Thank you for standing by, and welcome to the Dutch Bros Inc. Second Quarter 2023 Earnings Conference Call and Webcast. This conference call and webcast are being recorded today, Tuesday, August 08, 2023 at 5:00 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 Paddy.

Good afternoon, and welcome. I'm joined by Joth Ricci, CEO; Christine Barone, President; and Charley Jemley, CFO. We issued our earnings press release for the quarter ended June 30, 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.dutchbros.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-K 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. As a reminder, non-GAAP financial measures are neither substitute 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 would now like to turn the call over to Joth.

Thank you, Paddy. Good afternoon, everyone. Q2 results, demonstrate continued momentum in the business. This is the result of a team's collective ability to take the vision of a long-term growth plan and adapt to a changing environment. Our ability to deliver on new unit growth targets quarter after quarter remains a consistent breath spot. In Q2, we open 38 new shops across eight states, with 83 new shop openings through June 30. We are more than halfway through our objective of 150 new shops in 2023. This helped propel a 34% increase in revenue year-over-year, including a 580 basis points quarter-over-quarter improvement as same source sales shifted positive to 3.8%, reflecting better traffic trends. In Q2, approximately 90% of our beverages were served cold. We delivered increased profitability alongside this revenue growth, underscored by a 570 basis point expansion in company operated shop contribution margin. The second quarter saw shop margins return to seasonally normalized levels as we emerged from the COVID-related inflationary period, characterized by 2022 results. Revenue growth, company shop productivity, and disciplined SG&A investments drove almost $49 million in the adjusted EBITDA, more than double what we reported in Q2, 2022. We are very proud of the team and what it's accomplishing and encouraged by our underlying strength. As we look ahead, our long-term vision is clear and we remain focused as ever. After five years and working with Trav and team in nearly two years after the IPO, I believe Dutch grows as a strong healthy business with a very long runway. As we set the stage for scale in the company, I am pleased to share the Christine Barone will step into the role of President and CEO, effective January 01, 2024. I believe Christine is the right person to lead Dutch Bros in its next phase of growth. She is a rare leader with demonstrated abilities and marketing operations and finance. Since joining us in February, her impact has been immediate and action has been decisive as she has focused on our real estate strategy, driving traffic, improved data analytics, and overall marketing efforts. We are feeling the impact of her leadership as she executes against the current business and leads the team at the 2024 planning and beyond. Over the coming months, I will work side by side with Christine to best position the business for long-term success. We will execute against our plan, driving traffic, optimizing operations, selecting strong sites and building great shops efficiently. Most important, I am excited for what this means for the future of Dutch Bros, and I look forward to seeing how Christine's vision and leadership drives our brand towards our goal of 4,000 shops in the next 10 years to 15 years. With that, I will turn it over to Christine.

Thank you. Since joining the Dutch Bros team, I have been so impressed with our broistas, managers, operators and franchises. I am now beginning to execute on quick wins and laying the groundwork for our 2024 priority. As I discussed in detail last quarter, driving traffic has been a key focus over the last six months, and we are gaining traction. As Joth mentioned, we saw an improvement of 580 basis points of system-wide same-shop sales quarter-over-quarter, and substantially all of this was a result of improved traffic trends. Beyond driving sustainable traffic growth, these last six months have also provided an opportunity to assess our strategy and the strength of the business' foundational building blocks. I will provide a brief assessment of these building blocks and discuss how we will focus organizational attention over the near term to position Dutch Bros for long term success. The great news is that a strong foundation is already in place. We have incredible people systems and a rock-solid brand, two of the hardest foundational elements to replicate, which gives me confidence in our competitive positioning. The team has worked diligently over the course of more than 30 years, to build a one-of-a-kind culture that radiates through our frontline, and is the key enabler of our success. Supporting our people in culture is a critical lens in which we evaluate decisions and we plan to keep it that way as we execute our growth plan. As the market landscape has shifted over the last three years with elevated build cost, I see further opportunity to refine our real estate strategy. I also see opportunity to build on our values of speed, quality and service, and enhance our marketing capabilities with a continued focus on our rewards program. We begin any discussion of Dutch Bros with our fundamental differentiator, our people. The shop teams who greet and care for our customers and each other every day are the lifeblood of this organization. Recruiting, developing and retaining people remains our key focus and in this regard the organization is doing great. In Q2 we saw continued improvements in turnover, falling to the mid-60s from about 70% last quarter. We saw even larger improvements in the markets in which we made proactive wage investments. Our people pipeline is robust and continues to grow. We have more than 325 qualified operator candidates in the pipeline with an average tenure of seven years. Creating opportunity to grow with the company is a cornerstone of our people strategy and is the driving force behind shop expansion. In many organizations, people availability is a limiting factor to growth. At Dutch Bros, this is one of our competitive strengths. We will continue investing in our people, specifically in our shop managers, many of whom will become the next generation of regional operators. Through these investments, we aim to even more closely align incentives with great customer service and driving traffic. We're also investing in our leadership team. In June, we hired Tana Davila as our Chief Marketing Officer. Tana brings more than two decades of marketing experience in the multi-unit restaurant space. Her skill set is exactly what we need now to continue our expansion, deepen our customer relationships with our rewards program, and execute our traffic-driving initiatives. We plan to continue investing in key capabilities to support our growth aspirations and we believe these investments will enable us to compete effectively as we scale. In Q2, we opened 38 new shops, 35 of which were company-operated. Shops opened in 2022 and 2023 are annualizing to approximately $1.7 million in AUV. It is important to note that despite moderating AUVs, newer shops are following a similar profitability curve to what we have seen in prior cohorts, demonstrating what we believe are more favorable operating conditions as we continue to expand eastward. Consistent with what we shared last quarter, we believe moderation and new shop AUVs for recent age classes is in part a function of an elevated infill rate, which in 2023 is about twice the level it was in 2022. Elevated infill is a result of a purposeful decision to push the development pace in Texas. Since entering Texas in January of 2021, we have invested heavily in the market and as of June 30, we had 131 shops open in the state. Texas is a high potential market and a critical component of our eastbound expansion. Building depth and scale there has moved our operations closer to newer markets in the southeast and we believe securing this foothold quickly enables us to better compete as we move eastward. Being profitable quickly is important and we are encouraged that company-operated shop margins in Texas are following a similar profitability curve to the rest of the system. As previously announced, we chose to position our second roasting facility just outside of Dallas to support this long-term expansion. With build costs remaining elevated and moderating new shop AUVs, we are completing a body of work to adapt and refine our development plan to the conditions we anticipate over the next few years. We purposely built a robust pipeline, providing us the flexibility to be selective. A refined real estate strategy allows us to continue to live up to our commitment of building the right shops at the right time and expanding our footprint at the right pace on our path to 4,000 shops. To that end, we're taking the following actions. First, we plan to widen our initial reach as we enter new markets and adjust our pace of new market penetration. We believe this will provide markets time to curate demand while balancing the benefits of overhead leverage and distribution efficiency that comes with market density. Second, over the past several years, we pursued a strategy that favored ground leases, partly in response to supply chain and construction pressures, enabling us to exert greater control over our development process. This enabled us to sidestep some of the well-documented industry development delays. As we believe these pressures will begin abating, we have greater opportunity to pursue a more diverse range of lease and shop types, while continuing to focus on the drive-through channel. Third, we will continue to look for opportunities to value engineer our existing prototypes. We expect to see this work impact site build beginning in late 2024. Finally, we are doubling down on community by partnering with local organizations for targeted gift back days. We are continuing a 30-year history of investing in our communities, driving trial with promotions, and relevant events to build our brand and new shop revenue. These actions represent a curation of our approach to growth. We don't believe the full impact of these changes will be immediately solved [ph]. In the short term, we anticipate elevated build cost and believe moderated new shop revenue productivity will persist as these changes work through the system. The first half of the year demonstrates we can navigate change and deliver excellent profitability. We saw margin expansion in Q2, driven by a combination of shop level operational improvements and moderating adjusted SG&A growth. Company-operated shop profitability powers our growth aspiration. Not only did total company operated shop contribution grow almost 70% from Q2 2022 to approximately $67 million. These shops delivered 570 basis points of margin expansion year-over-year to 30.3% of company-operated shop revenue. Strong margins propeller new shop growth, facilitating quick payback periods and enabling us to reinvest into further development opportunities. A strong four-wall model allows us a certain level of flexibility to adjust and adapt as we expand. Adjusted SG&A as a percentage of revenue improved 140 basis points when compared to Q2 of last year, falling to 15.7%. We are committed to smart investments that support critical capabilities as we expand, but anticipate SG&A growth to remain below the rate of revenue growth, which will create leverage. Last quarter, I mentioned a key focus for the remainder of the year would be driving traffic. In Q2, we executed against our traffic-driving initiative with improvements and traffic substantially driving all quarter-over-quarter same shop sales group. The team acted quickly to activate a multi-prong approach, leaning into innovation, leveraging the rewards program, scaling up paid media, and utilizing promotions to drive trial. Here is a brief update on each key pillar. First innovation, we have been leaning into innovation in a big way in 2023. Last quarter, I discussed the introduction of our flavored Soft Top for St. Patrick's Day. In Q2, we took innovation to the next level with the nationwide release of our limited time-only Mangonada platform. Mangonada, which we tested last year, outperformed our own expectations in Q2, making up more than 10% of our menu mixed at launch and resulting in nearly three million drinks sold in the quarter. Later in the quarter, we built on this moment with our Strawberry Horchata Chai, which demonstrated the success of wider deployment of secret menu offerings. Also in the quarter, we pulled a few product drops to deliver quick burst of innovation and buzz, which included our cookie crumble topping and Poppin Candy Firecracker Rebel. Encouraged by customer response, we plan to continue to keep our menu fresh fun and relevant, while balancing operational focus in a simple pantry of ingredients. Second, rewards. We have seen continued momentum in our Rewards program, following the end of March Refresh. That refresh enables us to invest more surgically, bringing even more exciting promotions to Dutch rewards members, who make up almost 65% of our transactions. We began deploying this new approach in April with a double point Tuesday promotion, providing an extra incentive for Dutch rewards members to join us on Tuesdays. We saw a favorable customer reaction for each of the four weeks that we activated this promotion, which was encouraging. Later in the quarter, we experimented with a variety of time, geographic, and frequency-based offers, helping us to further refine our strategy and expand our toolkit. Third, paid media, in Q2 we leaned into enhancing our paid digital media capabilities, which was a meaningful driver of our traffic improvement quarter-over-quarter, used in conjunction with innovation and our targeted app-based promotional efforts, paid social enables us to reach a wider audience at an attractive ROI. We anticipate continuing to iterate and refine these efforts to create a holistic, full funnel marketing plan, grounded in our robust Dutch Rewards loyalty program. Fourth, promotion. In our last call, I noted the success of the Fill-a-Tray program we ran in late March. Encouraged by customer response, we rerun this promotion in June, experimenting with the promotional offer and timing, and we're just as pleased with the outcome. Bringing friends and family together to experience Dutch Bros is what we are all about, and we think this is a great way to reinforce these brand values, especially in new markets. Outside of Fill-a-Tray, we continue to pull some experiment with other multiple-based promotional activities that encourage trial and group visitation. Taking together, we made real progress against our traffic-driving initiatives, which built in momentum throughout the quarter. We plan to keep our foot on the gas, adding capabilities and executing through the back half of the year. My first six months have been exciting and productive. I'm impressed by the team's culture, willingness to adapt, and the progress we've made. We have many of the key building blocks in place to create our sustained competitive advantage, anchored on our cornerstone people systems. I appreciate the investments that Trav, Joth and the full team have made to immerse me in our culture, and help me quickly learn our business. Over the next few quarters, we look forward to sharing in greater detail how these blocks are coming together to shape this strategy. With that, I'll turn it over to Charlie to review our financials.

Thanks, Christine. In our decision-making, we emphasize profitable growth while keeping an eye toward the future. As many of you know, the four-blade windmill is one of Dutch Bros iconic images. In Q2, the windmill turned with a stiff summer breeze and generated outstanding growth and performance across four key aspects. Total revenue of approximately $250 million an increase of almost 35% year-over-year. Same shop sales growth, for the system term positive in the quarter at 3.8% with traffic driving the improvement. Adjusted EBITDA was approximately $49 million, double what we reported in Q2 2022 and 19.4% of revenue. Shop growth remains on track. We opened 38 new shops system wide of which eight opened in April, 13 shops in May and 17 shops in June. Of the 17 shops we opened in June, 11 shops were in the final week of the quarter, and that limited their sales contribution in Q2. Strong profitability is driven by surging performance in company-operating shops. Net sales grew 38% at company-operated shops. Shop contribution margin reached 30.3%, expanding 570 basis points year-over-year. Note this contribution includes 1.5% of pre-opening expenses. We continue to see strong labor productivity. Labor costs improved 280 basis points from the same period last year. This is primarily a result of improved scheduling and deployment. Better labor productivity more than offset the significant investments we made in wages. As Christine noted, people metrics remain strong, speaking volumes for the company culture, and hiring and retention practices in the retail shops. Costs of goods sold were 26.8% of company-operated shop sales for the quarter, down slightly year over year as menu pricing help, and some moderation took place in ingredient input costs. In the last week of the quarter, we began to update our customization pricing, creating a stream-wide system for a wider array of modifications. We also moved a number of shops in the higher price tiers, to better line in market pricing. Going into 2023, it was not our intention to take price. However, we made these moves to set our pricing architecture for the future. In the franchising and other segment, gross profit improved $19.2 million compared to $13.8 million in the same period last year. This segment of our business is more than stable now than it was a year ago as inflation impacted our coffee and rebel manufacturing businesses adversely. Shifting now to SG&A; for the quarter, SG&A was approximately $52 million, which includes about $10 million in stock-based compensation. Please make reference to the supplemental slides for a reconciliation between SG&A and adjusted SG&A. Therefore, with the exclusion of stock-based compensation and other non-recurring expenses, adjusted SG&A was approximately $39 million. This declined to 15.7% of revenue for Q2 2023 compared to 17.1% in Q2 last year. As Christine mentioned, we continue making investments in people as we build organizational capabilities and better support our operators in the field, but we also expect continued leverage going forward as revenue growth outpaces investment. Now on to a few comments on the health of our balance sheet liquidity. Last week, we successfully upsized our $500 million credit facility adding $150 million in capacity, expanding our syndicate and a transaction that generated a healthy amount of interest for lenders. Given the tightening credit markets, we view this outcome as a strong vote of confidence in the company's long-term financial outlook and growth prospects. Our overall credit facility now total $650 million, which is made up of approximately $100 million of drawn term loans, a $350 million revolver of which approximately $183 million was drawn as of June 30, 2023, and $200 million of undrawn delayed draw term loans. As of June 30, we had approximately $256 million of net debt. Inclusive of this upsizing, we would have had approximately $370 million in liquidity against our $650 million facility, up from approximately $220 million in liquidity before our refinancing. In Q2, our operations generated approximately $43 million in pre-tax cash flow, prior to capital spending and financing, reflecting expanding company shop productivity and SG&A leverage. In the quarter, we consumed approximately $59 million in CapEx, the vast majority to fund new shop growth. We believe we have a well-capitalized balance sheet, and our priority is to position the company, take full advantage of the long growth runway ahead in a responsible and thoughtful manner. Moving on to 2023 guidance. First, I will quickly take you through the specifics, highlighting the changes and some context. Our expectation for total system shop openings in 2023 remains unchanged. We expect to open at least 150 new shops, of which at least 130 will be company operated. Given the shop opening outlook is unchanged, guidance regarding capital expenditures also remains unchanged. Capital expenditures are estimated being the range of $225 million to $250 million, which includes approximately $15 million to $20 million in spending in 2023 for a new roasting facility, which is presented to open in 2024. Our estimate of system same-shop sales growth remains in low single digits. We believe improved traffic trends and pricing actions will offset the negative same-shop sales growth we reported last quarter. Having seen six months of performance, we have greater clarity in our full-year revenue expectations, which we now believe will be at the lower end of the previously communicated range of $950 million to $1 billion. This expectation considers the revenue moderation in 2022 and 2023 age classes, partially offset by recent traffic trends and pricing actions. As a reminder, seasonality, our back half of the year is typically lower than the first half when modeling our revenue. Adjusted EBITDA is now estimated to be between $135 million and $140 million, up from at least $125 million. This reflects stronger than expected year-to-date profitability trends, partially offset by our revised expectation of revenue at the lower end of our range. Our expectations for full-year adjusted EBITDA also reflect increased levels of investment to support key priorities outside what has been previously communicated. Thank you and now we will take your questions. Operator, please open the lines.

Thank you. We will now be conducting the question-and-answer session. [Operator instructions] And the first question comes from the line of Chris O'Cull with Stifel? Please proceed with your question. Chris O'Cull: Thanks for taking the question. Christine, congrats on the promotion and Joth, congrats on the successful career at Bros.

Thank you. Chris O'Cull: So Christine, I was hoping you could elaborate on your comments about changes to the development strategy and specifically as it relates to widening the reach and maybe pursuing a different type of shop and/or lease structure?

Yes absolutely. So, as we look to refine our real estate strategy, a couple of things we are working for. So, one, as we move into new markets, we think that as we widen our penetration, it will allow the brand really some time to build as we go into new markets. That is the piece I'm widening the reach. And then your second question in looking through shop types and lease types. So, we today have a variety of shop and lease types. And when we look at those, we have increased our ground leases over time, really to react to the market conditions that we've been seeing. And so, we believe over time as those market conditions and kind of all of the code supply chain pieces work their way, there's an opportunity to pull back a team [ph] bit on the ground leases as we move forward. We also have a variety of different shop types within our portfolio and we'll continue to experiment. Certainly, we've had a couple of openings with impacts and so, we will continue to look at that as a part of our portfolio going forward. Chris O'Cull: Okay, that's helpful. And then it's encouraging to hit the profitability curve for new stores as similar to the rest of the system. But can you provide an update on the average investment cost and maybe how new unit returns, how the target may have changed from the IPO?

Yeah, hey, Chris, it's Charley. So, as it relates to returns and investment, we haven't specifically shared the return results in the IPO. But if you look at the shape of what's happening; historically, we had outside returns. If you take our AUV relative to the investment cost in the profitability shop model, at the time of the IPO, we targeted a 35% return on ground leases and 75% on build a suit and we're pleased with that result, but as noted, going forward, in the short term, we've got elevated build costs, which are up between 30% and 40% on a project cost basis and those moderating new shop volumes as we are in-filling so heavily. So, we'll see what was highly likely excessive returns relative to the IPO coming more -- coming down and moderating in the near term. Chris O'Cull: Okay, okay, great. Thanks, guys.

And the next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.

Hi, good afternoon. I guess the following up on the real estate strategy refinement, it sounds as perhaps there's some ramifications from Texas and the refinement strategy. I just want to clarify if that's the case. Is there anything you've seen in Texas as you've kind of infilled in fortress there so quickly that if you had to do over, you might not want to replicate. And I'm trying to also think through the ramifications for the P&L as you go in maybe a little bit slower into new markets, is it fair to think that's an AUV enhancement, but maybe a bottom line drag, Charlie, if you could give us any thoughts on that?

Great, I can start with learning from Texas. So, I think one of the things is we grow, we're growing very quickly. So we are constantly taking in the learnings from each of the new shop openings and understanding how to get a little bit better each time, right. So that's a constant improvement. For us, Texas is a really important landmark in part of the country to really have gone into in a big way. It really provides that launching pad for the rest of the country for us. And we've been incredibly pleased with the customer response from our growth in Texas.

I think in terms of the P&L, the profitability quality call it a drag, we noted that our Texas shops, margins are very productive as productive as our existing portfolio. So as we look to widen our reach and go out a little further, it doesn't mean we're going to slow our development pace. It means we're going to change the shape of it. But we shouldn't see a drag on profitability. The other thing is very notable this year, beyond the margin productivity we're seeing is we've refined our opening approach and we are saving dollars on a like-for-like basis on pre-opening costs. So all those refinements as we go forward should help us move through this shifting of how we're going about this.

And the next question comes from the line of Andrew Charles with Cowen and Company. Please proceed with your question.

Great. Christine and Joth, can grab to both of you. Charlie, you just touched some of this, but I just want to make sure it's confirmed that with your findings, the real estate strategy, you guys still insist that you'll be able to support your prior targets for mid-teens annual growth in 2024 and beyond?

Absolutely. Yes.

Okay. Thank you. And then, Charles, to quick bookkeeping one, can you provide the price traffic and mix components of Q2 performance?

Yeah. So when you break down our system comps, you've got a plus six approximately on price and net of sales transfer, you have a flat traffic number sales transfer is estimated to be approximately 300 basis points.

Very good. And then Christine, one question for you, can you talk a little about the gap in same store sales to a company-operated franchise locations in 2Q. What you attribute that to and what are the opportunities to help make that a bit more consistent?

Yeah. So as we look at that gap, I think one of the things is we are still growing our rewards program. And so over time our newer shops, they are ramping up really nicely and adding rewards programs. And so as I noted, thanks you too, we really increased the rewards promotion. We also did a lot of what we would call throwback promotions. So things that we've done in the past that our customers get really excited about. We have seen great success in new markets with these -- franchise markets, which are some of our older markets are more familiar with some of these promotions.

Yeah. And so Christine, to sort of dovetailing off of that, higher promo costs in the company shops, particularly in the markets, as we see it in the brand. So therefore a higher rewards cost, sales transfer is higher, a higher rate in company -- in the company portfolio versus the franchise because we're going faster there. And then there's some geographical differences between where the franchisees are and where the company shops are and the relative growth rate of that. And all kind of lays out to allow for the difference that we're seeing. We don't see an operational difference. We have no data that would say there's an operational difference between the company and franchise portfolios.

Very helpful. Thanks to the color.

And the next question comes from the line of Sara Senatore with Bank of America. Please proceed with your question.

Oh, great. Thank you. Just a clarification and then a question please. So in terms of the margin, trying to understand from a restaurant level perspective, I know you did a really nice contribution bridge. But to what extent are there any influences from the shift from build the suit two ground lease to your early points, that tends to have higher margins or from opening in lower cost states. Just sort of like on apples-to-apples basis is, as we think about, as I think about the margins, I want to make sure, I understand kind of what any kind of mix impact might be. And then, I'll have a question on some of the marketing initiatives.

Yes, so the lease type, a ground lease or build a suit has no effect on the company shop reported margin. So it's not a factor. And the rest of -- so that margin walk upward as again, nothing to a police type. It's about half of that walk ahead is the menu price impact that things we've done. And then the rest of it is operational efficiencies and labor and savings and pre-opening and savings and operating expenses. We do have lower wage costs as we move East bound. So that's also a factor as the portfolio weighs in.

Okay, just to clarify, my understanding was that ground leases had lower part of the sort of philosophy behind doing ground leases was that, present lower rent expense because you weren't kind of reimbursing the landlord for keen eyes. Is that not the case?

I do have lower cash rent, but from gap for a GAAP accounting purposes, part of that gets inferred that difference gets inferred as interest and gets reclassed down the interest expense.

Right, okay. All right, I'll take that offline. And then in terms of, kind of the some of the marketing, changes like the sort of paid media, these some of the initiatives seem like kind of more traditional traffic driving initiatives. What does that mean in terms of how you're thinking about media as a percentage of revenues or how you are thinking about the marketing, mix going forward versus what maybe you had done previously?

So as we look forward, I think one, we've just brought in a new CMO, Tana, and so she's really beginning to ramp up in her job and looking at the mix of things that we're doing. But I would share that, I think from a percent spin, what we're looking at right now is we're specifically looking at the return on all of our initiatives. And I think with the data that we have from our rewards program, the way that we can see the performance of our different ad types and what we put in them and all of those things that we're not actually targeting a percentage. What we're looking for is really looking to expose our brand to new customers. We're in so many new markets and bring them in. And so rather than in targeting an actual percent, we're really looking at what can drive growth, what can drive trial, and what is an effective ROI in our marketing spend.

Got it. Thank you.

And the nice question comes in the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

Great. Thank you very much. Two questions. First one, just Christine with the AUVs being perhaps down a little bit from what you were initially expecting for new units, and as you mentioned the course to build up, I know you're working diligently on both fronts to mitigate that, but I'm just wondering if there was even the consideration of slowing down the near term unit growth from what's already industry-leading levels to give you more time to kind of absorb or maybe work through the headwind you're dealing with on both fronts or whether that was not even a consideration?

Hey, it's Charley. I'll speak to the new unit AUV. So, Jeff, if you remember at the IPO, we ejected $1.7 million. We know, we are seeing that moderate from well over $2 million, in the user class $2.7 million, and we also want to reinforce that's a lot of heavy infill going into the Texas, which we talked earlier about. We would necessarily repeat that as we go out a little wider. In terms of the build costs, well, that's pretty sticky. They elevated build costs. There are things we can do that we talked about earlier. Prototypes, doing an in cap, which is our project cost versus a ground-up free standing building. They'd be using some different lease types to seamless cash up front and so at this stage, we don't feel like that should really change the shape of our growth trajectory going through the next few years and I don't want to take into this as well.

Yeah, Jeff, what I would add to that is that we have a really robust real estate pipeline. And so what that allows for is that allows for us to take our learnings over time and adjust in places where we think it makes sense but continue that same growth. And I think the robustness of that pipeline on how many sites we have lined up to still go, will allow us to keep our shop growth on pace.

Understood. And then my follow-up is just on the restaurant margin, north of a 30% margin this quarter up 500 and some of basis points. That's really incredible. Just wondering, Christine, as you look at this business with a fresh set of eyes, having come from others within retail and whatnot, is there any thought to maybe the business being over-earning and well, maybe willing to reinvest some of those benefits in store? It just seems like those are well above industry level margins and maybe there's an opportunity to reinvest some of that to spur the strength in the platform. Thank you.

Absolutely. So a couple of things. I think one, as Charlie mentioned, this is easily our highest revenue quarter. So that also helps with profitability in the quarter. And then as we think about reinvesting absolutely and again, this brand was really built on investing in local communities, bringing new people and investing in driving trial. And so we are really going to continue doing that work to allow new guests to follow and log with us.

And the next question comes from the line of David Tarantino with Baird. Please proceed with your question.

Hi. Good afternoon. I had a question about the traffic trends and certainly a lot of improvement from the first quarter. But I was wondering if you could maybe talk about how much of that improvement might have been related to just lapping over a lower comparison versus kind of real underlying improvement based on the initiatives that you called out? I guess how much I guess of the traffic improvement was related to each of those factors?

Yes, we look at the traffic improvements quarter-over-quarter. We believe about a third of that traffic improvement is due to the easier lap from Q2 of 2022. And then evenly split really over the rest of the pieces. So innovation, Dutch rewards, and increase in the advertising spend, really all split the rest of that improvement in all traffic.

Got it. Okay. And then I guess, how did that inform the outlook for the second half of the year? I guess what's your expectations for the traffic picture is the rest of the year evolves?

We don't break it down in the full year from a guidance perspective. But, we mentioned low single digit total top. There's an element of pricing in there as well that we've noted and then we got sales transfers, right. So we're just going to keep pushing the gas on the traffic lift and try to get that as high as we can and we talked about the investments. So…

Yes. I think, one of the things I would add to that is that we've learned a lot with what we've done in Q2. And so we've experimented again from a rewards perspective with different types of offers, different day parts, different geographies. We've done the same on the promotions front. And so I would say we are, as we move forward, we'll continue doing similar activities. But with the learnings that we've had from Q2 to really enhance the profitability and understand where those actions have made the biggest differences.

Great. And if I could squeeze one more in, Charlie, I might have missed it, but the pricing increases that you implemented at the end of Q2. I guess, what amount of pricing I guess effectively did that lead to and what type of pricing are you going to be running in the second half of the year?

Well, on a full year basis, we're now going to range from about a 4% up to approximately a 6% full year price lap, with that price move that we just took.

And the next question comes in the line of Jeff Farmer with Gordon Haskett. Please proceed with your question.

Right. Thank you. Just looking to better understand the sales volume curve of some of these infill development shops, I guess more specifically to the extent that you're willing to share are these units or shops in the comp base as they seem to sales headwind or a tailwind at this point.

Right now, there's so few of these shops, for example, in the Texas market, it's in the comp set, it's really very low. It's di minimus at this point. Now, as we hit the first day of the 16th month going forward, that'll start to ratchet up as we go forward. I think in the second quarter, we had maybe approximately 40 shops or 50 shops in the comp base from Texas. So going forward, you'll see that more.

Okay. So, I'll back up from the comparable store units for a second, but just in terms of thinking about, I think we all understand that the infill shop volumes are lower, but in terms of the growth rate, anything you can share there in terms of year one, year two, year three in terms of the AV growth trajectory of those infill locations?

So too early, right. We're talking about '22 late '22 and '23's class being the high rate of infill. So they haven't annualized over themselves. And remember, we don't board a comp number till the first day of the 16th month, who allow shops to climb over their launch curves, settle. So it's just too -- it's premature to even know.

Okay. And then last one, I apologize, I'll just take one more and just sort of, I think early on in the year, you guys had broadly guided to the shop level, EBITDA margin for 2023. I think you basically said your expectation was that it would be flat. Any update there in terms of your expectation for the full year 2023 shop level EBITDA margin?

We're very confident in the flat and we feel like we'll probably outperform that. Going forward, it's our belief given the strong results we've demonstrated in the quarter, the fact that we've taken some pricing and we are beginning to see the green shoots of commodity -- commodity self-ness.

And the next question comes in the line of Andy Barish with Jefferies. Please proceed with your question.

Hey, guys, and I guess first, Christine specifically, just, as you've gotten involved and look at the pipeline, is there anything that makes you uncomfortable with that $1.7 million new store productivity number kind of stabilizing at these levels?

So, no. As we look forward, so we've got a lot of work as I shared on the real estate pipeline. It's obviously an important part of what we're working on here every day. And, as we look at that, I think, there are things that are ups and downs. So we know that, infill rate, it's going to take the AUVs down a little bit, but going into a new market where we are fresh in that market, we are going to see higher AUVs. And so, when you look at kind of the way that we can shape our pipeline and really build demand in these new markets while we're then going in an infilling and, by the way, I don't think it's a very long time between building that demand and then coming back and infilling that it's going to take. So, as I look at the pipeline and all of the richness of the data that we have now, after having, opened so many shops in Texas, I'm very confident as we go forward in what this pipeline will look like, what our growth will look like.

Great, appreciate that. And then, maybe, Charley, just on the updated guidance for the full year adjusted EBITDA, it seems like, at least from analyst expectations, you beat by about $10 million here in the 2Q and flowed that through. I know there's a lot of puts and takes, but what are some of the key investment areas that you call that if you're willing to share?

Yeah, so Christine sort of outlined a lot of those areas that we've been investing in, but going forward, those will be things around the capability to support growth going forward, making sure we have a solid team in place, using our rewards program and targeted promoting activity to keep driving traffic in the future and making sure we see new markets even more productively as we go forward. So, good observation that we're flowing through the 10-plus a little more, and I'll go back to the commentary about our 30% margin and being very mindful that we have the firepower to reinvest and we're going to do that.

Thanks very much, guys. Nice results.

And the next question comes from the line of Brian Mullan with Piper Sandler. Please proceed with your question.

Okay, thanks. Last call you shared that the frequency in that tap cohort of customers had held in really nicely where it was, while it was maybe the lower quartile where you had seen a little bit of softness. So, as it pertains to the second quarter, if you speak to what you saw with both of those cohorts in terms of frequency, and then maybe what are your expectations on that for the balance of the year?

Yeah, so we saw in Q2, we saw some improvements across cohorts. As we look forward, again, we'll continue to increase our rewards activity. So, we're seeing really great customer response from that reward activity. And with that, we would hope to continue to see improvement in the frequency.

And the next question comes from the line of Nick Setyan with Wedbush Securities. Please proceed with your question.

Thanks. I really want to hone on the margins. But first, you guys kind of said 6% system pricing. Is that in line for the company-owned stores in Q2?

No, it's not dissimilar system pricing move versus the company pricing move.

Okay, and then Q3 pricing sounds like it's going to be close to 3%. Is that fair?

Sorry, it's 6% for the full year. Last quarter we reported that pricing would be 4%, 6% for the full year roll over. It's not a 6% pricing move. I just wanted to make sure you understood that. It was approximately a 4% price move on an annualized basis that we just took. And then, please go ahead with your question.

So, sorry, Q2 the all-in menu price was what? Just to be clear. Year-over-year the all-in menu price.

In Q2 only, all-in versus last year is 6% year over year.

Okay. And then going forward in Q3, what did that translate to inclusive of the recent pricing increases year-over-year?

So, it's now estimated at approximately 7% effect for Q3 year-over-year.

Got it. So, if 7% pricing in Q3, really big year-over-year forward margin increases in the first half, sounds like Q3, which is perhaps some decent leverage, why shouldn't we see meaningfully above flat for the full year? And by that I mean, 150 bps, 200 bps above last year? Is Q4 going to be that much of a drag?

So, you've got about 6% price. So, we shot you guys a guide of low single digits. 6% is coming from price. And we're running around 300 basis points from sales transfer. Okay. So, your plus 6%, minus 3% from sales transfer kind of puts you in that low single digit range that we're talking about.

Sure. And then for the four wall EBITDA margin, you said it should be at least flat for the year, but it just seems like given the performance in the first half, it should be uniquely above flat year over year. Is that fair for the full year?

…In the fourth quarter we took a large entry for breakage income in the fourth quarter. Got to climb over that. We reported that last year that the breakage for '22 and '21 was $7 million that we have to climb over in profit from breakage last year in the fourth quarter. That's a big climb.

And the next question comes from the line of [indiscernible] with JP Morgan. Please proceed with your question.

Good afternoon, guys. Thanks for taking my question. I just wanted to check on the tap system rollout. Can you guys allow me on where our homage of the system has this rollout now? And then I'm also curious on how much of the 180 bps leverage you got in labor came from the efficiency of this tap rollout within the system you have exiting 2Q?

Yeah, absolutely. I can take that. So our tap system is still in a testing phase. We are currently in 16 shops that are operational right now. So as far as labor efficiencies, it's really not driving any of that labor efficiency in our markets. When I look across at what's driving the labor piece, it's really investment we've made in our labor scheduling systems and investment we've made in educating our teams on how the best schedule labor looking at scheduling against peaks and things like that. So that's really the result. That's what we're seeing from a labor perspective.

And now -- and I have a follow up on the pricing side, I think you guys talked about two different components here. One is higher pricing for the customization and the other being more number of shops moving to higher priced peers. So I'm just curious, like how much of the pricing taken was on the base menu versus what is the component mix which is contributing to this price step up between the two categories of customization pricing and moving shops to higher tiers.

Yeah, so one of the reasons why we took price was really to set up this long-term pricing architecture in the right way and so a little more than half of the pricing increase was to make moves in pricing tiers and customizations or modifiers and so about 2.5% of that price is actually for those moves. And then the rest is drink pricing moves really related to drinks that have those modifiers included in them. And so when you look at that, there's a couple of reasons, why one, when we looked at of our pricing regions and where we were priced versus competitors, we felt like there's obviously been some movement during COVID of where people moved and kind of where have for how prices have changed. That was really just catching up with that as we looked at moving into these new pricing tiers. And then from a customization standpoint, this really allows our customers to kind of pick and choose what they do and set up our long-term pricing architecture in a nice way.

Understood. That's really helpful, Christine. One last follow-up if I may. On your rewards members cohort, did you see any change in frequency of store visitation over the past few quarters? So you can figure take up like one specific cohort within the $6.2 million members you have now. Is there any change notable change in the frequency of visitation?

Yeah, so as we track our rewards data, that's not exactly how we track it right now. And when we're looking overall at traffic improvements, think with the number of new shops we have, we're both looking for those frequency changes, but we're also looking to add new customers in. And so those cohorts do have changing members within them. And so what we're really looking for is we want to bring new customers in that are quickly increasing their frequency over time and then also increasing the frequency of our existing customers.

Perfect. Thanks a lot for answering my questions and congratulations on the role.

And the next question comes from the one of Gregory Francfort with Guggenheim Securities, Please proceed with your question.

Hey, thanks for the question. Two quick follow-ups. The first is maybe just as we think about the changes on the lease is how you're going to finance these stores. Within the $225 million to $250 million of CapEx from this year, what would that have looked like under maybe the new mix you're considering?

I couldn't speculate going forward like that. I understand the question, but on the fly, I couldn't tell you what that would be.

I think it's important to note too, is our pipeline is planned 18 months to 24 months out and so we are currently now for the majority of our time looking for first sites in 2025. As we look at continuing the growth here, this will be a gradual change versus something more abrupt and so just want to make sure we're very clear that this is really a refinement. And you're continuing focus on learning from every new shop that we're opening.

Understood, understood then maybe just going back to the labor. I think you that put in place these changes to how you guys kind of schedule labor and somewhat in the middle of the fourth quarter. It's just so I guess it's now been around nine months. How is that done? Do you feel like you've gotten it to the right level? Do you think you maybe have an opportunity to take more labor out it or maybe reinvest? It was a big change and I'm curious kind of where you think that settled out versus where you might want to go?

Yeah, well, when we look at the change we made, it was really our labor scheduling system last year, catching up with the pricing moves that we made. So if you think about it at the shop level, we weren't actually changing the amount of labor that was in our stores. We were just catching it up with the pricing moves. And as we look over time, I think one of the great parts of our brand is really our people and our systems, the really strong turnover number that we have within our stores. And we believe that the investments that we make in labor, ensuring that our broistas have an awesome working environment and have the right number of people within the shop to please our customers is super important. So we are not looking to make changes in labor other than things that will make our shops more efficient from a line-speed perspective, but we're not looking to cut labor in our shops.

Understand. Maybe one last one, just Charley. I know it's been really top of all about the fundraising with, but I had a debt financing versus equity financing. I'm just curious, any updates are thoughts on that front will be helpful. Thank you.

We wouldn't comment on any future actions, but we're very pleased that we upside through the accordion and as we noted, very pleased that we had a broad syndicate join us in that effort. It turned out great.

And the next question is a follow up from Nick Setyan with Wedbush Securities. Please proceed with your question.

Thanks for the question. Just what was inflation - labor inflation and food cost inflation in the quarter, what do we expect it to be in Q3 and Q4 now?

We don't guide that forward, Nick. So wage inflation outside of the moves we made for the quarter was low single digits. And remember, as we move East, our wage rate is waiting down. So it helps to abate any wage inflation. We don't give those figures out by quarter going forward.

And what that from cost inflation for 3Q?

So ingredient input cost went down about 1%. They were actually elevated in Q1. They've now shifted from 1% higher to about 1% lower of input cost.

Ladies and gentlemen, at this time, there are no further questions. Now, I'll turn the floor back over to Joth Ricci for any closing comments.

Thank you for your questions. As we look ahead, our goals are clear and we are focused. We plan to continue executing against our plan driving traffic, optimizing operations, selecting strong sites and building great shops, efficiently. We plan to be smart, learn, adapt and run our playbook. We plan offense and our efforts to deliver profitable growth have begun to bear fruit. Throughout the quarter, we saw sequential progress in our traffic and our top language 34%. We delivered approximately 100% adjusted EBITDA growth year-over-year. We continue to build quarter-after-quarter creating a strong foundation for growth. Most importantly, I'd like to thank you for your time and your continued support of Dutch Bros.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.