Dutch Bros Inc.

Greetings and welcome to the Dutch Bros' fourth quarter 2022 conference call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Patty Warren. Please go ahead.

Good afternoon and welcome. I'm joined today by Joss Rickey, CEO, and Charlie Gimley, CFO. We issued our earnings press release for the fourth quarter and year-end December 31, 2022, after the market closed today. The earnings press release, along with a supplemental information deck, have also now been posted on our investor relations website at investors.dutchbros.com. Please be aware that all statements in our prepared remarks and in response to your questions, other than those of historical fact, are forward-looking statements and are subject to risk, uncertainty, and assumptions that may cause actual results to differ materially. They are qualified by the cautionary statements in our earnings press release and the risk factors in our latest SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. We assume no obligation to update any forward-looking statements. We will also reference non-GAAP financial measures on today's call. As a reminder, non-GAAP financial measures are neither substitutes for or superior to measures that are prepared under GAAP. Please review the reconciliations of non-GAAP measures to comparable GAAP results in our earnings press release. With that, I would now like to turn the call over to John.

Thank you, Patty. Good afternoon, everyone. We appreciate your continued interest in Dutch Bros. In 2022, we delivered another year of growth with 133 new shop openings system-wide, a testament to our team's ability to execute our proven strategy. Despite the well-documented economic disruption, we've exceeded our new shop development targets for the third consecutive year and have now doubled our shop count since March of 2019. Although we continue to see signs of broader economic uncertainty, we enter 2023 well-positioned to continue building market share and execute against our long-term goal of 4,000 shops over the next 10 to 15 years. As we look forward, I'd like to share a few points that underscore why we feel confident in our long-term positioning. Our drive-thru model is focused on speed, quality, and service. Our goal is to be the highlight of our customers' day, which we believe helps cultivate lasting relationships. More than 95% of our sales are beverages, which we believe leads to more daily repetition than if we were serving food. We enjoy high AUVs without the supply chain and operational complexity of a restaurant. And our menu evolves to consumer preferences. More than 80% of our beverages are cold, which enables high levels of customization and can service several day parts. We are particularly excited about the category growth of energy drinks and encouraged by our positioning within this competitive market. We have now opened at least 30 system-wide shops in each of the last six quarters, demonstrating the strength of our people systems and development pipelines. In 2023, we are targeting 150 new shops, which positions us to achieve our five-year goal of 800 system-wide shops by year-end. We will be within striking distance of a billion dollars in revenue in 2023 and 1,000 system-wide shops by the first half of 2025. This inspires us and excites us. We know this growth creates jobs and opportunities for our employees and the communities we serve. Our new shops continue to be efficient, demonstrating predictable and attractive shop-level economics, and they mature quickly. The group of shops opened in 2019, 2020, and 2021 are approaching our 30 percent year two contribution margin target, and the class of 2022 is maturing in line with our expectations. We are hitting these targets while we continue entering new trade zones across the country. This performance gives us confidence in Dutch Grow's growth strategy both in the near term and beyond. That said, we enter 2023 with opportunities to optimize our operations. We're rolling out a beverage tap system, which we believe will achieve both supply chain and beverage build efficiencies. We're also eyeing the further penetration of our Dutch Rewards and Dutch Pass programs. Here are a few updates on the five key objectives we shared as we started our public company journey. One was to continue to and attract and develop people who are a growth capital. Two was to open new shops wherever people want great beverages with an eye on 4,000 shops in the next 10 to 15 years. Three is to increase brand awareness and encourage deeper customer engagement. Four was to invest in and use technology to improve the customer experience. And five is to expand consolidated margins through operating leverage. Let's focus on our people. Earlier this month, we welcomed Christine Barone as our new president. We are thrilled she is on board and already getting up to speed. Christine will be instrumental as we take this business to the next level. In Q4, our shop level and management turnover remained below industry averages, and our shops were fully staffed. Shop level turnover improved about 3% quarter over quarter and sits in the mid-70% range. Shop manager turnover remains in the low double digits, and operator turnover was once again virtually nonexistent. We know employee satisfaction takes on many aspects beyond wages. However, we strive to ensure take-home pay is competitive. In Q4, we increased wages in select markets, and on January 1, 2023, we made a proactive investment in our people and increased wages across all jurisdictions that rely upon the federal minimum wage as their standard. Across all markets, we continue to have a strong applicant pool with far more people interested in working at Dutch Bros than available employment opportunities. To be clear, our investment in wages in 2023 is proactive, not reactive. Dutch Bros utilizes a grow from within model. In 2022, we promoted more than 2,500 people in the field, up from 1,700 in 2021. These promotions create compelling opportunities for our people across our organization. This growth and continuity in our ranks allows us to scale our culture and consistently deliver our unique brand of customer service as we enter into new markets. To help manage our people development, we maintain a qualified operator-candidate pipeline. We match internal candidates with growth opportunities as operators. Last year, we had about 200 qualified operator candidates in this pipeline, and we promoted 34 new operators from this list. The qualified candidate list has now grown to more than 275 individuals, demonstrating that our people pipeline is well ahead of our needs. Having such a deep bench is encouraging, especially as we look forward to another expected record year of unit growth in 2023. Now to shop development. In 2019, we began accelerating the company-operated growth model with a deliberate expansion outside the Pacific Northwest. We continue to be pleased with new shop performance, The AUV for our mature shops opened since 2019 is 2.1 million, approximately 25 percent higher than for shops opened in 2018 and prior. Since 2019, we have executed a variety of new market entry strategies, including Fortressing. Our Fortressing strategy allows us to saturate a market, entering quickly and going deep to develop scale. Going deep helps us manage the considerable demand we often see when we enter a new market. If we do not manage this demand skillfully, we risk allowing long lines to disrupt our customer and crew experience. Making sure our customers can efficiently and predictably navigate our lines is key to Dutch Bros' long-term success. In 2022, we executed our fortressing strategy, and about 70% of our new shops were infill, most notably in Texas. We believe the Texas market is a key long-term growth driver for Dutch Bros. Over the last 24 months, we have opened almost 100 locations in Texas, creating adequate supply to satisfy long-term demand as we build our powerhouse brand in the Lone Star State. For 2022 openings, annualized weekly sales were $1.8 million. This falls in our sweet spot, balancing volume and customer experience considerations. We remain confident in new shop AUVs as we continue to expand into Texas and the Southwest and Southeast. In 2023 and beyond, we plan to continue utilizing both deep and wide development strategies as we craft our holistic portfolio. This balance helps us saturate markets and positions us to capture large market share while quickly moving into new territories and planting the Dutch Bros flag. In 2023, we look forward to entering Alabama and Kentucky. This morning, we announced changes to our Dutch Rewards Program. By almost all metrics, this program has been an unqualified success. Beginning on or after March 27, each dollar spent at Betch Rose will result in rewards members earning three points instead of the current five points. This adjustment should help us better align redemptions with current pricing levels and ensure the long-term health of the program. The changes preserve the value of customer points earned to date. We are not changing the amount of points required to redeem a complimentary beverage. Instead, given the rise in menu prices in the past 18 months, we are adjusting the go-forward points earning rate. We believe those moves should create some headroom, enabling us to provide more targeted and customized offers to loyal customers while allowing us to better focus on key initiatives. Our Dutch Rewards program continues to grow as well. In Q4, approximately 64% of our transactions came from Dutch Rewards members. We believe there is a runway to expand this program, especially in newer shops. Our shops opened since 2019 have about 5% lower rewards penetration compared to our shops opened before 2019. In 2023, we plan to continue promoting the benefits of preloading funds and paying through the app. From an operational perspective, this is great for customers as it helps speed up line time. In Q4, we executed a promotion to encourage users to load funds, which doubled the daily average of loads. We look forward to implementing similar promotions going forward to introduce more customers to ease and simplicity of paying in our Dutch Rewards app. Additionally, we are excited to announce the launch of the Dutch Bros Creative Collective, a leading edge grassroots effort that empowers our employees to capture the Dutch Bros story. The Creative Collective allows us to move away from relying on models and agencies and instead partner with Baristas to create social media and marketing content so our brand continues to show up in a very authentic way. Our employees have always been the true source of our marketing power by providing incredible experiences at the window and reinforcing our unique culture. This program puts them in the driver's seat while creating compelling futures for talented creators in our system. Now let's talk about technology. We are investing in technology to improve both Ruista and customer experiences. In Q3, we added functionality for DutchPass users to share rewards in the form of free drinks. In Q4, we launched digital gift cards so our rewards members can share the good vibes and treat their friends and loved ones to Dutch Bros. In 2023, we look forward to implementing systems that enable us to move faster, make better decisions, and remove non-value-added tasks. Finally, we are committed to expanding margins over time through operating leverage. In Q4, we saw 940 BIPs year-over-year contribution margin expansion in our company-operated shops, increasing to 28.5%. Operational improvements in pricing contributed to this year-over-year increase. Charlie will provide additional details in his comments as the portion of this margin improvement is related to our initial breakage estimate booked in Q4. Furthermore, in Q4, adjusted G&A was 19% of total revenue, 120 bps improvement from Q4 last year. We expect G&A leverage to continue in 2023 and beyond as our revenue growth outpaces the G&A investments we need to support rapid growth and scale our business. As we complete, Our first full calendar year as a public company, we are encouraged by the acceptance of our new shops as we expand eastward. Our people systems are strong, and our 2023 development pipeline is fully loaded. We saw meaningful company-operated shop contribution margin expansion in Q4 and continued G&A leverage. Looking towards 2023, despite the larger macroeconomic noise, we remain focused on our unit growth plan. 4,000 system-wide shops in 10 to 15 years, and we feel that our four-wall model will support our long-term ambitions. In closing, I'd like to thank our operators and our franchisees who are at the front line of executing this every day, and all of the people behind the scenes supporting these efforts. The beauty of this business is that it flexes and changes with the times. Over the last 30 years, we have moved and adjusted, and over the next 30 years, we will continue to do the same thing. As a team, we maintain a long-term focus and are excited about our future. Now I'd like to turn the call over to Charlie to review our financials.