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.

Thanks, Joth. As Joth highlighted, we're off to a very good start as a public company, and we enter 2022 with good momentum across the business. Looking inside 2021's financial performance and looking forward into 2022, it's important to reflect on the overall investment thesis and map our outcomes against that frame of reference. In addition to our earnings release, there is a presentation that outlines our results posted on our investor relations website that contains supplemental information and details. As a people-first growth company, one of our key objectives is to expand the brand and give our people across the system new opportunities. This is going very well and even better than we anticipated entering 2021. Let's get to the specifics of new shop growth. Our objectives in the near term were to grow shop count by 20% annually and to add new shops that mature with average unit volumes at least as high as our system average. At the end of the fourth quarter, we had 271 company operated shops, nearly 50% more than we had at the end of 2020. Our overall system shop count was 538 shops or 22% more than we had at the end of 2020. Ahead of that objective and our guidance is 20 plus percent growth again in 2022. The second objective was to add shops that meet or exceed our system AUV. We continue to see new shops performing higher than our system averages, even as we work diligently to infill existing markets and quickly follow on in new markets. Shops opened in 2020 are averaging $2.1 million in average unit volumes, and shops opened during 2021 are trending above this figure as well. Take, for example, our College Station brine market, where we made our Texas entry just over a year ago. After launching our first shop with volumes well ahead of our system average, we quickly filled in the market to better distribute the demand amongst four total shops that are all within four miles of each other. The net effect was a better experience for our teams and our customers. This will be a recurring theme as we enter new markets. We do not celebrate after a big opening and seek to harvest. We are very mindful of wait times and providing the best experience possible for our customers and for our teams. Our speed goal is not only to have good overall service times for each experience, but to also be consistent in delivering that service by being very reliable. We believe that protecting shops from being overburdened helps us achieve these goals. Our growth strategy is playing out in new markets like Texas and in legacy markets like California. where we are taking our expansion in Southern California up a notch. In Southern California, we are seeing high opening week volumes, just like we have been seeing in Texas, Oklahoma, Kansas, and Tennessee. This speaks to how well the brand travels and to the underlying demand for the brand in existing and new markets. We entered 2022 with a strong pipeline of new shops that fit inside our selection criteria and meet our overall growth strategy objectives. to expand in existing markets, and to open a select set of new markets each year. All this is designed to give our operators growth opportunities and to do so in a financially successful way. You see that optimism in our new unit guidance for 2022, grounded by both volume and profitability results, supporting our decision to quicken the pace in measured ways. As it relates to new shop profitability, our results in 2021 affirm that we are right on track. Our objective is to combine high AUVs with outstanding contribution margins. Our goal is to have each new shop deliver a year two shop level contribution of around 30%. For the year 2021, company operated shop gross profit was 21.1% of company shop revenue. Appreciation was 4%, resulting in a company operated shop contribution of 25.1%. Importantly, pre-opening expenses were 3.2 percent of company-operated shop revenue. In considering our long-term target of around 30-plus percent year two shop margins, we believe we're right on track. As part of our company-operated shop contribution of 25.1 percent, please note that this figure includes both the aforementioned pre-opening expenses and other new unit inefficiencies, neither of which are included in a shop's second year of operation. Let me now walk you through the change in company-operated shop margins for both the full year and the quarter. As I know in today's environment, there is more focus on recent results versus long-term trends. As we have discussed last quarter, lower discount and promotional expenses positively impacted 2020 results. Based on social distancing protocol, we suspended use of paper stamp cards shortly after the COVID-19 pandemic began in March 2020. This persisted until Dutch Bros app launch in February 2021. Discount and promotional expenses, when expressed as a percentage of company shop revenue, fell from the upper teens in 2019 to the mid single digits at the end of 2020. We're now trending in the low double digits despite having such a large percent of our revenue driven by rewards customers. Josh spoke at link about all the positives from having a digitized rewards program. We track this investment very carefully. And if membership rises further, we would expect discount promotional expenses to rise accordingly. However, having more rewards members is a big positive for engagement frequency and ultimately revenue expansion. Secondly, as we move through the pandemic, we were very careful not to escalate our menu prices. In November, we took a modest price increase which was our first measurable price increase in over a year for our company shops. That price advance landed well for us. It was appropriate relative to our desired positioning in the market. With that grounding, let's now review company-operated shop contribution margins, given the importance of those trends to our investment thesis. On a full-year basis, company-operated shop contribution decreased from 28.7% of company-operated shop revenue to 25.1%. or a total reduction of 360 basis points. Of that, 340 basis points comes from the change in discount promotional expenses. Let's quickly look at the movement in beverage, food, and packaging costs and labor costs, given those are the two most significant costs and the industry in general has been challenged by these two areas over much of 2021. Beverage, food, and packaging costs increased from 22.4% to 25.3% or 290 basis points. 120 basis points of that increase is related to the change in discounts. That leaves 170 basis points of real changes. Mix and recipe changes drove 100 basis points of the increase. We have previously mentioned our decision to shift to a premade mix for the Dutch freeze category of beverages, driven by a number of operational considerations. Further, the costs and inefficiencies that are a normal part of opening new shops makes up the remainder of this increase. We opened many more shops in 2021 related to 2020, so this impact was outsized in our year-over-year comparison. Labor costs increased modestly from 29.3% to 30.6%, or 130 basis points. 140 basis points of that increase is related to the change in discounts. That leaves just 10 basis points real reduction despite incurring cost increases in labor. For example, in our West Coast markets, previously legislated minimum wage advances are in their final phases. Also, beginning in 2021, we instituted minimum staffing levels in our stores, which slightly increased labor costs, but were necessary to set up shops at the beginning and close of each day. Notably, these added expenditures will persist as we open many more shops in 2022 versus 2021. However, on the positive front, we incurred lower COVID-related costs in 2021 as compared to 2020, which helped offset most of those increases. On the whole, our underlying labor costs have been stable, with the impact of discounts driving change in the labor percentage. Further evidence comes in our lack of turnover, the stability in our workforce, and that we are not struggling the staff at the level other retailers seem to be is allowing us to keep our costs stable. I want to reinforce that as a people-first company, we are always assessing how we reward our teams and how we create engagement in ways that go beyond compensation. We are fortunate to not be struggling at this point, but we are watching this very closely. In the fourth quarter, company-operated shop contribution decreased from 24.5% of company-operated shop revenue to 18.7%, or a total reduction of 580 basis points. The change in discount and promotional expenses drove a 580 basis point reduction in margins, identical to the entire drop in this measure. The fourth quarter of 2020 represented our lowest discount and promotional cost expense of the year when expressed as a percent of revenue. Similar to the full year 2021 view I just noted, there are many moving parts and margins, but the major driver was this change in discount expenses. Please note that our menu price increase began to take effect in early November of 2021, and therefore any support of margins from pricing was for a partial quarter. Beverage food and packaging costs increased from 22.9 to 26.8% or 390 basis points. 190 basis points of this increase is related to the change in discounts. That leaves 200 basis points of real change or 30 basis points more than the full year trends noted above. Two things to point out. First, we incurred a bit more ingredient cost driven by inflation. And second, accelerating new shop development means we will have some cost inefficiencies as we open up new shops and establish logistics and new markets. Labor costs increased from 29.7 to 30.5% or 80 basis points. 220 basis points increases related to the change in discounts. That leaves 140 basis points reduction to account for in the quarter. In Q4 2021, we experienced lower COVID-related costs than in Q4 2020, driving 120 basis points improvement. All of these metrics are spelled out in visual detail in the investor presentation posted to support this earnings release on our investor relations website. Some words about fourth quarter profit and its quality. As we mentioned in the press release, this is being limited by a number of factors. On a dollar basis, we had higher pre-opening costs, which supported record new company shop openings. Of the total 6.2 million of pre-opening costs incurred, 1.1 million were attributable to openings late in the third quarter, leaving 5 million of pre-opening costs for shops open within the fourth quarter. On a per-shop basis, this is higher than our norm, as we had a number of openings that represented first shops in their respective markets, and speed to market also had some costs. First shops have higher pre-opening costs, as we spend more time with our opening crew, training our staff, and creating a solid, competent base for expansion. For the year 2022, we expect the average pre-opening expense per shop will be consistent to what we saw in 2021. We expect to incur approximately two-thirds of our pre-opening expenses in the first half of 2022 as a result of this type of opening and pace. This is an important factor as you look at our profitability in the first versus second half of 2022. Adjusted EBITDA was essentially flat in the fourth quarter compared to the same period in 2020. yet revenue growth in the quarter was over 50%. I just noted the significance of pre-opening costs within our fourth quarter results. Pre-opening costs in the fourth quarter were 6.2 million or 2.5 million more than in the prior year. Additionally, the fourth quarter of 2020 was also positively impacted by the lower rate of discount promotional expenses, with that impact being approximately $2.8 million. Finally, fourth quarter of 2021, was burdened with $3.1 million in ongoing costs associated with being a public company, which did not exist in the comparable quarter of the prior year. That is a different set of costs versus the specific equity offering costs we add back to a rabid adjusted EBITDA. In total, the impacts I mentioned were $8.4 million. As a reminder, adjusted EBITDA was $13.3 million in the fourth quarter. Once we consider the higher pre-opening costs, and public company costs in 2021 and the positive impact of lower discount promotional costs in our 2020 results, revenue growth and adjusted EBITDA growth become more synchronized. We made the conscious decision to accelerate growth in the fourth quarter and into 2022. And while we always try to balance the profit growth equation in the near term, we're also keen to focus on long-term, high-quality revenue that will yield lasting profit and growth. Speaking of unit growth, a few words about our liquidity. As of December 31, we had $18.5 million in cash and equivalents and $65 million drawn on our revolving credit facility, reflecting $46.5 million in net debt. We also had $85 million in committed undrawn capacity in our revolving credit facility. Yesterday, we refinanced our existing credit facility to provide greater liquidity and maintain a strong balance sheet. geared for new shop growth. Our new five-year facility provides us with $500 million in committed capital, split between a drawn term loan, undrawn delayed draw term loan, and a revolving credit facility. We believe this structure gives us ample capital to fund company operated unit growth while always maintaining modest leverage levels and a conservative balance sheet. We are opening more shops sooner, and both our latest openings and future company shop pipeline is shifting more toward ground lease arrangements, where we spend more capital upfront in return for lower rent going forward, as opposed to a bill to suit arrangement. It is evident that we're able to go fast, over 20 openings in December and a higher annual objective for 2022 versus 2021 total openings. We have also noticed that taking more control of the construction process has allowed us to move through the many challenges being faced today faster and more efficiently. That requires more liquidity access going forward should we choose to need it. We are grateful to our banking partners for working with us to achieve solid, affordable access to liquidity to fuel growth. Before turning it back over to Joth, we wanted to share guidance for 2022 and select metrics for Q1, or 2022 specifically. Total system shop openings are expected to be at least 125, of which at least 105 shops will be company operated. Total revenues are projected to be in the range of $700 million to $715 million. Same shop sales growth are estimated in the mid-single digits. Adjusted EBITDA is estimated to be in the range of $115 million to $120 million. Capital expenditures are estimated to be in the range of $175 to $200 million, which includes approximately $15 to $20 million for our new roasting facility that we project will open in 2023. For Q1, total shop openings are expected to be at least 30, of which nearly all shops will be company-operated. We expect approximately half of these shops to be the first shops in their respective new markets, requiring our highest level of opening support. Same shop sales are estimated in the mid-single digits. G&A spending includes the two events Joth mentioned, in the range of $2 million to $2.5 million. As a reminder, our business is seasonal, with our best consistently high daily volumes taking place in quarter two. Please see our supplemental slides in the investor deck for more details. With that, I'll turn it back over to Joth for closing remarks.

Thanks, Charlie. We have all the building blocks in place to ensure Dutch Bros remains a successful and enduring company. A powerful, authentic brand that shares the love. Strong people systems that drive company culture and fuel our shop growth. A highly engaged customer following. Customizable and uniquely curated beverages. Highly consistent and highly attractive unit level economics. A portable model that is successful across geographies. and an engaged co-founder with an experienced leadership team. Six months after our initial public offering, we are staying true to our core thesis. In many respects, we were ahead of the game with more revenue, more profit, and more stores than what we expected. In this time, we've hired more people and facilitated tremendous growth opportunities for our employees as well. We've treated our customers well, and we're doing our part to be good partners in our communities. Thank you again for your interest in Dutch Bros. And now we'd be happy to take questions. Operator, please open the lines.

Thank you very much. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, we request a limit to one question and one follow-up. The first question is from the line of John Ivanko with JP Morgan. Please go ahead.

Two questions, if I may. First, I'd like to actually start on a CapEx number. I mean, that is, you know, a pretty substantial change, at least relative to what we had in the model going to 175 to 200 million. So I guess two things. First, could you repeat how much is going to that roasting facility, which I guess would be isolated to 22 and 23. But secondly, as the business shifts from build to suit to ground lease, how much are you expecting to spend per ground lease unit and how much lower occupancy costs or or a lack of landlord financing do you think actually could benefit the P&L as you bear more of that upfront cost?

So in 2022, we expect about $20 million of capital related to the roasting facility that will open in 2023. In terms of the ground lease, if you recall from our IPO work, we said that a ground lease was our capital, our cash, of about $1.3 to $1.4 million. A bill to suit is about $500,000 cash contribution. If you take that differential, essentially times 7%, that's the different rent, that's the lower rent you'll pay if you select a ground lease.

And... Yes, and even if I were to back out that $20 million for the roasting facility on 105 company units, I mean, it still does feel a little bit high in CapEx. I mean, is there anything else going on the corporate basis or perhaps in remodels that the system may benefit from as part of that CapEx? Or is it you're once again front-loading fiscal 23 openings perhaps in some of that fiscal 22 capital budget?

Okay. Yeah, you're on it, John. We do have some front load spend as we move in and keep ramping up into 23, some pre-spend. If your pipeline is 65% to 70% ground lease and you start to do that shift versus where we were for the full year 21, you use up more cash. We'll get a little more active on upgrading units. Some things that we had just delayed With all the COVID disruption, we just put things on the back burner. So we'll go ahead and take care of that now and throughout 2022. Go ahead. No, please. Well, I think also coming out of IPO, we had some more cash expenses related to taxes and the equity piece of employee compensation that we had to front as well. So we left 21 with a little bit more out on our line than we would have expected.

Okay. And as we think about the 22 and 23 development, I mean, is there any rethinking of the Dutch Bros box of the future, maybe including a little bit more automation, including fountains, for example, just kind of figuring out how to be you know, more efficient, you know, perhaps with some of your beverage preparation, waste, consistency, what have you? Is that something that's now, you know, contemplated, you know, in your capital budget for 22?

Well, I know that, John, we're in the middle of testing several operational improvements inside of our stands. that if go well in testing phase, that we could see start to roll out things like fountain systems or things like tap systems for cold brew, which we have in place in several locations already. So to put a specific number on that, I couldn't give it to you right now, but there are several operational improvements underway inside the stand. Thank you.

Thank you. We have next question from the line of Sarah Senator with Bank of America. Please go ahead.

Okay. Thank you very much. Just, I guess, a clarification and then a question on the loyalty program. So first on the comp for the quarter, I think initially you had expected that to be up mid-single digits as well and end up being quite a bit better than that. Was that just kind of upside from the success of the seasonal quarter? beverages and the mix shift, or I guess I'm just trying to understand to what extent, for example, this guidance for 1Q might prove conservative insofar as it's sort of similar to what you gave us about the quarter that just passed. So that's the first question. And then the second question is on the loyalty members. You mentioned that they're spending about 3% more, but are you also seeing higher frequency, you know, just trying to get a sense of whether overall spend might be even bigger than that. You know, when we've seen other loyalty programs, I think the initial lift has been pretty meaningful. So trying to gauge kind of what is still the opportunity or maybe how your loyalty program might differ from, from some of the other that we've seen. Thanks.

Thanks, Sarah. You know, a couple of things on the promotional side of fourth quarter comps is we did As I mentioned, we executed a holiday program that was as strong and really surpassed all of our expectations related to what we did in kind of the December period and then kind of what we executed in the fall and how our team did that. I think it surprised all of us in how well that was received by the customer and the response that we had. We've also been working on premiumization of some of our products and utilizing the increased popularity of our soft top business and other ways to premiumize our business. I think our team did a good job of pulling together just incremental business during that time. I believe that we received a nice halo effect from the IPO and the news in the fourth quarter. We had more mentioned of Dutch Bros across all regions of the country than we'd ever seen in the past. And I believe that there was an impact on that in a very positive way to our business. As it relates to rewards, you want to handle that?

Yeah, I think, so a couple things there on loyalty spend. When you look at how much more a loyalty member spends in our program versus a non-loyal member, it looks a little light we have we have very loyal group of consumers across the business whether they're part of the rewards program or not but we we think that the the biggest thing that can happen is if you look at our top tier frequent customers and you drop down to the next tier there's a a pretty significant difference in frequency and so we feel like as we we can do some effective things to get that frequency up in that next quintile or quartile of customers on down. That's perhaps the biggest thing we can do. We also believe that stored value is a big idea, not only operationally, but just to create attachment and engagement and loyalty. And we're really at the infancy stages of getting customers to load money on their program.

Understood. Thank you very much.

Thank you.

Thank you. We have next question from the lineup. Andy Barish with Jefferies. Please go ahead.

Hey, guys. Let me do the follow-up first just on that last comment, Charlie. What percentage of rewards members roughly, you know, have preloaded funds at this point, and are there any specific programs to drive that higher?

So about 20 to 25% of our tickets from rewards members include stored value, a stored value activity. And I can't tell you about a specific promo that's coming, but we are working on ways to either incent them with additional points if they were to load or some additional reason to try to get that attachment up.

Got it. And then can you just give us, I guess, a little bit more color on just sort of, you know, the EBITDA, I guess the absolute dollars, you know, building up. I mean, it sounds like the first half, you know, especially the first quarter will be a little bit lower than if you just straight lined. you know, your $110 to $115 million or $115 to $120 million guidance. Sorry about that. So just trying to kind of get a sense of the, you know, the cadence and how, you know, we should think of the discounting impact as we move into, you know, 2022. Again, understanding that it is kind of a moving target.

Well, discounting, Once we got past this fourth quarter, in the first quarter, we will roll over the launch from 21. So we'll have had a high level of promotional and discount expenses in quarter one of 21. We'll lap that in quarter two of 22. So we'll get a little bit of favorability from that lap. The biggest thing going on is we're going to have a fair degree of pre-opening expenses in the first half of this year. More than 50% of those expenses will come in the first half because of this dynamic of these first-in shops. So we average about $125,000 per store in pre-opening. First shops can spend over $200,000, and then it falls off after that. So the way our pipeline's shaping up, is we're going to have a lot more, a fair degree more pre-opening costs in the first two quarters of 22. And that's going to create a timing drag on earnings until we reach the second half and we kind of get that back. Also note, we're opening more stores than probably you originally would have modeled. And so we're going to have more pre-opening expenses in aggregate related to that as well.

OK. Very helpful caller. Thank you.

Thank you. We have next question from the lineup. David Tarantino with Baird. Please go ahead.

Hi. Good afternoon. My question is on the shop level EBITDA margins. Charlie, I just want to get your thoughts on what you think the right long-term margin of the business is and whether that changed in your mind or not? And then if you think about, you know, all the details you gave us, you know, for the fourth quarter and some of the non-recurring impacts, I guess, you know, what's the bridge to get to whatever your long-term assumption is on shop of what you've got?

That's a great question. David, I would get you to reference, and it's hard because we just released this stuff, is page 12 on the deck that we put together up on the website. And it does a bit of a bridge. And if you go over to the right-hand side and you look on a trailing 12-month basis at our margins and you see from a contribution perspective, we reported 25.1% for the full year. That's got some pre-opening in it. We put that off to the right. Um, we're, we're not going to have, you know, expect to not have COVID costs if we do identify that. So if, if you look at that sort of cash margin, I'll call it in the upper twenties, um, including new stores. And if you were to take out the drag you get from new stores, cause again, we're going faster and faster. Um, and you were to sort of put that back in as well as the fact that we didn't have a, uh, much of a price increase in 21. you get to that, I'll call it 30% cash margin in the second year a store is open. And that ties right to our thesis. So as long as we feel like we can hold the line on investment costs, and we're doing just fine there, we can do these average unit volumes, 10% plus versus the system average, and we get a 30% second year cash margin, we have a really compelling investment thesis that's very much in sync with what we articulated back in the fall.

Got it. And then I guess, you know, you're always going to have new stores in the mix dragging that number down. So what do you think a good, at the expected growth rate you have, what do you think a good steady state on a reported basis would look like? And I apologize, I don't have a good internet connection, so I can't download the slides right now, so maybe you have it in there. Of course.

Yeah, so if you just, if you hit the brakes, right, which is kind of the way this slide is set up, if you hit the brakes and you had no pre-opening costs, and then you had the stores mature and season out to their margins, you're probably looking 50 to 100 basis points of drag from just the margin of new stores that come in, right, either late in the quarter or partly through the year. So that's the way I would think about it, is since we're going this fast, if you just remove pre-opening, the immaturity drag is 50 to 100 basis points in the overall reported margin.

Got it. That's very helpful. And then the last question, sorry for the too many follow-ups here. You mentioned the fairly modest price increase, and it is really modest relative to what we're seeing elsewhere. Are you contemplating adding more pricing to address some of the cost pressures in the business this year?

So we look typically in a normal timeframe. We're going to look at our pricing windows every six months, right, in the fall before holiday, in the spring before summer. And so we're very mindful of that. I think we've been fortunate to not have a lot of inflation drag, um, both in 21 and, you know, frankly moving into early 22. And so we haven't felt compelled, you know, we, we don't price to a margin. First of all, we want price to what consumers are willing to pay. And, um, so we're just, you know, honestly, we're flexible and we're watching that closely. Uh, but we do it with the mindset of the, our relative position, the market and the customer not to seek to a margin level. But we are feeling good as we enter 22 with the trajectory of our margins, given everything going on.

Great. Thank you very much.

Thank you. We have next question from the line of Jeffrey Bernstein with Barclays. Please go ahead.

Great. Thank you very much. This question was just on the restaurant margin you were discussing earlier. As you mentioned, obviously, the big focus for investors because a lot of peers are facing more pressures perhaps than you are. But I was hoping you can maybe just share what you think, well, COGS and labor inflation might be in 22. And therefore, if you can give any kind of directional color, just because you gave so much granularity on the fourth quarter, what guidance might be for the first quarter or the full year 22 on that restaurant operating margin line?

Yeah, so we're fortunate that that the two big costs, cost of goods and labor, we don't have any real significant upward momentum in the labor line. So we're starting halfway better than everybody else to begin with. And then secondly, we have a pretty simple pantry of goods. What we're really dealing with right now is freight and logistics costs going up. But we're able to do, as we've shown in Q4 and the walk I gave you in COGS, we're really able to handle that pretty effectively. And we'll get a full quarter of the price impact from November in our Q1. In terms of guiding a specific margin for Q1, I'd prefer not to do that. Q4 is the lowest seasonality. Q1 is the next lowest seasonality. And then we kind of get into Q2. But I just think from a, other than the discount rollover from a year over year perspective, we're just not feeling compression and margins. And the biggest thing for us is our labor costs are stable.

Understood. And then the unit growth projection, obviously the bump up impressive considering the environment we're looking into for 22. But I think you mentioned, obviously you're not a real estate company, but do you have any concerns over or any concerns pressures you're seeing related to supply chain or equipment or permitting delays, I would think that that has to have some impact unless you have a pipeline much greater than the 125 and you're therefore factoring in some challenges from that perspective, just trying to get a sense for your level of confidence with that increase despite the headwinds your peers are referring to. Thank you.

Hey, Jeff. This is Josh. We absolutely have considered all those factors in guiding to the new number. So your hunch is right. And we certainly, you know, are working on pipeline, you know, well into 23. So all of those factors have been included in the way that we've looked at the potential for our openings for this year, which is why we took the number up to 125. Great. Thank you.

Thank you. We have next question from the line of Andrew Charles with Colin. Please go ahead.

Great. Thank you. You guys mentioned the app remembers orders for the 60% of tenure utilized by the Dutch Rewards Program. I know it's early days, but can you talk to your philosophy on how to curate offers at this stage? And then as you look a couple years out, as you collect more data, data mining gets more sophisticated. What's the vision for how you plan to curate offers longer term? I know, for instance, on the mobile order side, potentially you know, firing those orders or prepping those orders, if you will, you know, before customers can really, you know, get to the stores and start to try to get them in advance or at least scan them at the point, have the breweries to scan them at the point of order so they help accelerate. But, you know, just wanted to be a little bit more imaginative around where this could go longer term.

Yeah, I, hey, Andrew, it's Josh. The, you know, as we've discussed for 2021, our goal was to test as much as we could on variable offers. So for example, one of the programs we ran in December was about having a new offer every day of the week for seven straight days and testing how customers responded to different point levels. So we could start to zero in on what's our most effective promotional program that we can run. So we did everything from double points on a specific item to bonus points on a total order to get an extra sticker. Like how did that? And then what we've done is we've tracked lift. We track traffic lift. We track sales for that day. And we really start to identify like what the impact was. Another key that we'll do is we'll do regional activations as well. So, you know, so we have tested things like encouraging people to load stored value and what that type of promotion offers. And then going back to that same customer group and encouraging them to spend. So how do those activations work? And we've also tested those down to market levels and in some cases down to micro market levels. So I think it's safe to say that we've run hundreds of tests over the course of 2022 and really really starting to kind of compartmentalize and build a strategy for how we build the app, how we use it to grow sales, how we use it to effectively manage a dynamic pricing model, um, and encourage, um, more, uh, more development amongst, you know, probably our mid and second tier users. Um, so we can get more traffic out of, out of that customer tier, but, um, all in teams doing a great job of learning. And I think as we move forward, um, I think my goal would be is that we could activate a promotion at the single customer level. That could be a few years away, but I think that you're effective in building a customer relationship with one-to-one relationship.

Okay. Thanks, Josh. That's really helpful. And then, Charlie, quick follow-up. Guidance for mid-single-digit comps in 2022, very encouraging. I know you're guiding that level as well for the first quarter. You are lacking the easiest comparison of the year in 1Q. So just curious, does guidance embed some level of conservatism for the quarter? Or perhaps if you can help us out just two-thirds of the way through the first quarter, that January maybe was a little bit more soft at Omicron before rebounding in February? Just looking to better contextualize the guidance for 1Q.

Yeah, it was softer in January. It was better in February, less outages. We're We're sitting ahead of the mid singles right now. You know, we're like everybody don't know where the world's going to go over the next 30 days with all that's going on. And so we're just being a little tepid about how we look at things. Um, it doesn't really move the needle much. The biggest revenue driver is, is annualization and new stores and new stores getting added. So it gets a lot of talk track, and it is important to the underlying health of the business, but it's really not that financially meaningful right now as fast as we're growing the top line. That's why we don't, we try not to overthink it.

Makes perfect sense. Thanks, guys.

Thank you. We have next question from the lineup. Chris Ockel with Stifel. Please go ahead.

Thanks.

john i was hoping you could unpack the opportunity you're seeing in southern california a bit more and why you think you're seeing such a strong consumer response relative to what you might have previously expected yeah you know as we've you know over the last years we've as we've made that move into southern california it's um you know some of it is just a people equation um and the fact is is that the density of of people And the opportunities in that market, as we looked at it, as we launched in Texas and got into some bigger markets and have seen success in places like Phoenix and Sacramento and Denver with our larger cities, we just felt like the opportunity in Southern California was tremendous. Our plan is to stay in the suburbs of the major markets. Our plan is not to go into Los Angeles or San Diego proper, but to stay in the outer skirts of those counties. You know, we opened in really in Riverside County and in Palm Springs to begin with and have now started to kind of trickle in more, including some development that we have in San Diego County in the second quarter. So, you know, I believe in our modeling, when we launched the IPO, we said that California was about 30% developed, considering what we felt like the total opportunity was in that state. So while we have a very well-developed market in Sacramento and continuing to grow new stores as our franchisees and in that market, we think that the Southern California opportunity really will make up the bulk of that 70% that was untapped in the state of California.

Okay. And then I was hoping you could also provide any or talk about any initiatives you guys might be working on this year to improve drive-through speed of service. just to help reduce the number of looking leaves.

Yeah, well, now that we have a shop in Tennessee, that hits home. But the number one thing we can do is improve drive-through speed and service. But we want to be careful about putting our people on a clock because we think that... We want people to serve speed with quality, not get too quick and make mistakes. And so what we're doing, we believe the app and the continued growth of the app and the encouragement of the app, we think part of why our broistas are the number one salespeople for the app and having customers convert is it does improve speed. It's the number one way for people to improve speed in our lines. is to continue the use of that app because it removes the friction in the line to do that. The second thing is we just continue to focus on our managers with our teams to have very efficient service. And some of that is art, not science, right? So we have to be careful that we don't upset a customer who does want to talk to one of our employees who has built a great relationship with them We don't want to rush them through because we're trying to quicken the line. So it's a fine dynamic between taking care of people and improving our speed. But I think with the constant attention of our leadership in the field and field operations, that will help. The last thing is as we build our infill model, we will continue to relieve pressure off of some of our larger locations and make sure that we're balancing volume. As Charlie mentioned, we've got four locations now in the College Station Bryan Market, and the pressure relieved from number one is really helping out balance the volume across the market, which also helps improve speed and improves our customer service.

That's helpful. And Charlie, can you remind me, what kind of cannibalization measure are you looking for this year as you backfill some of these markets?

So about 100 basis points of sales transfer is what the drag is on total comp. If you look at what happened to us in the fourth quarter, we had about 140 basis points. We went very fast and infilled very quickly. And we're kind of siphoning off 10% to 15% when we hit a store, just to give you a relative level of understanding on that. And that's back to Joc's comments, is the most important thing is we can infill, relieve pressure and create opportunities for the stores to grow more effectively.

That's helpful. I'm looking forward to you guys infilling Nashville.

We're going as fast as we can.

Take care. Thank you. Thank you. We have the next question from the line of Sharon Zacfio with William Blair. Please go ahead.

Hi. Good afternoon. I guess a question about new markets. Excuse me. As you are building out these new markets, I'm getting all choked up here. I need water or coffee. What are you learning about how loyalty, the digital loyalty program, ramps in new markets and how to best build awareness? And then, Charlie, on the discount side of the equation, I know you'll have some residual, of course, in the first quarter, given the timing of the lapping last year or the initiation last year. Can you kind of quantify how much discount impact you expect in the first quarter?

I think the positive lap is about 100 to 150 basis points, if I recollect that on the discount rate. So from a little higher elevated rate in quarter one of 2021 to where our run rate is right now, roughly, I think that's the number. So that was the second part of your question.

Yeah, the first part, Sharon, is really it's, you know, the benefit of our new markets is that we're opening our stands now with the app, you know, being not, you know, to our new customers, that's just part of the program. And so QR code on the cup. QR codes on the cup, our releases, encouraging use of it, downloads of the app before you even make your first visit. So on and so forth. How that compares to comp stores, I don't know the answer to that. Something we can certainly find out, and I think that's a good question. But intuitively, I will tell you that the app has been very positive for us as we've executed our new plan. And I do think it's a result of why the shops that we've opened in the last year with the app in place have done so well.

Sharon, you have any further questions?

Sorry, I would probably choke if I asked any more, so I will end it there. Thanks. Thanks, Sharon.

Thank you. We have the next question from the lineup, Joshua Long with Piper Sandler. Please go ahead.

Great. Thanks for taking the question. Perhaps following up on that last point, when we think about the opportunity around throughput or just the overall operational efficiency by driving that digital tender mix higher. Curious if you might be able to share any of the experiences or learnings you have for those stores where, you know, perhaps they're indexing or over-indexing ahead of the system. I think you mentioned in 4Q that was about 60% of, you know, tender was through that digital, you know, stores that you've seen. that next skew higher and just what you've seen, you know, worked or how you might think about that, you know, translating to the rest of the system as that piece of the business scales.

So if a higher percent of sales is coming from rewards members in one shop relative to another, I mean, you've seen, I've seen when I look at some of the data, upwards of 70% or so of tender come in in some shops, the higher uptake shops for rewards, sometimes as low as 50%. not enough really not enough data that to figure out whether that's affecting comp or not at this stage um certainly something as as we click down on this a little further is is back to micro targeting where do we have the best uptake on rewards as a percent of tender and where do we have the least good uptake and how do we target that and try to try to get that higher in in the lower ones because we know that creates a lot more attachments so We're in the early innings, as we said. We've done a lot of testing. We can do click downs to look at this a lot closer. And, you know, there's a lot of opportunities.

Thank you for that. And then just as a follow up, thinking about the commentary around moving into some new markets, or at least in the first half of the year, having some of those stores being more focused on going to new markets. Just curious, how do you think about scaling? And I'm sure the answer varies across markets, but any sort of high-level commentary you could provide in terms of the research to see that, you know, hitting that threshold in terms of either awareness or, you know, the initial stages of gaining scale in a market in terms of the number of units?

Well, I think it's a great question. I think as, you know, as we've talked, we've kind of got this three-pronged approach, right? So we need to We're going into new markets. I think that our entry into newer markets this year will be less than last year because we had so many new entries last year that we're now going to be doing things like we did in College Station where we're opening shop number two, three, and four, and now filling in markets, places like Lubbock, Texas, and Nashville, and Kansas City, and Houston, and Dallas. A lot of work will be done on infilling those areas. We have a lot of legacy markets, like opportunities where we can relieve pressure from existing businesses that have been around for a long time in places like Sacramento and Phoenix specifically, where we can really offload maybe some higher volume stores and start to balance volume out. And then we still have plenty of new opportunities as we look east, where we'll be opening up brand new markets. So it's kind of a You know, it's hard to answer that one way because we're really kind of running three different business models, you know, very effectively. And a lot of it will be determined by like what opens when and how that affects that plus people that are, you know, they're really, you know, moving into those new opportunities or taking on more of an existing opportunity. So I know it's a wordy answer, but there's a lot of factors that go into that.

Understood. Appreciate the color. Thanks so much.

Thank you. Well, with that, everyone, we want to thank you for your questions. Thank you for your time. Thank you for your continued interest in Dutch Bros. We are very excited about where we're headed in 2022 and beyond, and we want to thank everybody for their support, not just of our calls and the things that we do, but also of our people every day in the stands. Thank you very much. We appreciate you and have an amazing day.