Dutch Bros Inc.

Greetings and welcome to the Dutch Brothers' fourth quarter 2021 conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Patti Warren, Director of Investor Relations and Corporate Development. Sir, you may begin.

Thanks. Good afternoon and welcome. I am joined today by Joth Rickey, President and CEO, and Charlie Jimley, CFO. We issued our earnings press release for the quarter and year ended December 31st, 2021, after the market closed today, and we will file our 10K in the upcoming days. We have also posted our earnings press release and a supplemental information deck on our investor relations websites. at investors.dutchbros.com, and we'll post our 10-K there as well when it is released. A recording of today's call will be available on our website immediately following this call. Please be aware that all statements in our prepared remarks and in response to your questions, other than those of historical fact, including statements regarding our future results of operations or financial condition, recent strategy and plan and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are inherently subject to risk, uncertainties, and assumptions. They are not guarantees of performance, and they are expressly qualified in their entirety by cautionary statements. The forward-looking statements made are as of today's date, and we undertake no obligation to update them to reflect events or circumstances after today or to reflect new information, actual results, revised expectations, or the occurrence of unanticipated events, except for as required by law. We may not actually achieve these plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance upon them. For more details, please refer to our earnings press release and to the risk factors in our other SEC filings, particularly the risk factors described in our quarterly report on Form 10-Q for the quarter ended September 30, 2021, filed with the SEC on November 12, 2021, and in our 10-K for the year ended 2021 that will be filed in the upcoming days. Finally, while we have prepared our consolidated financial statements in accordance with generally accepted accounting principles of the United States, we will also reference non-GAAP financial measures today, which can be useful in evaluating our core operating performance. However, these non-GAAP financial measures, which may be different than similarly titled measures used by other companies and are not substitutes from measures that are prepared under generally accepted accounting principles. Rather, they are presented to enhance investors' overall understanding of our financial performance, but should not be considered to substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Investors should, therefore, refuse a reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings press release, and not rely on any single financial measure to evaluate our business. With that, I would like to turn the call over to Joc.

Thank you, Patty, and good afternoon and welcome, everyone. We appreciate your interest in Dutch Bros. Let me begin by some opening remarks on our 2021 performance and then discuss how well positioned we are for the future. Charlie will then review the important specifics of our financial results and provide guidance for 2022. I will conclude with some final thoughts before turning the call over to Q&A. Our first section is shop development. 2021 was a record year for Dutch Bros on many levels. Of course, we completed a successful IPO, but equally important, we opened 98 shops system-wide, of which 82 were company-operated, surpassing our previously provided guidance of 92 system-wide shops. In the process, we also entered three new states, Texas, Oklahoma, and Kansas. The magnitude of our new shop openings, along with our continued expansion into new markets, put us to the test, and the team delivered. We also handled the faster pace of new openings very well, and these units are performing at a very high level. In the fourth quarter, new shop development was the highest on record for Dutch Bros. We opened 35 new shops, including 30 company-operated shops. In December, we opened a record 23 shops. On Wednesday, December 3rd, we opened six locations in six different states, demonstrating our capacity to manage simultaneous development across multiple markets. Also of note, we opened eight more shops on the last weekend of the year. Through our pre-opening programs, we continue to invest in the success of each new shop, especially as we enter new markets. We send a dedicated opening team to instill our distinctive culture of speed, quality, and service. And in the long run, this investment pays for itself in spades. When shops open late in the quarter, they incur all of this pre-opening investment but typically do not yet have a chance to contribute meaningfully to the revenue or profitability and to offset these pre-opening investments in the current quarter. Charlie will get into further detail on new unit performance and overall profitability. When we enter a new market, we start with one shot, but quickly build several more to capture market share and satisfy consumer demand. Density and scale create a positive flywheel effect for us, increasing brand awareness, and providing more capacity to serve customers. Since 2020, average unit volumes for new shops have exceeded the system average, and these shops have demonstrated a predictable and consistent volume and margin progression, typically reaching margin maturity within three to four quarters of opening. The first quarter has also been off to a strong start. With February, we opened 25 shops, all of which are company operated. We expect to end the quarter with at least 30 new shops opened. We are excited about our near-term development growth prospects. The new shop opportunity is even better than we originally anticipated during our IPO process last year, as evidenced by our strong performance in new markets like Texas, Oklahoma, Tennessee, and Kansas. In early 2022, we opened our first shop east of the Mississippi River in Nashville, Tennessee. Throughout 2022, we will continue to expand in Texas, Oklahoma, Tennessee, and Kansas, and also ramp up development in Southern California, where results are pointing to a significant opportunity. In total, we now expect to open at least 125 shops above our original guidance of at least 112. Our ability to increase our development goal for 2022 is based upon our incredibly talented pool of operators, as well as our confidence in our ability to identify and secure new sites that attract and recharge. Staffing and labor headwinds within the overall industry are well known. We've read the headlines. While we are neither immune from market forces nor the impact of the Omicron variant, our overall labor costs and ability to maintain normal operating hours were stable in the fourth quarter and now into 2022. We had less than 1% downtime during the fourth quarter. This figure ticked up slightly in January 2022 as the variant peaked, but quickly subsided in February. We were able to utilize pooled staffing to help us during these times. Our fully cross-trained crews allow us to fill in where one shop has a shortage relative to another and draw from this pool as needed to weather the headwinds. We have not experienced the staffing challenges of the great resignation. During the fourth quarter, our shop level turnover was 56% and down sequentially from the third quarter. At the regional operator level, we have virtually nonexistent turnover, which we attribute to our unique people first culture. along with the significant career development opportunities and financial incentives that we provide to our employees. Dutch Bros has always been a people and culture first company, focused on providing meaningful development opportunities to those who want them. As we increase our shop development target, we open up even more leadership and growth opportunities for our people. We are not a real estate company. Our primary focus is not site availability, it is people development. When we commit to growth numbers, we do so because we are confident in the readiness of our operators. When we guide to at least 125 new shop openings this year, we do so with the knowledge that we have a sufficient bench strength ready to achieve the goal. Currently, we have nearly 200 fully qualified regional operator candidates in the pipeline ready to run a market. These candidates grew up in the Dutch Bros system, working their way up from Brewista, both in our shops and our franchisee shops. and have an average tenure of about six and a half years. At scale, they can support the 750 to 1,000 new shops across our system that we have planned. Behind these fully qualified regional operator candidates are approximately 900 others in the Dutch Bros Leadership Pathway Program. The Leadership Pathway Program provides a clear path from release to the manager to regional operator and is the core of our people development system. Augmenting this program is our new ed assist program provides tuition assistance for all employees across the company. We believe that our employees' continuous improvement, both personally and professionally, improves retention and positions desk bros to win. Now let's turn to our performance. Fourth quarter revenue increased 55.8% to 140.1 million compared to last year. System same shop sales grew 10.1% in the fourth quarter, and 15.3% on a two-year basis, while the company-operated same-shop sales grew 11.5% in the fourth quarter and 17.3% on a two-year basis. Our sales trends were steady throughout the quarter. We benefited from good performance in our fall and holiday promotion window, enticing more customers to choose a premium add-on or larger size, and the execution of a system-wide price increase. In combination, these efforts resulted in a weighted average price increase that far exceeded our list price adjustments. Quarterly adjusted EBITDA was $13.3 million at the upper end of our previously provided guidance range of $12.5 to $13.5 million. Included in this figure is a $6.2 million in pre-opening expenses, of which approximately $1 million is related to openings that took place late in the third quarter. The remaining investment supported our record setting 30 company operated shop openings in the fourth quarter. Our confidence in our people pipeline and development team allowed us to accelerate openings ahead of plan, allowing these shops to sooner contribute to profitability in 2022. While we are not immune to margin pressures, but are managing it appropriately, we continue to look for operational improvements and further opportunities in our market-based pricing model. In addition, we will use segmentation, personalization, and innovation to excite our customers about our unique premium and at times higher margin beverage offerings. In November, we successfully took a modest price increase of 2.9%. It was our first since prior to the pandemic and was well received by our customers, operators, and franchisees. Total revenue for the fiscal 2021 increased 52.1% to $497.9 million compared to last year. System same shop sales grew 8.4% for fiscal 2021 and 10.3% on two-year basis, while the company-operated same shop sales grew 9% for the full year 2021 and 11.1% on a two-year basis. Annual adjusted EBITDA reached $82.1 million, an increase of 17.7% compared to 2020. Momentum has continued into the new year, Underlying consumer demand remains very positive as evidenced by our same-shop sales and continued acceptance as we enter new markets and infill our current markets. As we've discussed in the past, one of our biggest priorities in 2021 and moving forward is the Dutch Rewards app. The Dutch Rewards program launched last year had already grown to 3.2 million registered users by year-end, which is approximately 6,000 customers per shop. In the fourth quarter alone, we added a half a million new members. Over the last six months, the average ticket for Dutch Rewards members was also 3% higher than for non-Rewards members. At year end, our digital tender was over 60%. We are pleased with our customers' adoption and use of the Dutch Rewards, especially as users begin to utilize the platform's stored value features. As more customers load funds to their accounts, we believe it can reduce transaction times, speed up our lines, and free time to create meaningful, lasting connections. Through the app, we also have the ability to remember each interaction with all of our Dutch Rewards members. We can leverage this knowledge to generate custom offers and thoughtful messaging to personalize our members' Dutch Bros experience. We're in the early innings of this work, and we're excited to continue unlocking value for our customers and our brand. Another area of things we aim for internally is to make a massive difference one cup at a time. Giving back to our communities has always been part of our DNA. Over the last several years, we've expanded and institutionalized what we call our social impact platform. This includes our ongoing philanthropy, diversity, equity, and inclusion, sustainability, and community and government relations. As a values-driven company, we hold ourselves accountable to our employees and our customers in this space, and they have high expectations. We have made clear our unwavering commitment to inclusion, launched important programs to support and train our people, and initiated systems to foster a diverse and inclusive future for Dutch Bros. Likewise, our sustainability program is focused on near-term goals to reduce our waste and water usage and ensure our coffee is ethically sourced. At the same time, we are developing a set of commitments towards an overall 2030 carbon reduction goal that will help ensure that we are a meaningful contributor to positive environmental change in the decade ahead. We are excited to continue developing our capabilities along these pillars and share our progress, accomplishments, and areas of improvement with you. To conclude, we believe that we have something here that is unique, a growing, profitable business with a phenomenal culture and loyal customer base with the foundation necessary to support growth for many, many years to come. After over two years of virtual events due to the pandemic, we held our first in-person leadership summit in Nashville this February. The energy of our teams was unmatched. We also recently celebrated the Dutch Bros' 30th anniversary in our home city of Grants Pass. Our employees were able to celebrate with their co-founder Trav and take a moment to reflect on the company's journey. These two get-togethers will impact our G&A in the first quarter. It's been some time since we had the ability to bring our people together on a larger scale and we believe this investment is critical to our culture. Both events were incredible for our operators, franchisees, and headquarters employees, testament to the culture we have worked so hard to create, carefully nurture, and grow for over 30 years now. It was humbling to look back at just how far we've come from the first double-headed espresso machine on a pushcart in downtown Grants Pass, Oregon, to a system of over 538 shops across 12 states at the end of 2021. And while we are proud to be recognized as one of the fastest growing brands in the United States food service and restaurant industry by location count, we are still in the early stages of a long-term growth story with enormous potential. Our goal is to serve high quality handcrafted drinks at 4,000 locations across the US within the next 10 to 15 years, while continuing to develop a people pipeline that enables our unit growth and supports communities. With that, I'd like to turn the call over to Charlie to review a few more details of the results.