Dutch Bros Q1 2023 Earnings Report $57.81 -0.58 (-0.99%) As of 02:34 PM Eastern Earnings HistoryForecast Dutch Bros EPS ResultsActual EPS-$0.16Consensus EPS -$0.08Beat/MissMissed by -$0.08One Year Ago EPSN/ADutch Bros Revenue ResultsActual Revenue$197.27 millionExpected Revenue$208.20 millionBeat/MissMissed by -$10.93 millionYoY Revenue GrowthN/ADutch Bros Announcement DetailsQuarterQ1 2023Date5/9/2023TimeN/AConference Call DateTuesday, May 9, 2023Conference Call Time5:00PM ETUpcoming EarningsDutch Bros' Q1 2025 earnings is scheduled for Tuesday, May 6, 2025, with a conference call scheduled at 5:00 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Q1 2025 Earnings ReportConference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryBROS ProfileSlide DeckFull Screen Slide DeckPowered by Dutch Bros Q1 2023 Earnings Call TranscriptProvided by QuartrMay 9, 2023 ShareLink copied to clipboard.There are 15 speakers on the call. Operator00:00:00You for standing by, and welcome to the Dutch Bros, Inc. 1st Quarter 2023 Earnings Conference Call and Webcast. This conference call and webcast are being recorded today, Tuesday, May 9, 2023 at 5 pm Eastern and will be available for replay shortly after it has concluded. Following the company's presentation, we will open up the line for questions and instructions to queue up will be provided at that time. I will now turn the call over to Patti Warman, VetCorral's Director, Investor Relations and Corporate Development. Operator00:00:33Please go ahead. Speaker 100:00:35Thank you. Good afternoon and welcome. I'm joined today by Joth Rickey, CEO Christine Barone, President and Charlie Gimley, CFO. We issued our earnings press release for the quarter ended March 31, 2023 after the market closed today. The earnings press release along with the supplemental investor deck have now also been uploaded to our Investor Relations website at investors. Speaker 100:00:58Dutchpros.com. Please be aware that all statements in our prepared remarks and in responses 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 ks and our 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. Speaker 100:01:35As a reminder, non GAAP financial 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 Joc. Speaker 200:01:51Thank you, Patty. Good afternoon, everyone. Q1 was a solid quarter for Dutch grows as we continue to deliver on our vision for long term sustainable growth. We opened a record 45 new system wide shops in the quarter, of which 42 were company operated. We continued our expansion eastward reaching Knoxville, Tennessee and opened shops across 9 states. Speaker 200:02:14We grew revenue by 29.6 percent and drove 5.90 basis points expansion in shop contribution margin year over year. We remain pleased with the underlying strength of the business. We responded decisively to the economic climate and focused on accelerating shop level profitability, particularly in labor productivity to deliver a strong company operated SHOP margin. At the same time, we continue to invest in our SHOP footprint to grow business, delivering on yet another quarter of our new SHOP growth plan. Our people pipeline and systems are strong demonstrated by our deep bench of qualified operator candidates and already low and further improving employee turnover. Speaker 200:02:55We saw meaningful four wall margin expansion We continue to see SG and A leverage as we build new shops and scale our platform. This continued underlying strength provides encouragement as we against our long term goal of 4,000 shops in the next 10 to 15 years. For the quarter, system wide same shop sales were negative 2%. As a reminder, at this stage of our growth journey, just 70% of our shops sit within our comp base. Same shop Sales decelerated into February before hitting an inflection point in March, exiting the quarter with momentum. Speaker 200:03:31Earlier in the quarter, we lapped Difficult comparison, rolling over strong performance in 2022 as we remained open through the Omicron wave. Later in the quarter, we began investing in a number of traffic driving initiatives that leveraged our unique assets as we began to see the improvement. To expand more on what we're doing, I'd like to introduce our new President, Christine Barone. Christine joined Dutch Bros in February and is already leading the development and Speaker 300:04:02Thanks, Joss. It's been one of the great pleasures of my career to integrate into We are focused for the remainder of the year on proactively responding to potential macroeconomic challenges and driving traffic. We're taking several steps to tackle our priorities. 1st, we're leaning into throwback promotions that have served to drive traffic and trial in the past. One example is our FilaTrade promotion in March, where we offered 4 medium drinks for $15 This promotion, which lasted 6 hours on a single Wednesday afternoon, resulted in the largest sales day in the company's recorded history, Driving same shop sales upwards of 40% higher than a typical Wednesday. Speaker 300:04:53Most importantly, a trip to Dutch Bros became a group event, which is what the brand is all about. 2nd, we're driving innovation to ensure we're meeting the needs of our customer base. For St. Patrick's Day, we released our first ever flavored soft tops. The Lucky Clover and Irish Cream flavors of our premium add on allowed our customers to celebrate with a special drink, which was great for a couple of reasons. Speaker 300:05:20First, it increased overall check by 50 basis points and second, it drove approximately 35% higher soft top adoption during the LTO period. Finally, we're doubling down on targeted promotions within the Dutch Bros app to not only drive traffic, and to also encourage customers to load funds on the Dutch Pass. The rewards refresh announced in Q1 provides us the flexibility to invest more surgically, whenever we intend to continue to. Lian moves us away from a one size fits all approach. These results tell us our customers remain excited about the brand. Speaker 300:05:58The summer months are traditionally some of our best for sales and we intend to build on the momentum we believe. We plan to continue to drive innovation and launch targeted marketing campaigns into Q2. For example, in April, we introduced our Mangonada Rebel and Double Point Tuesdays, and we have been pleased with our customers' responses to these efforts. I look forward to continuing to work with the team to capitalize on these opportunities, while also identifying operational efficiencies. Speaker 200:06:30Thanks, Christine. The work Christine and team are doing supports our key business pillars: people, shop development, operating leverage, brand awareness And technology. People remain our focus. On January 1, we made a proactive investment in our people And increased base wages in federal minimum wage markets. Arbor West has responded well. Speaker 200:06:52Shop level turnover in those markets improved by about 6%. System wide shop level turnover fell 3% to about 70%. Our people pipeline now includes more than 275 qualified operator candidates to support new shop growth. AUVs for mature company operated shops opened since 2019 were $2,000,000 approximately 20% higher than company operated shops opened prior to 2019. While 2022 new shop AUVs are down slightly from Q4 trends, it is still early in the maturity of many of these shops. Speaker 200:07:29Estimated sales transfer remains in line with our The SHOP classes of 2019, 2020, and 2021 have each achieved our 30% contribution margin target even as we've entered new trade zones across the country. Shops opened in 2022 are reaching a run rate 30% contribution margin in just 3 to 4 quarters. Like many others, we have seen pressure on build costs and are working actively to value engineer our shops in order to offset some portion of that escalation. We have a healthy list of actions that we can take and plan to incorporate into our pipeline. While we can't avoid all the escalation, we plan to make improvements going forward. Speaker 200:08:15Despite these market conditions, our shops continue to achieve strong cash on cash returns, which encourages us to keep investing in the long term future. Continued expansion helps us to accrue the benefits of market scale over time as we introduce new customers to our brand. We are forming daily relationships and developing these routines takes time, but often proves to be sticky. These considerations combined with other traffic driving and operational initiatives Christine mentioned earlier support our continued steady pace of growth. We intend to drive margin expansion as we grow both through continued SG and A leverage and through operational improvements at the shop level. Speaker 200:08:55In Q1, adjusted SG and A was 18.6 percent of total revenue, a 220 basis point improvement from Q1 last year. We expect further leverage as our revenue growth continues outpacing the SG and A investments we need to support rapid development. We also realized significant contribution margin improvement in our company operated shops, achieving 5.90 basis points of expansion year over year to 24.2 percent of company operated SHOP revenue. Improvements in our labor processes were a major driver And we recognized 400 basis points of margin leverage year over year in labor to 28% of company operated SHOP revenue. We believe this benefit was a product of steady improvements in scheduling standards and operating tactics that we began implementing in 2022. Speaker 200:09:47Included in this 400 basis points of improvement in Q1 is $3,000,000 of the wage investments we discussed last quarter. Finally, we're in the process of ensuring we have the right technology in place to support our customers and shops. Used correctly, we believe technology can be a major traffic driver moving forward, helping us improve reliability, speed and customer satisfaction. Currently, we're investing in our infrastructure and payment processing systems as well as the Dutch Bros app. The Dutch Rewards program is a major part of our business and continues to grow with approximately 65% of our transactions coming from Dutch Rewards members. Speaker 200:10:28In March, we executed a change to our rewards program. The change rightsized the discount following last year's movement on price. As part of the refresh, we built in opportunities to reinvest in the program and our members. We now have the ability to provide A more one on one experience based on a customer's wants, needs and habits. We believe our customers can now see how we are reinvesting in the program And to date, we have not experienced any meaningful pushback. Speaker 200:10:57As we look ahead, we plan to continue our focus on execution, specifically Driving traffic, optimizing operations, selecting strong sites and building great shops. We believe we are beginning to see the benefits of these efforts in Q1 as we delivered $23,900,000 in adjusted EBITDA, a nearly 150% increase year over year. I want to publicly thank our franchisees and operators who are executing every day. It is their operational focus that underpins this positive outcome, particularly as it relates to our strong labor and SG and A leverage and its corresponding impact on profitability. We aim to keep our eye on the ball as we navigate the larger business environment on our path to a long term goal of 4,000 shops. Speaker 200:11:43Now, I'd like to turn the Speaker 400:11:44call over to Charlie to review our financials. Thanks, Joth. We just reported our 7th straight quarter of at least 30 shop openings. Our team's ability to embrace the challenges inherent with high growth and to operate an expanding portfolio of shops across multiple states With increasing profitability has been impressive. My comments around Q1 financial results center on our retail operations and how they drove excellent Company shop profitability and then by extension, our overall adjusted EBITDA was 150% higher than a year ago. Speaker 400:12:20In 2022, we absorbed significant margin impact from the effects of inflation. The teams were tasked with additional productivity objectives We're asked to do so in a thoughtful way as to not risk our long term sustainable growth. Even with some belt tightening, We continue to strategically invest in corporate capabilities and enable growth. As a reminder, we now have 4 38 company operated shops after having operated only 37 company shops at the beginning of 2018. Some quick highlights from the quarter. Speaker 400:12:54Revenue of $197,000,000 grew 30% compared to the same period in 2022. Adjusted EBITDA grew nearly 150% over Q1 last year to $23,900,000 Company SHOP sales grew 33% And company SHOP profit contribution grew 76%. Driving that profit lift was an increase in company operated job contribution margin to 24.2 percent or a 5.90 basis points improvement over the prior year. Recall that this contribution margin includes 190 basis points of pre opening expenses. The key to this quarter And what bodes well as we move through our next phases of growth was our company operated SHOP margin expansion. Speaker 400:13:41Rather than walk down the P and L, let's start with the biggest driver, Labor performance. Labor is an investment that is critical to delivering our goals around speed, quality and service. Labor costs were 28% of company operated shop revenue, improving 400 basis points from the same period last year. As a backdrop for this performance, recall that last quarter we announced an $8,000,000 wage investment in states where the federal minimum wage is the standard. Further, we alerted you to an additional $11,000,000 in incremental wage spending necessitated by legislative minimum wage increases. Speaker 400:14:17This aggregate $19,000,000 in higher wages would be partially offset by the rollover from 20 22's menu pricing actions. In Q1 2023, we enjoyed the full benefit of improved labor operating standards implemented in late 2022. When we began increasing productivity, optimizing schedules and resetting standards. We believe this came together in Q1's P and L as retail operations delivered 400 basis points of labor improvement in spite of $3,000,000 in incremental wage expense and what can be the negative effects of traffic deleverage. Cost of goods sold were 28.3% of company operated shop revenue in Q1, up 90 basis points from the same period last year. Speaker 400:15:03As while inflation has slowed measurably, shop delivered costs remain elevated year over year. Pre opening costs were 1.9 percent of company operated shop revenue in Q1, down 2 70 basis points from the same period last year. Preopening costs are a function of the sequence of shops opening within a trade zone. 1st shop within a trade zone requires our highest level of support. And as a result, we opened 2nd and subsequent shops with lower levels of support. Speaker 400:15:33In Q1, we had a higher proportion of infill shops, which do not require as much support, driving down our pre opening expense timing for the quarter. As the mix of 1st in versus subsequent shops ebbs and flows each quarter, you will see this expense be a function of that sequence. We managed to a full year number as we have to let the pipeline take on its natural sequence. In our Franchising and Other segment, gross profit improved to $16,900,000 compared to $14,400,000 in the same period last year. We executed a price increase on products sold to our franchisees in Q3 of 2022. Speaker 400:16:10This action was designed to shore our profitability in the segment, helping offset input cost inflation in the goods we sell onward to our franchisees, including the high quality coffee we proudly roast in our plant in Grants Pass, Oregon. Shifting now to SG and A. For the quarter, SG and A was $46,000,000 This includes $9,200,000 in stock based compensation. Adjusted SG and A was $36,700,000 and continues to decline as a percent of revenue to 18.6% for Q1 compared to 20.8% in Q1 last year. We are pleased with adjusted SG and A leverage in Q1 and we expect continued leverage going forward is an ongoing component of our investment thesis. Speaker 400:16:55Please make reference to the supplemental slides for a reconciliation between SG and A and adjusted SG and A. Now on to a few comments on the health of our balance sheet and liquidity. We finished Q1 with $235,900,000 of net debt. That represents an increase of $45,200,000 from Q4 directly tied to those record openings we reported. We have $247,000,000 of undrawn liquidity on the present $500,000,000 credit facility. Speaker 400:17:24We are committed to maintaining a well capitalized balance sheet, remaining flexible and being ready to take full advantage of the long growth runway ahead. Finally, we are affirming our full year 2020 guidance. Total system shop openings are expected to be at least 150, of which at least 130 shops will be company operated. Total revenue in the range of $950,000,000 to $1,000,000,000 Same shop sales growth is estimated to be in the low single digits. We are maintaining our adjusted EBITDA guidance of at least $125,000,000 Being just 90 days into our fiscal year, We believe it is too early to translate Q1's results towards any change in our view of the full year adjusted EBITDA. Speaker 400:18:09For example, Despite the underlying improvements in company operated shop margins, in the remainder of the year, we may see a moderation in the preopening favorability we experienced in Q1. Furthermore, as noted, we will continue investing throughout the remainder of the year in initiatives designed to drive traffic. We will look forward to updating you on our progress in early August when we share Q2 results. Capital expenditures are to be in the range of $225,000,000 to $250,000,000 which includes approximately $15,000,000 to $20,000,000 in spending in 2023 for a second roasting facility, which we project will open in 2024. Thank you. Speaker 400:18:51And now we will take your questions. Operator, please open the lines. Operator00:18:57Thank you. We will now conduct a question and answer session. Our first question comes from Andy Warish with Jefferies. Please proceed. Speaker 500:19:32Hey, guys. Christine, welcome aboard and figured I'd ask the first question of you just in your impressions in the 1st few months Back up in the Pacific Northwest, kind of what you see as the opportunities and the key areas, some of which you touched on today that you're focusing on for the rest of 'twenty three and beyond? Speaker 300:19:57Absolutely. Thanks, Andy. Nice to hear your voice. Excited to be here today and to be part of this team. I think going in, I heard a lot about the culture and that Special sauce that we have here at Dutch Bros. Speaker 300:20:11And I would say kind of walking into the company, it's even better than I thought it would be. And spending a lot of time in our shops, meeting some of our Broistas, going to some of our new shop openings, It's really just been awesome to see the energy that comes to life in our shops and how much fun people are having as we're making drinks for our customers. The same energy really translates into the headquarters and so excited to be here with the team. As I look forward for the year, the priority is certainly in driving traffic and continuing some of the momentum that I about earlier in driving transactions, one of the things I wanted to highlight is, with a move that we made on the rewards program, which really took Some of that discount out of the base discount is going to allow us to really use that rewards program in a different way And to focus on areas where we can drive transactions as we see things soften here and there. And so excited about that move and that on our operational efficiencies and delivering those to the shops. Speaker 300:21:29So thanks, Andy. Speaker 500:21:31Thanks, Christina. Charlie, one quick question diving into the COGS line a little bit. I think it's The first time at least that I can remember were COGS as a percentage of sales was higher than labor, even with Dairy cost down significantly and rolling over your changes on the freeze product, you talked about a little bit of The pressure on delivered costs, is that some lag going on? And how should we kind of think about that in the current commodity environment going forward? Speaker 400:22:09Andy, thanks for that question. So a couple of things there on the cost side in COGS. Dairy is still up year over year. As we mentioned, there is a lag from when the price comes down in that commodity when it flows through our system. And then for us coffee costs are up year over year, low to mid single digits. Speaker 400:22:28The seat price was elevated many, many months ago and flows into our system. And then that rebalancing of COGS being higher to labor is more of the product of the labor leverage and efficiency we got And less about the escalation in the cost of goods percentage. Speaker 500:22:46Okay. Thank you very much. Speaker 600:22:49You're welcome. Operator00:22:52The next question comes from Chris O'Cull with Stifel. Please proceed. Speaker 700:22:56Yes. Good afternoon, guys. Joc, you mentioned you exited the quarter with some comp sales momentum. So I'm just curious if it looks like transactions may have been down kind of in that high single digit range in the Q1, but what level of sequential improvement in transactions have you seen so far in the current quarter? Speaker 200:23:18Well, we so we talk about momentum coming out of March. The Fill a Trade promotion happened on March 29, and we had Days of sequential improvement coming out of that. We are not talking about April today. We're not going to get into Q2 and just kind of focus on Q1. We feel like overall, listen, we were lapping A tough Q1 of Omicron from 2022. Speaker 200:23:53And I think what Christine did when she first came in was really look at traffic driving opportunities through the balance of the quarter and we really weren't able to execute those until Kind of mid to late March, and really start to put good plans in place as we go forward. So We're about flat on underlying traffic for Q1 versus Q4. So there was a steady rate there and we'll kind of see how The balance of the year plays itself out here as we're building our new programs and using some of that investment that Christine discussed Coming out of the rewards program and our ability to really dissect and go aftermarket opportunities. Speaker 700:24:35That's helpful. I mean, it doesn't sound like you're planning to take any additional pricing this year. So I guess as pricing starts to roll off, presumably you're going to need to rely on that better traffic performance to hit that comp guidance. Are you seeing success with these programs that gives you confidence that you can see that type of improvement in the comp over the course of the rest of the year, especially in the back half? Speaker 200:24:59I think Everything, Chris, right now is in evaluation mode. We're testing some new programs. We've run some new programs Related to our rewards program, we've evaluated some we've ran some local area marketing programs. We're continuing to evaluate kind of what we see the back half of the year look like, and the pricing discussion is Continuing to be something that we're talking about. But overall, we're pleased with the momentum coming out of Q1 and All of these plans that Christine and team have started to really kind of put in place, We think those will be very positive for the business, but time will tell. Speaker 700:25:49Sounds good. Thanks. Operator00:25:53The next question comes from John Ivankoe with JPMorgan. Please proceed. Speaker 800:25:58Hi. The question is on new unit volumes. I think I Picked up in your remarks, Joth, that maybe some of the units started slower as they kind of ramp on their maturity curve. And certainly, we picked up That and our numbers that the new unit volumes at least on a system wide basis year over year not a perfect calculation by any means, But looked a little bit lower. So can you, I guess, expand on that topic? Speaker 800:26:24I mean, what you're seeing, Different types of markets. I mean, if you see anything that's really below your expectations or it's just like a series of You said it's just going to take a couple of months or a couple of quarters to get up to their averages given you opened so many in the quarter. Speaker 200:26:41Yes, John, I think your I think the last part of that comment is super insightful. I think that we listen, we've had some Amazing openings as well. I mean, if you go to some of the things that we've done in Southern California and some of the volumes we've seen there, some of the larger openings in the history Happened in those markets. But as we've rolled, we've opened 112 new locations in Texas in basically 27 months. And I think in some of those cases as we talked about last quarter, those are opportunistic real estate, 16 locations In a little over a year in San Antonio, some of the shops we've opened in Houston and Dallas, I mean, there's a lot of infill happening That does take time to build and curate a market. Speaker 200:27:30And I think the benefit of Dutch Bros is we've been doing this for 30 years And we have seen in markets like Las Vegas and Tucson and Colorado Springs and some other studies where we've had other markets open lower than average and it takes time to build those up and go. And A great part. I think one of the things that we feel real confident in is that when you have great margins in a business, it allows you to invest over time and build something for the long term. And we're trying not to buy customers. We're trying to curate customers, bring them into our service model And give them the great experience that Dutch Bros has and move those along. Speaker 200:28:13So every market is going to be a little bit different And we're very pleased with the reception that we've had in all markets. I mean, even we talked about opening Knoxville, Tennessee and being all the way That far east now. The customer reception we've had everywhere has been fantastic and we look forward to continuing to build that. Speaker 800:28:33Okay. Thank you for that. And secondly, if I may, operationally, I have in our notes, you were expected to move to a tap system at around 10 Chops a month from March and every new store from July 1. Correct me if those numbers are Correct. What are you seeing in terms of the taps? Speaker 800:28:53Are you getting operational efficiencies? You're seeing a talk about the True customer margin responses, that system is still very, very new in your system. Speaker 200:29:04Yes, it's still very new. We launched The 5 TAPs in Texas, since we had our last call, which was our March program was to get those 5 TAP systems in place. Our plan remains intact to launch. By the end of the second quarter, we'll have 30 locations executed and then we'll start to implement And new shops, starting in the back in really in July. So it's too early for us to be counting on or touting any Specific operational efficiencies, but we like the way the tests are going. Speaker 200:29:39Obviously, we like the plan that we have The build out and I think hopefully on the next call we'll be in a position to really give some early indicators as far as what that looks like. Speaker 800:29:54Okay. Look forward to that. Thank you. Operator00:29:58The next question comes from Andrew Charles with TD Cowen. Please proceed. Speaker 900:30:03Great. Thanks. Charlie, I have two questions on just reiterated list to what is your same store sales guidance. Can you walk us through your thoughts on how this will Congrats to 2023, just given the 2 different dynamics of lapsing amount of price with a rebound amount of traffic and how you expect that to broadly manifest within Kind of same store sales cadence. And then just separately, just given that 1Q was a bit below our expectations thinking that you guys would be positive for The quarter, where can we expect the shortfall to be made up for in 1Q? Speaker 400:30:36So in terms of the Progress through the quarter, first start with the pricing rollover. On round terms, Q1 is 8, Q2 is 6%, Q3 is 3% and then Q4 is flat for a full year of 4%. So, and then the traffic rollover gets a little bit easier as we move through the year. So that's how we would expect things to progress through the balance of the year. In terms of your question about Q1 being below On a comparable sales basis, that's for the most part anchored in the afternoon daypart. Speaker 400:31:19It's not a product or a geography per se. It is that afternoon day part, which does have a tendency to be a bit more discretionary. Speaker 900:31:30Okay. And then, I remember, at the time of the IPO, you guys were talking about investment costs per store, Construction costs were up $1,500,000 They were up double digit in 2022 to about $1.65 ish or so, dollars 1.7 ish. In 2023, could you talk about what's embedded in your CapEx in terms of cost per new store? Speaker 400:31:51Yes. We do have the elevated cost embedded in our CapEx guidance in the upper ones. So those numbers you quote of around $1,500,000 with preopening, those have escalated to around 1,800,000 To $1,900,000 depending on where the site is for an all in project cost. But we feel like our guidance covers that additional CapEx, And we should be well funded for this year in terms of what we guided on the capital side. Speaker 900:32:22And just lastly, Charlie, you referred on the call to funding that you're open minded to new sources. Just with interest rates picking up, what would lead you to be a bit more proactive with looking into more longer term Speaker 400:32:42Well, I think given we have our CapEx Plan for this year has elevated bill cost built into it. We saw AUVs between Q4 and Q1 moderating In terms of those the revenue that's coming in and margins being higher, there's nothing present that would cause us to change are taxed, 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. Speaker 900:33:22That's very helpful. Thank you. Speaker 400:33:24Thank you. Operator00:33:26Next question comes from Sharon Zackfia with William Blair. Please proceed. Speaker 1000:33:31Hi, 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 coming into April. Speaker 1000:33:44But 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 multiyear 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. Speaker 300:34:11Absolutely. So when we look at momentum, I think we are looking at With a 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 as 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. Speaker 1000:34:44That'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? Speaker 200:35:03As we look at our frequency, As we kind of break down our cohorts and kind of what's going on in the consumer environment and also with what's happened in the market as far as For the first time now, we actually have everybody open. Everybody is back doing business. Lifestyle seem to be kind of getting back into A regular routine. And what's interesting is that our top cohort, that top 20% group actually, we haven't seen Much change from that group at all. It's actually held. Speaker 200:35:36The frequency has held. And really through the Q1, it actually held up Very well. We're seeing more softness in kind of that lower quartile of cohorts. So like that bottom kind of bottom third group seems to be where the softness has come in, in frequency. We're constantly looking at that and we actually have about 10 different tiers of cohorts that we look at and manage. Speaker 200:36:06And then also have to look at how the infill and some of the sales transfer is playing out related to the impact on that as well. But the good news is that our loyals are And maintained at a very strong rate. And then a reminder that 65% The transactions are coming through the app and that's a really another strong indicator of our customers' interactions with us and how they're using the app to really be part of the Dutch Bros. Family. Speaker 1000:36:40Thank you. Operator00:36:43The next question comes from Jeffrey Bernstein with Barclays. Please proceed. Speaker 600:36:48Thank you. Two questions. The first one just as we think about the macro outlook, I think you mentioned maybe you're more discretionary or more vulnerable in the afternoon dayparts. 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 And then I had one follow-up. Speaker 200:37:20So, Yes. I mean, that's a long answer to that question, I think, Jeff. I think that the 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 6 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. Speaker 200:37:55It grew sales by 40% And had spillover double digit transaction growth. So we know that we can drive traffic. We know that we can attack 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 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 And how to make Dutch Bros part of your daily routine. And that's not a new thing for us. Speaker 200:38:30It'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. Speaker 200:38:53And we've been testing it. We've been running it, and driving new programs. Christine mentioned the MangoNada 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 kind of what's happened with that business and how we're taking trends That are more on brand and Mango Nada is anchored by tajin, which is such a hot addition to beverage flavor right now that It's a great way for Dutch Bros. Speaker 200:39:28To flex in something that's on trend and important to the consumer. Speaker 600:39:34Understood. And then just a follow-up, I know you mentioned in the economic climate that the teams responded quickly and decisively. I'm just wondering 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, they 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. Speaker 600:40:00So 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. Speaker 200:40:12Yes. 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 listen 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%, and up to which is down another 3%. Speaker 200:41:23I 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. Speaker 900:41:34Thank you. Operator00:41:36The next question comes from Sara Senatore with Bank of America. Please proceed. Speaker 1100:41:41Thank you. 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 Leased 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? Speaker 1100:42:06I know, sugar, for example, is one 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, and then I'll the second. Thank you. Speaker 400:42:25Okay. 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 you see 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 has 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. Speaker 400:43:04And we just have to wait and see whether that plays out or not. And you had a Speaker 1100:43:10Yes. 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. Speaker 1100:43:29So 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? Speaker 200:43:50Hey, Sarah, this is Joth. I'll start with that answer. One is that we do not have any intention of Slowing down here in the 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, it's actually been fantastic. And given the unit economics of our shops and the way we can operate, We can flex related to how these businesses open and we can continue to invest to build a strong customer base. Speaker 200:44:30And When you have great margins and you've got great four wall numbers the way that we do, it gives us some great flexibility to be able to go in. And Whether you're in Lubbock or Houston or Dallas or Waco or Fort Worth or everywhere in between, we're very pleased with what's come out of the gate there. I was just down in that market about 3 weeks ago and really enjoyed turning 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. Speaker 400:45:10Yes. And just to add, Barrett, so if you look at 2021 and you move into 2022 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 Speaker 1000:45:43markets and then backfill. Speaker 400:45:43So the It's in a backfill. So the AUVs will ebb and flow as we move through our pipeline over time. Speaker 1100:45:50Got it. Okay. Thank you very much. Thank you both. That's very helpful. Operator00:45:55The next question comes from David Tarantino with Robert W. Baird. Please proceed. Speaker 1200:46:01Hi, 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 remind us what some of those Changes were that drove the productivity improvements at the unit level. And I guess are you now I think you might have 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. What exactly was changed? Speaker 1200:46:36And I guess, how would you describe it? Is it just simply less hours or something else? Speaker 400:46:44So a couple of things there. First of all, last year, we had a reasonable degree of overtime. We've removed a lot of that out of 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. Speaker 400:47:09We 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. Speaker 1200:47:46Great. 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 My experience that I guess your guests have been accustomed to. Speaker 400:48:05Beyond 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. Speaker 300:48:40Yes. 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 if we as the teams adjusted to those pricing moves that we were able to leverage that labor investment as well. Speaker 1200:49:07Great. That's very helpful. Thank you. And then the last question on this Charlie, it doesn't seem like you're assuming this sort of margin performance continues. If I look at your full year Guidance, literally take the midpoints of your ranges on revenue and EBITDA. Speaker 1200:49:27It's Assuming maybe 50 basis points or so of margin improvement on the adjusted EBITDA line and you delivered nearly $600,000,000 in the Q1. 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, I guess related to this dynamic. Speaker 400:49:51So The wage investments that we talked about making, dollars 19,000,000 for the full year, that's going to ramp as we go through the year. It gets bigger. The legislative wage 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 will take a little bit of an edge off of that going forward. Speaker 400:50:23So in the guidance, we're not assuming any margin accretion Relative to last year. And also remember that we're climbing over in the Q4, the 2021 points breakage That was $5,000,000 We have to lap that from a margin perspective. Speaker 1200:50:43Got it. Thank you very much. Operator00:50:47The next question comes from Nick Sation with Wedbush. Please proceed. Speaker 1300:50:53Thank Just in the context of reiterated full year revenue and low single digit comp guidance, And then obviously the Q1 comp performance, what gives you the confidence to reiterate the full year targets in terms of top line sales? Is it the quarter to date performance? Is it something else that you have planned? Speaker 200:51:21Well, I think there's several things, but I'll highlight a few. One is that the seasonality of this business, Q2 and Q3 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 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 Build margin to allow us to do that. Speaker 200:52:08The programming that our teams are working on to identify soft markets And build in dayparts or drink mix is another one. So, 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. Speaker 1300:52:29Thank you. And then just again on this food and beverage, 28.3% in Q1. Sequentially, there was a big uptick there. And I guess the question we're all trying to figure out now is What drove that uptick if inflation is moderating? Is it beverage mix? Speaker 1300:52:48Was it some of the promotions that you were running? And then second, going forward, Q2, Q3, Q4, is this 28% level what we should think about? Or are there some other drivers, Particularly to get that lower, particularly as pricing is the year over year pricing benefit declines? Speaker 400:53:08Well, first remember, we had very sharp inflation in the early part of last year and we are 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 have 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 cost increase. That's what you're seeing in the COGS. Speaker 400:53:48In terms of the way forward, we don't we're not expecting a lot of change there, we're not also expecting any real change or benefit in that. Speaker 1300:54:01And so just to clarify, this 28% sort of level is like a fair way to think about That cost level going forward, the beverage and food cost level going forward for the rest of 2023? Speaker 400:54:17There's really nothing about product mix, that changes from quarter to quarter. We promote different things. So the level of cost of goods, we would see going forward, Q1 is a little bit higher than what we'd expect going forward, but it's not Operator00:54:40The next question comes from Gregory Francfort with Guggenheim. Please proceed. Speaker 1400:54:45Hey, 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 that. I'm curious what your thoughts like what you're seeing in Oregon where maybe you're not opening stores anymore. Speaker 1400:55:03Are you seeing similar levels of down a couple of 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? Speaker 200:55:14Let us get to the Oregon data and actually Q1 Oregon, actually the comp group was up slightly. Oregon was flat to actually up slightly. You have Washington actually, let's see, the tracking group was basically, call it, flat. So those basis of stores that are in that more of Speaker 400:55:44the 30 year history, I would say that's been flat traffic. So, Margaret, 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 is kind of like everybody else. Speaker 1400:56:04Got 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. Just who do you view as the competitive side you can take share from? And as you've kind of grown into ingrown sales there, is that where your customers are? Speaker 1400:56:25Are they coming from C stores? Are they coming from quick service? Are they coming from at home? I'm just curious What the evidence has suggested in terms of where the market opportunity is? Thanks. Speaker 200:56:37Yes. So 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 as we look at a market, we're going to go 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 local givebacks 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. Speaker 200:57:27We do have friends and family opening where we again use word-of-mouth to open. We throw hiring parties where In many cases, you might have 10 times the amount of people applying for a job that actually get 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. 2 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? Speaker 200:58:03So really, 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 really anywhere That is promoting 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 business in 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. Speaker 1400:58:50Thanks for that. Maybe if I can sneak one last one in. You made some comment on the funding of funding your free negative free cash flow. Can you just remind us when your expectation is Flipping to free cash flow positive. And in terms of funding that, I think you're basically funding with 7%, 8% debt right now. Speaker 1400:59:10I guess, why that rather than maybe an equity raise or something like that? I'm just curious your thoughts. Appreciate it. Speaker 400:59:17Well, as we said a couple of 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 build 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. Speaker 400:59:55And 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 Operator01:00:25I would like to turn the call back over to management for closing comments. Speaker 201:00:29Thank 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 2 weeks, we look forward to hosting our annual Drink 1 for Dane event in honor of The Muscular Dystrophy Association and its efforts to find a cause and cure for the disease. Typically, this is our largest and most exciting give back day of the year. For those of you that are in market areas, we invite you to participate by visiting us on May 19. Speaker 201:01:07And for our investors, thank you for your time And as always, the continued support of Despereros. Thank you. Operator01:01:16Thank you. This concludes today's teleconference and webcast. You may disconnect your lines at this time and thank you for your participation.Read moreRemove AdsPowered by Conference Call Audio Live Call not available Earnings Conference CallDutch Bros Q1 202300:00 / 00:00Speed:1x1.25x1.5x2xRemove Ads Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) Dutch Bros Earnings HeadlinesDutch Bros price target lowered to $80 from $82 at Morgan StanleyApril 15 at 3:41 AM | markets.businessinsider.comDutch Bros releases 3 new lavender flavors for spring. What to knowApril 15 at 3:41 AM | yahoo.com[Action Required] Claim Your FREE IRS Loophole GuideThis shouldn't surprise anyone who's been paying attention, but... Pres. Trump may be about to unleash the biggest "dollar reset" since 1971.April 15, 2025 | Colonial Metals (Ad)1 Growth Stock Down 35% to Buy Right NowApril 14 at 8:00 PM | fool.comIced Growth, Hot Valuation: Why Dutch Bros Is Still A HoldApril 14 at 12:04 PM | seekingalpha.comMeet the Monster Stock That Continues to Crush the MarketApril 13 at 6:30 PM | fool.comSee More Dutch Bros Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Dutch Bros? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Dutch Bros and other key companies, straight to your email. Email Address About Dutch BrosDutch Bros (NYSE:BROS), together with its subsidiaries, operates and franchises drive-thru shops in the United States. The company operates through Company-Operated Shops and Franchising and Other segments. It serves through company-operated shops and online channels under Dutch Bros; Dutch Bros Coffee; Dutch Bros Rebel; Dutch Bros; and Blue Rebel brands. 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There are 15 speakers on the call. Operator00:00:00You for standing by, and welcome to the Dutch Bros, Inc. 1st Quarter 2023 Earnings Conference Call and Webcast. This conference call and webcast are being recorded today, Tuesday, May 9, 2023 at 5 pm Eastern and will be available for replay shortly after it has concluded. Following the company's presentation, we will open up the line for questions and instructions to queue up will be provided at that time. I will now turn the call over to Patti Warman, VetCorral's Director, Investor Relations and Corporate Development. Operator00:00:33Please go ahead. Speaker 100:00:35Thank you. Good afternoon and welcome. I'm joined today by Joth Rickey, CEO Christine Barone, President and Charlie Gimley, CFO. We issued our earnings press release for the quarter ended March 31, 2023 after the market closed today. The earnings press release along with the supplemental investor deck have now also been uploaded to our Investor Relations website at investors. Speaker 100:00:58Dutchpros.com. Please be aware that all statements in our prepared remarks and in responses 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 ks and our 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. Speaker 100:01:35As a reminder, non GAAP financial 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 Joc. Speaker 200:01:51Thank you, Patty. Good afternoon, everyone. Q1 was a solid quarter for Dutch grows as we continue to deliver on our vision for long term sustainable growth. We opened a record 45 new system wide shops in the quarter, of which 42 were company operated. We continued our expansion eastward reaching Knoxville, Tennessee and opened shops across 9 states. Speaker 200:02:14We grew revenue by 29.6 percent and drove 5.90 basis points expansion in shop contribution margin year over year. We remain pleased with the underlying strength of the business. We responded decisively to the economic climate and focused on accelerating shop level profitability, particularly in labor productivity to deliver a strong company operated SHOP margin. At the same time, we continue to invest in our SHOP footprint to grow business, delivering on yet another quarter of our new SHOP growth plan. Our people pipeline and systems are strong demonstrated by our deep bench of qualified operator candidates and already low and further improving employee turnover. Speaker 200:02:55We saw meaningful four wall margin expansion We continue to see SG and A leverage as we build new shops and scale our platform. This continued underlying strength provides encouragement as we against our long term goal of 4,000 shops in the next 10 to 15 years. For the quarter, system wide same shop sales were negative 2%. As a reminder, at this stage of our growth journey, just 70% of our shops sit within our comp base. Same shop Sales decelerated into February before hitting an inflection point in March, exiting the quarter with momentum. Speaker 200:03:31Earlier in the quarter, we lapped Difficult comparison, rolling over strong performance in 2022 as we remained open through the Omicron wave. Later in the quarter, we began investing in a number of traffic driving initiatives that leveraged our unique assets as we began to see the improvement. To expand more on what we're doing, I'd like to introduce our new President, Christine Barone. Christine joined Dutch Bros in February and is already leading the development and Speaker 300:04:02Thanks, Joss. It's been one of the great pleasures of my career to integrate into We are focused for the remainder of the year on proactively responding to potential macroeconomic challenges and driving traffic. We're taking several steps to tackle our priorities. 1st, we're leaning into throwback promotions that have served to drive traffic and trial in the past. One example is our FilaTrade promotion in March, where we offered 4 medium drinks for $15 This promotion, which lasted 6 hours on a single Wednesday afternoon, resulted in the largest sales day in the company's recorded history, Driving same shop sales upwards of 40% higher than a typical Wednesday. Speaker 300:04:53Most importantly, a trip to Dutch Bros became a group event, which is what the brand is all about. 2nd, we're driving innovation to ensure we're meeting the needs of our customer base. For St. Patrick's Day, we released our first ever flavored soft tops. The Lucky Clover and Irish Cream flavors of our premium add on allowed our customers to celebrate with a special drink, which was great for a couple of reasons. Speaker 300:05:20First, it increased overall check by 50 basis points and second, it drove approximately 35% higher soft top adoption during the LTO period. Finally, we're doubling down on targeted promotions within the Dutch Bros app to not only drive traffic, and to also encourage customers to load funds on the Dutch Pass. The rewards refresh announced in Q1 provides us the flexibility to invest more surgically, whenever we intend to continue to. Lian moves us away from a one size fits all approach. These results tell us our customers remain excited about the brand. Speaker 300:05:58The summer months are traditionally some of our best for sales and we intend to build on the momentum we believe. We plan to continue to drive innovation and launch targeted marketing campaigns into Q2. For example, in April, we introduced our Mangonada Rebel and Double Point Tuesdays, and we have been pleased with our customers' responses to these efforts. I look forward to continuing to work with the team to capitalize on these opportunities, while also identifying operational efficiencies. Speaker 200:06:30Thanks, Christine. The work Christine and team are doing supports our key business pillars: people, shop development, operating leverage, brand awareness And technology. People remain our focus. On January 1, we made a proactive investment in our people And increased base wages in federal minimum wage markets. Arbor West has responded well. Speaker 200:06:52Shop level turnover in those markets improved by about 6%. System wide shop level turnover fell 3% to about 70%. Our people pipeline now includes more than 275 qualified operator candidates to support new shop growth. AUVs for mature company operated shops opened since 2019 were $2,000,000 approximately 20% higher than company operated shops opened prior to 2019. While 2022 new shop AUVs are down slightly from Q4 trends, it is still early in the maturity of many of these shops. Speaker 200:07:29Estimated sales transfer remains in line with our The SHOP classes of 2019, 2020, and 2021 have each achieved our 30% contribution margin target even as we've entered new trade zones across the country. Shops opened in 2022 are reaching a run rate 30% contribution margin in just 3 to 4 quarters. Like many others, we have seen pressure on build costs and are working actively to value engineer our shops in order to offset some portion of that escalation. We have a healthy list of actions that we can take and plan to incorporate into our pipeline. While we can't avoid all the escalation, we plan to make improvements going forward. Speaker 200:08:15Despite these market conditions, our shops continue to achieve strong cash on cash returns, which encourages us to keep investing in the long term future. Continued expansion helps us to accrue the benefits of market scale over time as we introduce new customers to our brand. We are forming daily relationships and developing these routines takes time, but often proves to be sticky. These considerations combined with other traffic driving and operational initiatives Christine mentioned earlier support our continued steady pace of growth. We intend to drive margin expansion as we grow both through continued SG and A leverage and through operational improvements at the shop level. Speaker 200:08:55In Q1, adjusted SG and A was 18.6 percent of total revenue, a 220 basis point improvement from Q1 last year. We expect further leverage as our revenue growth continues outpacing the SG and A investments we need to support rapid development. We also realized significant contribution margin improvement in our company operated shops, achieving 5.90 basis points of expansion year over year to 24.2 percent of company operated SHOP revenue. Improvements in our labor processes were a major driver And we recognized 400 basis points of margin leverage year over year in labor to 28% of company operated SHOP revenue. We believe this benefit was a product of steady improvements in scheduling standards and operating tactics that we began implementing in 2022. Speaker 200:09:47Included in this 400 basis points of improvement in Q1 is $3,000,000 of the wage investments we discussed last quarter. Finally, we're in the process of ensuring we have the right technology in place to support our customers and shops. Used correctly, we believe technology can be a major traffic driver moving forward, helping us improve reliability, speed and customer satisfaction. Currently, we're investing in our infrastructure and payment processing systems as well as the Dutch Bros app. The Dutch Rewards program is a major part of our business and continues to grow with approximately 65% of our transactions coming from Dutch Rewards members. Speaker 200:10:28In March, we executed a change to our rewards program. The change rightsized the discount following last year's movement on price. As part of the refresh, we built in opportunities to reinvest in the program and our members. We now have the ability to provide A more one on one experience based on a customer's wants, needs and habits. We believe our customers can now see how we are reinvesting in the program And to date, we have not experienced any meaningful pushback. Speaker 200:10:57As we look ahead, we plan to continue our focus on execution, specifically Driving traffic, optimizing operations, selecting strong sites and building great shops. We believe we are beginning to see the benefits of these efforts in Q1 as we delivered $23,900,000 in adjusted EBITDA, a nearly 150% increase year over year. I want to publicly thank our franchisees and operators who are executing every day. It is their operational focus that underpins this positive outcome, particularly as it relates to our strong labor and SG and A leverage and its corresponding impact on profitability. We aim to keep our eye on the ball as we navigate the larger business environment on our path to a long term goal of 4,000 shops. Speaker 200:11:43Now, I'd like to turn the Speaker 400:11:44call over to Charlie to review our financials. Thanks, Joth. We just reported our 7th straight quarter of at least 30 shop openings. Our team's ability to embrace the challenges inherent with high growth and to operate an expanding portfolio of shops across multiple states With increasing profitability has been impressive. My comments around Q1 financial results center on our retail operations and how they drove excellent Company shop profitability and then by extension, our overall adjusted EBITDA was 150% higher than a year ago. Speaker 400:12:20In 2022, we absorbed significant margin impact from the effects of inflation. The teams were tasked with additional productivity objectives We're asked to do so in a thoughtful way as to not risk our long term sustainable growth. Even with some belt tightening, We continue to strategically invest in corporate capabilities and enable growth. As a reminder, we now have 4 38 company operated shops after having operated only 37 company shops at the beginning of 2018. Some quick highlights from the quarter. Speaker 400:12:54Revenue of $197,000,000 grew 30% compared to the same period in 2022. Adjusted EBITDA grew nearly 150% over Q1 last year to $23,900,000 Company SHOP sales grew 33% And company SHOP profit contribution grew 76%. Driving that profit lift was an increase in company operated job contribution margin to 24.2 percent or a 5.90 basis points improvement over the prior year. Recall that this contribution margin includes 190 basis points of pre opening expenses. The key to this quarter And what bodes well as we move through our next phases of growth was our company operated SHOP margin expansion. Speaker 400:13:41Rather than walk down the P and L, let's start with the biggest driver, Labor performance. Labor is an investment that is critical to delivering our goals around speed, quality and service. Labor costs were 28% of company operated shop revenue, improving 400 basis points from the same period last year. As a backdrop for this performance, recall that last quarter we announced an $8,000,000 wage investment in states where the federal minimum wage is the standard. Further, we alerted you to an additional $11,000,000 in incremental wage spending necessitated by legislative minimum wage increases. Speaker 400:14:17This aggregate $19,000,000 in higher wages would be partially offset by the rollover from 20 22's menu pricing actions. In Q1 2023, we enjoyed the full benefit of improved labor operating standards implemented in late 2022. When we began increasing productivity, optimizing schedules and resetting standards. We believe this came together in Q1's P and L as retail operations delivered 400 basis points of labor improvement in spite of $3,000,000 in incremental wage expense and what can be the negative effects of traffic deleverage. Cost of goods sold were 28.3% of company operated shop revenue in Q1, up 90 basis points from the same period last year. Speaker 400:15:03As while inflation has slowed measurably, shop delivered costs remain elevated year over year. Pre opening costs were 1.9 percent of company operated shop revenue in Q1, down 2 70 basis points from the same period last year. Preopening costs are a function of the sequence of shops opening within a trade zone. 1st shop within a trade zone requires our highest level of support. And as a result, we opened 2nd and subsequent shops with lower levels of support. Speaker 400:15:33In Q1, we had a higher proportion of infill shops, which do not require as much support, driving down our pre opening expense timing for the quarter. As the mix of 1st in versus subsequent shops ebbs and flows each quarter, you will see this expense be a function of that sequence. We managed to a full year number as we have to let the pipeline take on its natural sequence. In our Franchising and Other segment, gross profit improved to $16,900,000 compared to $14,400,000 in the same period last year. We executed a price increase on products sold to our franchisees in Q3 of 2022. Speaker 400:16:10This action was designed to shore our profitability in the segment, helping offset input cost inflation in the goods we sell onward to our franchisees, including the high quality coffee we proudly roast in our plant in Grants Pass, Oregon. Shifting now to SG and A. For the quarter, SG and A was $46,000,000 This includes $9,200,000 in stock based compensation. Adjusted SG and A was $36,700,000 and continues to decline as a percent of revenue to 18.6% for Q1 compared to 20.8% in Q1 last year. We are pleased with adjusted SG and A leverage in Q1 and we expect continued leverage going forward is an ongoing component of our investment thesis. Speaker 400:16:55Please make reference to the supplemental slides for a reconciliation between SG and A and adjusted SG and A. Now on to a few comments on the health of our balance sheet and liquidity. We finished Q1 with $235,900,000 of net debt. That represents an increase of $45,200,000 from Q4 directly tied to those record openings we reported. We have $247,000,000 of undrawn liquidity on the present $500,000,000 credit facility. Speaker 400:17:24We are committed to maintaining a well capitalized balance sheet, remaining flexible and being ready to take full advantage of the long growth runway ahead. Finally, we are affirming our full year 2020 guidance. Total system shop openings are expected to be at least 150, of which at least 130 shops will be company operated. Total revenue in the range of $950,000,000 to $1,000,000,000 Same shop sales growth is estimated to be in the low single digits. We are maintaining our adjusted EBITDA guidance of at least $125,000,000 Being just 90 days into our fiscal year, We believe it is too early to translate Q1's results towards any change in our view of the full year adjusted EBITDA. Speaker 400:18:09For example, Despite the underlying improvements in company operated shop margins, in the remainder of the year, we may see a moderation in the preopening favorability we experienced in Q1. Furthermore, as noted, we will continue investing throughout the remainder of the year in initiatives designed to drive traffic. We will look forward to updating you on our progress in early August when we share Q2 results. Capital expenditures are to be in the range of $225,000,000 to $250,000,000 which includes approximately $15,000,000 to $20,000,000 in spending in 2023 for a second roasting facility, which we project will open in 2024. Thank you. Speaker 400:18:51And now we will take your questions. Operator, please open the lines. Operator00:18:57Thank you. We will now conduct a question and answer session. Our first question comes from Andy Warish with Jefferies. Please proceed. Speaker 500:19:32Hey, guys. Christine, welcome aboard and figured I'd ask the first question of you just in your impressions in the 1st few months Back up in the Pacific Northwest, kind of what you see as the opportunities and the key areas, some of which you touched on today that you're focusing on for the rest of 'twenty three and beyond? Speaker 300:19:57Absolutely. Thanks, Andy. Nice to hear your voice. Excited to be here today and to be part of this team. I think going in, I heard a lot about the culture and that Special sauce that we have here at Dutch Bros. Speaker 300:20:11And I would say kind of walking into the company, it's even better than I thought it would be. And spending a lot of time in our shops, meeting some of our Broistas, going to some of our new shop openings, It's really just been awesome to see the energy that comes to life in our shops and how much fun people are having as we're making drinks for our customers. The same energy really translates into the headquarters and so excited to be here with the team. As I look forward for the year, the priority is certainly in driving traffic and continuing some of the momentum that I about earlier in driving transactions, one of the things I wanted to highlight is, with a move that we made on the rewards program, which really took Some of that discount out of the base discount is going to allow us to really use that rewards program in a different way And to focus on areas where we can drive transactions as we see things soften here and there. And so excited about that move and that on our operational efficiencies and delivering those to the shops. Speaker 300:21:29So thanks, Andy. Speaker 500:21:31Thanks, Christina. Charlie, one quick question diving into the COGS line a little bit. I think it's The first time at least that I can remember were COGS as a percentage of sales was higher than labor, even with Dairy cost down significantly and rolling over your changes on the freeze product, you talked about a little bit of The pressure on delivered costs, is that some lag going on? And how should we kind of think about that in the current commodity environment going forward? Speaker 400:22:09Andy, thanks for that question. So a couple of things there on the cost side in COGS. Dairy is still up year over year. As we mentioned, there is a lag from when the price comes down in that commodity when it flows through our system. And then for us coffee costs are up year over year, low to mid single digits. Speaker 400:22:28The seat price was elevated many, many months ago and flows into our system. And then that rebalancing of COGS being higher to labor is more of the product of the labor leverage and efficiency we got And less about the escalation in the cost of goods percentage. Speaker 500:22:46Okay. Thank you very much. Speaker 600:22:49You're welcome. Operator00:22:52The next question comes from Chris O'Cull with Stifel. Please proceed. Speaker 700:22:56Yes. Good afternoon, guys. Joc, you mentioned you exited the quarter with some comp sales momentum. So I'm just curious if it looks like transactions may have been down kind of in that high single digit range in the Q1, but what level of sequential improvement in transactions have you seen so far in the current quarter? Speaker 200:23:18Well, we so we talk about momentum coming out of March. The Fill a Trade promotion happened on March 29, and we had Days of sequential improvement coming out of that. We are not talking about April today. We're not going to get into Q2 and just kind of focus on Q1. We feel like overall, listen, we were lapping A tough Q1 of Omicron from 2022. Speaker 200:23:53And I think what Christine did when she first came in was really look at traffic driving opportunities through the balance of the quarter and we really weren't able to execute those until Kind of mid to late March, and really start to put good plans in place as we go forward. So We're about flat on underlying traffic for Q1 versus Q4. So there was a steady rate there and we'll kind of see how The balance of the year plays itself out here as we're building our new programs and using some of that investment that Christine discussed Coming out of the rewards program and our ability to really dissect and go aftermarket opportunities. Speaker 700:24:35That's helpful. I mean, it doesn't sound like you're planning to take any additional pricing this year. So I guess as pricing starts to roll off, presumably you're going to need to rely on that better traffic performance to hit that comp guidance. Are you seeing success with these programs that gives you confidence that you can see that type of improvement in the comp over the course of the rest of the year, especially in the back half? Speaker 200:24:59I think Everything, Chris, right now is in evaluation mode. We're testing some new programs. We've run some new programs Related to our rewards program, we've evaluated some we've ran some local area marketing programs. We're continuing to evaluate kind of what we see the back half of the year look like, and the pricing discussion is Continuing to be something that we're talking about. But overall, we're pleased with the momentum coming out of Q1 and All of these plans that Christine and team have started to really kind of put in place, We think those will be very positive for the business, but time will tell. Speaker 700:25:49Sounds good. Thanks. Operator00:25:53The next question comes from John Ivankoe with JPMorgan. Please proceed. Speaker 800:25:58Hi. The question is on new unit volumes. I think I Picked up in your remarks, Joth, that maybe some of the units started slower as they kind of ramp on their maturity curve. And certainly, we picked up That and our numbers that the new unit volumes at least on a system wide basis year over year not a perfect calculation by any means, But looked a little bit lower. So can you, I guess, expand on that topic? Speaker 800:26:24I mean, what you're seeing, Different types of markets. I mean, if you see anything that's really below your expectations or it's just like a series of You said it's just going to take a couple of months or a couple of quarters to get up to their averages given you opened so many in the quarter. Speaker 200:26:41Yes, John, I think your I think the last part of that comment is super insightful. I think that we listen, we've had some Amazing openings as well. I mean, if you go to some of the things that we've done in Southern California and some of the volumes we've seen there, some of the larger openings in the history Happened in those markets. But as we've rolled, we've opened 112 new locations in Texas in basically 27 months. And I think in some of those cases as we talked about last quarter, those are opportunistic real estate, 16 locations In a little over a year in San Antonio, some of the shops we've opened in Houston and Dallas, I mean, there's a lot of infill happening That does take time to build and curate a market. Speaker 200:27:30And I think the benefit of Dutch Bros is we've been doing this for 30 years And we have seen in markets like Las Vegas and Tucson and Colorado Springs and some other studies where we've had other markets open lower than average and it takes time to build those up and go. And A great part. I think one of the things that we feel real confident in is that when you have great margins in a business, it allows you to invest over time and build something for the long term. And we're trying not to buy customers. We're trying to curate customers, bring them into our service model And give them the great experience that Dutch Bros has and move those along. Speaker 200:28:13So every market is going to be a little bit different And we're very pleased with the reception that we've had in all markets. I mean, even we talked about opening Knoxville, Tennessee and being all the way That far east now. The customer reception we've had everywhere has been fantastic and we look forward to continuing to build that. Speaker 800:28:33Okay. Thank you for that. And secondly, if I may, operationally, I have in our notes, you were expected to move to a tap system at around 10 Chops a month from March and every new store from July 1. Correct me if those numbers are Correct. What are you seeing in terms of the taps? Speaker 800:28:53Are you getting operational efficiencies? You're seeing a talk about the True customer margin responses, that system is still very, very new in your system. Speaker 200:29:04Yes, it's still very new. We launched The 5 TAPs in Texas, since we had our last call, which was our March program was to get those 5 TAP systems in place. Our plan remains intact to launch. By the end of the second quarter, we'll have 30 locations executed and then we'll start to implement And new shops, starting in the back in really in July. So it's too early for us to be counting on or touting any Specific operational efficiencies, but we like the way the tests are going. Speaker 200:29:39Obviously, we like the plan that we have The build out and I think hopefully on the next call we'll be in a position to really give some early indicators as far as what that looks like. Speaker 800:29:54Okay. Look forward to that. Thank you. Operator00:29:58The next question comes from Andrew Charles with TD Cowen. Please proceed. Speaker 900:30:03Great. Thanks. Charlie, I have two questions on just reiterated list to what is your same store sales guidance. Can you walk us through your thoughts on how this will Congrats to 2023, just given the 2 different dynamics of lapsing amount of price with a rebound amount of traffic and how you expect that to broadly manifest within Kind of same store sales cadence. And then just separately, just given that 1Q was a bit below our expectations thinking that you guys would be positive for The quarter, where can we expect the shortfall to be made up for in 1Q? Speaker 400:30:36So in terms of the Progress through the quarter, first start with the pricing rollover. On round terms, Q1 is 8, Q2 is 6%, Q3 is 3% and then Q4 is flat for a full year of 4%. So, and then the traffic rollover gets a little bit easier as we move through the year. So that's how we would expect things to progress through the balance of the year. In terms of your question about Q1 being below On a comparable sales basis, that's for the most part anchored in the afternoon daypart. Speaker 400:31:19It's not a product or a geography per se. It is that afternoon day part, which does have a tendency to be a bit more discretionary. Speaker 900:31:30Okay. And then, I remember, at the time of the IPO, you guys were talking about investment costs per store, Construction costs were up $1,500,000 They were up double digit in 2022 to about $1.65 ish or so, dollars 1.7 ish. In 2023, could you talk about what's embedded in your CapEx in terms of cost per new store? Speaker 400:31:51Yes. We do have the elevated cost embedded in our CapEx guidance in the upper ones. So those numbers you quote of around $1,500,000 with preopening, those have escalated to around 1,800,000 To $1,900,000 depending on where the site is for an all in project cost. But we feel like our guidance covers that additional CapEx, And we should be well funded for this year in terms of what we guided on the capital side. Speaker 900:32:22And just lastly, Charlie, you referred on the call to funding that you're open minded to new sources. Just with interest rates picking up, what would lead you to be a bit more proactive with looking into more longer term Speaker 400:32:42Well, I think given we have our CapEx Plan for this year has elevated bill cost built into it. We saw AUVs between Q4 and Q1 moderating In terms of those the revenue that's coming in and margins being higher, there's nothing present that would cause us to change are taxed, 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. Speaker 900:33:22That's very helpful. Thank you. Speaker 400:33:24Thank you. Operator00:33:26Next question comes from Sharon Zackfia with William Blair. Please proceed. Speaker 1000:33:31Hi, 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 coming into April. Speaker 1000:33:44But 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 multiyear 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. Speaker 300:34:11Absolutely. So when we look at momentum, I think we are looking at With a 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 as 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. Speaker 1000:34:44That'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? Speaker 200:35:03As we look at our frequency, As we kind of break down our cohorts and kind of what's going on in the consumer environment and also with what's happened in the market as far as For the first time now, we actually have everybody open. Everybody is back doing business. Lifestyle seem to be kind of getting back into A regular routine. And what's interesting is that our top cohort, that top 20% group actually, we haven't seen Much change from that group at all. It's actually held. Speaker 200:35:36The frequency has held. And really through the Q1, it actually held up Very well. We're seeing more softness in kind of that lower quartile of cohorts. So like that bottom kind of bottom third group seems to be where the softness has come in, in frequency. We're constantly looking at that and we actually have about 10 different tiers of cohorts that we look at and manage. Speaker 200:36:06And then also have to look at how the infill and some of the sales transfer is playing out related to the impact on that as well. But the good news is that our loyals are And maintained at a very strong rate. And then a reminder that 65% The transactions are coming through the app and that's a really another strong indicator of our customers' interactions with us and how they're using the app to really be part of the Dutch Bros. Family. Speaker 1000:36:40Thank you. Operator00:36:43The next question comes from Jeffrey Bernstein with Barclays. Please proceed. Speaker 600:36:48Thank you. Two questions. The first one just as we think about the macro outlook, I think you mentioned maybe you're more discretionary or more vulnerable in the afternoon dayparts. 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 And then I had one follow-up. Speaker 200:37:20So, Yes. I mean, that's a long answer to that question, I think, Jeff. I think that the 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 6 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. Speaker 200:37:55It grew sales by 40% And had spillover double digit transaction growth. So we know that we can drive traffic. We know that we can attack 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 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 And how to make Dutch Bros part of your daily routine. And that's not a new thing for us. Speaker 200:38:30It'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. Speaker 200:38:53And we've been testing it. We've been running it, and driving new programs. Christine mentioned the MangoNada 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 kind of what's happened with that business and how we're taking trends That are more on brand and Mango Nada is anchored by tajin, which is such a hot addition to beverage flavor right now that It's a great way for Dutch Bros. Speaker 200:39:28To flex in something that's on trend and important to the consumer. Speaker 600:39:34Understood. And then just a follow-up, I know you mentioned in the economic climate that the teams responded quickly and decisively. I'm just wondering 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, they 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. Speaker 600:40:00So 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. Speaker 200:40:12Yes. 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 listen 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%, and up to which is down another 3%. Speaker 200:41:23I 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. Speaker 900:41:34Thank you. Operator00:41:36The next question comes from Sara Senatore with Bank of America. Please proceed. Speaker 1100:41:41Thank you. 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 Leased 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? Speaker 1100:42:06I know, sugar, for example, is one 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, and then I'll the second. Thank you. Speaker 400:42:25Okay. 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 you see 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 has 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. Speaker 400:43:04And we just have to wait and see whether that plays out or not. And you had a Speaker 1100:43:10Yes. 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. Speaker 1100:43:29So 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? Speaker 200:43:50Hey, Sarah, this is Joth. I'll start with that answer. One is that we do not have any intention of Slowing down here in the 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, it's actually been fantastic. And given the unit economics of our shops and the way we can operate, We can flex related to how these businesses open and we can continue to invest to build a strong customer base. Speaker 200:44:30And When you have great margins and you've got great four wall numbers the way that we do, it gives us some great flexibility to be able to go in. And Whether you're in Lubbock or Houston or Dallas or Waco or Fort Worth or everywhere in between, we're very pleased with what's come out of the gate there. I was just down in that market about 3 weeks ago and really enjoyed turning 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. Speaker 400:45:10Yes. And just to add, Barrett, so if you look at 2021 and you move into 2022 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 Speaker 1000:45:43markets and then backfill. Speaker 400:45:43So the It's in a backfill. So the AUVs will ebb and flow as we move through our pipeline over time. Speaker 1100:45:50Got it. Okay. Thank you very much. Thank you both. That's very helpful. Operator00:45:55The next question comes from David Tarantino with Robert W. Baird. Please proceed. Speaker 1200:46:01Hi, 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 remind us what some of those Changes were that drove the productivity improvements at the unit level. And I guess are you now I think you might have 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. What exactly was changed? Speaker 1200:46:36And I guess, how would you describe it? Is it just simply less hours or something else? Speaker 400:46:44So a couple of things there. First of all, last year, we had a reasonable degree of overtime. We've removed a lot of that out of 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. Speaker 400:47:09We 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. Speaker 1200:47:46Great. 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 My experience that I guess your guests have been accustomed to. Speaker 400:48:05Beyond 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. Speaker 300:48:40Yes. 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 if we as the teams adjusted to those pricing moves that we were able to leverage that labor investment as well. Speaker 1200:49:07Great. That's very helpful. Thank you. And then the last question on this Charlie, it doesn't seem like you're assuming this sort of margin performance continues. If I look at your full year Guidance, literally take the midpoints of your ranges on revenue and EBITDA. Speaker 1200:49:27It's Assuming maybe 50 basis points or so of margin improvement on the adjusted EBITDA line and you delivered nearly $600,000,000 in the Q1. 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, I guess related to this dynamic. Speaker 400:49:51So The wage investments that we talked about making, dollars 19,000,000 for the full year, that's going to ramp as we go through the year. It gets bigger. The legislative wage 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 will take a little bit of an edge off of that going forward. Speaker 400:50:23So in the guidance, we're not assuming any margin accretion Relative to last year. And also remember that we're climbing over in the Q4, the 2021 points breakage That was $5,000,000 We have to lap that from a margin perspective. Speaker 1200:50:43Got it. Thank you very much. Operator00:50:47The next question comes from Nick Sation with Wedbush. Please proceed. Speaker 1300:50:53Thank Just in the context of reiterated full year revenue and low single digit comp guidance, And then obviously the Q1 comp performance, what gives you the confidence to reiterate the full year targets in terms of top line sales? Is it the quarter to date performance? Is it something else that you have planned? Speaker 200:51:21Well, I think there's several things, but I'll highlight a few. One is that the seasonality of this business, Q2 and Q3 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 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 Build margin to allow us to do that. Speaker 200:52:08The programming that our teams are working on to identify soft markets And build in dayparts or drink mix is another one. So, 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. Speaker 1300:52:29Thank you. And then just again on this food and beverage, 28.3% in Q1. Sequentially, there was a big uptick there. And I guess the question we're all trying to figure out now is What drove that uptick if inflation is moderating? Is it beverage mix? Speaker 1300:52:48Was it some of the promotions that you were running? And then second, going forward, Q2, Q3, Q4, is this 28% level what we should think about? Or are there some other drivers, Particularly to get that lower, particularly as pricing is the year over year pricing benefit declines? Speaker 400:53:08Well, first remember, we had very sharp inflation in the early part of last year and we are 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 have 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 cost increase. That's what you're seeing in the COGS. Speaker 400:53:48In terms of the way forward, we don't we're not expecting a lot of change there, we're not also expecting any real change or benefit in that. Speaker 1300:54:01And so just to clarify, this 28% sort of level is like a fair way to think about That cost level going forward, the beverage and food cost level going forward for the rest of 2023? Speaker 400:54:17There's really nothing about product mix, that changes from quarter to quarter. We promote different things. So the level of cost of goods, we would see going forward, Q1 is a little bit higher than what we'd expect going forward, but it's not Operator00:54:40The next question comes from Gregory Francfort with Guggenheim. Please proceed. Speaker 1400:54:45Hey, 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 that. I'm curious what your thoughts like what you're seeing in Oregon where maybe you're not opening stores anymore. Speaker 1400:55:03Are you seeing similar levels of down a couple of 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? Speaker 200:55:14Let us get to the Oregon data and actually Q1 Oregon, actually the comp group was up slightly. Oregon was flat to actually up slightly. You have Washington actually, let's see, the tracking group was basically, call it, flat. So those basis of stores that are in that more of Speaker 400:55:44the 30 year history, I would say that's been flat traffic. So, Margaret, 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 is kind of like everybody else. Speaker 1400:56:04Got 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. Just who do you view as the competitive side you can take share from? And as you've kind of grown into ingrown sales there, is that where your customers are? Speaker 1400:56:25Are they coming from C stores? Are they coming from quick service? Are they coming from at home? I'm just curious What the evidence has suggested in terms of where the market opportunity is? Thanks. Speaker 200:56:37Yes. So 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 as we look at a market, we're going to go 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 local givebacks 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. Speaker 200:57:27We do have friends and family opening where we again use word-of-mouth to open. We throw hiring parties where In many cases, you might have 10 times the amount of people applying for a job that actually get 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. 2 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? Speaker 200:58:03So really, 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 really anywhere That is promoting 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 business in 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. Speaker 1400:58:50Thanks for that. Maybe if I can sneak one last one in. You made some comment on the funding of funding your free negative free cash flow. Can you just remind us when your expectation is Flipping to free cash flow positive. And in terms of funding that, I think you're basically funding with 7%, 8% debt right now. Speaker 1400:59:10I guess, why that rather than maybe an equity raise or something like that? I'm just curious your thoughts. Appreciate it. Speaker 400:59:17Well, as we said a couple of 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 build 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. Speaker 400:59:55And 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 Operator01:00:25I would like to turn the call back over to management for closing comments. Speaker 201:00:29Thank 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 2 weeks, we look forward to hosting our annual Drink 1 for Dane event in honor of The Muscular Dystrophy Association and its efforts to find a cause and cure for the disease. Typically, this is our largest and most exciting give back day of the year. For those of you that are in market areas, we invite you to participate by visiting us on May 19. Speaker 201:01:07And for our investors, thank you for your time And as always, the continued support of Despereros. Thank you. Operator01:01:16Thank you. This concludes today's teleconference and webcast. 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