Driven Brands Holdings Inc.

Good morning, and welcome to Driven Brands' second quarter 2021 earnings conference call. My name is Tamiya, 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 GAAP financial measures on the company's investor relations website and in its filings with the Securities 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 the company SEC filings, including the Form 8-K filed today containing the company's earnings relief. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in the company SEC filings and the earnings release available on the Investor Relations 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 star one to be placed in the queue. I'll now turn the call over to Jonathan. Please go ahead, sir.

Thank you and good morning. We had another great quarter across the board and are excited to share the results. Before we jump in, let me reiterate the power of Driven Brands. Driven Brands is the largest automotive services company in North America, and yet we have less than 5% market share in this highly fragmented and consolidating industry. Our scale means that we have many competitive advantages, like our marketing dollars, data, purchasing power, unit growth, to name just a few. We have consistently taken share in this industry for the past decade, and we will continue for the next decade. Our four operating segments provide diversification to our business model, diversity across our brands, geographies, and needs-based service categories. These multiple segments provide many levers to organically grow same-store sales and units. And because of our asset-light business model, we generate a ton of cash, which we reinvest back into the growth engine. Over the long term, Driven has and will consistently deliver double-digit revenue growth and double-digit adjusted EBITDA growth. And this is before we layer on acquisitions, which is incremental upside to our model. This is the compounding power of Driven Brands. We're pleased with our Q2 results that we released this morning, and all credit goes to our team and our amazing franchisees who consistently deliver. Compared to Q2 of 2020, consolidated same-store sales were significantly ahead of expectations at positive 39%. On a two-year basis, same-store sales were up 19%, accelerating from Q1 into Q2. Revenue more than doubled to $375 million. Adjusted EBITDA more than doubled to $101 million. And adjusted EPS was $0.25, beating expectations. another up to bottom beat we are very proud of these results and remain optimistic for the remainder of the year our same store sales performance was high quality built on a foundation of marketing and operational execution we drove more new and repeat customers to our shops our teams are executing across all segments resulting in both one and two year same store sales growth across all segments and increased market share across all segments in Q2. We continue to benefit from our competitive advantages, marketing, operation, scale, inventory, which led to more customers, more sales, and more profits for our franchisees and for Driven. For retail customers, our Driven playbook is simple. We leverage our significant marketing funds to bring customers to our shops. we provide the highest quality of service proven by industry-leading NPS scores. And when customers are in our data ecosystem, our CRM engine can predict their next visit, potential upsells, and more. Execution is critical to getting this right, and the teams have proven over the past 10 years the ability to do so. You can see this in the performance of our maintenance business, and we're pumped that we're still in the early innings of implementing it with CarWash. even before layering on more Wash Club subscriptions. We see tremendous upside to our retail businesses. We're driving trial, gathering more customer data, and we're only just beginning to add customer cross-marketing from our other brands. To illustrate, on average we see over 300 cars a day from a quick loop and a car wash in the same trade area. And today, less than 5% of customers visiting one service have ever visited the other. This provides significant opportunity to cross-market our services. One example, we've already learned that our premium oil customers mirror the same customer profile as our Car Wash subscription members, allowing for more upsell and targeting opportunities. There are many similarities between these two businesses. In fact, we have started testing rebranding some of our Car Wash locations to Take 5 Car Wash. We are very early in the test and look forward to sharing more details down the road. We continue to see growth with our commercial customers as well. Over the past 10 years, vehicle complexity has provided a natural tailwind as average repair orders have grown by approximately $1,000 or 40%. As vehicle complexity continues to evolve, so does driven, and our commercial customers value that. Our insurance partners continue to want fewer scaled providers that can service their customers better. We've added over 400 direct repair programs so far this year, with half of those coming from the top 10 insurance carriers. And existing partnerships continue to drive more cars to our shops in 2021. Let me take a minute and highlight our platform services segment. Our scale and competitive advantage shine through in the second quarter. We were able to secure parts for our franchisees and customers while 80% of the market, independents, experienced significant inventory challenges. Given the tightness in the market throughout 2020, we secured inventory several quarters in advance of our historical timelines, leveraging our data, our scale, and our supply chain relationships. three things many of our smaller competitors do not have. Being in stock when others are not is leading to share gains. We've also successfully passed on higher costs without any impact to volume. In fact, our active customers are at an all-time high, and we continue to add new customers. This has allowed our franchisees to continue to enjoy record sales in Q2 and grow shares. We remain bullish about the demand for our services and we'll get an added boost from the reopening for 2021, 2022, and beyond. Said simply, as consumers drive more, Driven wins. We leverage our scale, sophistication, data, and marketing engine to ensure that as consumers drive more, we capture that demand. And the fundamental growth in our business is hard to miss. Two-year same-store sales growth was a strong 19%. Turning to unit growth. In the second quarter, we added 70 net new units. This was a healthy balance of franchised and company store openings and tuck-in acquisitions. We have the team, tools, and processes in place to execute these multiple unit growth levers. Our unit growth outlook remains very healthy for years to come. Our new unit pipeline continued to grow into Q2. Our organic growth pipeline now sits at over 950 units. And this is a combination of large and growing pipelines of both company and franchise locations. Our company store pipeline is strong with over 200 locations and continues to build. This provides very strong visibility into both 2021 and 2022 openings. Let's talk about franchise unit growth. Demand for our brands is strong amongst new and existing franchisees. Today, we have more than 750 commitments to open franchise sites, which provides visibility into unit growth for the next four years. And we have locations identified for over 250 of these already. Our franchisees are opening their new stores ahead of plan, working fast and making money. Today, we have visibility in all the expected franchise openings for 2021. Something I'm really happy about is Take 5 was recently named in the top 10 in Entrepreneur Magazine's franchise list. They cited Take 5 as one of the most innovative, emerging brands with strong growth potential. And we feel that demand in our pipeline. This morning, we reaffirmed our store opening guidance for 2021. We expect to open between 160 and 190 stores, which will be a combination of Greenfield and franchise locations. Now, I want to spend a moment talking about M&A. This is a core strength at Driven. However, it's not in our earnings guidance. All transactions have been accretive to earnings. We make the businesses we acquire better, and they make us better. The fragmentation in this industry allows for highly accretive acquisitions for many years to come. Following the acquisition of Take5 in 2016, we invested heavily in building a best-in-class tuck-in M&A playbook. This includes the processes, the systems, the people, and the relationships, which resulted in acquiring more than 250 locations since 2016. Couple that with more than 300 company and franchise greenfield openings over that same timeframe, that is how we grow fast. With the highly fragmented car wash industry, we will again leverage our M&A muscle. Earlier this month, we announced that we closed on two larger car wash acquisitions. So far in 2021, we have acquired units and 67 units since acquiring ICWG in August 2020. Our Greenfield company pipeline is also strong, and that will start yielding openings in the second half of 2021 and into 2022 and beyond. Both our QuickLube and CarWash tuck-in acquisitions are highly accretive. And in all cases, the stores are rebranded and incorporated into our base business. Integration typically happens within 180 days of purchase. And then we focus on improving the business through better operations, marketing, leadership, and, of course, purchasing synergies. Scale matters in our industry. And tuck-in M&A is one of the highest and best uses of our cash flow, which will compound over time, driving for all stakeholders. 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 runaway for growth. Our top line growth was strong for the quarter. We grew revenue 123% versus prior year. This coupled with our attractive and stable margins allowed us to more than double adjusted EBITDA. Company store four wall margins in Q2 were 40%. That is why we are deploying capital into growing our company stores, and have visibility into over 200 stores over the next 24 months. This is a great use of free cash flow that drives substantially higher EBITDA rates and high return on equity projects that will also compound over time. As we continue to grow same-store sales and add new units, we will generate a ton of cash. We then reinvest that cash into even more future growth. This is the compounding power of driven brands. growth and cash generation. Consumer trends are positive but not fully back to pre-COVID levels across all our segments just yet. We are optimistic overall vehicle miles traveled, or VMT, levels will continue to trend towards pre-COVID levels and grow from there. This will likely be mid to late 2022. What's very encouraging is that despite VMT not being fully back to normal, we are significantly outperforming pre-COVID levels. We are gaining share and delivering strong results because of our great execution across unit growth, marketing, operations, and supply chain. Let me share my thoughts about the rest of the year and beyond. It's positive. We remain bullish on 2021 and feel very good about achieving our updated guidance for adjusted EBITDA of $345 million for 2021. The strength and diversity of our business model will continue to deliver best-in-class results. In addition to our increasing operating capability, the reopening is not yet complete. Now I would summarize our view on 2021 this way. Driven will continue to take share in this highly fragmented industry. And our scale, data analytics, same-store sales, and unit growth will continue to expand our competitive advantage. Consumers are driving again, and that's good for Driven. And I remain very bullish on Driven's longer-term future because we are a compound grower. Our growth is low risk because of our current market share. We're asset light and generate a lot of cash. Our business model works well in all economic cycles. And finally, we execute and do what we say we're going to do. This is what will drive Driven's long-term growth model. Revenue growth at attractive, consistent margins, which leads to adjusted EBITDA growth and significant cash generation. It's simple, predictable, and will compound. And you can see this very clearly in both our Q1 and Q2 results. Driven is growth and cash. I'll now turn it over to Tiffany for a deeper dive into the Q2 financials.

Thanks, Jonathan, and good morning, everyone. We delivered another strong quarter thanks to the hard work of the entire Driven Brand team. We continued to capitalize on important industry tailwinds with a relentless focus on operational excellence, and our proven playbook enabled these results. System-wide sales hit a record $1.2 billion in the quarter. which we generated revenue of $375 million, more than double that of the prior year. Adjusted EBITDA was $100 million, and as a percentage of revenue, adjusted EBITDA margin was nearly 27%. And finally, adjusted EPS was 25 cents for the second quarter, exceeding our expectations as a result of strong sales volume, which allowed us to leverage our expense base driving significant flow through. This is the power of the Driven Brands platform, a scaled, growing, highly franchised business with a diverse needs-based service offering that delivers very attractive margins. Now, let me break things down a bit more. System-wide sales growth in the quarter was driven by same-store sales growth, as well as the addition of new stores, both company and franchise store growth, and tuck-in acquisition. We have tremendous white space to continue growing our store count in this roughly $300 billion highly fragmented industry. Our franchise company, Greenfield and M&A Pipeline are all robust, and we are aggressively growing our footprint. Since Q2 last year, we've added 1,087 net new stores. In the second quarter of this year alone, we added 70. This was healthy growth across the portfolio. with net new units in every segment. Same-store sales growth was 39% for the quarter. This, of course, lapsed the depths of the pandemic last year. To normalize things a bit, if we look at same-store sales on a two-year basis, same-store sales grew 19%, and two-year trends have improved substantially from nearly 3% in Q1. This strong two-year trend indicates continued momentum in the fundamentals of our business and is a testament to the offensive strategy we put into motion in 2020 to drive performance in 2021. We once again outpace the industry across all business segments, continuing to gain market share. And we expect this momentum to continue into the back half of the year. Now remember, we are over 80% franchised, so not all segments contribute to revenue proportionally. For example, PC&G was roughly half of system-wide sales this quarter, but less than 15% of revenue because it's effectively all franchised with lower average royalty rates. Maintenance and car wash are a mix of franchise and company operated, contributing approximately 40% and 35% of revenue respectively. This is all laid out in our infographic, which is posted on our IR website. I encourage you to spend some time with it to help you better digest the portfolio mix and relative contribution. When you put unit growth and same-store sales growth in the blender and account for our franchise mix, our recorded revenue in the quarter was $375 million, an increase of 123% versus the prior year. From an expense perspective, we continue to carefully manage site-level expenses across the portfolio. In fact, prudent expense management, together with a strong sales volume, throw four-wall margins of 40% at company-operated stores. Above shop, SG&A as a percentage of revenue was 22% in the quarter, and over 700 basis points improvement versus last year. Depreciation and amortization was $26 million versus $8 million in the prior year. This is primarily attributable to the ICWG acquisition. Interest expense was nearly $17 million in the quarter. And we recorded income tax expense of $17 million, which is an effective tax rate of approximately 33%. For the second quarter, we delivered net income of $35 million and adjusted net income of $42 million. You can find a reconciliation of adjusted net income, adjusted EPS, and adjusted EBITDA in today's release. Now, a bit more color on our second quarter results by segment. The maintenance segment posted positive same-store sales of 42%, the strongest across the portfolio. On a two-year basis, same-store sales growth was 27%. Maintenance continued to benefit from more targeted digital marketing, which led to a significant increase in car count from both new and repeat customers. We capitalized on the fact that consumers are driving more and their travel plans are increasing. For example, over Memorial Day weekend, VMTs surpassed that of 2019 by about 5%. And a June Forbes report suggests that 9 in 10 Americans have plans to travel in the next six months, a new pandemic high. From a profitability perspective, while we continue to benefit from our decision to refine Take-5's labor model, reducing labor hours per car, we ran slightly leaner on labor as a result of the nationwide labor shortage, which led to an even higher flow-through on incremental sales. And we continue to leverage the purchasing power of our platform to drive cost savings from oil purchases and associated volume rebates. As we continue to grow store count and same-store sales, we will generate incremental pricing power. While not included in our consolidated same-store sales base until the anniversary of the acquisition next quarter, the car wash segment posted same-store sales growth of 35%. On a two-year basis, thanks to our sales were positive 21%. Wash Club subscriptions increased to over 47% of sales in the second quarter, and the number of Wash Club members grew by an additional 50,000. This is a great recurring revenue stream that provides a level of predictability to this business. Non-Wash Club revenue per wash continues to increase as well. The result of a simplified menu board and the focus that our teams have placed on improved selling techniques. Revenue per wash is up over 10% versus last year. From a profitability perspective, we have renegotiated our contract, achieving a significant cost reduction while increasing the service level and associated growth incentives. Similar to our oil program, the more volume we do, the greater the benefits. The paint-collisioning glass segment posted positive same-store sales in the quarter of 37%. On a two-year basis, same-store sales increased 11%. While we have experienced several quarters of reduced collision trends resulting from less congestion on the roadways, we are encouraged by the improved VMT trends in the second quarter and have posted our first quarter of positive same-store sales in the last year, despite our Canadian footprint where VMT still lags the U.S. The hard work of this team, despite the pressure in 2020, can now shine through. They continue to build our commercial partnerships in this segment through DRPs and fleet programs, which help position us very well as the reopening continues to take shape across the markets we serve. And finally, the platform services segment posted same-store sales growth in Q2 of 37%. On a two-year basis, same-store sales grew 34%. Having strong in-stock levels at 1,800 radiator, while many competitors did not, coupled with an opportunistic increase in average selling price, ultimately drove continued record sales levels within the quarter. We are pleased with our strong operating performance in the quarter, which resulted in significant cash generation that allowed us to further invest in the business. Let me take a moment to speak to our liquidity and capital structure. We ended the second quarter with $147 million in cash. In May, we closed on a new $300 million revolving credit facility. This facility, together with the variable funding note that is part of our whole business securitization structure, brings our total revolving credit capacity to $415 million. We had $321 million of undrawn capacity on our revolving credit facilities at the end of the quarter, resulting in total liquidity of $468 million. We intend to continue using our balance sheet to capitalize on the substantial white space in a roughly $300 billion consolidating industry while maintaining an investment-grade credit rating. Now, looking ahead at the balance of the year, 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. We continue to be bullish on 2021. We have delivered two strong quarters The U.S. reopening continues, and Canada and parts of Europe are set to reopen in the second half of the year. In this morning's earnings release, we raised our full-year guidance to account for the strong operating performance in the second quarter and better visibility for the back half of the year. We are on track to open 160 to 190 net new stores across the portfolio. This is organic growth. It does not include M&A. We expect positive same-store sales growth across all of our segments. And on a consolidated basis, we expect low double-digit same-store sales growth. That will drive revenue of approximately $1.4 billion, adjusted EBITDA of approximately $345 million, and should result in adjusted EPS of approximately 83 cents based on 165 million weighted average shares outstanding. Now, there are a few additional items I want to mention as you update your models for 2021. First, we have completed the analysis of car wash threshold improvements and now expect depreciation and amortization to be approximately 105 million. Our interest expense assumption is unchanged at approximately $70 million, and our effective tax rate is unchanged at approximately 30%. In closing, we have delivered strong results in the first half of this year, raised our guidance substantially, and expect the strength of this portfolio to continue to deliver best-in-class results with significant opportunity for continued growth in a fragmented and consolidating industry. We look forward to speaking with you again in late October when we release our third quarter results. Operator, we'd now like to open the call up for questions.

At this time, I would like to remind everyone in order to ask a question, press star then a number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Chris Herbers with JP Morgan. Your line is open.

Thanks. Good morning, everybody. I know you're not guiding by quarter, but can you give us some flavor on how you're thinking about the cadence of sales and EBITDA in the back half? How are you thinking about it on a two-year basis in sales? Are you raising more for 3Q versus later in the year? And if so, is that just prudence? And then any comments on margins overall would be really helpful.

Hey, Chris, good morning. Thanks for the question. So if I can, I'm going to take a few minutes just to give you – More color even than you asked for, because I think this could be helpful and probably answers a few questions that are on the line. So let me give you a little bit of color on monthly comps in the second quarter. I'll tell you how we're feeling about July, and then I'll answer your direct question, because I think all of that provides a really good picture for you. So qualitatively on the second quarter itself, on both a one- and two-year basis, monthly comps were just as you would have expected. April was our strongest as we lapped the strictest shelter-in-place orders from a year ago. And then same-store sales trended down each month of the quarter as we lapped tougher compares. So while same-store sales trended down throughout the quarter, comps in June on a one- and two-year basis were still double-digit positive. As we come into July, we are off to a great start. We're really pleased with our performance, and we're seeing strength across the segments. Now, our guidance for the full year basically implies about a 4.5% comp in the back half. I would say, in terms of expectation for Q3 and Q4, not a big disparity. Obviously, as we got further into the year, we had some challenges in Q4. So the pairs are a little bit heavier than Q3. So qualitatively, I give you that little bit of color. We expect positive comps across all of our segments. VMT is expected to be flat in the back half of the year, so that's a little bit of color commentary for you in that regard. And I'll stop there. Any follow-up questions for me as you think about that cadence?

Yeah, so just maybe on top line just to clarify, so you were saying that June on a one-and-two-year basis you were low double digits across all segments?

One and two-year are different. So on a two-year basis, I would say better, right? On a one-year basis, we were low double-digit, yes.

Low double-digit. Got you. And then the commentary around July would suggest that, I mean, it is a bit more of a travel month, you know, all regions of the country out of school. So is July trending better than June? july is not complete yet so we're off to a great start we're pleased with performance i'm going to leave it there it's a 28 understood um got it and then just just a clarify uh clarification question are the acquisitions that you've made year to date in the updated guidance and just not the future uh potential acquisitions or uh is it excluding both yeah great question chris so we've our guidance includes acquisitions we've made to date

but does not include acquisitions that are under LOI or contemplated in our pipeline in the back half of the year.

Got it. Thanks very much. I'll open it up for somebody else.

Your next question comes from the line of Simeon Goodman with Morgan Stanley. Your line is open.

Good morning. Hi, Jonathan. Hi, Tiffany. My first question is a two-parter on the car wash segment. The first part of it is the penetration. Tiffany, I think you said 47. I think we had 45 on the wash club last quarter. Can you talk about seasonally, is there normally an uptick from Q1 to Q2? I don't know if we have the numbers, how they compare to a year ago. And then bigger picture, can you talk about any updated thoughts on franchising car wash or rebranding to a single banner?

Hi, Simeon, it's Jonathan. I'll start, and Tiffany can certainly jump in. In terms of wash club seasonality, I think this is a bit of a weird year because people are now getting out and driving and all that kind of stuff. So I think there's some natural seasonality to the business, but I don't want to give any sort of deeper color commentary on sort of seasonality with wash club subscriptions. We are continuing to execute our plan, which is focused on great operations, simplified menu, better selling techniques at the stores, and we're reaping the benefits there. So I think hard to comment on seasonality regarding wash club subscriptions. Rebranding, I mentioned in my comments that we're testing rebranding some of our stores to take five car wash. It's very early in the test. We think that having a unified banner potentially in time makes sense from a brand equity and consumer perspective. But very early stages of the test, and we'll look forward to updating you guys in future quarters.

And, Cindy, I think the only thing I'd add is we're making great progress on wash club penetration, subscription penetration, right? So you've seen that penetration percentage tick up just about every quarter. And more importantly, even in the penetration, because that bounces around based on the mix of wash club and non-wash club, is that we're adding members every month, right? 50,000 this quarter. I think it was 50,000 last quarter. So the team is making great progress.

And is there seasonality in general, not saying what the numbers are, but is there seasonality to wash club penetration or it shouldn't work that way given that it's a loyalty program and it should build cumulatively over time?

Yeah, the latter, Sidney, and it does build cumulatively over time.

Okay, that's fair. And then my follow-up question is thinking about the incremental margins or the flow-through, for the remainder of the year. Tiffany, you mentioned that you're not fully staffed in some places, in some businesses. How should we think about it, you know, even on maintenance this quarter? You know, our model, we flow through it, I think, a little bit better last quarter, and yet the comp was even stronger. And so we're trying to think about, you know, we get the guidance and it's better in the back half, but how to think about flow through and some of the considerations you mentioned around labor.

Yeah. So listen, I want to be really clear here. I don't want to overplay this card, right? We are certainly not immune to the labor challenges, the nationwide labor challenges. We're facing the same challenges as everyone else. It's important to note that in the maintenance segment in particular, while we're facing those challenges, and it did give us a little bit of incremental flow through, if I just give you order of magnitude here, the company operated store four wall margins were 40% in the quarter. That's a combination of car wash and maintenance. If you look at maintenance, maintenance was about 43%. The impact of the labor shortage was about 50 basis points. So it's $700,000. It's 50 basis points. It's not a large number, right? So it is a benefit. But the bigger benefit that's boosting those incremental margins is just sheer car count, right? And the fact that consumers are driving more and are pushing more cars through those boxes And those incremental cars are driving incremental margins. So I don't want to overplay that point that we are facing some labor shortages.

Okay. Thanks. That's helpful. Take care.

Your next question comes from the line of Liz Suzuki with Bank of America. Your line is open. Great. Thank you.

Are you starting to see any pause in the recovery in areas that are starting to see spikes in COVID cases from the Delta variant? Or does it seem like that recovery and driving activity is really still chugging along?

Hey, Liz, it's Jonathan. I'd say that we're not seeing any detrimental moves in traffic or demand in those areas. But, you know, look, this is a moving target. But, you know, so far we're not seeing that.

Okay. And let's have the gap in performance in areas that have really reopened, like in the US versus like Canada, that's still pretty, you know, tightly locked down.

Yeah, I think I mentioned it and Tiffany mentioned it in our prepared remarks. You know, Canada's, you know, hard to say exactly, but two to three quarters maybe behind the U.S. in terms of opening. You know, they really started opening up in early July. So still a bit of softness there. And then obviously we mentioned some of our European markets. You know, I don't want to go through all 13 countries, but... you get various degrees of sort of, you know, normality in Europe. So we definitely think the U.S. is ahead in terms of consumer behavior, consumer spending, with sort of a lag certainly in Canada and parts of Europe. That's how we think about it.

Okay, great. Thank you.

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

Hi, good morning. Thanks for taking our questions. You had mentioned in the prepared remarks that being in stock when others weren't was a driver of market share during the quarter. I wondered how big of a driver this was and how it looked as the year goes on, just given some of the challenges we're seeing within the supply chain.

Hey, Kate, it's Jonathan. I'll start, and Tiffany can certainly jump in. But, you know, I think I mentioned, you know, we were very – proactive on this area, really back in Q1, late Q2 of 2020. We feel very good about our supply chain and inventory availability and access to inventory for the balance of this year and beyond. There's certainly pressures there in terms of actual availability and then some of the shipping costs. We're certainly seeing that. As I mentioned, we've successfully passed that on to our customers, and we're seeing active customers at an all-time high. So, You know, I don't know exactly when this thing sort of relieves itself. I think we're probably looking at, you know, another, you know, maybe two to three quarters of this sort of being an impact. But we feel very good about where we are today.

Thank you. Your next question comes from a line of Peter Benedict with Baird. Your line is open.

Hey, guys. Good morning. Thanks for taking the question. I guess my first is around car wash. Just curious, any comments, qualitative or what, around the competitive environment, just within the car wash segment around M&A multiples, where they may be landing? And related to that, just your thoughts, you talked about the rebranding. Is that something that can be a precursor to the idea of franchising? within that segment longer term. Just curious your thoughts on that.

Sure. Thanks, Peter. Good questions. In terms of multiples, I think we've talked before that tuck-in M&A acquisitions are sort of in that mid to high single digit and no change in that guidance. In terms of rebranding, It's something that was part of our underwriting thesis when we first looked at this business back in August 2020. We do think there's power in having potentially one brand for our car wash business. I think I've also mentioned on previous calls that, like we did with the QuickLube business, we owned that business company stores for about a year. We sort of worked on the model, made some tweaks to it, and then obviously we started franchising it. No commitment to franchising the car wash business, but I think it wouldn't be unfair to look at that playbook, what we've done in the past, and say that we would do it again. So more to come on that.

Okay, great. That's helpful. And then my follow-up would be just around the cross-segment engagement by your customers. You mentioned kind of still, I think, less than 5% maybe crossover. Can you maybe build a little bit on how you plan to grow this timeline? Is this something that can see meaningful traction in the next 12, 24 months, or is it just a longer-term, I guess? Thank you.

Yeah, I think we mentioned less than sort of 5% on average are sort of visiting one service to another. It's part of our digital journey. It's part of our data journey. We're very early into it. Obviously, that overlap matters in terms of proximity from one store to another. So we think this is a multi-year journey. We're super excited about it. And I think we would hope to obviously grow that less than 5% to way more than 5% over a multi-year basis. Just an important opportunity for us that we're sort of leaning into now.

Okay. Fair enough. Thanks so much.

Your next question comes from the line of Sharon Vexia with William Blair. Your line is open.

Hi. Good morning. I guess I wanted to delve a little bit deeper on the implied second half guidance. I guess there is some conservatism, it appears, in the comp guidance. I know you said July was off to a strong start. I'm wondering if July is ahead of that imputed kind of 4.5% comp for the second half. And then also on the margin, I think there's a bit of a step down in the implied EBITDA margin. Is that just seasonality in the business? Are you expecting any kind of incremental pressure and margin in the second half?

Hi, Sharon. Thanks for your question. So, you know, as I said, the guidance implies about a 4.5% same-store sales guide in the back half. We're pleased with where July is trending. We're going to stay qualitative there, not any quant to share. Look, I think, you know, we continue to be somewhat cautious, right? We're not post-pandemic yet, right? There's still some variability in the market. We feel good about our level of execution, certainly. As we've talked about in our prepared remarks, we played offense last year when others were playing defense. So we feel good about how we entered 2021, the way we set ourselves up as the reopening takes shape. You're certainly seeing it in our first and second quarter prints. But with Delta variant out there, you know, we've certainly taken that into consideration and we want to remain prudent as we think about the back half.

but um you know we're excited about 2021 and we're going to continue to execute at the top of our game and um hopefully we come back with some great news for you here in the back half of the year that's really helpful can i ask a follow-up question on the staffing levels are you fully staffed now um and did it impact any um any of the top line results in the second quarter

Yeah, Sharon, we're staffed to deliver the results that we delivered in Q2. Look, there's constants of staffing pressures, but we're optimistic that that will ease a little bit as some of the employment stimulus sort of eases off in the back half of the year. You've got to remember that our company-operated stores, both Car Wash and Quick Lube, are highly efficient labor models, right? There are not a lot of people working in those stores, so we use great operational procedures and technology to sort of limit the labor exposure there. So I'd say that there's staffing pressure, but you don't deliver the comms that we delivered in Q2 if you don't have really excellent sort of staffing levels in the stores.

Thank you.

Your next question comes from the line of Chris O'Call with Seafull. Your line is open.

Thank you. Good morning, guys. Jonathan, my question relates to the company's M&A strategy for the car wash segment. And is the company trying to get into a dominant position that it acquires stores or operates locations? And is the focus on acquiring chains with an express format? Maybe talk a little bit about that. And then I had a follow-up. Sure. Sure. Thanks, Chris.

Good to have you on the team. We buy stores in Quick Lube or Car Wash because they're accretive transactions. We have a machine that's been built since 2016 in order to execute against that. We acquire at accretive multiples. We integrate and make the businesses better. So, the last thing I'd say in terms of dominant position, sure, we want to have a dominant position in every single segment that we operate in. And I think you know scale really matters in this industry. So, getting to a scale's position in our segments is important to us. So, there's some things to think about from an M&A perspective. The other thing I would point you to is our QuickLube business really provided an amazing playbook in terms of car wash. So we're sort of repeating to some extent the playbook we've done in our QuickLube business. In terms of the type of assets that we're acquiring, we are very focused on the express tunnel car wash business. So that's our core focus in terms of acquisitions and greenfield stores.

I know you mentioned there were no changes to your valuation assumptions and that acquisitions are still highly accretive. But are you concerned at all that if the number of players increase in PE-backed players, I guess, that it could impede your acquisition plans?

It's a good question. We have a M&A muscle and experience over the last 10 plus years. That's, I think, second to none in the industry. We have a reputation because we are a known buyer in the industry. And I would say that we continue to do highly accretive transactions. We're not worried about whether there are some smaller type PE groups in We have a mission, and we're going to continue on that. And I think it's validated by 50 units have been acquired so far in 2021 and 67 total units since we acquired the business in August of 2020. So we feel very good about our M&A strategy, you know, both in terms of what we've delivered so far and the future. Great. Thank you.

Your next question comes from the line of Lavesh Hemnani with Credit Suisse. Your line is open.

Hi, everyone. Congrats on the strong quarter, and thanks for taking my questions. So I had a follow-up question on the strategy behind rebranding the car wash take five locations. I'm trying to understand if this is just a strategy because the market wouldn't allow for two separate locations, or is this just being viewed from the customer angle where it might drive more marketing synergies over time?

Thanks, LaVesh. I think I said in my prepared remarks we're testing it. So I think we've got a thesis around the benefits for it, but we'll come back to in future quarters. But from a big-picture perspective, having a single brand product which we present to the customers is probably long-term a positive for our business. So that's what we're testing, and we'll come back to you with more results. But again, early in the test, and we're excited about what we're seeing so far.

Got it. Thank you. I just had a quick follow-up on the margin. So you guys are benefiting from, you know, the renegotiated chemical contract or new take-file labor model. Is there a certain time this year or only next year when you're annualizing that change, or is this something that is constantly going to be driving the business?

I meant the last part of your question, but I think you were asking about the renegotiated chemical contract. That was specific to the car wash segment. That contract was renegotiated at the end of 2020. So we lapped the benefit of that renegotiation in the fourth quarter.

Got it. And what about the take five labor model? Is that the same time period?

The labor model was Q2, sorry, the take five labor model was Q2 of 2020. So we just lapped the anniversary of those changes.

Understood. Thank you so much.

You bet. Your next question comes from a line of Karen Short with Barclays. Your line is open.

Hi, thanks for taking my question. I have a couple questions. In terms of the crossover shopper, what do you actually think the potential is relative to just under 5% that you cited? And then, what is the actual physical overlap in the store base within the appropriate trade area? I'm just trying to gauge what the opportunity is on that crossover.

Sure. Thanks, Karen. Less than 5% today, so a bigger number than that in the future. So let's say that's a starting point for potential. We've got 4,000 locations. There's significant overlap within the businesses, but we've got businesses that have different intervals with customers. Some of our customers come multiple times a month with car wash, multiple times a year with quick lube, and so on and so forth. So I would say that we have the data because we capture data across all of our businesses. So we know the habits of the customer. We also understand lifetime value of a customer in the automotive aftermarket spend. So understanding where we have the opportunity to capture more of that wallet share is important to us. But in terms of potential, I would say we're less than 5% today. We believe that it will be much bigger than 5% in the future.

Okay. And then with respect to elasticity, obviously you commented that you're seeing inflation. Can you just give a little color on where inflation is today and what level, if you think there is a level where you may get some pushback from the customer?

I think it's a good question, and we've talked about this before, but if you look across our businesses, take out Car Wash for a second, which has an average check of about $10 or $11. Our next smallest average check is about $80 in our quick-loop business. So the ability to pass on price, either because of commodity pressure or labor pressure, is very doable. And, in fact, across all of our segments, we've done that over the last 12 months, and we've seen no negative impact to businesses. consumer traffic or consumer demand or no negative impact to NPS scores, Net Promoter Scores, which is the customer satisfaction. So, we have a unique position where because of our higher average check, because of our needs-based services that we offer to consumers that we have very successfully passed on any sort of incremental inflationary pressures that we've endured over the last 12 months. So, I think Inflation, in summary, is a net positive for driven brands. And then remember, from our franchisees' perspective, they do a great job of passing on price, and obviously we get paid royalty off the top line on franchisees. So I think inflation generally is a net positive for driven brands.

Okay. I have a question. Your longer-term algorithm was obviously for low double-digit revenue growth and low double-digit EBITDA growth, but you're obviously – much wider gap on the EBITDA growth versus the top line. Any thoughts on that algorithm longer term in terms of whether EBITDA growth actually could be higher?

Well, we're certainly not going to change our long-term growth algorithm two quarters into being a public company. So we're certainly sticking with the long-term growth algorithm. Obviously, we want to be prudent in terms of how we manage expectations, but we're very pleased with what our long-term growth algorithm is. And remember, that's organic. That's before we think about any M&A, which is definitely upside to the model.

Right. Thank you.

Our last question comes from the line of Peter Keith with Piper Sandler. Your line is open.

Hey, thanks, guys. Nice results. So, Jonathan, two quarters into being a public company, I'm curious what the conversations are like with potential franchisees. Now that your results are public and we can see the attractive four-wall EBITDA margins, are you trying to attract potentially more institutional money or more well-capitalized franchisees that perhaps want to own a portfolio of the driven brands?

Hey, Peter, great question. That's a really good one. I would say that, you know, look at our franchise pipeline. I think it's up to 750 units. It grew by about 100 units from Q1 to Q2. Demand for our brands is strong. I don't think the public entry of driven brands is really affecting that demand. I think the demand is driven because these are great businesses, needs-based essential services with really strong unit-level economics. So I don't think the average franchisee really cares whether Driven Brands is public or not or potential franchisee. And in terms of, you know, larger institutional type franchisees, you know, how we think about our franchisees is we want equity that is highly correlated with the term of the franchise agreement. So, you know, I don't necessarily want private equity. I want patient equity, our typical franchise 15 years. And I want people that are investing in our business sort of, you know, to marry towards that franchise agreement. So that's how we think about that.

Okay, fair enough. And then I did want to flesh out a little bit more around that cross-marketing. Maybe a basic question, but you pointed out that the premium oil customers, kind of mirror customers, maybe at a high level provide some characteristics on what those overlaps are. And then as you're starting to get into this cross-marketing, are you finding it easier to drive to oil change or drive to car wash, or is it pretty comparable?

Good question. So when we said the oil change customer and the car wash subscription customer mirror each other, that's around demographics, that's around household income, that's around proximity to the store, likely around the car that they drive as well. So those things sort of line up very well. And not surprising, right? The folks that are buying sort of the premium oil may have a little more disposable income, more likely to buy a subscription for the car wash. But again, we know that because we capture data from both sides of the businesses, so then we can actually marry up the data to understand which customers are buying both services. That then in turn leads us to, if we have premium oil customers that are not buying Car Wash subscriptions and live within relative close proximity, that's definitely a target opportunity for us to invite them to come to us Car Wash. So that's how we think about that. This is all data-driven from our data lake, which we've talked about before. So I would say, you know, just a big opportunity for us, and I think Karen tried to push me on it as well, you know, less than 5%, what's it going to be in the future? We think it's going to be bigger than 5%, but it'll take time.

And that goes mostly taking those oil customers to car wash, not vice versa.

Oh, I think this is absolutely, it's not a sort of one-way traffic. So I think... You know, it works across all of our businesses. So when you think about our collision businesses, our quick loop businesses, our minor key businesses, other businesses, all those customers are spending money in sort of their lifetime, what we think about sort of the lifetime value of their spend in automotive aftermarket. So, you know, there's opportunities not just with quick loop or car wash, but across the entire Driven Browns ecosystem.

Okay, thank you.

Very helpful.

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

Thanks to me. And I think we're out of questions, but I just wanted to say thank you to the driven team and especially to our franchisees for just having a phenomenal first half of 2021. And just to reiterate how optimistic and excited we are for the back half of the year. Thank you to me.

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