Driven Brands Holdings Inc.

Good morning and welcome to Driven Brand's fourth quarter 2020 earnings conference call. My name is Denise and I will be your operator today. As a reminder, this call is being recorded. Joining the call this morning are Jonathan Fitzpatrick, President and Chief Executive Officer, Tiffany Mason, Executive Vice President and Chief Financial Officer, and Rachel Webb, Vice President of Investor Relations. During today's call, management will refer to certain non-GAAP financial measures, you can find the reconciliations to the most directly comparable gap financial measures on the company's investor relations website and in its filings with the Securities and Exchange Commission. Please be advised that during the course of this call, management may also make forward-looking statements that reflect expectations for the future. These statements are based on current information and actual results may differ materially from these expectations. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings release. Information about any non-GAAP financial measures referenced, including our reconciliation of these measures to GAAP measures, can also be found in our SEC filings and the earnings release available on our website. Today's prepared remarks will be followed by a question and answer session. We ask that you limit yourself to one question and one follow-up. Please press 1, star 1, to be placed into the queue. I will now turn the call over to Jonathan. Please go ahead, sir.

Thank you, Denise, and good morning, everyone. I'm thrilled to be joining you on our first earnings call following our IPO in mid-January. Now the focus of myself, Tiffany, and our entire team has always been to consistently deliver great results. And that focus has only been further amplified now that we are public. We remain incredibly excited about capitalizing on the white space in front of us and ensuring we drive value for all our stakeholders. 2020 was quite a year. We carefully managed through the pandemic and drove strong results. Acquired and fully integrated international car wash group the largest acquisition in Driven's history. We completed two debt offerings and launched our IPO. And I want to thank our franchisees and our employees for their unwavering dedication and commitment to delivering exceptional service to our customers. Our industry is strong, and we are optimistic about the rebound in trends as consumers more fully re-engage in their daily activities and drive more. The strength of our results is a testament to our business diversification and amazing franchisees. You saw our results for Q4 and fiscal 2020 released this morning. While same-store sales declined 5.6% for the year, our performance outpaced the industry as we continued to gain market share, largely from independents and small chains. We added a total of 1,121 locations across our portfolio in 2020, representing net store growth of 36%. And I'm proud to report that we hit the top end of our expected range for fiscal 2020, with revenue of over $904 million, adjusted EBITDA of $205 million, and acquisition adjusted EBITDA of $269 million. Tiffany will get into more detail regarding those results in addition to our guidance for fiscal 2021. but I'm pleased to share that so far into our first quarter, we're on plan. Now, let me take a minute to remind people who and what Driven Brands is. Driven is an integrated platform diversified across multiple brands, geographies, and needs-based services, operated primarily by our incredible franchisee base. We are the largest automotive services company by store count in this extremely fragmented, $300 billion industry. Our brands and our franchisees are made even stronger as part of the driven platform. Our franchisees get to be in business for themselves, but not by themselves. And we have scale in an industry where scale matters. And we use our massive growing data capabilities to make smarter decisions, which help drive store count, same-store sales growth, and revenue growth across all of our businesses. We have many levers to grow organically and through acquisitions, and because of our asset life business model, we generate significant cash flow. Our long-term organic growth algorithm is simple, and it's what we've been doing for the last five years. Grow revenue from a combination of same-store sales growth and new stores, and deliver attractive and consistent margins, which result in adjusted EBITDA growth and significant cash generation. This is how we think about the business. Let me take a few minutes and dive deeper into the component parts of our long-term growth model. I'll start with revenue growth, which is comprised of same-store sales and unit growth. We have numerous levers to grow same-store sales. and I'll hit on just a few. First, our $90 million marketing fund and data analytics engine, two benefits of the scale-driven platform, have been critical in helping us drive customers to our shops and keep them coming back. Our data analytics continue to make us smarter about how and when we target customers, both new and existing, across our brands. In our maintenance segment, specifically the Take5 brand, we shifted our media strategy in 2020. We launched a new campaign emphasizing our contactless customer experience and deployed our media dollars in a very targeted local approach. As a result, in 2020, Take5 gained share and these gains are continuing in 2021. The online estimator tool deployed for our paint collision and glass segment allows customers to get real-time estimates for their paint jobs without leaving their homes. This helped attract a different customer, skewing more female and slightly younger. Because this is a digital platform, the cost of acquiring customers is very attractive. And as importantly, we capture prospective customer information, which can be used for future direct-to-consumer marketing. Since the acquisition of Car Wash in August 2020, we have integrated over 17 million new customer data elements. We are using that data to drive new customer acquisition and revenue per wash across our stores. We are excited about early results. Staying with Car Wash, another lever to grow same-store sales is the subscription model. We're able to drive more predictable revenue by increasing the percentage of Wash Club subscriptions. Since August, we have implemented new operational sales tactics and retrained all personnel on selling memberships in the United States. In the fourth quarter, we increased our Wash Club membership from 41 to 45%. This ramped throughout the quarter, and we expect this percentage to continue to increase. The final example of growing same-store sales is by increasing the number of commercial partnerships. We continued to add additional insurance and fleet agreements and renew existing agreements in the fourth quarter. For the full year, we added more than 1,200 direct repair programs with insurance carriers, which is up over 50% versus 2019. We also expanded our fleet programs, both in terms of adding new fleet customers, as well as expanding existing fleet relationships, driving incremental customers to our shops. As a one-stop shop for commercial providers, this growth is testament to the quality, service, and performance of the driven platform. Now moving to the second major driver of revenue, store growth. First, organic store growth. We opened over 190 stores across the Driven system in 2020. 40 of these were company operated stores and our franchisees opened 151 new locations. Put simply, Driven will continue to grow EBITDA and generate a lot of cash. Let me talk about M&A for a moment. As we have previously discussed, this is not included in our long-term growth model. But as you can see from our history, it will be part of our future. We acquired Fix Auto USA in April 2020 and fully integrated them into the driven system. This acquisition added more than 150 locations to our collision business and expanded our footprint on the West Coast. Our most significant acquisition of 2020 was the International Car Wash Group, which we acquired in August and was fully integrated in early Q4. This acquisition added over 900 locations to our system. We acquired 19 additional stores through our tuck-in strategy, most of which were car wash acquisitions. Overall, Driven ended 2020 with more than 4,200 locations, almost 40% more stores, than at the end of fiscal 2019. And we believe there is room for more than 12,000 stores in North America alone, triple that of our current store base. So we have a lot of runway for growth. Now looking ahead to 2021 and beyond our franchise pipeline is strong with over 600 new store commitments, more than double our pipeline at the end of 2019. This pipeline will open over the next three to four years, and it has continued to grow in 2021. This is testament to the power of the driven platform. Franchisees believe we can help them make them more profitable than they can be on their own. We see particular strength in Take 5. Our unique and differentiated operating model, a focus on customer service and quality, combined with best-in-class cash-on-cash returns for our franchisees, has resulted in a pipeline of over 350 additional locations. And our franchisees are growing with us, leading to even more new store openings. One of our newer franchisees signed a five-unit development agreement in May 2019 to build Take Fives in Mississippi and Alabama. He opened these five stores more than two years ahead of schedule. He has since signed a new development agreement for an additional five stores and will soon open his sixth location. He's been thrilled with the returns he's seen from the strong brand performance. In fact, Take 5, home of the 10-minute oil change, recently earned a J.D. Power Award for the highest overall customer satisfaction score among all oil change providers. And three of our brands, Take5, Carstar and Mako, made the franchising top 500 ranking this year. Our franchise and development team is making Driven a franchisor of choice. Our franchisees are getting best-in-class returns, continuing to build, and are spreading the word to others. And we're finding interest from a variety of backgrounds, not from just automotive. As we look forward, we have significant opportunities for shareholder value creation. Our focus is to capitalize on the recovery and trends across the industry, which we don't take credit for, but we're happy to benefit from. Continue our playbook of consistent same-store sales growth, leveraging the strength of our platform, marketing and data analytics capabilities, customer satisfaction, and commercial growth. to grow both franchise and corporate stores and continue to target accretive M&A. This is our long-term growth algorithm, which will deliver revenue growth at attractive, consistent margins, which leads to adjusted EBITDA growth and significant cash generation. I'll now turn the call over to Tiffany for a closer look at our performance, long-term targets, and guidance for 2021. Tiffany.

Thanks, Jonathan, and good morning, everyone. I'll begin with our performance in the fourth quarter, then share highlights from fiscal 2020 before providing some context to accompany our guidance for fiscal 2021. Looking in the rearview mirror at the fourth quarter, system-wide sales were $935 million, from which we generated revenue of $289 million, an increase of 58% versus the prior year. Adjusted EBITDA was $66 million, more than double that of 4Q 2019. As a percentage of revenue, adjusted EBITDA margin was 23%. Revenue growth in the quarter was driven by the addition of new stores. As Jonathan mentioned, we acquired Fix Auto in the second quarter of 2020, which added more than 150 collision shops to the portfolio. And we acquired ICWG in the third quarter of 2020, which extended our service offering to a fourth segment, adding over 900 car wash locations in the U.S. and Europe. Over the course of the year, we've also added new franchise locations, opened Greenfield Company-operated stores, and completed tuck-in acquisitions. In the fourth quarter alone, we added 42 Met News stores. Needless to say, our development team has been hard at work cultivating the franchise, greenfield, and M&A pipelines. While same-store sales declined 3.4% for the quarter, our performance outpaced the industry as we continued to gain market share. Our operators and franchisees navigated a second wave of COVID-related lockdowns and disruption. However, our breadth of service offering, geographic footprint, and strong competitive positioning were able to blunt the impact. In fact, we posted same-store sales of positive 1.2% in our maintenance segment and positive 9.5% in our platform services segment, while our paint collision and glass segment was down 7.3%. It's important to note that consolidated same-store sales for the fourth quarter on a two-year stacked basis were positive 2%. As a reminder, car wash will not be included in our same-store sales base until the anniversary of the acquisition in August of 2021. Now, from an expense perspective, we carefully managed site level expenses across the portfolio. While above shop, SG&A as a percentage of revenue was 24% in the quarter, a 450 basis points improvement versus last year. All of this led to strong adjusted EBITDA performance in the quarter of $66 million. Depreciation and amortization was $29 million versus $9 million in the prior year. This increase was attributable to the ICWG acquisition. In the fourth quarter, we finalized the purchase accounting step-up, which resulted in an incremental $7 million of expense. Interest expense was $31 million in the quarter, nearly double 4Q19 as a result of two factors. First, in July, we issued $175 million of new notes with a coupon of 3.9% under the whole business securitization structure. This drove nearly $2 million of incremental interest expense in the fourth quarter. Second, in August, we assumed $722 million of debt as part of the ICWG acquisition. This drove nearly $10 million of incremental interest expense. Then in December, we took advantage of the lower interest rate environment and refinanced the whole business securitization notes that we had issued in 15 and 16. This resulted in a $5 million non-cash loss on extinguishing of debt, but a lower weighted average interest rate for the whole business securitization debt portfolio overall. Income tax expense was $5 million in the quarter, largely driven by non-deductible expenses in a foreign jurisdiction and the impact of changes to state tax rates on our deferred tax liabilities. So for the fourth quarter, we posted a net loss of $7 million, but adjusted net income of $2 million. Now, a bit more color on our fourth quarter results by segment. The maintenance segment posted same-store sales growth of 1.2%. Maintenance benefited from the new Take 5 marketing campaign that launched in early 2020, as well as the improved media allocations that Jonathan mentioned. We also benefited from our decision to overhaul Take 5's labor model, reducing labor hours per car. And we continue to leverage the purchasing power of our platform to drive cost savings from oil purchases and associated volume rebates. The car wash segment contributed $91 million of revenue in the fourth quarter. As Jonathan mentioned, Wash Club subscriptions now represent 45% of sales, a 400 basis points improvement since August. This is a great recurring revenue stream that provides a level of predictability to this business. From a cost savings perspective, we renegotiated our chemical contract, achieving significant cost reduction while increasing the service level and associated growth incentives. Paint Collision and Glass posted a same-store sales decline of 7.3% in the quarter. This segment lags the others in terms of COVID recovery due to reduced collision trends resulting from lower congestion on the roadways across much of the U.S. and Canada. This is a unique challenge for PC&G. However, collision continues to gain market share as we add new commercial partnerships. Importantly, while PC&G posted negative comps in the fourth quarter, on a two-year stacked basis, we drove sequential improvement from Q3 to Q4. And finally, platform services experienced the strongest same-store sales growth in Q4 with a positive 9.5%. The addition of exhaust to the product line at 1-800-RADIATOR has been a success. This additional product offering added $11 million in system-wide sales for the full fiscal year. So that was the fourth quarter. Now let me hit some highlights from the unprecedented year we just completed. First and foremost, we capitalized on the fragmentation in the industry in 2020, despite navigating the ever-changing landscape of COVID-19. Fiscal 2020 system-wide sales reached $3.4 billion, we added a total of 1,121 locations across our portfolio, or net store growth of 36%. We introduced the car wash segment by acquiring and integrating ICWG, the largest acquisition in Driven's history. And while same-store sales declined 5.6% for the year as a result of the pandemic, this is a strong recovery given that same-store sales were down nearly 20% in the second quarter. Overall, we captured significant market share. This quick road to recovery speaks to the needs-based nature of our services. The resilience of our business model was tested this year and has been proven. All of this translated into revenue for fiscal 2020 just over $904 million, an increase of 51% compared to the prior year. and we managed expenses carefully, resulting in adjusted EBITDA of $205 million, an increase of 72%. As a percentage of revenue, adjusted EBITDA margin was 23%. Acquisition adjusted EBITDA, which assumes all 2020 acquisitions occurred on the first day of the fiscal year, was $269 million. You will recall from the recent development section of our S-1 filing in January that this puts us at the top of our expected range. We are very proud of our team and our franchisees for the year that they delivered. They have shown resilience and grit, and we are well positioned to increase our market share as the industry continues to recover in 2021. And that brings me to our liquidity and capital structure. We ended the year with just over $188 million in cash and cash equivalents, as well as $156 million of undrawn capacity on our revolving credit facilities. During our IPO in January, we issued 31.8 million shares of common stock and received net proceeds of $652 million. Together with cash on hand, we used these proceeds to pay down the debt we assumed in the ICWG transaction. bringing our year-end net leverage on a pro forma basis to five times and lowering our annual interest expense on a go-forward basis by nearly $40 million. Following the exercise of the Green Shoe in February, we issued an additional 4.8 million shares of common stock. We received $99 million in net proceeds, 43 million of which was used to purchase 2 million shares of common stock from existing shareholders. We intend to use the remaining 56 million of net proceeds for general corporate purposes. We now have 167.4 million shares outstanding and a $1.5 billion whole business securitization debt portfolio with a weighted average fixed annual interest rate of 4% and a weighted average remaining term of six years. We intend to use our balance sheet to capitalize on the substantial white space in a $300 billion consolidating industry while maintaining an investment grade credit rating. Now looking ahead, we are focused on our proven formula for growth with a platform that is scaled and diversified. Our formula is simple. We add new stores, we grow same store sales, and we deliver stable margins. This results in significant cash flow generation that we reinvest in the business. Over the long term, that translates into low single-digit same-store sales growth, low double-digit revenue and adjusted EBITDA growth, and mid-to-high-teens adjusted net income growth. There's no change here. Those are the long-term financial targets that we shared during our roadshow. Now, in this morning's release, we issued limited guidance for fiscal 2021, given the continued uncertainty related to the duration of the COVID-19 pandemic and its impact on consumer trends. What we provided is what we can control. Net store growth from a well-developed franchise and greenfield pipeline and a commitment to adjusted EBITDA margins. We expect 160 to 190 net new stores across the portfolio with segment level expectations laid out in this morning's release. There is essentially no M&A in our projections. While M&A is a core part of the driven brand strategy, it can be difficult to predict, so we've excluded it. We'll continue to carefully manage expenses and expect to deliver adjusted EBITDA margins of approximately 23%, consistent with fiscal 2020. Now, while we can't predict the level of same store sales growth in fiscal 2021, we do expect positive same store sales. Consumer's financial health is in good shape. They have been spending less and saving more over the past year. That coupled with stimulus plus accelerating vaccine distribution will increase mobility. All create tailwinds for automotive services. In terms of quarterly cadence, we expect Q1 to be the low point as we navigate the continuation of COVID. Q2 to result in significant growth as we lap the depths of the pandemic last year. And then a return to historic averages in the back half of the year. The net result is same store sales growth for driven brands in fiscal 2021. It's important to note that this outlook hasn't changed since our analyst day. And as Jonathan shared, we are on plan so far in the first quarter. Now, there are just a few other items to mention as you model fiscal 2021. First, we anticipate depreciation and amortization of approximately $110 million. Second, we have lowered our annual interest expense by nearly $40 million as a result of paying off the ICWG debt with IPO proceeds. However, we will recognize approximately $45 million of non-cash debt extinguishment costs associated with that repayment in the first quarter of 2021. Third, we anticipate an effective tax rate of approximately 30%. And lastly, based on 160 to 190 net new stores, roughly 40% of which are company-operated, gross capex will be approximately $75 million. And given our highly franchised base, maintenance capex is minimal and is expected to be in line with our historic annual spend of approximately $10 to $15 million. In closing, the strength of this portfolio continues to deliver best-in-class results, and we have significant opportunity for growth in a fragmented and consolidating industry. We are bullish on 2021, and we look forward to speaking with you again in late April when we release first quarter results. Operator, we'd now like to open the call up for questions.

Hey, at this time, I'd like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Liz Suzuki with Bank of America. Your line is open.

Great. Thank you. So outside of the M&A that Driven Brands has undertaken, there's been relatively less industry consolidation than we might have expected in such a disruptive year. Some industry participants have talked about PPP loans kind of keeping these smaller businesses afloat. So my question is whether you think government support actually limited your M&A opportunities and that if in the next year or two you could see more opportunities for tuck-ins?

Hey, Liz, it's Jonathan. How are you? Good morning. Look, I think we were pretty active from an M&A perspective in 2020, right? We did fixed auto in April and we did the car wash deal in August. So I think we were pretty active. I do think on some of the smaller chains and independents, there is a little bit of residual PPP funding or stability impact there. But, you know, our pipeline from M&A perspective feels really good. And I would say that we're not concerned about the opportunities going forward.

Great. And then, you know, another one on kind of organic store growth. Which segments of automotive service do you think the U.S. market in particular is understored or if it isn't understored but is kind of just stored incorrectly? How do you see that as an opportunity for Driven Brand?

Hi, Liz. Tiffany, great to hear from you this morning. So just to further Jonathan's point, the places we would expect to lean in, we see tremendous opportunity in the maintenance segment. um specifically in the quick loop space and we will continue our greenfield expansion as well as the franchising of that business that franchise pipeline is tremendous and we're really pleased with the way that business is unfolding secondly car wash obviously is a brand new opportunity for us super excited about the white space in that business as well We took advantage of a significant amount of tucking activity in the fourth quarter as we fold that business into our portfolio, and we'll continue to execute M&A transactions as well as build new greenfield sites in the car wash space. And then, of course, in the paint, collision, and glass segment, that's a franchising model, fully franchising model, and there's great runway there to continue to convert independent collision shops to our driven collision brands. Great. Thanks so much. Thank you.

Your next question comes from Simeon Gutman with Morgan Stanley. Your line is open.

It was mentioned in 21 guidance, positive same-store sales. I realize that's somewhat open-ended. Is there any more specificity you can provide? Where that range could be that underlies the 30% EBITDA margin guidance that you also gave for the year?

Great to hear from you as well. So thanks for the question. Here's what I would say. You know, like I said in scripted remarks, consumers are in great shape financially, right? They've been saving more, spending less. Vaccines are starting to roll. That's going to improve mobility. So we think this business, you know, continues to recover over the course of the year. As I said at the end of my remarks, we're really bullish on 2021. Obviously, Q1 is going to be the low point as we lap the last quarter that didn't have a COVID impact last year. Q2, I think we all expect to be gangbusters just because we're lapping some pretty tough comps last year. And then we'll return to historic averages somewhere around the 4% mark in the third and fourth quarter. So definitely positive for the year. We expect, frankly, positive comps across all of our segments. And as we get further into this recovery, further into vaccine distribution, the business just continues to get healthier and healthier.

Okay. And then maybe my follow-up, I'll make it a two-parter and then I'll stop. Can you just parse out the, call it the businesses that are more reopening versus the ones that did steady? And you said you expect to get these healthier run rates by the end of the year. Are all signs pointing to being on track to getting there and you're seeing signs of even in early places where vaccine distribution is stepping up or miles driven is improving? Are you seeing the right signs? And then the second part of it was, how did Car Wash step up its loyalty so much in the quarter? I think it wasn't year over year. I think it was maybe it was year over year. How did it step it up so much? And was that from anything, that legacy that the Car Wash business had in place or things that Driven did?

Yeah, great, Simeon. Let me take the first part of that question. I'll let Jonathan talk about the subscription model for Car Wash. So as we think about segment performance, if you look across the business by quarter, you know, obviously Q2 was tough. We all know Q3 we started to see great rebound. And so we posted positive comps in Q3 in the maintenance segment as well as in the platform services segment. As we've talked about pretty broadly, paint collision in glass was a bit lagging in recovery because of congestion miles. The lower congestion miles mean less collision risk. As we roll from Q3 to Q4, we saw continued positive performance out of maintenance and platform services. And importantly, with P, C, and G, while it's still negative, on a two-year stack basis, we saw great sequential improvement. So we're seeing recovery across all of the businesses in which we operate. And back to my comments about 2021, you know, as things continue to recover more broadly in the industry, our businesses will continue to perform very, very well.

Hey, Simeon, it's Jonathan. I'll just sort of answer the question on the subscription revenue in Car Wash. Yeah, I think we saw about 400 basis point improvement in Q4. You know, that was sort of, you know, I'd say we're continuing to see that in Q1. How did we do that? I think it's a couple of things. One is, as you know, you've heard us talk about before, variable compensation is a huge element for us. So we made sure that all levels of the organization in Car Wash had the right variable compensation plans in place. Secondly, we had a highly focused effort on retraining people in terms of selling techniques. And then lastly, obviously, Suzanne and the data analytics team leveraged data to understand how to best execute against this incremental subscription model. So we think it's very much building on a good base that the ICWG team had pre-acquisition, but we're sort of supercharging that and feel really good about sort of those trends as we look forward.

Okay, thank you. Good luck.

Thanks, Janine. Your next question comes from Chris Horvath with JPMorgan. Your line is open.

Thanks. Good morning, everybody. Can you talk a little bit about some of the segment comps here in the fourth quarter? You know, the main end segment did a plus one. We're modeling a bigger number, plus seven. On the other hand, platform services, you know, clearly outperformed. Did something surprise you in December in terms of what happened in maintenance, in terms of the COVID spikes or weather or what have you, and then similarly, what drove the outperformance in platform?

Sure, Chris. Thanks for the question. So let me start with maintenance. Posted a 1.2% positive comp in Q4. You know, good positive comp, very strong comp. We continue to benefit in the maintenance segment from the new marketing campaign that Jonathan discussed in his prepared remarks, right? So we released that in the early part of 2020 and continue to get great customer response, not only from existing customers, but in terms of new customer acquisition. I think what's offsetting that marketing effort to some extent was that second wave of COVID. I mean, obviously, as you look across our businesses, we were dealing in multiple geographies with multiple levels of restrictions. So there was some pressure there. The beauty of the Driven Brands portfolio, though, is our diversification. Whether it's diversification in terms of geography or service occasion, we're able to help balance out the portfolio with the mix that we have. So 1.2 positive in maintenance. We continue to see great performance in the maintenance segment and are bullish about that business for 2021. Platform services had a 9.5% comp. As I mentioned in my prepared remarks, we actually issued or implemented a new product line with exhaust this year. It's done a tremendous business for us. So that's one positive. And I would also tell you, you know, obviously ThoughtForms Services being primarily a distribution business where we have very high in-stock levels, throughout the COVID pandemic and into the fall, in a lot of cases, we were the source for some of those heavy-duty, long-tail items that independent operators needed to be able to repair cars. So we were there when our customers needed them, and it's benefited our business in a big way.

Makes sense. And then, you know, two-parter as a follow-up. So I guess more broadly, have you, within this segment, have you, has your expectations changed in terms of, you know, how the performance might be relative to the analyst day? And then related to that, can you talk about how stimulus affected your business? Presumably last April probably wasn't much given lockdown, but, you know, then you had January and February.

you know presumably stimulus wasn't in your expectations you know the current stimulus plan that's about to be approved wasn't in the original expectations is that accurate yeah that's right so let me give you a few thoughts there so um first thing i would say is our expectations for 2021 are largely in line with what we thought back in december when we had our analyst day so no no dramatic shifts in overall performance nor in the makeup or mix of the segments As we think about Q4 and rolling into Q1, for sure, stimulus is in the mix. That's a good tailwind for us. As I mentioned, as vaccines start to roll out, that's an additional tailwind. But then, of course, we were battling some other related pressures coming out of Q4 and into Q1, whether it's COVID lockdowns, severe weather in some parts of the country. Net-net, as we said, we're on plan for Q1. And our expectations really aren't different than what they were in early December.

That's great. Thanks very much.

Thanks.

Your next question comes from Peter. Benedict, it's Baird. Your line is open.

Hi, guys. Good morning. I guess going back to the car wash segment, wondering if you can maybe talk a little bit about the competitive environment there. A lot of people kind of going after that segment, and you guys made some progress there in the fourth quarter with some tuck-ins. Just curious kind of what you're seeing there, the level of competition when you're going after these tuck-ins, kind of any view on the multiples that are being paid, either specifically or just qualitatively. That's my first question.

Hey, Peter, it's Jonathan. I'll do my best to answer that. Look, I think you should think about what we've done with the Take 5 business over the last five years. You know, we started with 60 stores. We sort of perfected the model. We grew company stores. We added franchising. Super successful in terms of a really specialized M&A team here that knows how to buy the right assets at the right prices. So we like competition because we generally beat it. So we feel really good about the car wash business, both in terms of what we've done since we've acquired it and the future for that business. So feel really, really bullish about the car wash opportunity as we look forward. Okay, thanks, Jonathan.

And then maybe just any broader comments around your franchise renewal rates, how they've been trending. It sounded like things were pretty positive on that front, but just curious what maybe you can share on that more broadly. Thank you.

Yeah, look, our franchisees did amazing in 2020. We're so proud of them. They stayed open. 95% of our stores stayed open for the entire year. Franchisees managed demand changes in their business, the labor model in their business. We helped them in every way we could. So we didn't lose one franchisee as a result of COVID impact in 2020. So our renewal rates are very good and have not changed. And even more importantly, Peter, If you look at our franchise pipeline, right, our franchise pipeline is bigger than it's ever been. So we see this renewed and incremental interest in people getting into the automotive space because, quite frankly, they see the benefits of this industry. So our franchising, you know, portfolio in general is in terrific shape. Okay. Sounds good. Thank you very much. Good luck.

Thanks, Peter. Your next question comes from Sharon. Zach, we are with William Blair. Your line is open.

Hi. Good morning. I guess two questions. I mean, understanding the issues surrounding paint collision and glass, how much of an increase kind of in miles driven or congestion do you think you need to start seeing that kind of inflect back into positive comp territory? And I guess implicit on that too is if I look at the segment margin, Is any kind of positive comp going to kind of translate into an improvement in margins in that business? Or because it went down so much in the second quarter of last year, is there more of a gap that needs to be made up? And then a second question on pipeline for both M&A and franchise development. I'm wondering if you've seen an uptick in interest since going public.

That's great. Morning, Sharon. So let me take the first two, and I'll let Jonathan address the franchise pipeline and that specific question. So in terms of vehicle miles traveled and its impact on PC&G, obviously vehicle miles traveled being down is a factor for that business. More importantly even is the amount of congestion miles. And so early in the pandemic when severe stay-at-home orders were in place, we saw as much as a 70% or 80% decline in congestion miles. which put tremendous pressure on the collision business. In the back half of the year, that's recovered a bit, right? So we're now down about 40 or so percent. Our forecast for VMT, and as we triangulate that with external sources, would suggest that VMT returns to 2019 levels by late 2022. But importantly, congestion miles, as vaccine distribution picks up and people become mobile again, we actually think congestion miles start to recover and get to a place where it's recovered by September of this year. So, you know, PCNG, while lagging the rest of the segments, has been recovering, and we continue to see solid momentum, you know, solid progress in that space. In terms of margins, the only thing I would add would be, you know, obviously PC&G is a franchise business. So as those volumes come back and we record revenue on those system-wide sales, that's a franchise business where the profitability drops straight through to the bottom line. So when you have that impact coupled with the fact that maintenance and platform services are performing quite well and maintenance has very healthy margins, as does car wash, That's why we're confident in our expectation that we can deliver 23% EBITDA margins for 2021. Jonathan, do you want to touch pipeline again just real quick?

Yeah. Good question, Sharon. Let's talk about M&A first of all. And the question was, is being public affected that? We've been very acquisitive for the last five plus years. We've done over 40 transactions. We're staffed. to do M&A. We would be considered an acquirer of choice in this industry. So that's not changed since we've gone public. This is something that we're very good at and have a phenomenal track record of doing it. And I would imagine that we will continue to do that in the future. So no real impact from being public there. In terms of franchisee interest in our business, really, I don't think anything's changed since being public. I think what's happened, though, Sharon, over the last sort of 18 to 24 months is a couple of things. One is people understand the power of the driven platform and the benefits that we bring to franchisees, whether that's, you know, scale, whether it's purchasing, whether it's marketing, whether it's data analytics. I think, you know, franchisees maybe from other industries are understanding the the power of the automotive aftermarket space and that it's needs based. It's highly recession resilient. Quite frankly, they can make better returns in this space than other spaces. It's highly fragmented. So I think all of those things coming together really not to do with driven being public. I think people are just recognizing the phenomenal industry that we operate in. Thanks.

Your next question comes from Kate McShane with Goldman Sachs. Your line is open.

Hi, good morning. Thanks for taking my question. I know that data analytics is a big initiative and differentiator for you. So I wondered if there was anything new to discuss there or whether there are new measures or ways to leverage existing data to help drive 2021 comps.

Thanks, Kate. Jonathan here. I will tell you that I think, you know, Simeon mentioned it earlier. He asked about the subscription model and car wash. You know, it's no surprise that we're driving, you know, 400 basis point improvement in Q4. We're still seeing that improvement. A lot of that is coming from our data analytics capabilities. So that's one specific example of how we're leveraging data to drive, you know, actual results and revenue and better cash in our business. So, look, we continue to have data analytics capabilities. influence across all things we do in driven brands, whether that's, you know, same-store sales, whether it's real estate models, whether it's M&A models, whether it's subscription models. So it really is just part of our DNA and part of our culture, and as we continue this journey, it's only going to get more powerful.

Thank you. And my second question, unrelated, I just wondered if there's any way back to the same-store sales guidance framework comments how you're thinking about organic market share gains in 2021 and how it compares to 2020.

Yeah, so Kate, let me take a shot at that and then you can tell me if you have a follow up. So again, first and foremost, nothing in our outlook has really changed since the analyst day in December. We feel great about our competitive positioning as we enter 2021. As we said a couple of times this morning, we're on plan in the first quarter. And we expect positive same-store sales in total and, frankly, positive same-store sales across all four segments. So, you know, obviously that would suggest, you know, on a total basis recovery by the end of, you know, essentially recover by the end of 2021. So, you know, we feel very good about our positioning and, you know, based on the comments around data analytics, driving, you know, additional traffic to the stores, driving more insights that we can use to leverage for targeted marketing and continuing to drive the car wash subscription model. We've got lots of effort and support behind driving same-store sales.

And, Kate, I would just sort of come over the top there and say, look, we are fully committed, as we were in analyst day, to delivering consistent organic same-store sales growth in that sort of, you know, low single digit for many years to come, right? So that's absolutely how we think about the business.

Thank you. Thanks, Kate. Thanks, Kate.

Your next question comes from Peter Keith with Piper Sandler. Your line is open.

Hi. Good morning, everyone. Congrats on your first earnings call. You had mentioned at the beginning of the script that your sales and adjusted EBITDA were at the high end of your expected range. But it looks like your adjusted net income didn't quite come in with the street expectations, and I would argue maybe your expected net income from the analyst day. So the core of the question is, is there something non-operating that changed from the analyst day that potentially caused a bit of a net incomeness?

Hey, Peter, good to hear from you. Thanks for the question, and I appreciate the question so that we can ensure we clear the air here. So really importantly, when we think about operating performance, to the point, revenue and adjusted EBITDA and even acquisition adjusted EBITDA came in at the top end of the range. So operating performance was very strong in the fourth quarter and for the fiscal year. There are some non-operating things, below-the-line things that I'll point out. So if you look at the midpoint of the net income guide in recent developments versus the net loss that we reported, there are essentially three things driving that delta. It's about a $7 million delta. $5 million of that has to do with higher tax expense. And as I said in my prepared remarks, we had a non-deductible expense in a foreign jurisdiction specifically related to car wash. We also had the impact of some state tax changes on deferred tax liabilities. That's $5 million of tax. And we had $7 million of higher depreciation and amortization associated with the purchase accounting that we finalized in the fourth quarter and related to the step-up and associated useful lives for car wash. Offsetting those two negative impacts was a larger foreign currency gain to the tune of about 6 million as a result of great movement in P12. So all non-operating items that caused that delta versus what our expectation was.

Very helpful. Thank you for that. And maybe my last question, a bit of a follow-up to Chris's question just on the stimulus. With the amount of checks, the dollar amount of the checks coming out, and it looks like there's even going to be some child tax credit benefits in the back half a year, you guys serve a core middle-income consumer. And I'm wondering if you typically see any sales bump from stimulus or monthly checks to middle income, and maybe thinking a little bit more around the discretionary side of the business, which would be around car wash, any historical observations would be helpful.

Hey, Peter, it's Jonathan. Look, we're super bullish about the rest of this year. I think that the return to mobility, people driving more, coupled with stimulus checks that, as you rightfully pointed out, sort of hit our core customer. Our core customer has a household income of about $60,000. They drive cars with about 100,000 miles on them. Those cars are about 10 years old. So if you think about the sweet spot of where stimulus is going to impact, we feel really good about sort of our core customer being a beneficiary there. So I would just reiterate that we're super optimistic about how 2021 is going to shape up. in terms of return to mobility and driving more, and clearly sort of, you know, over-the-top help is this stimulus package that looks like it's going to get passed.

Okay. Thanks so much, and good luck with the coming year.

Thank you. Your next question comes from Karen Short with Barclays. Your line is open.

Oh, hi. Thanks very much. I actually was wondering if you could maybe give a little color on – the cadence of comps during the quarter. I mean, I'm assuming weather would have had some negative impact on comps on some of the segments, given the polar vortex. And then wondering if you could give a little color on comp in the quarter to date. And then I had one follow-up.

Hey, Karen. Sorry, it's Jonathan. We don't talk about the W word. We won't talk about it today. We won't talk about it in the future. We're very pleased with Q4 comps across the organization. And just to sort of reiterate how we're feeling about Q1, I should say, like I said earlier, we are, you know, on plan for Q1 and look forward to, you know, really good performance for Q2 and beyond in 2021.

Okay. And then I guess maybe just a little more on the stimulus. Is there any way you could give some color in terms of what the stimulus would have done to impact January relative to what the next stimulus will be? Because obviously it's exponentially higher. And then if you didn't want to answer that, I wanted to see if you could maybe talk a little bit about where you think the right leverage level would be given all the M&A opportunity and where you feel comfortable.

Yeah, I'll just reiterate on the stimulus. Look, this is going to be an unusual year on many respects. We are seeing the vaccinations get out there. We're seeing more optimism with the consumer. They've obviously saved some money in 2020. So driving trends are going to continue to increase. Mobility is going to increase. People may have more money in their pockets. So we feel really good about that. 2021. I'm not going to specifically tell you what we think stimulus could or couldn't do to our business, but we're really optimistic about 2021. And then I'll let Tiffany cover the leverage piece.

Yeah. Morning, Karen. So as I said in prepared remarks, we ended 2020 on a pro forma net debt basis at five times. And that's pro forma for the pay down of the ICWG debt that came from the proceeds of the IPO. We are very comfortable at five times leverage. It puts us in line with or better than our highly franchised peers. And so as we think about taking advantage of white space in the market, most of that's going to come through tuck-in acquisitions in the segments that we talked about earlier in the call. And most of that tuck-in acquisition can be effectuated with cash from operations. So, you know, I would say five times leverage feels like the right place for us. Again, puts us in a good spot relative to the peer set. And we feel like we're very well positioned to take advantage of the pipeline of M&A. Thank you.

Okay. And your last question comes from Seth Sigmund with Credit Suisse. Your line is open.

Thanks a lot. Hey, everybody. So I wanted to follow up on the EBITDA margin guidance for this year. So flat at 23%, you are guiding to positive comps. I think that outlook is pretty consistent with what you said before, which would, you know, margins around this 23% range. But can you just remind us, some of the puts and takes to be thinking about here and, you know, how operating leverage, I guess, is held back if there's offsets to be thinking about. Thank you.

Sure, Seth, good morning. So let me make a couple of comments. I would say first and foremost, think about the mix of the business, right? We've got a maintenance business that is a mix of company-owned stores as well as franchised business. The margins on the company-owned stores are in the mid-30% range. And the franchise business, obviously, we collect the royalty, and that royalty drops straight through to the bottom line. Car wash in the U.S. is company-owned. Again, you know, mid-30% margins, very healthy business. And then from a PC&G perspective, all franchised. So, again, collector royalty and those royalty rates drop through your profitability. So to the point on our expectation for 23% margins consistent with what we just delivered in 2020, obviously with the white space in our industry, we're focused on growth, right? So our focus is on growth, and we want to make sure that we deliver stable, consistent margins as we grow the business. Having said that, same-store sales growth and new stores drive incremental EBITDA dollars, and that allows us to leverage fixed costs. And then, of course, we're always looking for opportunities to improve margins through cost reduction strategies and efficiencies. So we're committed to delivering stable, consistent margins, but we will continue to look for opportunities to drive improvement.

Okay, perfect. That's helpful. And there are no major cost concerns, or at least you should have an ability to offset any cost pressures as it relates to supplies or anything like that. You just comment on, you know, some of the levers that you may have there.

Yeah, we'd be happy to. So I agree. You know, given that we're a franchisor, right, and the majority of our stores are franchised, that gives us a little bit of insulation from a cost perspective, whether you're thinking about labor or you're thinking about product costs and our ability to pass through any sort of inflation there. So no concerns. You know, I think as you think about the company-owned business and wages, obviously our models require less labor than most of the multi-unit franchise models. So we have less labor in our stores. As Jonathan mentioned earlier, most of our employees are at a very healthy living wage now. And some of that comes from the variable comp and our commitment to that variable comp program. And then because our average ticket is a bit larger than many multi-unit models and our service levels are fantastic in an essential needs-based environment, we do have, as a last resort, the ability, if we need to, to pass along inflation. Two big product categories would be oil and paint. I think in the oil space, this is obviously lubricant products. Our contracts are long-term in nature. There are multiple commodities, so there's natural hedge in those agreements, and they're also tied to indices. We necessarily aren't locked into a fixed price, for example. over that long-term contract. On the paint side, that's paint we're selling to franchisees. And again, you know, somewhat limited in the impact that it has to us because we're collecting royalties on that franchise business. So punchline here, Seth, is no real concern from a cost perspective.

Okay, that's great. That's very helpful context. If I could just follow up on one other point, I mean, a lot of conversation around demand and the impact of miles driven. Can you just give us a little bit more color on How immediate of an impact do you see when miles driven improves versus, I guess, a lag from the cumulative wear and tear on a vehicle? And is your sense that there may be pent up demand from cars that have not been used as much that that will come back pretty immediately? How are you guys thinking about that?

hey seth it's jonathan yeah look i just reiterate right there's a lot of moving parts going on in 2021 right we've got you know uh increased mobility driving trends are going to pick up i think people are going to start returning to work at some point in 2021 we've obviously got stimulus checks i think there is probably some pent-up demand in terms of some vehicle maintenance or vehicle service it's not like a food occasion where that's gone and gone forever the car is still there Again, our core customer, a lot of our core customers have still been driving and working in 2020. So, look, I would just reiterate that we feel really bullish about 2021, and there's far more tailwinds in our future than there are headwinds. That's how we think about it.

Thanks very much. Good luck.

Thanks, Ed.

I will now turn the call back over to Mr. Fitzpatrick.

Thanks, Denise, and thank you all for your time this morning. We're incredibly proud of our team, our franchisees, and our results in 2020, and we look forward to a really great 2021. We'll talk to you all soon. Thank you all.

This concludes today's conference call. You may now disconnect.