Melco Resorts & Entertainment Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 13 speakers on the call.

Operator

Thank you

Speaker 1

for standing by. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session.

Speaker 1

I would like to turn the call over to Ms. Elowitz Hale, Vice President of Global Corporate Communications. Ms. Hale, please go ahead.

Speaker 2

Good morning, everyone, and welcome to Krispy Kreme's Q2 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. Crispykreme.com. Joining me on the call this morning are Mike Tatersfield, President and Chief Executive Officer Josh Charlesworth, Global President and Chief Operating Officer and Jeremiah Shukian, Chief Financial Officer.

Speaker 2

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, to 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 ks 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.

Speaker 2

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 ecream.com. With that, I'll turn the call over to Mike.

Speaker 3

Good morning, and thank you everyone for joining us today. I am pleased to report our 4th consecutive quarter of double digit organic revenue growth, evidencing the strength of our omni channel strategy. Our Q2 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 DSD 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.

Speaker 3

I want to extend thanks to our Krispy Kremeers, 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 donors 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 in driving further availability of our donuts.

Speaker 3

We have learned that different channels play different roles in satisfying our customers globally through our omni channel system. These supplemental channels will help us reach our long term goal of 75,000 points of access. This quarter, our points of access grew nearly 13% globally year over year and we were particularly pleased with the momentum we saw in the U. S. Our global points of access now stand at 12,872 and we continue to be confident in our ability to achieve our annual goal of 10% to 15% growth.

Speaker 3

Our U. S. Fresh donut business led the way as our focus on increasing access helped drive another quarter of continued improvement in our largest market via maximizing our existing hub and spoke infrastructure. Our continued momentum driven by the expansion of our DFD strategy gives us confidence in our plan to expand into new channels Like QSR, drug and club, while building on our existing customer base. For example, Our current test with McDonald's, which Josh will talk about further, has been a fantastic learning experience thus far and has enhanced our belief that the QSR channel is a significant growth opportunity, not just in the U.

Speaker 3

S. Market, 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.

Speaker 3

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 twenty twenty three starting in Canada and the U. K.

Speaker 3

In addition, we are focused on meaningful innovation Including opening our innovation center in Philadelphia in Q3. Insomnia Cookies continues to evolve in 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 Donut Day, which has truly become Global Donut Day for us. It was the strongest and largest donut day in Krispy Kreme's history, further cementing the importance of access to our guests.

Speaker 3

It wasn't only about actual donut sales that day, but also about gifting every customer one of our signature original glazed donuts just because they took the time to visit us. The single event generated over 3,000,000,000 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 Q3, we have seen continued organic revenue momentum from our Q2. 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 $2,150,000,000 and adjusted EBITDA to 315,000,000 My excitement and enthusiasm for all this brand has to offer continues to grow.

Speaker 3

We have the team, to 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?

Speaker 4

Thanks, Mike. Our omni channel system continues to deliver robust growth around the world with our fresh U. S. Donut business delivering double digit organic sales growth in the quarter once again. We saw strong performances in the U.

Speaker 4

S. Across all of our sales channels, Thanks in large part to our specialty doughnuts, including Cookie Blast, Fan Faves and Mini Sur Mums, which all proved popular in the quarter. Selling the same fresh donuts 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 Q2, we added 4 62 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.

Speaker 4

In the U. S, We added another 239 DFD doors in the quarter, led by expansion with Kroger, which now carries Krispy Kreme in more than 1,000 locations across the country. All in, we now have over 6,300 DFT doors in the U. S. With average weekly sales up 16% year over year in the second quarter.

Speaker 4

We also continue to add secondary display cabinets to high traffic grocery doors, Which add up to 70% incremental sales to a DFD door. 87 of these premium cabinets have now been added in U. S. Grocery stores year to date with a similar number expected for the balance of the year. A new initiative which we just announced with Amazon Is a small format Krispy Kreme fresh shop located within Amazon Fresh grocery stores.

Speaker 4

This capital light pilot exemplifies our strategy to make access to our fresh donuts more convenient for the consumer and is already underway with the opening of our first two locations in Chicago earlier this month. To support all of this growth, we took the number of production hubs with spokes in the U. S. From 137 to 143 during 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 $4,700,000 Driving Krispy Kreme's U.

Speaker 4

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 clubs without spokes.

Speaker 4

Cities like DC, Miami and Charlotte, which have all seen significant door growth this year, are seeing some of our highest margin increases and are now demonstrating that we can deliver 20% plus margins in U. S. Cities just like we have seen internationally for several years in places like Sydney, Toronto and London. As we've previously shared, we are also running a DFD test in the QSR channel in Kentucky with McDonald's, which is now in its 6th month. As a reminder, we are servicing over 160 McDonald's restaurants With fresh donuts delivered daily, which they sell on to their customers branded as Krispy Kreme.

Speaker 4

While the test is still ongoing, The results have shown us that the consumers value the Krispy Kreme experience in the QSR channel, that these sales are incremental to our existing donut shop and DFT 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 donor capacity and capabilities to accelerate expansion of DFD in the U. S. Overall, we are confident that should we need to, we can quickly leverage existing hubs and selectively add new production hubs to support a network even bigger than the 15,000 points of access we set as our long term goal in the U. S.

Speaker 4

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 donuts targeted at local celebrations, Including a Royal Dozen range to celebrate the King's Coronation contributed to double digit retail sales growth in the quarter. Pricing and cost control initiatives also brought EBITDA margin back above 20%.

Speaker 4

We've also taken actions on DSD in the UK, Including optimization of our price pack architecture, expansion into the club channel and the inclusion of Krispy Kreme in customer loyalty card programs, which are starting to improve our performance. I'll now turn the call over to Jeremiah.

Operator

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 soften. As Mike said, we saw growth across all of our reporting segments in the Q2 with net revenue up 9% year over year to $409,000,000 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 Donuts and the Growth of DFD in E Commerce. We continue to see low levels of elasticity due to pricing, which we took again during the quarter. As a result, product and distribution costs as a percent of revenue declined 30 basis points year over year.

Operator

This contributed to adjusted EBITDA growth of 3.1% in the 2nd quarter to $49,000,000 or an increase of 4.1% in constant currency. Adjusted EBITDA margin levels were 11.9% compared to 12.6% 1 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 $100,000 in the 2nd quarter was driven by a $4,400,000 largely non cash expense related to the exit of branded Sweet Treats.

Operator

Adjusted net income for the quarter decreased 13.1 percent to $11,400,000 and adjusted diluted EPS in the 2nd quarter with $0.07 Turning to our segment results. The U. S. Business segment total revenue increased 9.3% in the second quarter $267,000,000 and organic revenue growth was 12.7%. This was driven by pricing, DFT expansion in e commerce despite disruption from 3rd party POS provider during the 1st part of the quarter that impacted our ability to execute promotional activity.

Operator

In addition, we saw strong revenue growth in Insomnia Cookies, which opened 23 new bakeries over the trailing 4 quarters. Adjusted EBITDA for the U. S. Segment was up 16 percent to $28,100,000 with margin expansion of 60 basis points year over year to 10.5%, driven by strong performance in our U. S.

Operator

Fresh donut business. This reflects the successful pricing actions taken over the last 9 months, to the efficiency benefits realized from our hubs with spokes and the benefits from our U. S. Shop network optimization program. This margin expansion was delivered despite the same disruption caused by the 3rd party POS provider that impacted revenue as it also impacted our ability to manage labor efficiently.

Operator

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 $98,300,000 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 19,500,000 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 he spoke about our UK Business to positively contribute to margins over the remainder of the year.

Operator

Market Development, which is made up of our franchisee businesses around the world In Equity Owned Japanese and Canadian markets, our organic growth accelerates to 23%. Total revenues in the 2nd quarter Increased 17.4 percent to $43,000,000 driven by the strength in Japan, strong performance in our Costa 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 percent to $15,700,000 despite a roughly $800,000 negative impact from foreign exchange headwinds. Adjusted EBITDA margins increased 290 basis points to 36.5% in the 2nd quarter compared to the prior year. We continue to be very pleased with our performance in Japan and the Canadian markets, which has led to outsized performance in this segment.

Operator

Turning to the balance sheet. Recall that last quarter, we successfully refinanced our debt, extending maturities to 2028, enabling our future growth. We also began efforts to reduce our reliance on vendor financing to normalize terms and reduce what has become a more expensive way to provide financing. As a reminder, expense from vendor financing hits adjusted EBITDA, not net interest expense. We continue to make progress on that reduction in the 2nd quarter have reduced our reliance on these programs by over $80,000,000 year to date, which will have a longer term tailwind to adjusted EBITDA and net income due to lower rates.

Operator

While we saw our leverage increase to 4.2 times in the quarter, we expect to close the year under 4 times. Our leverage excluding this shift in vendor financing would have been much closer to 3 point and we continue to execute on plans to drive leverage close to 2 times to 2.5 times net leverage by 2026. Free cash flow, excluding these efforts, was also strong at $14,600,000 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 $105,000,000 $115,000,000 in 2023.

Operator

This includes the opening of at least 30 to 40 new Insomnia Cookie Bakeries in roughly 10 company built hubs in 2023. We are also reaffirming our 2023 guidance and continuing to trend toward the middle to higher end of our revenue and adjusted EBITDA ranges. This includes growth of 9% to 11% inorganic revenue an 8% to 10% in net revenue, dollars 205,000,000 to $215,000,000 of adjusted EBITDA and between $0.31 $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.

Operator

S. Dollar index a little over $1,000,000 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 Q2 results that prove the underlying strength of our business, giving us further confidence in our momentum as we enter the second half of twenty twenty three. Operator, we can open up the call to Q and A now, please.

Speaker 1

Thank you. Your first question comes from the line of Sarah Senatore, Bank of America, please go ahead.

Speaker 5

Great. Can you hear me?

Speaker 3

We can. We can.

Speaker 1

Okay. Good. Thank you. So we'll talk

Speaker 5

it for a minute. I guess a question a clarification and then a question. In terms of the POS disruption, Do you have any sort of estimate of what that might have been in terms of an impact on 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.

Speaker 5

And you mentioned in the You're seeing some success in adding Krispy Kreme to loyalty card programs. 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.

Speaker 5

K. Or maybe that inform how you're thinking about loyalty programs, just given the relatively low frequency nature of the crispy cream occasion. Thanks.

Operator

Thanks, Sarah. It's a great question. It's Jeremiah here. I'll start off by saying that despite the interruption, we still delivered improved margins, saw strong 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 disruptions caused across the business really manifest itself in 2 key areas.

Operator

1 was delays in our ability to run and execute promotional activity and LTOs, which had an impact on revenue. And then 2, the lack of visibility to real time information, which impacted our ability to manage labor. I think what I would say is that you'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.

Speaker 5

Thanks.

Speaker 4

Hi, sir. This is Josh. On the 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 point 5,000,000 loyalty members around the world. That's an increase of 18% year over year, including 11,500,000 in the U.

Speaker 4

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.

Speaker 4

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 starting to I'm a part of that. There'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.

Speaker 4

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.

Speaker 4

With our fresh donuts and have much more broad availability in the U. But it's something that we think down the line with DFD will certainly play a role.

Speaker 5

Yes, understood. It's a different format. I guess I was just wondering if maybe to the higher frequency occasion that comes with your people going to 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.

Speaker 4

Yes, definitely. I mean most of our loyalty programs that we manage directly through the retail donut shop sales channel. This starts to add that capability through DFD and it gives a lot of visibility as well. The U. K.

Speaker 4

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 becomes more top of mind.

Speaker 5

Got it. Thank you so much.

Speaker 4

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

Speaker 1

Mr. Joe Ivensville, JPMorgan, please go ahead.

Speaker 6

Hi, thank you. How are you? Hi, John. So 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 And I guess there is some thought of maybe putting in some more assets in terms of even expanding DFD accounts beyond 15,000. So Also in those remarks, I mean, almost kind of dovetailed exactly into McDonald's and the 160 stores or so That you have in Kentucky.

Speaker 6

So I guess, was there an intention to kind of tie those two comments together? I mean, in other words, are you looking at Your footprint and your capacity now to potentially prepare for a regional or even national expansion into McDonald's?

Speaker 3

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 throughs that you see in the QSR chain and we can do that. So what we've really started to look at as a channel is What's the opportunity in that channel within our existing footprint and how could that work?

Speaker 3

And then really push on from that.

Speaker 4

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 DSD door for us, similar sales and profit margins. I mean, in fact, it's we're selling a limited selection of donuts, but at the same fresh daily donuts we sell anywhere else. And there's no sort of, as I mentioned, there's sort of cannibalization effect.

Speaker 4

So for us, We're thinking about, the learning from that. I mean, we've learned, for example, how to deliver over longer distances from our hubs than we've had to do before whilst maintaining quality and service standards. So it's really proving a valuable test. They're being super collaborative. And as I said a moment ago, We're confident we could serve more McDonald's stores to your point, but it's obviously up to them.

Speaker 4

We look forward to hearing from them how they think the test is going. Regarding the more broader point that you're making around hubs and spokes, with this level of DFD Expansion, it behooves us to start looking ahead to how do we service more and more DFD doors. It's clear with the growth rate we have, Whether it's in QSO 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, donut 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.

Speaker 4

We think we could get to mere 12,000 DFD doors just with the existing hubs. Remember, we have about 2 25 production hubs in the U. S. That we directly owned, 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.

Speaker 4

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 8000 to 10000 over the years to come as we meet the DFD demand, We think that Stallone 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.

Speaker 6

Yes, very interesting. And the comment about 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, that 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?

Speaker 6

I mean, do you want to Should those hubs actually start to redevelop spokes as you kind of look at markets again and maybe there are some smaller format or convenience or QSR chains That can turn on the delivery light, if you will. That's good. That was an accidental pawn. 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.

Speaker 4

I mean, our hub network was not originally designed for this kind of opportunity. So, but what we do know how to do is make a lot of doughnuts. And so we've been learning how to adapt it For the future model. And so these legacy hubs, these hubs with outspokes, 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 you start, Of course, we want to invest in new hubs, but before we start doing that, what can we do with our existing?

Speaker 4

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 with outspokes And we've converted actually just in the way you described 17 hubs with outspokes 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 DSD 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 donut 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.

Speaker 4

Now we've addressed along with the non profit ones. All the while you can see that we're adapting our learning and thinking about what's the Our learning and thinking about what's the right kind of hub for this new model, larger areas at the back of house, Even more than one line at the back of house, more logistics areas, maybe even the location of the hub. You don't want it on Main and Main if you're driving trucks out the back all night. And so we're learning and adapting. And of course, The opportunity for automation technology to be a part of that as well.

Speaker 4

So all of those mean that absolutely the hub is evolving. It's there to support omni channel and we're excited about the changes we've made to the legacy and now what we can do to support this growth going forward. I don't know, John,

Speaker 3

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?

Speaker 4

Yes, right, because we want to

Speaker 3

be outstanding to all the customers we serve and that's going to always be one of our priorities as well.

Speaker 4

Yes, you've got McDonald's, but you've got the Kroger's and Walmart's, fantastic

Speaker 6

Yes, understood. A separate topic, if I can, obviously, UPS driver strikes really in the news. Can you in that context or outside of that context, talk about your staffing execution, what you guys are doing Kind of attract and retain on the delivery side specifically for you, how we should

Speaker 7

be thinking about that going forward?

Speaker 3

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.

Speaker 3

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.

Speaker 4

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 donuts, that's the heart of our DSD 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.

Speaker 4

But for now, they're Krispy Kreme, they're part of our core and doing a great job to get those donuts out to all these new locations as well as our existing partners. Thanks, John. Operator, could we have the next question please?

Speaker 1

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

Speaker 7

Great. Thanks for taking the question.

Speaker 8

I was just Quickly wanted to get your

Speaker 7

thoughts on pricing in the back half of the year. I know you had discussed earlier, Jeremiah, that there's a little elasticity that you're seeing As you're taking some of the pricing, but we're certainly hearing from other quick service operators that plans for the back half of the year are to take less pricing, if not zero pricing. So curious to get your thoughts on later 20 23 and into 2024, how you're thinking about pricing across the different markets and different channels for the brand?

Speaker 3

Yes. I'll start and then Jeremiah will just get into probably a little bit more in the detail. We always look at pricing as a strategic Peace 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 see our customers continue to to migrate towards a better product as well as premiumization from partnerships, whether they be the M and M's Donuts or the SpongeBob's 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 dozens business have a secondary dozen at a value price.

Speaker 3

So it really works with us. It's a way of giving back as well. That's been fairly consistent as we've really honed in on our dozens model because it capitalizes on gifting and frequency as well.

Operator

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 much broader growth lever than just list price increases.

Operator

The way we think about it, as Mike kind of just referenced, the premiumization of the portfolio through donut offerings, Price pack architecture is a lever for us. Then also the way we think about and drive efficiency in our promotional and discounting strategies. And so we tend to think about it more holistically. So to your point, we're in the back half of the year as we might come under a bit of pressure around list price increases. There's other levers in our portfolio to kind of drive from a pricing realization standpoint.

Operator

That said, we'll continue to evaluate price every quarter globally, while ensuring We're providing an attractive offering to our consumers and our strategy is to really take price in line with inflation going forward. So you'll continue to see that play out.

Speaker 8

Got it. And just thinking about

Speaker 7

the inflation, obviously, we'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 2024 certainly lower than what we've been seeing in That's 12 months, 24

Operator

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 The year labor is kind of locked in more or less at mid to high single digit inflation. As we look forward to 2024, We are seeing some deflation and we're looking opportunistically to lock in prices at attractive price points. But what I would say is we're still seeing elevated prices in things like sugar, which remain around 5 year highs.

Operator

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.

Speaker 9

Got it.

Speaker 7

Thanks for taking the questions.

Speaker 1

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

Speaker 8

Thank you. Just a question on the insomnia business in the U. S. Can you just update us on how the business is doing right now? Perhaps give some early thoughts On the pace of growth for next year.

Speaker 8

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.

Speaker 3

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, it's about 23 shops in the last 12 months. Our target is to get 30 or 40 cookie shops and unlocking that on a yearly basis and growing from that. So we've seen that opportunity and see Line of sight of that, we continue to invest in our innovation center, which we will be opening up in Philadelphia. That will really help drive Whether it's a limited time offerings or anything from a cookie perspective of what should be or what the consumer is looking for in the dozens business As well, right. So from that aspect, we have a unique brand in terms of how we compete in the marketplace, right.

Speaker 3

It's a late night A business started in the college and we really try to capitalize that and we continue to grow from that business. So The competitive set, we think of ourselves again as a gifting and a snacking opportunity. And what we see in the business This is 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 TAM as we've identified even in our Investor Day to get to 4,000 a month bakeries.

Speaker 8

Okay. Thank you. And then just a question on the DFD business. Mike, in the prepared remarks, you spoke the idea that the QSR channel Might also work outside the U. S.

Speaker 8

As well. Are there any markets that you might already have in mind? I would think it would be logical, Maybe places where you already have hubs, but anyway you could elaborate on that comment or just even how much time you might be spending on this opportunity, just where it lies in the priority list? Any thoughts would be great.

Speaker 3

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. Is a big test case, because the DFD system that we have works around the world, Those will be natural ones once we prove it and run it in the United States.

Speaker 3

So we'll be very disciplined about how to do that. And then The same logic would work. In a DFD system, 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 your focus will be on the U. S.

Speaker 4

All right. Thanks, Brian.

Speaker 1

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

Speaker 10

Thanks. Good morning. What was the year over year sales growth per U. S. Hub in the quarter?

Speaker 4

So the sales per hub, the hubs with spokes was $4,700,000 which was up 9% year over year.

Speaker 10

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

Speaker 4

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% will be the annual Sales over the last 12 months and it's 9% versus the same time a year ago.

Speaker 10

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

Speaker 10

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

Speaker 8

Per Hub?

Speaker 4

Yes. In terms of if you wanted to calculate what's the growth of DSD 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.

Speaker 10

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

Speaker 4

In terms of the

Speaker 10

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

Speaker 4

Because of the hubs that outspokes you're thinking, so, yes, to 25%, I think it was and a year ago we had 240%, yes, yes.

Speaker 10

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, call it over 30% growth In DFD sales per hub, how much do you think that added To your sales per U. S. Hub, is that essentially do you think that equals the 9?

Speaker 10

Or Was that more? Is there how do we kind of think about that as just a pure Sales per hub contributor that over 30% growth in DFD sales per hub.

Speaker 4

Yes, I know this omni channel model can definitely be complicated and Forgive us for that. I think that one of the challenges is there's retail sales in there and also the hub reductions are hubs without spoke. 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 were 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 the most likely the biggest driver going forward of the sales per hub 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.

Speaker 4

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 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.

Speaker 1

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

Speaker 11

Yes. Thank you. Good morning. Could you talk more about the international segment just because I think that's been the one that's been a little bit slower growing recently. And I think just from other companies, we've seen Probably resilient results in some of those markets, although it certainly varies.

Speaker 11

What do you think is really still needed there to drive faster growth?

Speaker 4

The success of the brand and our omni channel business, it continues to play out around the world, as Mike said earlier. I mean, these specialty donut campaigns we're seeing successful across the planet. The points of access expansion of the DFT model It's applicable everywhere and e commerce is strong everywhere. We're seeing, for example, Mike mentioned, Jeremiah mentioned that Canada and Japan are 30% plus growth. Actually, our international franchise markets on average grew more than 20% last quarter.

Speaker 4

Company owned Australia and Mexico grew high single digit in the quarter And the U. K. Was flat. So I think your question is largely a U. K.

Speaker 4

Question. We did actually see very interestingly strong double digit retail sales growth in the UK last quarter, but it was offset by a decline in DFD specifically. That's consistent with what we see as sort of an industry wide trend for reduced supermarket visits. Team's doing a great job to those conditions, as I mentioned a moment ago, already taken actions to do things like in addition to the loyalty card They came up with Sarah'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.

Speaker 4

So I mean the headline to the question is, we do see strong resilient performance across the world, but like with any portfolio of business. You do have ups and downs from time to time that you need to manage. In our case, it's specific to the U. K. And we're confident around the applicability of the model going forward around the world.

Speaker 11

Okay, thanks. Could you comment on like roughly how I think guess this is a U. S. Comment, but how much total price you had In the Q2 and how much do you think you're going to have in the second half?

Operator

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.

Operator

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.

Speaker 8

Thank you.

Speaker 1

Our next question comes from Mr. Bill Chappell, Choice Securities. Please go ahead.

Speaker 9

Thanks. Good morning. Good morning. Yes. I was wondering, is there a way to quantify the impact of the vendor disruption in the quarter?

Speaker 9

And I assume it's Just on U. S. Sales?

Operator

Yes, I can take that. And I think Sarah 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.

Operator

Specifically, as we weren't able to See real time information and 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.

Speaker 4

Yes, and we still delivered organic growth and on the fresh business saw 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.

Speaker 9

Yes. And I guess the thought process being that you're now talking about full year guidance at Hi, Ann. Of your range, despite that, so I assume that just us carrying through the next two quarters as if The issue doesn't happen and what your run rate could have been last quarter. Is that fair way to look at it?

Operator

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.

Speaker 4

Yes. I mean, it's the consumer we're seeing is strong, particularly in the U. S. Where this impact happened. I mean, as we talked a lot about the convenience of DFT, e commerce and the love of these specialty donuts, we've seen that trend continue into July.

Speaker 4

If you saw our M and M's donut range, which even include a special premium price donut filled with mini M and M's, really popular. Again, we're seeing that. Growth is driven by quite interestingly the 18 to 24 year old demographic, a very healthy part of the consumer base now represents 28 of our sales and these sweet treat loving heavy QSR spending digital natives, they've got a lot of confidence in the brand. And that's why I think we talk about momentum on the brand even now.

Speaker 9

Got it. And then just also a follow-up on the pricing. You talked about Yes, mid single digit pricing going forward. Is that kind of a net number because you also especially talked about Europe And more multi packs 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 stepped up promotions, particularly in Europe.

Operator

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 Get more from a price realization perspective.

Operator

It's more of a kind of profit impact than you'll see in kind of list price changes Things like price pack architecture are just changing in the discounting kind of strategies that we have.

Speaker 9

Got it. Thank you.

Speaker 1

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

Speaker 12

Thank you. I have a follow-up on pricing as well just over the geographic segments. Just putting sort of what you've given us about the U. S. Pricing and price realization and comparing it Sales growth versus the EBITDA growth for international market development and the commentary in the release.

Speaker 12

It seems pretty evident there's just more pricing power right now in the U. S. Certainly, that's the way your new strategy seems to be rolling out. Can 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.

Speaker 12

In terms of the amount of pricing power.

Operator

It's actually It's a great question. Maybe I can tackle the pricing and then Josh can tackle kind of consumer across the different kind of markets that we see. We have seen aggressive pricing across all of our markets in the second quarter in kind of the high single digit, low double digit range. So 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 UK.

Operator

I guess, Josh, I don't know if you have any comments

Speaker 4

Well, I'll say the macro environment is interesting around the world, but only moderately so. By that, I I talked a bit about M and Ms and the success there, but also that we've been deploying that specialty donut strategy around the world. And in fact, the UK saw double digit organic growth in the retail business After a variety of engaging specialty donut programs like the Royal Dozen one I mentioned on the call earlier, It really reflects that when we get our execution right, when we excite the customer in this low frequency business, It's still an affordable treat even in the context of price increases. I mean, an OG donut still costs 1.79 in the U. S.

Speaker 4

So you're talking about what's most important is to make sure that people have access and convenience to the brand And we're 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 on Japan and Canada. And we don't see whether or not Pricing was taken in one market versus another is the driver of that success. It's more implementation of the strategy. We've got great Hotline execution has really brought alive the business in Japan.

Speaker 4

We're doing really well with Costco and Club in Canada. So slightly different reasons, but We don't see pricing power variation as a driver of performance. But overall, your overall general point that in the U. S, When it's worth it, when the programs are exciting, when we bring meaningful innovation and notoriety to the brand, We are able to pass on the pricing we must given the inflationary environment in our commodity group. And so we appreciate that our to see the value in what we're selling.

Speaker 3

The only other thing I'd add is the gifting and the sharing is a global So when people are using that for our brand, it's just a different occasion, right? So whether it's Mother's Day, whether it's Father's Day and whatever was around the world. That's a great gift that's shared by families, right? So the mindset in our markets the same. How do we do the dozens?

Speaker 3

How do we build that? How do you premiumize? How do you make it affordable still the sweet treatment? How do you then complement it? It really is about that discipline of how do you make sure the frequency is driven by gifting etcetera and then match it up with just great partners.

Speaker 12

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, Go into the CPI and look at like baked goods and donuts or something like that or QSR away from home It seems to be pretty far off. I mean, it sounds like you're competing against the Godiva's of the world and Various things. 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 As you said, this sort of infrequent occasion of the kind of indulgence

Speaker 4

that

Speaker 6

you

Speaker 12

guys are bringing to market.

Speaker 3

So again, we do look at the competitive set as a broad sweet treat. Our direction is to be the most loved sweet treat brand in the world, right? So the opportunity, if you look specifically at the donut category, right, We don't really focus our energy on a single serve. We actually focus our energy on the dozens business. We do that and we bring either premiumization with partners, I'm with recent with M and Ms for example.

Speaker 3

And the mindset is you can capitalize on occasions, which is when gifting really happens or Unique events like Halloween and holidays or you can just really unlock because your partners They're creating that desire. So when you have an M and M's donut that might be broken in half and these little mini M and M's come out, People want to try that, right? So you end up trying to say, how do I maximize that opportunity? And it is about People will still have a sweet treat. We just want to be in our affordable indulgent space, sweet treat space.

Speaker 3

We want to be there when they're making that decision. All right.

Speaker 9

Thank you.

Speaker 1

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

Speaker 3

I appreciate everybody being on the call. I always want to talk and thank our Krispy Kremeers for doing an incredible job. And I also want to be a little bit of reflection and make sure that folks keep their thoughts and minds on 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.

Speaker 1

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

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Earnings Conference Call
Melco Resorts & Entertainment Q2 2023
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