This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: present that would cause us to change our tax, but we're always evaluating that. And I think as we get through the high season of Q2 into Q3, we'll look at our liquidity needs, look at the performance of our shops, and always reassess.
spk02: That's very helpful. Thank you.
spk07: Thank you.
spk02: Next question comes from Sharon with William Blair. Please proceed.
spk04: Hi, good afternoon. Sorry about my voice. Hopefully I'll make it through the question. So I had two questions. I appreciate the commentary on March and the momentum and coming into April. But I'm also curious because I seem to recall in the year ago period, you had a little bit of a slowdown related to gas prices. So when you're thinking about momentum in the business, are you looking at that on a multi-year basis as opposed to just kind of the natural lift you might get from lapping those gas impacted comparisons. And then I have a follow up.
spk03: Absolutely. So when we look at momentum, I think we are looking at the stack of comp over several different years. We're looking week by week what's happening and we're looking at the impact of the different promotions we have during the time periods that we're offering those promotions. So if we look at that positive momentum, we do think it's what we were seeing at the end of March is more than just lapping something positive.
spk04: That's really helpful. Thank you. And then I just wanted to kind of inquire on how your average customer frequency has been trending. You obviously have a lot of data now. And I'm curious how that's kind of evolved since the time of the IPO.
spk09: You know, as we look at our frequency, you know, as we kind of break down our cohorts, you know, and kind of with what's going on in the consumer environment and also with what's happened in the market as far as, you know, for the first time now, we actually have everybody open. You know, everybody is back doing business. Lifestyles seem to be kind of getting back into a regular routine. And what's interesting is that our top cohort, you know, that top 20% group, actually, we haven't seen much much change from that group at all. It's actually held, the frequency is held, and really through the first quarter it actually held up very well. We're seeing more softness and kind of that lower quartile of cohorts, so like that kind of bottom third group seems to be where the softness has come in in frequency. you know, we're constantly looking at that and we actually have about, we have about 10 different tiers of cohorts that we, that we look at and manage. Um, and then also have to look at how the infill and some of the sales transfer is playing out, uh, related to the impact on that as well. But the good news is, is that our loyals are loyal, um, and maintained at a, at a very strong rate. Um, and then a reminder that, you know, 65% of the transactions, um, you know, are coming through the app and, uh, that's a really another strong indicator of of our customers interactions with us and how they're using you know the app to really you know be part of the Dutch Bros family thank you the next question calls from Jeffrey Bernstein with Barclays please proceed thank you uh two questions the first one just as we think about the macro outlook um
spk05: I think you mentioned maybe you're more discretionary or more vulnerable in the afternoon day parts. And clearly as a beverage-focused brand, it just seems like more broadly you're more vulnerable than most. Just wondering how you think about your brand positioning and maybe what tools do you have to mitigate if you were to see accelerating sales pressures? And then I had one follow-up.
spk09: So, yeah, I mean, that's a – It's a long answer to that question, I think, Jeff. I think that some of the ways that we've responded, I mean, I think that by running that fill-a-tray program from noon to six on a Wednesday, that was absolutely targeted towards a very specific customer base. It was targeted towards a specific part of the day where we were seeing softness. And what was great about that day is it actually was the single largest day in the company's recorded history. for sales grew sales by 40%. And had, you know, spill over double digit transaction growth. So we know that we can drive traffic, we know that we can attack, you know, different needs of the business based on the market. Because again, I mean, when you're running a 30 year business, there are some markets for us that are that are going to be stable and execute very well. And there's other markets where we're still teaching the customer about Dutch Bros, how to interact with Dutch Bros, and how to make Dutch Bros part of your daily routine. And that's not a new thing for us. It's something that we've been through. And I think for us, when you add 100 and some locations over the course of 12 months, we still have a lot of work to do as we're kind of building brands. And I think as Christine talked about, freeing up the rewards program that allows us to invest more in the business and go after very specific needs of the business. And that's the beauty of the app. And we've been testing it. We've been running it and driving new programs. Christine mentioned the Mango Nada program. That was actually a program that we tested in a few markets last year before we took it system-wide, which we launched in early April. So we're excited to share with you more about, you know, kind of what's happened with that business and how we're taking trends that are more on brand. And Mangonada is anchored by Tahine, which is such a hot addition to beverage flavor right now that it's a great way for Dutch grows to flex in something that's on trend and important to the consumer.
spk05: Understood. And then just to follow up, I know you mentioned in the economic climate that the teams responded quickly and decisively. I'm just wondering if What in particular about the climate changed in your view, or are you just referring to maybe headlines? Because it does seem like some of the more traditional quick service food and beverage peers haven't really noted a change in climate, or some of them talk about how they could be a beneficiary of maybe a little bit of a trade down. So just wondering what in particular did the team respond to? Perhaps you're talking more about margins than on sales, but just trying to get some color as to what in particular you're referring to in terms of their response. Thank you.
spk09: I think in response on – it's probably more the headlines than it is anything specific. I think that the challenges in the market and some of the challenges in labor and in driving labor improvement, I think that – and honestly, I think whether it's macroeconomic trends or challenges, every great business should be looking at how they improve across all facets of their income statement. I think last year when we saw labor creeping up and getting into a spot where it was becoming too large of a percentage of our business, I think the team attacked that. And it's running much more efficiently today and doing a better job across the board. I think the second area where we listened to our employees was around the minimum wage investment, not just in the mandated markets, but also in what we took on for the federal minimum wage states. And by seeing a turnover in those states come down 6% and seeing total company-wide turnover now at 70%, which is down another 3%, I think those are all strong indicators about how we're attacking not just the customer trend, but also how we continue to make Dutch Bros a great place to work.
spk05: Thank you.
spk02: The next question comes from Sarah Sinator with Bank of America. Please proceed. Thank you.
spk00: Two clarifications, please. The first is just on the commodities costs, and I know, Charlie, you mentioned coffee and dairy were still up. If I look ahead at these futures markets, it looks like those should be tailwinds. So is that the right way to think about that margin going forward? Are there other offsets? That we should be thinking about. I know sugar, for example, is one that that's actually been inflationary this year. So any kind of direction you can give when thinking about inflation and how that flows through, given that you buy, you do contract or buy forward. So that was the first question. The second. Thank you.
spk07: Okay. On the sugar, on the input cost of sugar and coffee, there's about a 15-month lag from the time that price moves to the time it flows into our system. So even though you're seeing a C price moderate, you wouldn't see much or any of that in the current financial year. When it comes to dairy, while we're thankful that dairy is moderated, we're just mindful that production is best in the spring. And it's more volatile in the summer, depending on hot summer or not in the production area. So we're cautious just looking at that. And we just have to wait and see whether that plays out or not. And you had a follow-up.
spk00: Yeah, thank you. This one is actually on the new unit volumes being slightly lower. And I know you said you've entered other markets where they've ramped. But I guess new unit volumes being lower in some of the newer markets like Texas and still very high in California always, I think, bears watching. So I was just wondering what you would be looking for. Would you contemplate slowing the pace of growth and perhaps being less opportunistic in some of those newer markets just until you sort of have a sense of exactly what that ramp looks like? Just any kind of sort of flags that you pay attention to.
spk09: Hey, Sarah, this is Joth. I'll start with that answer. One is that we do not have any intention of slowing down here as we kind of look ahead. We're actually very pleased with the way that our new units have been executed. We're pleased with the way the response that we've had in every community in Texas has actually been fantastic. And given the unit economics of our shops and the way we can operate, you know, we can flex related to how these businesses open and we can continue to invest to build a strong customer base. And, you know, when you have great margins and you've got great, you know, four wall numbers the way that we do, it gives us some great flexibility to be able to go in. And so, you know, whether you're in Lubbock or Houston or Dallas or Waco or Fort Worth or everywhere in between, You know, we're very pleased with what's come out of the gate there. I was just down in that market about three weeks ago and really enjoyed touring the shops and seeing the customer responses, and it feels like Dutch Bros. And we'll take a long approach to that, and we'll build an amazing business the same way we did in California, the same way we've done in Colorado, and the same way we've done in Arizona. So we're very pleased with that.
spk07: Yeah, and just to add – So if you look at 21 and you move into 22 new units, there was significantly less infill in those years. It was a lot of launching in the new markets, particularly the launch in Texas. Now, if you look at Q4 openings, which got to nearly 30% infill, and then Q1, which got to nearly 60% infill, that's part of the moderation. The ebb and flow we'll see as we go out. We got into Knoxville, then we'll go backfill things. And then we'll take another try to go out again into new markets and then backfill. So the AUVs will ebb and flow as we move through our pipeline over time.
spk00: Got it. Okay. Thank you very much. Thank you both. It's very helpful.
spk02: The next question comes from David Tarantino with Robert W. Baird. Please proceed.
spk06: Hi. Good afternoon. My question is about the margin performance that you had in Q1. and really what you're assuming for the rest of the year. So I guess, Charlie, can you, can you remind us what some of those changes were that drove the productivity improvements at the unit level? And, and, you know, I guess, are you now, I think you might've mentioned this, but I wanted to confirm, you said that you're seeing the full extent of those now, and those started in the second half of the year, but what, what exactly was changed? And I guess, you know, how would, How would you describe it? Is it just simply less hours or something else?
spk07: So a couple things there. First of all, last year we had a reasonable degree of overtime. We've removed a lot of that out of the system with better scheduling, a better way to look at our scheduling. And yes, on a relative basis, less hours are being deployed versus what we would have deployed last year at this time. So that's just straight productivity. We started mobilizing against that in the latter part of last year, saw some of that benefit in Q4, didn't see enough of it to bank on it, and we saw a fair degree of that in Q1. So that's going to, we think, play itself out as we move through the rest of the year from a margin perspective. And then commodities have moderated. I spoke to that earlier as far as what our view of dairy and coffee is, but commodities have slowed down in terms of the escalation. So all that bodes well for our company shop margins to stabilize now and be very good going forward.
spk06: Great. And on the reduced hours, is that really tied to reduced traffic levels? I guess how are you accomplishing this while still providing the same level of hospitality and customer experience that I guess your guests have been accustomed to?
spk07: Beyond reducing hours when you have less drinks to be made, we actually are specifically going in and scheduling labor more appropriately to the forecast and then working those schedules matching, so working and matching that schedule. So it is direct productivity versus a product of lower traffic. And we've looked at how we measure that, track it. We're looking at it specifically on a weekly basis. at a micro level, which we didn't have the ability to do necessarily last year.
spk03: And I would add as well that we were scheduling based on sales dollars. And so as we took price increases last year, that sometimes can take a little bit of time to come out of that. And really you want the teams to come along with you on that. So as the teams adjusted to those pricing moves, that we were able to leverage that labor investment as well.
spk06: Great. That's very helpful. Thank you. And then the last question on this front, Charlie, it doesn't seem like you're assuming this sort of margin performance continues. If I look at your full year guidance, you know, literally take the midpoints of your ranges on revenue and EBITDA, it's assuming maybe 50 basis points or so of margin improvement on the adjusted EBITDA line, and you deliver nearly
spk07: 600 in the first quarter so I guess what is it about the balance of the year that's going to be less good on a year-over-year basis you know I guess you know related to this dynamic so the wage investments that we talked about making you know 19 million dollars for the full year that's going to ramp as we go through the year it gets bigger the legislative wage increase increases add on top of themselves And then we are building in more federal minimum wage markets on a relative basis. So that piece will get larger as we go through the year. And the productivity benefits that we have today, that'll take a little bit of an edge off of that going forward. So in the guidance, we're not assuming any margin accretion relative to last year. And also remember that we're climbing over in the fourth quarter. the 2021 points breakage that was $5 million. We have to lap that from a margin perspective.
spk06: Got it. Thank you very much.
spk02: The next question comes from Nick Sation with Redbush. Please proceed.
spk01: Thank you. You know, just in the context of reiterated full year, you know, revenue and low single legit comp guidance, And then obviously the Q1, you know, comp performance, you know, what gives you the confidence to reiterate the full year targets in terms of top line sales? Is it the, you know, quarter date performance? Is it something else that you have planned?
spk09: Well, I think there's several things that I'll highlight a few. One is that, you know, the seasonality of this business, you know, Q2 and Q3 is, index at a much higher rate than Q1 and Q4. We have plans in place to continue to be the things that Christine talked about, to be able to drive more traffic and build more of that business. We think it's still too early. We think it's still too early to be predicting anything related to the balance of the whole year. So we feel like investments in traffic driving initiatives, the work that we've done to be able to, you know, build margin to allow us to do that, the programming that our teams are working on to identify soft markets and build in day parts or drink mix is another one. So, you know, we think it's early. We love our team and we love kind of the opportunities that we think we have in front of us.
spk01: Thank you. And then just again, on this food and beverage, you know, 28.3% in Q1, you know, sequentially, there was a big uptick there. And I guess the question we're all trying to figure out now is, you know, what drove that uptick if inflation is moderating? Is it beverage mix? Was it some of the promotions that you were running? And then second, going forward, you know, Q2, Q3, Q4, is this 28% level what we should think about? Or are there some other drivers? particularly, you know, to get that lower, particularly as pricing is, you know, the year of your pricing benefit declines?
spk07: Well, first remember, we had very sharp inflation in the early part of last year, and we were anchored so heavily in dairy costs, and that moved up 20, 25% last year. So when you look at margins year over year, even though people at the feeling inflation has slowed down from a rollover perspective, we've had that impact in our COGS. And coffee is up, as I mentioned earlier. So both coffee and then the full year annualization of the dairy costs increase. That's what you're seeing in the COGS. In terms of the way forward, we're not expecting a lot of change there, but we're not also expecting any real change. change or benefit in that.
spk01: And so just to clarify, this 28% sort of level is like a fair way to think about that TOGS level going forward, the beverage and food cost level going forward for the rest of 23?
spk07: There's really nothing about product mix that changes from quarter to quarter. We promote different things. So the level of cost of goods You know, we would see going forward Q1 is a little bit higher than what we'd expect going forward, but it's not significantly higher.
spk01: Got it. Thank you very much.
spk02: The next question comes from Gregory Frankfurt with Guggenheim. Please proceed.
spk08: Hey, guys. Thanks for the question. I think it was Charlie you may have mentioned earlier that you guys have not seen a lot of regional disparity in the comps, and I guess I'm just a bit surprised by it. Excuse me. Sorry. By that, I'm curious what you're seeing in Oregon, where maybe you're not opening stores anymore. Are you seeing similar levels of down a couple points on comp and down high single-digit traffic? I'm just curious if you've seen that different than maybe Texas or some of the other markets.
spk09: Let us get to the Oregon data. Actually, Q1 Oregon, actually the comp group was up slightly. You know, Oregon was flat to actually up slightly. You have Washington actually up, let's see, the tracking group was basically, you know, call it flat. So, you know, those basis of stores that are in that, you know, more of the 30-year history, I would say that's been flat traffic.
spk07: So in a market without much development, if any, Oregon, we did not see it veer off or be positive relative to the rest, to Josh's point. So there's no indication there that tells us anything. Oregon's kind of like everybody else.
spk08: Got it. Understood. And then just I wonder if you could expand on your strategy of entering Texas and how you're building brand awareness there and how you're entering different cities. Who do you view as the competitive set you can take share from? And as you've kind of grown and grown sales there, is that where your customers are? Are they coming from C-stores? Are they coming from quick service? Are they coming from at home? We're just curious what the evidence has suggested in terms of where the market share opportunity is.
spk09: Thanks. When we modeled Texas, our original modeling really showed hundreds of locations that we could go into the marketplace. We feel like we're actually still in the early innings of building out market share in that state. I think that the As we look at a market, we're going to go in and as we build awareness, some of it is actually just opening and word of mouth is a key driver for Dutch Bros business. We do a lot of work in a very local kind of what we call a trade zone to build community awareness, to build brand awareness in in local give backs that we do through providing back to philanthropy. We do work in community. We do work in, we do a lot of friends and family, or not a lot. We do have friends and family opening where we, again, use word of mouth to open. We throw hiring parties where, you know, in many cases you might have, you know, you might have 10 times the amount of people applying for a job that actually get hired. So there's several ways that we open. And so really what we look for is word of mouth to help build the awareness and how do you interact with Dutch Bros from a shopping experience. Two is where are you getting share from? And I think that what's interesting about the beverage business is that this is a daily routine, right? So really, you know, our competition is anywhere where you're going to have immediate consumption of a beverage. And that could be a convenience store. It could be a grab and go section. in a grocery store, it could be a Starbucks, it could be, you know, really anywhere that is promoting, you know, strong beverage. And I think that's the beauty of the market set is that the competitive set is so big and the opportunities to go grab, you know, business and different day parts and different product categories are outstanding. So that's why you don't really ever stop. You actually continue to build it because you're building into people's routine and the way that people consume beverages every day.
spk08: Thanks for that. Maybe if I can speak one last one in. You made some comment on the funding of funding your negative free cash flow. Can you just remind us when your expectation is of flipping to free cash flow positive? And in terms of funding that, I think you're basically funding with 7%, 8% debt right now. I guess why that rather than maybe an equity raise or something like that? I'm just curious your thoughts. Appreciate it.
spk07: Well, as we said a couple times, and it's a very good question. First of all, we may see some delay in our ability to get to free cash positive given the elevated bill cost, but we're going to work hard to try to knock some of that back and knock it down. And so we'll activate on that. And then in terms of the type of funding, I guess I would say we have a very good and sizable credit facility in place today. We're not forced or compelled to do anything different right now, but we're always open to exploring what makes the most sense. And what we are doing with that very efficiently is not sitting with a lot of fallow cash on the balance sheet. We're drawing as we need. versus what an equity raise may do initially. So, again, we're open to what our options are going forward, and we will absolutely make sure this business is well-funded to get to that 4,000-unit shop, Pam.
spk08: Awesome. Thank you for the thoughts.
spk02: Thank you. At this time, there are no further questions in queue. I would like to turn the call back over to management for closing comments.
spk09: Thank you, Operator, and thank you, everyone, for your questions. As we close, I wanted to highlight an upcoming cornerstone event for Dutch Bros. In about two weeks, we look forward to hosting our annual Drink One for Dane event in honor of our co-founder, Dane Boersma, and his battle with ALS. Although Dane is no longer with us, we memorialize his legacy by hosting an annual company-wide giveback day to support the Muscular Dystrophy Association and its efforts to find a cause and cure for the disease. Typically, this is our largest and most exciting giveback day of the year, For those of you that are in market areas, we invite you to participate by visiting us on May 19th. And for our investors, thank you for your time, and as always, the continued support of Desperose. Thank you.
spk02: Thank you. This concludes today's teleconference and webcast. You may disconnect your lines this time, and thank you for your participation.
spk08: Thank you.
Disclaimer