year, with processes initiated in Mexico, U.K., and Australia.

Q: About rationalizing DFD doors, is it still in the works?

A: Identified 1,500 underperforming doors, already intervening while adding higher sales doors with major customers.

Q: Thoughts on CapEx and steady-state Krispy Kreme?

A: Capital-light model should lead to lower CapEx as a percentage of revenue; steady-state involves franchising internationally, multichannel retail, and digital growth, focusing on sustainable profitable growth and deleverage.