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.