Dutch Bros Inc.

Thank you for standing by and welcome to the Dutch Brothers Inc. fourth quarter and fiscal year 2023 earnings conference call and webcast. This conference call and webcast are being recorded today, Wednesday, February 21st, 2024 at 4.30 p.m. Eastern Time and will be available for replay shortly after it is concluded. Following the company's presentation, we will open up the lines for questions and instructions to queue up will be provided at that time. I would now like to turn the call over to Patty Warren, Dutch Brothers Director, Investor Relations and Corporate Development. Please go ahead, sir.

Good afternoon and welcome. I'm joined by Christine Barone, CEO and President, and Charlie Jimley, CFO. We issued our earnings press release for the fourth quarter and year ended December 31st, 2023, after the market closed today. The earnings press release, along with the supplemental information decks, have been posted to 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 risks, uncertainties, 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 measures are neither substitutes for nor superior to measures that are prepared under GAAP. Please review the reconciliation of non-GAAP measures to comparable GAAP results in our earnings press release. With that, I'd now like to turn the call over to Christine.

Thank you, Patty. Good afternoon, everyone. We had an exceptional 2023, and we entered 2024 with great momentum. Revenue grew 31% year over year, and adjusted EBITDA grew an outstanding 76% from 2022. We opened 159 shops, of which 146 were company-operated. In Q4, we opened 37 new shops. marking our 10th consecutive quarter of 30 or more new shop openings and demonstrating the remarkable consistency of our growth story. We ended 2023 with our highest AUVs on record, $1.97 million, and we delivered 2.8% system same shop sales growth for the year. These outstanding results were underpinned by excellent flow through, driving a substantial expansion of our margins. Dutch Bros is a time-tested, people-driven company that continues to deliver consistent, high-quality growth. This growth is underpinned by excellent four-wall economics and is enabled by our shop teams who remain focused on our key tenants, speed, quality, and service. Earlier in 2023, we began laying the groundwork with key initiatives to lift traffic, which we shared with you during our Q1 call in May. In Q4, we saw the impact of these efforts culminate with 5% same-shop sales growth, 100 basis point acceleration from Q3. These results were driven by sequential improvement in customer traffic with particular strains in the midday and afternoon day parts. Furthermore, we achieved record Dutch rewards penetration in Q4 with over 65% of transactions attributable to rewards members. Keep in mind that 35% of our shops have been open less than two years, which makes the 65% penetration number even more impressive. With such a successful 2023 as our backdrop, we are optimistic for our next phase of growth. I will now spend a few minutes discussing our key priorities. We began any discussion of Dutch Bros with our fundamental differentiator, our people. We aim to deliver unparalleled employee engagement and by extension, customer connection. Recruiting, developing, and retaining outstanding people remains our primary focus and one of our greatest strengths. I am proud to say that last month we were named the top QSR brand in Nation's Restaurant News and Technomics America's Favorite Chain Survey, in part because of our high marks for service. Once again, the culture we infuse into each shop and the skills and abilities of our broistas to make drinks and create relationships are evident. We believe these are the keys to building brand affinity and fueling our growth. Dutch Bros was also the highest scoring consumer brand among Gen Z and the only coffee brand in the top 10. We view this as a confirmation that exceptional culture, exceptional people, and exceptional service speak to customers across demographics and generations. This was underscored this month when we opened our first shop in Orange County, California. where our reception by the community was absolutely electric. Over the three-day opening weekend, we drove over $90,000 in sales. What I find remarkable is that after 32 years and over 800 shops, a shop can open with such excitement and that line stretched for more than a mile. It's clear to me we have something special here and that after all these years and all these shops, our brand resonates. We couldn't open shops like this without our people. and I am pleased to report that our people pipeline continues to be robust. We now have more than 350 qualified operator candidates in the pipeline, with an average tenure of seven years. At scale, we anticipate each operator will be capable of leading three to seven shops. Over the past two years, we've promoted over 60 people to the position of operator. This model allows many of our highest performing and most committed employees to continue to grow with us. We believe this approach enables us to strengthen our culture and values as we grow, reinforcing our competitive mode. As we expand into new markets, we take great pride in introducing Dutch Bros at its best. Homegrown, motivated, friendly operators steeped in our unique culture and experts in an operating system we have been building and refining for over 30 years. In January, we announced three additions to our leadership team. Sumi Ghosh, incoming president of operations, Josh Gunzer, incoming CFO, and Jess Elmquist, chief people officer. The entire team is looking forward to adding the wealth of experience they bring to what already makes Dutch Bros great. We embarked on a project last year as a leadership team to outline how our corporate team can best support our shops as we scale and grow. An expansion of our support center operations into Arizona is a key pillar of this work. We recognize the importance of continuing to attract top-notch talent, and we believe adding a significant presence in the Phoenix market positions us to better compete for this talent. We also believe this expansion will enable easier access to our operations as we grow across the United States. As part of this move, we anticipate that approximately 40% of support operations staff will be in Arizona by January of 2025. Many of these positions will focus on driving the strategic direction of the company and assisting day-to-day operations in the field. We expect to maintain a significant presence in Southern Oregon, where our roasting, accounting, and select other functions will continue to be based. Southern Oregon has been a key part of Dutch Bros' success. and we will continue to be connected to the community in a meaningful way. Dutch Bros is a growth company, and 2023 was a record year for us. We opened 159 new shops across 13 states, the most new shop openings in our history. This exceeded the expectations we communicated with you last year of 150 shops. Over the past five years, we have now opened over 500 system shops, and we have grown our company operated shop count from 90 to 542, an average annual growth rate of 43% over those years. In 2023, our development represented 24% growth in total system shop count and 37% growth in our company operated shops. In 2024, we expect to open 150 to 165 new shops which would represent another big development year for us. Another year of growing at this pace demonstrates our confidence. Confidence in our brand, confidence in our people pipeline, confidence in our four wall model, and confidence in our team. As we grow toward our goal of 4,000 plus shops, we continue to make refinements to our development strategy and market planning approach. In 2023, we outline the steps we were beginning to take to shift our strategy. primarily the greater emphasis on balancing speed and market penetration. We also discussed a renewed emphasis on capital efficiency with a longer-term shift toward more build-to-suit leases and flexibility with the exploration of a wider array of prototype units such as end caps. We would expect to begin seeing the impact of these changes in 2025. Our exceptional four-wall model provides fuel to our growth engine We continue to work diligently to maintain what we believe is one of the most compelling four-wall models in the industry. Last year, we shared with you our intention to achieve at least 100 basis points of adjusted SG&A leverage this year. In 2023, we greatly exceeded this objective, delivering 190 basis points of leverage. We accomplished this while continuing to invest in building organizational capacity. Since 2021, the year of our IPO, we have delivered 280 basis points of adjusted SG&A leverage. In total, we delivered 430 basis points of adjusted EBITDA margin expansion in 2023. This underscores our team's commitment not only to growth, but profitable growth. Since I joined a little over a year ago, the team has been focused on delighting our customers and driving traffic. In Q4, total system same-shop sales were 5%. a sequential improvement of 100 basis points from Q3. We believe this improvement is largely a result of the increasing momentum of our traffic driving initiatives, as our traffic trajectory improved from Q3 to Q4. Consistent with the larger industry, we saw some softness around weather events in January. As weather eased, our sales trends have strengthened, and we were pleased with the results. Here is an update on these initiatives. Innovation. We believe innovation plays a large role in the next stage of growth. Specifically, one of our priorities is category innovation, where we can build sales layers to support visit frequency and introduce new customers and occasions. We believe our operations are uniquely suited for these efforts, and that as a brand, we have an opportunity to play a more active role in curating, developing, and bringing forward innovative products. Earlier this year, we launched Protein Coffee, a new beverage that delivers at least 20 grams of milk protein in each medium-sized serving, and could provide a roadmap for future category expansion. Products like this really excite us, as they have the potential to drive routine with our customers. We will continue to add exciting LTOs to our lineup and highlight our unique secret menu items, as we did in Q4 with our highly successful winter campaign. The buzz around our Truffle Mocha platform drove our LTO mix to the highest levels on record during the competitive holiday season. We believe our innovation strategy will bring in new customers to Dutch Bros and drive awareness, interest, and loyalty. We are also focused on driving traffic through paid media, utilizing advertising to raise awareness. We believe advertising has a role in educating guests on what Dutch Bros is about And we're confident that once people visit us, they will have a great experience and want to come back. Our brand insights work supports our strategy. As we move into new markets with lower initial brand awareness, we recognize the need to adapt our approach. In these new markets, we are leaning into top of the funnel activities, particularly through digital channels and local community activations. We look forward to continuing to scale these efforts over time and are optimistic about the long-term impact of these sustained efforts. On Black Friday, we once again recorded our highest sales day on record when we provided shoe charms with the purchase of any two drinks. This was exciting for many reasons, specifically demonstrating what we believe is our ability to participate authentically in culturally relevant moments and create strong connections with our Gen Z guests. Third, we are continuing to increase the sophistication of offers, messaging, and capabilities on our app and Dutch Rewards platform. Last quarter, we discussed entering the second phase of our Dutch Rewards program, a more tailored approach to promotions. In Q4, we achieved our highest rewards penetration on record, with more than 65% of our transactions attributable to rewards members. Moving forward, our focus will be in refining our personalization capabilities. Though early, we are encouraged by the customer response, particularly with efforts like gamification and segmentation. Perhaps most excitingly, today we are announcing a pilot test of mobile order functionality in our app. We have begun operational testing and intend to begin beta testing our new app with mobile ordering in Arizona. Pending the results, we would expect to conduct a multi-shop test as part of our innovation stage gate process. We recognize this could be a big opportunity for us and also understand the importance of getting this right, delivering on our core values of speed, quality, and service. As such, it is our goal to roll out this capability to the majority of shops by the end of the year. In 2024, we are taking the steps to build a rock solid foundation upon which to embark on the next phase of our growth story. I am proud of what the team has accomplished to get us to this point and I am confident we have the building blocks of long-term success. We have terrific customer engagement with rewards members driving a record 65% of our transactions in Q4, and we are excited about opportunities in front of us to further accelerate this platform. We have top-tier growth. We delivered 31% year-over-year revenue growth in 2023. This growth has been consistent. demonstrated by 10 consecutive quarters of opening 30 or more shops on our way to 4,000 plus. We have excellent shop margins. We have demonstrated that we can drive this exceptional growth with profitability. We are well capitalized. We believe our recent primary offering and credit upsizing provides a long runway and plenty of flexibility upon which to execute our growth plan and capture our considerable white space. And most importantly, we have great people. We have outstanding and engaged broistas in our shops and a strong pipeline of operators ready to open our new markets. These factors give us great confidence in our future. With that, I'll turn it over to Charlie to review our financials.