Krispy Kreme Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 25, 2025

There are 12 speakers on the call.

Operator

Thanks for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Krispy Kreme's fourth quarter twenty twenty four earnings call. I would now like to turn the call over to Dre Eldridge, Krispy Kreme Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, everyone. Welcome to Krispy Kreme's fourth quarter twenty twenty four earnings call. Thank you for joining us today. We will be referencing our earnings press release and presentation during the call.

Speaker 1

These are available on our Investor Relations website at investors.krispykreme.com. Joining me on the call

Speaker 2

this morning are President and Chief Executive Officer, Josh Charlesworth and Chief Financial Officer, Jeremiah Ashukian. After prepared remarks,

Speaker 1

there will be a question and answer session. Before we begin, I would like to remind you that during this call, we will be making forward looking statements pursuant

Speaker 3

to the safe harbor provisions of

Speaker 1

the Private Securities Litigation Reform Act of 1995, including statements of expectations, future events, or future financial performance. Forward looking statements involve a number of risks, assumptions, and uncertainties. And we caution investors that many 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 Form 10 K filed with the SEC and in the other filings we make from time to time with the SEC. Forward looking statements made today are only as of today.

Speaker 1

The company assumes no obligation to publicly update or revise any forward looking statements, except that may be required by law. Additionally, we will be referring to non GAAP financial measures. Please refer to our earnings press release and presentation on our website for additional information regarding those non GAAP measures, including a reconciliation to the closest comparable GAAP measures. Jeremiah will take us through our financial performance in a moment. But first, here's Josh.

Speaker 2

Thanks, Dre. Good morning, everyone, and thank you for joining us. We delivered our eighteenth consecutive quarter of organic sales growth despite the cybersecurity incident we disclosed in December. I want to take a moment to thank our hardworking Krispy Kremers for their resilience through the disruption and acknowledge their unwavering dedication to our customers. As I reflect on 2024, I'm pleased that we delivered 21% revenue growth in our expanding U.

Speaker 2

S. Delivered fresh daily network and surpassed $250,000,000 in sales for the first time through this channel. We're now operating in 40 countries around the world with an established pipeline of franchise market growth. We also reached several strategic milestones to enter our transformation to becoming a bigger and better Krispy Kreme. We simplified the business by divesting a majority stake in Insomnia Cookies.

Speaker 2

We added national distribution partners in The U. S. And we restructured our management teams to fully focus on our largest growth opportunities, profitable U. S. Delivered fresh daily expansion and the wider adoption of our capital light international franchise model.

Speaker 2

Our transformation continues in 2025 with clear business priorities that are rooted in our strategy. We are spotlighting our core offerings. Our focus is on growing with national distribution partners. We expect to soon award contracts to outsource U. S.

Speaker 2

Logistics. We have begun a process to evaluate refranchising certain international markets, and we are strengthening our performance based culture. Now, I will walk you through these priorities. Our iconic brand is a distinctive and undeniable asset, delivering more than 100,000,000,000 media impressions last year, far more than businesses of a comparable size. In the fourth quarter, our team boosted consumer engagement with creative marketing, particularly through a viral Grinch video series promoting our Grinch Christmas Specialty Donut Collection.

Speaker 2

And earlier this month, our Valentine's Day collection led to the biggest U. S. Retail sales day ever. This buzz not only creates awareness among Krispy Kreme fans, but it converts to sales. To maximize this conversion in 2025, our most beloved and affordable original glazed doughnuts will get the spotlight as we evolve our marketing efforts, simplify pricing, and focus on value conscious consumers who we know are under pressure.

Speaker 2

For example, we plan to bring everyday value by offering additional savings for purchases of two or more dozen. Although we will offer fewer days overall on discount, we will use meaningful discounts to drive demand on days like National Donut Day that we can turn into buzz worthy events. We continue to expand availability in 2024 as we grew global points of access by 24%. In The U. S, we added more than 2,800 new doors with national partners such as McDonald's, Kroger, Publix, and Target who are eager to expand with us nationally.

Speaker 2

Internationally, company owned points of access also increased 14%, driven by Australia and Canada. This very morning, we launched daily deliveries to approximately 500 McDonald's restaurants in the Greater New York City area and remain on track to reach about 6,000 restaurants by year end. In 2025, we expect to continue our U. S. Expansion with national partners, both existing and new, for example, Costco.

Speaker 2

An added benefit of this expansion with national partners is the opportunity to identify and close existing underperforming doors, which we expect to do in 2025. While much of this growth is enabled by existing capacity, growing into new and underserved geographies will be supported by adding hubs with spokes, of which we now have 158. We expect to build five to seven of these in 2025 in areas like Minneapolis, keeping our expansion on track. Through this growth, we will increase doughnut volumes at existing production hubs, which is expected to improve productivity and profitability. As we become bigger, we must also become better.

Speaker 2

We're addressing the increased complexities that accompany growth by simplifying the business, focusing on what we do best, making doughnuts. Now, recent pilots confirmed that third party logistics achieved excellent service levels and provided predictable logistics costs. We expect to soon award contracts to several national and regional carriers to outsource U. S. Logistics.

Speaker 2

And we are aiming to outsource more than half of our DFD deliveries by year end. Our most profitable capital light international franchise business grew points of access by 8% in 2024, as we expanded in markets such as France and South Korea. For example, our franchise partner in France has rapidly grown to 19 doughnut shops across Paris and plans to add another 50 points of access as they enter the DFT channel in 2025. This franchise model is the most capital efficient way for us to grow internationally, and so we've begun the process to evaluate refranchising certain international markets. We also expect to open in two to four new countries with franchise partners, including Brazil and Spain in 2025.

Speaker 2

Between all international and U. S. Markets, we anticipate reaching more than 23,000 points of access by year end. An important initiative this year is strengthening our performance based culture. We have launched new incentive based compensation in the field focused on results oriented metrics, such as consumer satisfaction and materials efficiency.

Speaker 2

We're also investing in operations leadership and simplifying shop, employee, and manager roles to support our Krispy Kremers. I believe that delivering on these priorities in 2025 will result in a bigger and better Krispy Kreme. With that, I'll pass it over to Jeremiah.

Speaker 3

Thanks, Josh. I'll cover our fourth quarter results, which, as Josh has mentioned, were impacted by the cybersecurity incident. Excluding the estimated impacts from the cyber incident, results were largely in line with our expectations. The incident affected business operations, including online ordering, materials replenishment and labor planning. We estimate the incident impacted revenue for the quarter by $11,000,000 with an estimated adjusted EBITDA impact of $10,000,000

Speaker 1

driven

Speaker 3

by the margin from lost sales and operational inefficiencies resulting in higher ingredient waste and elevated labor hours. Insurance is expected to offset a portion of these costs and losses, and we continue to believe this will not have a material impact on the long term trajectory of the business. Today, systems are operational, following great work from our teams, both internal and external, who worked tirelessly to ensure that our shops were running and that our systems came back online safely and efficiently. Net revenue was $4.00 $4,000,000 for the fourth quarter, driven by delivered fresh daily growth. We marked our first quarter with over $100,000,000 in global delivered fresh daily revenue, underscoring the value of our omni channel strategy.

Speaker 3

Organic revenue grew 1.8% despite an estimated two eighty basis point headwind from the cybersecurity incident. Organic revenue was driven by global points of access growth of 24%. Adjusted EBITDA declined to $45,900,000 primarily linked to an estimated $10,000,000 impact from the cyber incident, as well as the sale of a majority stake in Insomniac cookies. Adjusted EBITDA margin was 11.4% with with an estimated two ten basis point impact from the incident. Turning to our US segment results.

Speaker 3

Organic revenue declined 1.2%, primarily linked to an estimated four sixty basis point impact from the cybersecurity incident. Adjusted EBITDA was $23,600,000 lowered by an estimated $10,000,000 of the headwinds from the cyber incident and from the sale of a majority stake in the SONIA cookies. Our DFT expansion strategy continues as points of access growth accelerated to 34% year over year, progressing with several major national accounts. Average revenue per door per week, or APD, was $631 down slightly from the prior year as expected given the changing customer mix. For example, large scale Walmart doors, which have an APD that is higher than the segment average, represent approximately 15% of our US DSD doors, down from 19% in a year ago period despite net growth with Walmart in that timeframe.

Speaker 3

Looking into 2025, we anticipate revenue growth as we expand our DFD network partly dampened by consumer pressures. From a profitability perspective, we expect margin compression in the front half due to lingering impacts of the cybersecurity incident on labors and material management in Q1 specifically, and long term business investments with revenue growth and hub and spoke efficiencies expected to deliver operating leverage in the second half. Within our equity owned international markets, organic revenue grew 7.8% year over year, led by Canada and Japan. PointsBet S grew 14% fueled by DFP revenue growth of 21% as we continue to execute against our hub and spoke strategy. Adjusted EBITDA was $25,700,000 with adjusted EBITDA margin down to 18.6%, largely due to continued pressure in The UK.

Speaker 3

As mentioned on the third quarter call, we have a new management team in The UK who have just completed their first quarter with the business. The team remains laser focused, implementing plans to return this key market to profitable growth. The team are continuing to right size the production network, work on core range, including strengthening original glazed, which is underrepresented in that market, in addition to piloting different price points and different channels to ensure value for the consumer. Elsewhere, markets such as Canada and Japan continue to deliver strong results driven by the OG doughnut with both markets improving margins year over year, driven by strong consumer centric execution. In our most profitable segment, market development, organic revenue declined 0.7% due to timing of equipment sales.

Speaker 3

Adjusted EBITDA margin improved again to 57.8% linked to favorable sales mix and SG and A improvements. Adjusted earnings per share for the year was $0.11 driven lower by depreciation and amortization as well as interest expense. We also estimate the twenty twenty four cyber incident had a $0.04 impact to adjusted EPS. In 2024, we delivered positive operating cash flow. We also maintained a similar level of growth debt while reducing supply chain financing by $44,000,000 Leverage at year end was also impacted by the cybersecurity incident.

Speaker 3

As we transform the business ahead of accelerating profitable growth in both The US and a wider adoption of our capitalized expansion internationally, we expect to deliver the following results in 2025. Net revenue of $1,550,000,000 to $1,650,000,000 organic revenue growth of 5% to 7% adjusted EBITDA of 180,000,000 to $200,000,000 and adjusted earnings per share of between $0.04 and $0.08 Providing some further insights into our financials in 2025, we anticipate that margins compressed in the first half due to lingering impacts of the cybersecurity incident on labors and material management in Q1 specifically and long term business investments with revenue growth and up and spoke efficiencies expected to deliver operating leverage in the second half. SG and A expenses remain flat as a percent of revenue as the restructuring announced last year is offset by inflation and bonus accruals. Capital expenditures to track between 67% of net revenue. And interest expense is expected to be between $65,000,000 and $75,000,000 due to higher interest rates with $500,000,000 of our long term debt hedged.

Speaker 3

This all reflects a $3,000,000 to $5,000,000 headwind to adjusted EBITDA from foreign exchange rates. With regards to the first quarter of twenty twenty five, we've seen consumer softness. We're also seeing an impact from weather in the Southeast and fires in California. Taking these into account alongside the divestiture of insomnia cookies, startup costs from our U. S.

Speaker 3

Expansion and the lingering cybersecurity impact in Q1, we expect the first quarter net revenue will be between $370,000,000 and $390,000,000 with $25,000,000 to $30,000,000 in adjusted EBITDA. I remain confident we are taking the right actions in 2025 to set the business up for long term profitable growth and improve returns on capital.

Speaker 2

Thanks, Jeremiah. In summary, our largest growth opportunities are profitable US delivered fresh daily expansion and the wider adoption of our capital light international franchise model. In 2025, our transformation to a bigger and better Krispy Kreme continues with the clear business priorities we shared today, namely spotlighting our core offerings, focusing on growing with national distribution partners, our expectation that we will soon award contracts to outsource U. S. Logistics, the evaluation of refranchising certain international markets and strengthening our performance based culture.

Speaker 2

I look forward to our profitable growth in the years ahead. Operator, let's now open it up to Q and A, please.

Operator

We will now begin the question and answer session. We'll take our first question from the line of Daniel Guglielmo with Capital One Securities. Please go ahead.

Speaker 4

Hi, everyone. Thanks for taking my questions. On the OpEx line specifically, those expenses are in line with prior year without Insomnia Cookies. And understand that there's $3,000,000 from the cybersecurity incident. But thinking for 2025, where are you expecting kind of OpEx expenses to go?

Speaker 4

Should we be modeling kind of flat to what we've kind of seen this quarter, taking into account seasonality? Or just curious how you're thinking about that.

Speaker 3

Yeah. Thanks, Dan. I can take that question. Obviously, we're investing, let me just come back to, from a, from a guide perspective with respect to OpEx and in general, we are expecting to invest, in things like operations leadership as we're building kind of performance culture and getting ready for a national, rollout and footprint in The US, while also setting up the business for long term growth, by streaming our operations and focusing on making donors by outsourcing logistics. Both of these things, we do expect to pressure OpEx in the front half of the year and then start to leverage that in the back half of the year.

Speaker 4

Great. Thank you. That's helpful. And then just, as a follow-up to that, with kind of the DFD expansion into, you know, McDonald's, Target, Walmart, the larger names, What's kind of the process for thinking about existing maybe DFB locations that are less economical? How do you guys think about maybe kind of shutting down some of those if it's, not kind of hitting the margin levels that you're expecting?

Speaker 4

Just want some color there, and even if you guys are doing that.

Speaker 2

Hi, Dan. Thanks for the question. Yeah. It's important to start by saying that the, you know, the strategy to make our our fresh donut doughnuts available in more places with the national partners you referenced, such as Walmart, Target, and Kroger, you know, is working. And so, you know, our expansion today is focused around those national partners.

Speaker 2

You know, we're also bringing on indeed new ones, such as Costco, which we mentioned, earlier in the call. With that in mind, we're making sure we're continuously optimizing the network, and that means, you know, any lower performing doors, we can optimize as we go, make sure that the system is strong for the long term. We talked a lot about a bigger and better Krispy Kreme. That means sustainable, efficient growth in the long term, profitable growth, and hence, we will take the opportunity, for any smaller locations to optimize those as we grow.

Operator

We'll take our next question from the line of Brian Harbour at Morgan Stanley. Please go ahead.

Speaker 5

Thanks. Good morning, guys. For the top line guide, you're talking about 5% to 7% organic growth. You're probably aware that you're kind of guiding, I think, below where the street is now for top line. So could you kind of just explain that?

Speaker 5

I don't know what the difference international versus U. S. Is. Are you expecting there to be more door rationalization as you're sort of adding some of the McDonald's doors? What exactly kind of drives that top line guide?

Speaker 2

Hi, Brian. I think I'll start by talking about the start of the year. It has been a choppy start of the year in our traditional retail locations in The US, you know. And there's there's freezing temperatures and wildfires, but we also see the value conscious consumer under pressure. I mean, that being said, you know, the consumer remains highly engaged with the Krispy Kreme brand.

Speaker 2

We're an indulgent purchase for special occasions. I mentioned earlier that Valentine's was, was our biggest sales day ever. But we we are finding that we need to put a spotlight on our beloved and affordable original glazed brand. So that is one of the key drivers, particularly as we start the year out.

Speaker 5

Okay, understood. And just on, I guess, on the CapEx and free cash side, I think that the CapEx number you're saying was actually a little bit lower than you might have previously indicated and correct me if I'm wrong. But I guess the broader question is sort of the last couple of years you've burned about $75,000,000 of cash. Last year sort of insomnia proceeds helped kind of with that capital budget. Do you think this year will look similar?

Speaker 5

Do you think that some of the refranchising proceeds that you're considering would sort of go to that capital budget for this year?

Speaker 3

Yeah. Thanks for the question, Brian. I think, you know, I'd start with 2024. We're actually pretty pleased with the fact that we delivered positive, operating cash flow despite lowering the use of supply chain financing was, which was a strategic decision that we've made to reduce our reliance on that. In addition, that kind of cyber pressuring EBITDA as we kind of exited the year.

Speaker 3

As you mentioned, we're committed to driving free cash flow when we look to transform the business to ensure we have the right capabilities, long term. In 2025, we're focused on driving improved conversion of EBITDA to free cash flow, being even more discerning with our CapEx, as you mentioned, and reducing kind of the spend in that area. And all whilst working toward making improvements in working capital. I would expect to your kind of question the inorganic ways to drive operating cash flow through refranchising to be incremental to this, but our objective is to drive positive free cash flow in 2025.

Speaker 2

It's worth adding as well from an operational point of view that as we prepare for this nationwide footprint in The US and we expand with the national partners, we're finding more and more ways to leverage our existing capacity, whether it's because we've increased productivity at our existing hubs or we're learning, how to get the donuts out to the points of access, better and better. So there is an opportunity, we think, going forward to to to invest a little less than we originally expected in the hubs, which means that we'll probably only build about five to seven new hubs this year in The U. S, which is a little less than we previously expected, reflecting the ability to leverage that existing capacity better.

Operator

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

Speaker 6

Good morning. I wanted to ask you about your business with McDonald's. Just how 24 came out versus internal expectations, top and bottom line? And what is kind of reflected, however specifically you can speak to it, in 2025, with any updates based on results?

Speaker 2

Andrew, yes, we started the phased rollout of McDonald's just in October. We're already in, actually, '2 and a half thousand restaurants today. We we're launching in New York just today. We we expect to be in about 6,000 by the end of the year and and 12,000 by the end of twenty twenty six. So that rollout's on track.

Speaker 2

It's important to understand as well that the phase nationwide rollout of McDonald's is part of a broader strategy to to make our, fresh doughnuts more accessible, as mentioned earlier, with Walmart, Target, Kroger, Costco, and others. So, you know, all that being said, the feedback from from McDonald's is very positive. They tell us it's it's it's working well, and we're working we're working hard with them to to maximize the opportunity, make sure that the the the launch goes well. And we've seen during those, the launch phase that, you know, with local marketing, the the team at McDonald's is able to raise awareness, make sure that people know it's on the menu, driving very strong demand and no visible cannibalization, of of our other sales channels. Now what we're doing now, it's early on in the rollout.

Speaker 2

We're making sure that we're working with them to maximize the opportunity during out the whole rollout phase even when that local marketing, comes off, when that awareness drops, when it's not as visible on the menu, when naturally demand softens. We're making sure that we work with them to get all the way to the national rollout phase at the end of twenty twenty six when, you know, we'd expect, they would start putting on national market.

Speaker 6

Okay. So that's sort of like the J curve where, you know, initial demands above sort of the steady state, which I think is typical, right? And has that been in line with expectations?

Speaker 2

Well, the initial demand, when this prominence on the menu board is actually come in in those first few weeks above. Then when it comes prominence comes off the menu board, there's no graphics, there's no other marketing. The doughnuts aren't actually visible to the customer. It's not like they're on the counter or anything. They'll be fined the back there.

Speaker 2

So the demand has dipped, actually a little lower than we expected. So right now, we're focusing with them on how to make sure awareness is maintained during this local rollout phase whilst we wait to be nationally distributed. As I said, the feedback from them is very positive, and so the partnership continues to progress very well. And it continues to unlock for us expansion opportunities across the country. I mentioned Costco, it's a really big opportunity for us.

Speaker 2

It wouldn't have been possible without starting the McDonald's rollout target, which we just started in 2024 following the announcement of McDonald's continues to be a big expansion driver in 2025. So, it's part of an overall program to get our awesome fresh doughnuts out to more people.

Operator

Our next question comes from the line of Raul Krathipalli with JPMorgan. Please go ahead.

Speaker 1

Good morning, guys. On the DFT door weekly sales being down 5% lower year on year, you did cite customer mix change as expected. I'm just curious to get more color on what drove this, is the McDonald's stores realization a little lower than you expected or anything else you can share there? And I have a follow-up.

Speaker 3

No, thanks, Raul. And as you kind of mentioned, APD in The US were primarily driven by customer mix. As we continue to add customers in The US, some of our bigger footprint customers like Walmart, which make up a lower percentage of our total DFT footprint now compared to the same quarter last year, will pull down APD naturally, just given their higher kind of APDs. That's the primary driver.

Speaker 1

And, did you guys quantify the impact the cybersecurity incident had on the 2025 EBITDA guidance?

Speaker 3

We did not quantify the impact of cyber on the 2025 guidance. What I can tell you is operationally, things like labor management and materials management were still an issue as we started the year. And so we do expect that and have called that out in our Q1 guide that we provided this morning.

Speaker 2

It is important to understand as of today, thanks to the tremendous hard work of the team, our business operations are fully operational.

Operator

Our next question comes from the line of Bill Chappell with Truist Securities. Please go ahead.

Speaker 7

Thanks. Good morning. Just maybe a clarification from an earlier question. If I look at your revenue for 2024, it was $1,700,000,000 or sorry, if I take your revenue from last year and I do plus 5% to 7%, it gets me to $1,700,000,000 and you're guiding $1,500,000,000 to $1,600,000,000 So can you just break out how much of that offset is from insomnia and how much of it is from, I assume, currency?

Speaker 3

Yeah. Thanks, Bill. It's a great question and is absolutely the right kind of pick up. US segment net revenue in particular was impacted obviously by the sale of, Insomnia Cookies, which is roughly about 70,000,000 in revenue a quarter, on that front. Foreign exchange is having roughly a $40,000,000 impact, on, on total net revenue, for the year as well from an international business perspective.

Speaker 7

Got it. So that's those two just getting back to the your 5% to 7% organic growth?

Speaker 3

Got it. Yes.

Speaker 7

Okay. Thanks. And then any way to do that on the bottom line in terms of just again you're doing 193 and EBITDA you're going to 180 to 200 this year. How much of that is, how much of that insomnia and how much of it would be, would be, FX?

Speaker 3

Yeah. On insomnia, we generate roughly, dollars 8,000,000 or we used to generate roughly $8,000,000 a quarter in EBITDA on insomnia. That will obviously come out in the front half. And we have called out a $3 to $5,000,000,000 impact as a result of foreign exchange on the EBITDA line as well.

Operator

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

Speaker 8

Hey, thanks. Just a question on the third party logistics. In the prepared remarks, I believe you said you could have half The U. S. System by year end.

Speaker 8

Just related to that, can you just give an example of the puts and takes from a P and L perspective? What expenses

Speaker 9

would go away?

Speaker 8

What new expenses would you have? And can you talk about whether or not there would be a net benefit to EBITDA as you see it once it's all in place?

Speaker 3

Yeah. Thanks, Brian. And we've begun to scale obviously to support DFT expansion in The US, including McDonald's with our existing in house model to start. In February, we're moved to the contract phase and remain engaged with multiple carriers to finalize contracts. While we go through this phase and into the rollout, we do expect some transition costs and moving to an outsourced model, so a bit of kind of EBITDA pressure.

Speaker 3

But we are targeting EBIT neutral. However, we're still in the negotiation phase, but expected costs are contemplated in our guide.

Speaker 2

And the and the goal of getting to more than half the system, it's a big initiative, exciting for the teams in terms of giving us predictability in costs. We think that we'll get excellent service levels, just generally be a more streamlined set of operations. But all that's taken into account in the guide today. So, you know, the the the puts and takes have been have been pulled through.

Speaker 8

Okay. Thanks. And then follow-up to the question on international, the process to refranchise certain markets. You know, there's not that many company owned markets right now. So could you just give a sense if you're are you amenable to looking at refranchising all of them?

Speaker 8

Are there some of them you'd like to continue owning for whatever your reasons are? Just any color on that and how long you think the process might take would would be great.

Speaker 2

Sure. You know, we've we've learned that the best way to grow overseas is with local scaled master franchise partners, and we have strong and growing businesses in several international markets that we both own, and our franchise. But what we think is the best way going forward, the fastest way of taking advantage of the opportunity in the most capital efficient way is to evaluate, refranchising, the international markets that we own. Canada. That's the group that we own.

Speaker 2

We're evaluating all of those as an opportunity to do that. The most important thing is to, you know, find a really good partner with quality proven operators, you know, hold our brand standards, deploy the operating model that we that we talk through, the hub and spoke model, and then, you know, have, of course, have a strong financial position. So we're still in the evaluation phase, right now, Ryan, but but, you know, we'll provide updates as we have them regarding any particular market. But we intend on doing this to make sure that we can focus most of our time on expanding with national U. S.

Speaker 2

Partners in The U. S, strengthening that US footprint in preparation for the nationwide rollout of those partners and overall transforming Krispy Kreme into a bigger and better Krispy Kreme.

Operator

Our next question comes from the line of Jafar Mitzari with BNP Paribas. Please go ahead.

Speaker 10

Hi, good morning. First question is on what you said about Q1. I just wanted to triple check I've heard correctly. I think you've indicated EBITDA of between 25,000,000 and 30,000,000 in Q1. You've also given some indication on Insomnia quarterly EBITDA.

Speaker 10

So last year, Q1 EBITDA with insomnia was CHF 58,000,000. So I might correct if I assume you're effectively bearing the brunt of the impact in that Q1 and your full year guidance then implies there will be adjusted EBITDA growth year on year in Q2, Q3, Q4?

Speaker 3

Hey, Jafar, I can take that question. Yes, I think as we think about Q1 in particular and the quarter itself, there are really kind of four things driving year over year change. The first being the sale of majority stake and insomnia cookies. Second being the lingering impacts of the cybersecurity incident on labors and material management, which I had referenced. Third, you know, we are incurring startup costs as we, you know, invest in US expansion.

Speaker 3

And the fourth being some of the consumer pressures due to the adverse weather across the country. So when we think about Q1, it's going to be the most pressured on it. What I would say is we do expect sequential improvement as we go through as year to provide the excess capacity we're tapping into with our points of access growth, driving hub and spoke efficiency. But it will be most pressured in Q1.

Speaker 10

Super. Thank you. And then on international refranchising, early days as you said, but what's your very early view on the type of potential partners you could find? Do you expect to be discussing sales on a local country level? Or do you think there could be regional players interested on taking on multiple countries?

Speaker 10

Specifically, a lot of U. S. Restaurant brands have listed franchises. Do you think you could be considering conducting local IPOs for the OpCoast, for example, and retaining the brand and the franchise? Or do you think these businesses are too small for public markets?

Speaker 2

Yeah. The way the way we have built, we have, more than 30 franchise partners around the world, that work very, very well is whether we they have the master franchise for that market, for that country, and can build out full omnichannel model within the borders of that country. We've seen that in existing markets, across South America, Middle East and Asia, and indeed new markets like France, which we opened up recently, partnering, with Columbus Cafe there, a a a national operator of of great standing. Similarly, in Korea, we partner with Lotte, obviously, a fantastic, operator, well known within the country and very strong and well financed. And so we'll be looking at profiles like that, people who either have been involved or have an understanding of bringing in expertise, whilst of course having good financial backing to support what is a fast growing brand.

Speaker 2

We wouldn't rule anything out at the point of an evaluation, but we're not expecting to be going out there IPO ing the businesses. There's no immediate plans for that. It's more around finding the right partner to build sustainably because this is a growth model and we have people approaching us across the world all the time to partner with us since we were able to communicate the clarity of our growth trajectory and demonstrate profitable capital efficient growth to them.

Operator

Our next question comes from the line of John Tower with Citi. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking the questions. Just real quick on clarification. I'm assuming this is the case, but just want to make sure. There's no refranchising contemplated in your guidance today, correct?

Speaker 3

That is correct, John, yes.

Speaker 9

Okay, great. Maybe if you could speak to it sounds like in 2025, both in The U. S. And internationally, there's a pivot in terms of marketing the actual product more towards the OG and away from maybe not even away from, but it sounds like you're putting more of a spotlight in the OG Donut. And I'm just curious to know why, like what exactly are you seeing that suggests that's the proper tact to take?

Speaker 2

The original glazed donut, it's our most differentiated product. There's nothing quite like the experience of having a fresh original day's doughnut and even more so if you have one hot off the line. Indeed, we see, no matter what channel people are purchasing our doughnuts in, if they've had a Hot Original Glows doughnut, their memory structure is such that they think of the time they had that. And so it really differentiates us against against the competition. It's it's also, our, you know, not only is it beloved, but it's our most affordable product.

Speaker 2

And and we are conscious of the the value conscious consumer. We we see particularly for for large families and and gatherings looking to buy more than a dozen, that we wanna bring value and and and the original glaze can can do that. Then then finally, I mean, very practically, it's it's it's, our easiest doughnut that we make. It's the core of what we do, more than half of our sales, so it's the highest margin as well. So not only, is it iconic for the consumer differentiating versus the competition, but the best way for us to sustainably profitably grow the business in all our channels.

Speaker 9

Got it. And maybe just one last follow-up on you had mentioned that, you're seeing some softness from a consumer demand standpoint. Can you maybe break that down across the channels? Are you seeing any one channel stand out in terms of where that weakness is coming from?

Speaker 2

Well, we've consistently seen, over the last couple of years as we've deployed the strategy of bringing the doughnuts to more people, the way we're bringing the doughnuts to them, making it much more convenient for them in their lives, we've seen strong sustained growth. And of course, we've been adding more and more points of access around the world. And so, I mentioned on the call today that that we've we've grown more than 20% in the delivered fresh daily channel as the off premise sales that I'm referencing, in 2024 and achieved a milestone of $250,000,000 of revenue in the year. So that's thanks to that expansion of Deliver Fresh Daily. We're also seeing the digital channel has been growing consistently.

Speaker 2

Obviously, there was some disruption in December from the cyber incident, but apart from that, that has been growing actually at a similar level over the last few quarters more than more than 20%. What I was referencing today was where we're asking people to come to our traditional donut shops, come into the lobby, have the experience of the donut case. It's it's an amazing experience, and it's often triggered by that hot light original glaze to your earlier question, hence the importance of focusing on that in our strategy.

Operator

And we'll take our next question from the line of David Palmer with Evercore ISI. Please go ahead.

Speaker 11

Thanks. Good morning, guys. Wanted to ask you about that cyber impact. You estimated $10,000,000 as a headwind to the fourth quarter. I would imagine estimating that would be even pretty difficult.

Speaker 11

I mean, what is can you make us understand how you calculated that? Like what does that represent? How do you have it what where did this shortfall come from? And then what was that drag? Do you now that it's sort of behind you as you stand today, what do you think the drag has been for 1Q?

Speaker 3

Thanks David. I'll take that question. And the way we think about it, we talked a little bit about the impact to online sales and ordering, which would roughly make up half of the impact that we saw in the fourth quarter, with respect to how you kind of quantify that. We actually didn't sell anything online for a number of weeks. And therefore, we're, you know, that's a fairly easy one to kind of quantify.

Speaker 3

On the kind of labor and materials efficiency piece, we look historically at where kind of our adherence to schedule and labor hours are to estimate where and how inefficient we were during that timeframe as well, which, which gives us pretty, pretty high kind of confidence and comfort that, you know, those were the impacts that we saw for the, for the fourth quarter. We're not disclosing, you know, the impact on the first quarter, specifically. But what I can tell you is we were back up and running, from an e com perspective. So, less of an impact from lost sales, but continue to see the impact on efficiency until we had the back of shop systems up and running for the first few weeks in January.

Speaker 11

And just a follow-up on outsourcing with the logistics. What is going to be the when is that fully going to be rolled out? And what's the impact to EBITDA and cash flow? I would assume that there'd be some CapEx implications as well, maybe on an annualized basis as you roll that out? Thanks.

Speaker 3

Yeah. So, I think as Josh has mentioned, we expect to transition roughly half the fleet by the end of the year. With respect to the cost associated with that, as I mentioned, we will incur some start up costs as we go through the transition, but do expect and are working toward a goal of EBIT neutral for the year. As you can imagine, there may be some actually cash benefit, as a result of, of outsourcing as we kind of negotiate payment terms with vendors and those types of things versus paying our folks, you know, on a regular basis. So we're still working through all that as we go through the contact, contract phase where, where, you know, we are targeting effectively EBIT neutral is what we're, we're saying.

Operator

And that will conclude our question and answer session. I'll turn the call back over to Josh Charlesworth for any closing comments.

Speaker 2

Yes. I'll just say thank you for your interest in Krispy Kreme today. Thank you to our Krispy Kremeers for all the hard work you do every day. Now, our path forward is clear as we transform into a bigger and better Krispy Kreme, one that delivers profitable, capital efficient growth in the long term. Thank you.

Operator

This concludes our call today. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Krispy Kreme Q4 2024
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