Krispy Kreme, Inc. (DNUT) Earnings Call Transcript & Summary

Okay. Hi, everyone. I'm Brian Harbour. I cover restaurants and food distributors at Morgan Stanley, this is our last session of today, which is Krispy Kreme. Josh Charlesworth, is incoming CEO, haven't officially but close. We're close.

Definitely. Feels like it for sure.

Right. Jeremiah Ashukian is the CFO. Thank you, guys, for joining us here. Maybe just given that you're -- Josh, you're not new to the company, you're in a new role, Jeremiah, you've joined recently. What's kind of surprised you about your new roles perhaps?

Yes, you're almost yet to start. So maybe I'll go first. I'm surprised. But I heard about it coming in, so I spent 21 years at Mars in corporate as the CFO, Mars Wrigley North America before joining. Growth was much harder to get at. And I think the thing that surprised me most operating in sweet-treat space like this was the potential for growth of this company. There's so much opportunity to grow. It's white space in the U.S., in markets in the U.S. like Boston, Minneapolis, it's white space in channels like QSR and club. It's international, it's low frequency. There's just so many opportunities and levers to grow the business, but it's very much around how we start to prioritize and focus those things. So I wasn't expecting that much, which you would have seen us take some action around Branded Sweet Treats early to help create some focus and you would have seen the recent announcement around strategic alternatives for insomnia. So by far, growth.

Yes.

7 years in Krispy Kreme, I don't think I'm surprised, but I will say that coming into the role of CEO, I previously was COO. The growth that Jeremiah talked about is so clear that I think a lot of my focus as the CEO is going to be about maximizing the potential of Krispy Kreme because of the so many growth levers in front of us. I mean the strategy, Mike Tattersfield, our outgoing CEO, established is pretty straightforward, make our donuts available in more places and just keep reminding people of the joy that is Krispy Kreme to eat, but actually perhaps more importantly, to give and share with others. And given that the #1 reason why somebody may not purchase Krispy Kreme is just inconvenient. Let's get those donuts out to more places. And we're still in a fraction of the potential we could be in. 1300 locations, sounds like a lot, but they're generally grocery convenience stores and a big CPG player would be in millions. And we're still relatively infrequently purchased at less than 3 times a year. So in that context, for me is coming into the role, it's really focusing on making sure that the operations of the company live up to that promise and servicing all this growth. We make 5 million donuts a day already, that's a lot to get perfect every time. And with channel opportunities like QSR would be an obvious one, the standards were going to -- expected by our customers are going to be high. So that's really, I think, the only shift you'll see is a real focusing in on leveraging that growth opportunity.

You have shifted focus somewhat versus the IPO because at the time it was more about being a broader sweet treats leader, and you had a couple of different businesses. Now you're shifting to basically just a fresh donut focus. So what was behind that? I don't know maybe it's something to do with the fresh donut TAM. Has anything else changed in your minds?

Yes, if we go even back before the IPO in 2021, I joined the business in 2017, shortly after it was taken private. And we were exploring what's the right strategy to deploy. And I think by the time we get to the IPO, we had 3 really interesting growth businesses, the fresh donuts in new channels and internationally, which is obviously our focus today, a longer shelf-life range and in some of your cookies. And so we talked about all 3, as you'd expect in an IPO. I think what's happened is the longer shelf life proven to be interesting from a consumer point of view, but not necessarily from a business point of view. So we exited that. And then the fresh donuts, particularly -- I mean, I think we said that our long-term goal was 20,000 points of access at the IPO, then we went to 50,000, then we went to 75,000. Clearly, the TAM, as you say, of these fresh donuts in new countries. We're adding 3 to 5 a year now. Actually, we're going to be more like 7% this year, I think on we -- and the channels that we realize that we can distribute these fresh doughnuts into that aren't cannibalizing each other has made us realize that, that opportunity is so big. Let's focus all our resources, not just money every morning when we get up in the morning, I just want to think about donuts. I want to think about donuts and cookies. The cookie business, it's really -- it turned out to be a great investment, turned out to be a phenomenal business that was a college business that became the city business now becoming a suburbs business in some cookies now international. There's so much growth there, but that requires a lot for a team to focus on as well. Let's allow another team to focus on that, and we'll focus on Krispy Kreme.

Okay. Let's maybe focus on the U.S. first. Your business is more occasion-driven than some of the companies I cover, for example, right? So it's a little bit different. And maybe just talk about how that form of demand is holding up. You noted some improvement into the fourth quarter. Is that more holiday-driven? Do you think it's just kind of look some of the collaborations we did are working? What's driving that? And how is that holding up?

I won't say as an improvement into the fourth quarter more of a continuation of the great momentum we're seeing. Third quarter reflects the summer months, fourth quarter is filled with holiday season and celebratory events. And so creating momentum and excitement around the brand and infrequently purchased brand, a brand that's often a gifting sharing brand is always going to be leveraged best in the fourth quarter for us around those holidays we had, yes, we announced a fantastic Halloween with our Scooby-Doo Doughnuts. We have Elf Doughnuts out in the market right now, if any of you are interested, we create an enormous amount of energy around these specialty occasions by creating talk about donuts, what do you want to talk about? And the media impressions, we generate $40 billion of those a year, are all about getting buzz towards the brand. And when people come to buy in this case Elf Doughnuts, they tend to buy original glades than our other products at the same time. And so yes, we're pleased with the fourth quarter. We said that in the earnings call, but we expect to be because that's when the excitement comes to the brand.

Yes. I think very much a permissible time, so very much falls consumer kind of sentiment. So now is the time where things like treating yourself is more permissible for consumers, so they're just naturally more to pick it up. As Josh mentioned, we started the fourth quarter growing double digit again. So we feel pretty good that demand is holding.

Okay. Makes sense. Give a sense for -- in that vein, you do have generally a lower frequency business because it's occasion-driven. And that's -- you said you're -- that's how you want it to be, right? But I guess the question is do you have a sense of kind of what share of U.S. consumers you're not reaching or haven't bought Krispy Kreme, because it's not just necessarily about like where the footprint is, but who do you think is kind of not coming in the door?

Well, as I mentioned, the #1 reason why someone doesn't purchase is convenience. And so they may know the brand often when I introduce the company to people. I mean, even though it's in 38, soon to be 39 markets, only $1.6 billion of revenue, people are like, "Oh, I thought the brand will be bigger than that," is because we're not convenient. We're not available to a lot of folks even in America. So about 85% of people will not have bought Krispy Kreme to answer your question directly. So I tell you how much upside there is putting it in front of them. And I think that's why we see, when we put it in different channels, we put it in drugstores, we put it in a QSR environment as well, of course, as subway stations and in our own shops. We see very little cannibalization between them because people aren't going as a destination that often. There are some. They're going for another reason to the Walmart and they go, "Oh, wow, there's donuts here. I forgot about those. I haven't tried those since I was a kid or I heard about that on social media, they've got these cool donuts, let me try them." But yes, the penetration is still very low. And it's a penetration strategy that's our biggest opportunity, both in the U.S. and in new markets around the world.

When talking about promotions just in the past couple of years, right? I think you've done a few different ones.

Yes, maybe I can start and build and have a bit of history, but I would say lots in short. Obviously, promotional activity is important for us as we think about driving traffic and volume in the business, but also driving the right ROI and promotions is something I think we've learned more recently, I would say. We are building a lot of capability in this space, so call it revenue growth management, how we activate list price changes, how we think about premiumizing the portfolio, how we think about price pack architecture and then more importantly, how we drive the right return on investment on our promotional activity because it is a way for us to drive price realization in the business by getting smarter at this. I think you would have seen us walk away from unprofitable promotions that we ran last year. I think Beat the Pump was probably the foster child for this, where it was great for driving traffic and driving volume, but terrible for margins, and this is where we match the price of donuts to the price of gas for a very long time. So that whole point around when is the right to go depth, when's the right frequency as we think about promotional activity? And then how do we pair it with also ensuring that we're buying something at full price versus just offering a discounted on a single product side?

As well as the financial angle. There's the sort of top-of-mind awareness point as well. I mean, what's the point of training the customer to look for a discount? There's no real benefit to that. But there is a benefit to getting a lot of attention on the brand for perhaps a one-off type event or something that's really differentiated. So we've done things like on Friday the 13th, get the second dose for $0.13. Media picks it up. They can talk about Friday at the 13th Tax Day. What is it? We will pay the tax; I think it was on the second or you only will only charge you for the tax. I think it was on the second doesn't. We actually went even further recently on World Kindness Day, we actually said the first 500 dozen donuts that was picked up that day at every donut shop, would be free for you to then give to somebody else as a gift, create enormous media awareness, and I think same-store sales were up 30% as well. So because, of course, people come to the shop and they buy other things or what have you. So those kinds of promotions that really break through and put the brand top of mind are the ones that most excited about as opposed to normal discounting. Okay. It's so infrequent. You just -- people can barely remember what they last paid for it. So it's more about bringing excitement to the rep.

Right. And then maybe just on the footprint itself. Remind us through because you had some closures, are you through the closure program at this point in the U.S?

Yes. No, I think we are. So we're going from about 240 hubs last year, tail end of last year, down to around $225 now. It was quite an extensive program. So it's not just rationalizing unprofitable hubs without folks, if you will. We also looked at the hubs that didn't have spokes and where we could add routes to those areas. We've done so as well, and we've seen profitability improve significantly. Obviously, as we reassess the network for DFD expansion in new channels, essentially QSR, will probably slow our rationalization of hubs in the space, knowing that there could be potentially used for them in the future.

Certain as we get feedback about strange language, at least it's worth saying what I mean by model. We, one of the big shifts in the strategy in the last few years is to recognize that the donut shops that hopefully, you're all familiar with, where we make the donuts and you can get hot donuts off the line, they can make a lot of donuts. They can make 270 donuts an hour. And that's more donuts than we can sell on-site. And so the strategy has been, well, let's sell those same donuts somewhere else. And hence, why we've expanded into these points of access of grocery stores, convenience stores and what have you. The other thing is -- and so typically, you can by adding spokes to the hub is what we call it, and where we start to then distribute out, we can significantly improve the efficiency and productivity of that site, not obviously the capital return, but indeed, a lot of the fixed costs there can be covered and hence, you get margin flow through. And so -- but some of them were old, very old and just can't be converted, and it was closing some of those that was behind that strategy. Now we are finding the economics are so compelling that some of the ones we decided not to convert. We are adding hub and spoke all the time. But clearly, we need to move to a phase, and we talked a little bit about it in our last earnings release of investing for the future in modern facilities that can support not 40 or 50 of these off-site locations, but hundreds of points of access in order to realize the growth opportunity that we have.

That's [ early ] to my next question, which is, would you expect net hub growth as we look over the next year or 2 because there are some new markets that you're going to bring on? But then also to that point, can you sustain double-digit DFC door growth with the current hub footprint? Or are there some existing markets where you, in fact, need to build more hubs at this point?

So with -- I'm sure we'll talk about the opportunity of entering the QSR channel and doing a pilot with McDonald's, which we've been doing this year, we've obviously looked at what it would take to support our customer align McDonald's. And so we've done a lot of detailed work on this. And we think we can support 6,000 incremental points of access with the existing capacity. But that would leave certain parts of the country completely not served yet and still some underserved even if we didn't have a McDonald's expansion. There are parts like New England, Upstate New York, Minneapolis, where we don't sell at all. And there are just other cities where which is maxed out, particularly Florida, California, whether they just love our donuts. So we do expect the hubs to start the net hubs to start growing now. We're just opening one this week in Philadelphia. For example, modestly sort of 5 to 10 next year, I would expect, but then it would expand much faster after that as we support the growth. But I think that it's been a shift from utilizing the existing capacity to now starting to think about where we can put in capacity to support this growth in what is now a proven growth and value creation model.

Yes. The -- as part of adding spokes to hubs without them, right? Some of that is also margin optimization, improving margins of your U.S. spokes. And you've always used Europe as the example of a more dense, higher-margin market. But where do you think you are on that journey to sort of optimize the margin footprint in the U.S.?

Can I just talk a little bit about strategic maybe you go into where -- why you can't see it yet, maybe because like in the U.S., we feel like we are really motoring on this now. We can see the cities where we're adding the spokes benefiting from -- to the bottom line from these additional spokes. The model was invented in the U.K. and to a certain extent, in Australia by franchisees some years ago, and we've brought it here in the U.S., and they really got to a level of maturity where we're consistently delivering over 20% margins with 40% to 50% of sales off-premise. We're still at 25% in the U.S. So we still got a way to go, but I believe that we can get to that long-term number. You can't see yet in the numbers because of a few things.

Yes. And so that's not only kind of driving top line and absorption of the hubs. There's also the productivity work that's happening underlying that as well. So things like demand planning to drive improvements in waste and in labor efficiency, things like digitization and automation where it's possible, things like design to value are definitely kind of areas that we're -- I would say we're probably early innings on the margin productivity kind of plans versus a bit more ahead of the game on the productivity. In the U.S. specifically, we saw a decent improvement in margin in the third quarter. So 30 basis points, we were up. When you actually deaverage what was happening because there's a few things in the U.S. segment, like insomnia in addition to the fresh donut business, we were up well over 100 basis points in margin in the U.S., fresh donut business in Q3. And that's despite having a lap bit of a headwind where the performance of the business wasn't strong last year, so we need to replenish the bonus accrual as well. So moving closer to almost 200 basis points in margin expansion. So we're definitely kind of seeing the improvement sequentially and year-over-year they have come through.

Okay. Why don't you talk about McDonald's a bit, which as many people I'm sure know, you're testing, serving your donuts in McDonald's restaurants and Greater Louisville, still right? Is this the only partner you're working with at the moment? How might you think about working with others?

Yes. We're testing in 164 restaurants across all of Kentucky with McDonald's. We've been doing that since I want to say March. And McDonald's, obviously, not just a big partner, but a very, very impressive operator and is very diligently running that test. We are learning from it, and I'm sure they are for a final decision made by them, but obviously, we're in advanced discussions to consider a rollout. And because we're in those advanced discussions and the sheer size and opportunity of the McDonald's QSR expansion, why would we be looking at anything else? It is a significant growth lever for us. And we wanted to, if and when a decision is like made by McDonald's like that, we would want to do it very, very well. So we appreciate taking this time to be diligent. We're taking the time to improve our operations, and we wouldn't want to start chasing growth. We want to make sure it's really high-quality, sustainable growth. But absolutely, if it doesn't work out in the discussions with McDonald's, the QSR channel is, in our eyes, proven as a great growth driver, whether that's in the U.S. or around the world. We think that will be really interesting. I hope it's McDonald's. They've been great to work with so far. And I think that our brand also overlaps really well with them around the world, but that's further down the road.

Do you think it would work in theory, anywhere the McDonald's system?

I think most of it as far as we understand it, yes. And I think Kentucky, from our view, it works there. And so we would be hopeful that it would work everywhere. And I really, really hope it works out because I think that our customers really looking for Krispy Kreme when they're out and about doing other things. And so being reminded of that as much as they will be when they go to McDonald's, which obviously a much higher frequency business will be great for the brand. And indeed, we talked a little bit about seasonality earlier. I think it's very complementary. It's stronger in the summer as far as I understand McDonald's, we're stronger in the colder months. So it will bring some stability there as well for our operations. So a really -- it will be a great partnership. And we're obviously doing our best to make it happen with them and hopeful that we're able to get an announcement.

Great. And then how do you think about -- you alluded to it, but how do you think about kind of capital investment ahead of that? How long would that take? How much do you think you'd have to do to be able to serve in theory kind of their whole system?

We can do just under half their system pretty quickly. We just need trucks and drivers and some infrastructure around that. But I'm sure if they do make a decision, they're interested in the total so we've been evaluating that. And anyway, DFD expansion is so big, not just with McDonald's opportunity, but QSR in general and other channels. I mean, we've recently opened DFD with Amazon Fresh. I think the club opportunity is really big. We're in Costco in various countries around the world. I think it could be a big opportunity in the U.S. [indiscernible] and so on and so forth. And indeed, if we were going to a McDonald's or a QSR location, we'll be driving past a Walmart on the way. So we're only in the 1/4 of the Walmart already. So there's so many places to get behind an investment strategy without it being fully dependent on McDonald's. If we did get to a rollout of McDonald's, you're probably talking 2 or 3 years just because of the nature of development, although we'd obviously look once that decision is made to fast track some elements of it. We think that production hubs we may build them slightly differently than we have in the past, and that might weigh your way of speeding it up. But it's investing behind what is a great return on capital is a relatively easy decision to make right now, given the expansion we have with these -- all these customers.

Okay. Makes sense. Let's maybe just talk about the costs and operations side a little bit. Could you maybe just talk about the cost outlook for next year as you see it at the moment on the food and labor side, any sort of like labor investment that you think you'll have to make?

Yes. So it's a bit of a mixed bag, to be quite honest. We're seeing some commodities and things like wheat and edible oils come down, so deflationary. We're seeing some commodities like sugar, remain at 10- to 12-year highs. And so we'll expect continued kind of inflation next year. We talked about this, I think, in Q3, where we expect high single-digit inflation on the commodity basket of goods for us, which would include things like cartons as well, which is unhedgeable. So it's a bit of variability in there. But for the most part, we're thinking high single digit. Labor, obviously, you can't hedge. And there's a lot more potential for variability there. We'll continue to invest in our Krispy Kreme. So we do expect high single-digit inflation in labor. We're also dealing with things potentially like California where legislation will change and therefore, labor and inflation in that market could be as high as mid-teens, so we do expect a continued kind of inflationary environment as we head into '24.

Yes. And will you handle that similar to others where you obviously take wages up that much, price to offset it reasonably?

Yes. I mean pricing will always be a play a role for us and be part of our strategy. And the plan for us is to take price where we can to offset as much inflation as we can. We do recognize that we're heading into a different environment over the next 12 to 18 months, and we're being very cautious around how much pricing we can take and where we take it. And things like I just mentioned, the early innings on productivity improvements, labor efficiency, waste and some of those other things are in play a bigger role for us next year. So we're definitely kind of looking at how to manage margin more holistically than I think we have in the past.

Could you talk more about that? What's -- what do you think will be kind of most impactful on just some of the productivity stuff, any operational changes, et cetera?

The largest part of our cost structure is labor. So obviously, we want to minimize waste and improve productivity and yields in our manufacturing processes, but labor efficiency is always going to be the biggest unlock. And fundamentally, our primary strategy for that is hub-and-spoke productivity and actually expanding the spokes and leveraging the fixed costs. That's our primary focus. On top of that though, I will admit that we still make the donuts the same way that we have for probably decades. They are all hand process, for example, decorated literally. These [ Elf ]donuts here at Krispy Kreme will have diligently decorated them him or herself by hand, which you think, oh, well, that's cool, but the consumer doesn't know that. They don't appreciate that. They don't necessarily see that. And so there are definitely automation opportunities that we are testing right now and to a certain extent, deploying already, particularly what we call in-line icing. So you can imagine the donut flips over into a bath of chocolate and comes out again through to more complex things like a robot putting the donuts into the box or into the tray. Those are happening and could well be significant. I mean, just I know the number in the U.S., we spend $100 million on making the donuts just in the U.S. labor. And obviously, that would be a material improvement if we could find ways of doing that more efficiently in the long run. And I believe we would maintain quality and consistency, which is becoming increasingly important to our more sophisticated customers now.

Great. Is there a situation where U.S. margins you think could be similar to the international -- the markets that you own at least, right? There are density differences, but is there anything limiting that?

Well, we're already seeing in markets like Atlanta, L.A. where we are well established with the hub and spoke model and have hundreds of points of access margins that are at or even higher Miami, another one than in Europe. So definitely, now the whole system and the nature of the geography of the U.S. has always had me assume that, that would be something that maybe we couldn't quite get to a U.K. level. I think my views are evolving now because when you think about distributing to a customer like a McDonald's through the whole system and all the places on the way to McDonald's that we could also sell in, suddenly you start to think we can make this look like an international efficient system. And so I think it's really, really exciting to see the growth of DFD in all these new channels. And I believe it not just gives us top-line opportunity, but the opportunity to get efficiency and get density as you describe it.

Yes. Touch on the international side maybe, at least in some of the major markets, what's kind of your outlook there for '24, which do you think will be strongest? I think the U.K. has perhaps been a bit weaker this year. But how do you think this trend into next year?

It's an interesting portfolio of international markets. Obviously, the franchise markets where we're seeing a lot of new growth, we're owning in Paris just next week. We think Europe is a really, really high growth opportunity for us, really interesting. We will see a lot of growth from those new markets with this franchise or some of them we own, like Japan and Canada and Mexico, and we also see those with very high growth engines. The availability of the donuts is quite low. The brand is loved and the model is profitable and working. We're adding production hubs in Japan and Canada as we speak and Mexico to support long-term growth there. So it's actually a very similar story as we've discussed a lot for the U.S. U.K. and Australia are more advanced in their distribution levels. The hub and spoke model is older, but there is still significant opportunities interestingly. We are not really in grocery stores in Australia. We just went into Walworth in the last year. The other big player is Coles. We're not really in convenience stores in the U.K. So there's still some white space opportunity in both of those. So this is what Jeremiah talked about at the beginning. There's so many places to grow. No wonder we're focusing on the donuts, not cookies or other things when those are all the opportunities we have. So international, we feel good about it.

It reminds which are the new ones coming next year?

So we've got France, and then we'll roll out France, which is quite an exciting plan, a great partner there. What else we announced because I've got one in my head that we have...

I'm letting the chart of stuff you disclose or not.

But we've got -- we definitely think Europe is going to be a big opportunity. Turkey is a big growing one that we have announced. And then yes, we've got some big countries to come. I'm going to -- we haven't disclosed that.

We'll wait for that in the future. Can you remind us where you are on pricing currently in the major markets? And what have you learned kind of about timing that?

So pricing right now is trending in the kind of low double-digit across most markets. We do expect some of that to carry forward into '24 as a bit of a tailwind for us, which is why we think we can take a little less price in the inflation rate and still kind of manage in addition to kind of the productivity work we need to do. As I also mentioned, pricing, we're thinking broader about it. So there's lots of different levers that I won't go through again, but a lot of different levers will pull from a pricing point of view to drive net price realization versus just list price perspective. In terms of what we've learned, we need to be much more agile in this space. We need to be looking internally and externally of what's happening, what our competitors are doing, when we take, when we don't take regionally and all those types of things. So there's been lots of learnings, I think, in the last and you've probably been here longer than I have, like last 12 months, I would say, in terms of how to kind of manage pricing going forward.

I'm really interested in specialty donuts, particularly when we're using branded partners. We're basically running out of donuts every time we do it. One way of doing -- of addressing that is obviously, is there an opportunity there to push up the price of the specialty donuts when it's worth it for the consumer. They obviously think it's worth it and maintain the more accessible price point of the original [indiscernible]. And so I think there is a learning there, which is around our ability to differentiate between the tiers more than we do today.

Yes, makes sense. Do you have a sense for your plans for next year or like when you would take pricing at this point or still figuring that?

Yes, we're still figuring that out.

But we will cover inflation strategy, right? And we look at it every quarter now. We used to look at it once a year, and that obviously calls out. And we look at it across the channels because we want -- although we can't tell our customers want to then charge the consumer. We want them to be similar so that the consumer understands they're getting a fresh donut, and it's a similar experience and therefore, price point across all those channels.

Okay. Got it. As you think about your 2026 plans, how fast would you kind of expect SG&A leverage in there? How do you think about that roughly?

Yes. Josh and I have been talking a lot about the next phase of this business. And one of the most important things for us is going to be drive consistent operating leverage year-over-year going forward and really focusing on improving every line in the P&L, whether it's gross profit, whether it's contribution margin or whether it's SG&A for that matter. I do expect us to start to bring the SG&A line down starting next year. We are obviously, as I mentioned, lapping some headwinds this year with the U.S. bonus structure. This is 0 last year. It's paying a bonus this year. International is obviously on the flip side because they're having more challenging us. So we have a bit of headwind in SG&A internationally. But for the most part, overall, we'll be very focused on bringing that number down, starting to see that benefit [indiscernible].

The Krispy Kreme of today is the product of more than 25 franchisee acquisitions over the last few years. One of the outcome impacts of that is our teams are somewhat autonomous in the way they work around the world. And we have quite a lot of people trying to sort problems around the world locally. We think through better coordination of our efforts, we will have more efficiency. And in fact, we'll probably solve some of those challenges quicker, particularly some of the operating productivity areas that we've talked about already. So I do believe that SG&A is an opportunity as we do that, even though we'll be working to expand the business. It will be in a different way. So it's pretty exciting to think about all the ways through rigor and discipline and focus and KPIs and all those things that you'd expect from a great company that we can take this growth and see the operating leverage drop to the bottom line over the coming years, including G&A.

Okay. On the CapEx side, your target has 6% of sales. It's above that now. Is that going to remain the case you think over a couple of year time frame if you're putting some money into the U.S. network to build that out?

Yes. The tick-up that we're seeing this year is largely driven through foreign exchange. So that's playing an impact right now on the CapEx investment. We do expect around a 6% to 7% CapEx range over the next couple of years as we move through this. But then obviously, longer-term guide down at 6% by 2026 is definitely kind of part of our plan.

Yes, because we're talking about CapEx to support DFD. Fundamentally, DFD is a low fixed asset solution. DFD [ do ]costs less than $2,000 to add to a grocery store. It's these production hubs that can cost $3 million to $5 million depending on how big they are. And if we can put down ones that service hundreds and hundreds of points of access, we think that the return on capital could significantly improve, get paybacks of less than 3 years on these investments and then just keep utilizing these production hubs to the max. So you can see a couple of years of investment to support the expansion. But fundamentally, this coming back down to something lower more appropriate for the model unlocks.

Yes. Okay. Sounds good. I think we're about out of time. So I will leave it there. But very much appreciate you guys joining us.

Thank you. It's been fun to talk about donuts. There are donuts outside.

There are donuts all around.

You can get to grab a box, give them to others. You don't have to eat them all yourself, but you can if you want. Take care. Thank you.

Thanks, everyone.