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.