Driven Brands Holdings Inc.

Good morning, and welcome to Driven Brands' third 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 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 the company's SEC filings, including the Form 8K filed today containing the company's earnings release. 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.

Thank you and good morning. We had another great quarter across the board. Our third is a public company and are excited to share the results over the course of today's call. Driven Brands is the largest automotive services company in North America, and our diversified portfolio of services gives us many levers to grow same-store sales and units, which ultimately drive profit growth. We've consistently taken share for the past decade, and yet we are less than 5% of this massive and growing fragmented market. We will continue to take share and win in this industry because of our core competitive advantages, our sheer scale, our ability to collect and then use our customer data to drive higher frequency and deeper penetration, our ability to open new units, either franchise or company. Now, over the long term, Driven has and will consistently deliver organic, double-digit revenue growth and double-digit adjusted EBITDA growth. And because of our asset-light business model, we generate a ton of cash. We then use that cash to further accelerate our growth by layering on acquisitions, which as we have proven, has massive incremental upside to our model. Said simply, driven is growth and cash. And we're pleased with our Q3 results that we released this morning, and all credit goes to our team and our amazing franchisees. Compared to Q3 of 2020, consolidated same-store sales were positive 13%. Revenue increased 39% to $371 million. Adjusted EBITDA increased 42% to $98 million. And adjusted EPS increased 30% to 26 cents a share, another top to bottom beat. And we are very proud of these results and remain optimistic about the remainder of this year, and more importantly, about 2022 and beyond. Now in Q3, we gained market share across all segments. We continued to lead into our competitive advantages, our data, marketing, operations, store growth, and supply chain. which led to more cars, more sales, and more profits for our franchisees and for Driven. We drove same store sales through a healthy balance of new customers, increased repeat rates, better mix, and our ability to take price. All of this combined led to 13% same store sales. We continue to see strength in our consumers and their driving behavior in 2021. Vehicle miles traveled continues to be a tailwind. The summer started strong. June and July were the first months that VMT was flat to 2019. And then in August, VMT softened slightly, likely around concern for the Delta variant. September rebounded nicely to a similar pattern experienced in June and July, and that trend is continuing into Q4. 2022 is set up to be a very strong year for driven brands. Our consumer outlook for 2022 is positive, which should return VMT to pre-pandemic levels. First party data is getting more and more valuable as we continue to shift from mass marketing to personal one-to-one engagement and a call to action. Now, we see tremendous opportunity from the customer data we're continuously capturing. While we've always done a great job of collecting customer data, I'd say we've only done a good job of digesting and commercializing it. And to that end, I'm excited to welcome Matt Meyer to the Driven Brands team as Chief Data and Digital Officer. Matt joined us from Whirlpool, where he expanded their offerings to include industry-leading IoT connected appliance experiences, expanded their direct-to-consumer digital platforms, and led their global data and advanced analytics competency. Matt will be working with Suzanne Smith, our Senior Vice President of Marketing Analytics and Intelligence, to unlock even more customer frequency and penetration opportunities across Driven. We currently have 20 million unique customers in our data lake, and we're adding about 900,000 each quarter. This customer data will continue to be foundational to our market share gains over the next decade. We've been leveraging data to drive higher customer frequency and increased penetration. Now we're starting to test cross-marketing and driving more customers to our digital platforms. But this is just the tip of the iceberg. This will allow us to lower acquisition costs of new customers, and increase the wallet share of existing customers by continuing to cross-market and provide complementary products and services. As we look across driven segments, the opportunity for incremental sales from targeting and cross-marketing is huge, and we're just starting to unlock this. And all of this with minimal costs, thanks to the data infrastructure we have already built and the plug-and-play model that can be applied across customers. And none of this is built into our long-term guidance, but the opportunity is significant. Moving to unit growth. In the third quarter, we added 53 net new units. This was a balance of franchise and company store openings and tuck-in acquisitions. And I'll break down these complementary levers for you. But to us, they're interchangeable. Our goal is to own the best street corners in the best market. in the best, fastest, and highest return on investment we can. Our organic new unit pipeline continued to grow into Q3. Our total organic new unit pipeline now sits at over 1,000 units. That's up by 10% versus the prior quarter through a combination of both company and franchise locations. Now, let's break that down a bit. Our company store pipeline is strong with over 220 locations. also up 10% since Q2 and continues to build. This provides very strong visibility into 2022 and 2023 openings. The franchise pipeline is also growing every quarter. Today we have more than 800 commitments to open franchise sites. Looking back at our first public call, this franchise pipeline was 600 sites, which gives you a sense of just how quickly it is growing. And these 800 commitments provide visibility into unit growth over the next four years. And we have locations identified for nearly 300 of these already. Based on the well-developed pipeline, we are confident in opening at least 250 locations in 2022. And those are all organic openings. That is before we include any sites in the M&A pipeline, which will obviously add to the overall visibility for unit growth. Now supplementing our strong organic pipeline is our equally robust M&A pipeline. Scale matters in our industry, and M&A is one of the highest and best uses of our cash flow, which will compound over time, driving higher returns for all stakeholders. M&A is a core strength at Driven, and all transactions to date 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. 2021 has been a busy year, particularly for car wash acquisitions. So far this year, we have acquired 70 car wash units for a total of 87 units since adding the car wash business to the Driven Brands portfolio in August 2020. This brings our total car wash unit count to 288 units in the United States. This is a 44% increase in store count in only 14 months. And these acquired stores will continue to benefit from our scale in data, marketing, operations, supply chain, and purchasing. And they'll have a full year impact in 2022 and beyond. This is M&A augmenting our compounding organic growth algorithm. Now, let me give you a few details about our car wash acquisitions to date. The average transaction includes 2.6 locations. 60% are proprietary deals being generated by our internal business development team. The AUV at acquisition is 1.3 million. Purchasing synergies are significant, with a 40% average reduction in chemical costs. Our pipeline is strong, and we feel very good about this growth lever for years to come. And remember, that is before we layer on greenfield car wash growth, which we expect to be about 50 units in 2022. If you look at the average of the trailing three years, Driven has acquired more than $50 million of pre-synergy EBITDA annually. Every acquisition is integrated, and in all cases, the business has improved under Driven ownership. Synergies typically translate into a two to three turn reduction in purchase multiple post acquisition. And these synergies come from better use of data, better marketing, better operations, and better purchasing. We won't provide annual guidance for M&A, however, Adding $250 million of incremental pre-synergy EBITDA over the next five years to Driven's organic long-term growth algorithm would be a very reasonable assumption for your models. We've now been in the car wash business for a little over one year. Looking back to when we acquired the business in August of 2020, there were fewer than 200 locations in the United States. We now have 288 locations. as our teams applied the Driven Growth Playbook through both greenfield openings and acquisitions. The car wash business has been highly accretive to both our top and bottom lines, and we have made significant changes to improve its foundation, which has resulted in higher subscription rates and healthy same-store sales, and we are opening and acquiring new units. But there is still a long way to go. And I'm even more optimistic about this business than when we bought it a year ago. But we will continue to optimize it. And I'm delighted to announce that John Teddy has joined Driven Brands to run our U.S. car wash business. John spent the bulk of his career driving transformation and growth in multi-unit retail and consumer services businesses. Most recently, he was head of strategy and corporate development at Lowe's. Previously, John also worked at the Home Depot. And John is no stranger to Driven. He was a key member of the Take5 team where he helped grow our business significantly from 2017 to 2020. We're thrilled to welcome John back to the Driven team. Now, I've been asked about our long-term strategy and competitive mode for Carwash. And when I think about the long-term potential for this business, it's simple. We are going to be the biggest Carwash company in the industry. Now, while we intend to have the most stores, we are equally committed to having the best stores. We want stores that have great real estate, and then we commit to offer customers the best experience when they come to one of our locations. This is core to everything we do at Driven. We want the customer to trust that our brands will always offer a great experience with first-class customer service. That's our long-term vision for the car wash business, and we're only 14 months into that journey. We recently started testing rebranding our car washes to the Take 5 brand name, and it is still very early innings, but I wanted to give you an update. Now, the hypothesis is straightforward. Having one national brand allows for efficiencies across marketing, real estate, operations, people, and subscription member benefits. So why the Take5 name? Well, our Take5 brand name stands for fast, friendly, quality, and simple. And that is what customers want in a car wash experience. Take5 has industry-leading NPS scores of over 80% and repeat rates of over 70%. Our customers trust the Take5 name. It also accelerates the growth of our Take5 brand recognition across the country while enabling cross-promotional synergies between our two most frequented brands. There are also many markets where our car wash and quick glue businesses overlap, and future development will, in many cases, be in the same markets and even on shared real estate, driving further brand connection and efficiencies. We started with five Take5 branded car washes and have since expanded to 25. and we'll keep you posted as our test progresses. Now, let me share my thoughts about the rest of the year and beyond. It's very positive. We remain bullish on 2021 and feel very good about achieving our updated guidance for adjusted EBITDA of $350 million for 2021. This is up 23% from the original $285 million estimate ahead of our IPO less than 12 months ago. More importantly, we feel really good about the momentum in our business heading into 2022. We've added 145 stores so far this year. They will ramp and have a full year impact in 2022. And all of our store pipelines continue to grow. Unit count growth should accelerate in 2022, and 250 new units feels very achievable. And M&A will continue to be an additional accelerator to our results. Tiffany will give full 2022 guidance on our Q4 earnings call in February 2022. As a private company, when I joined Driven in 2012, we generated less than $40 million in EBITDA. In 2015, we announced our first five-year plan with a goal of $200 million in EBITDA. We achieved that early and increased our target to $300 million, which we have also achieved ahead of schedule. Our new dream big plan is now targeting adjusted EBITDA of at least $850 million by the end of 2026. That means continuing to deliver on our long-term organic low double-digit revenue growth and low double-digit adjusted EBITDA growth, plus the $250 million of pre-synergy acquisition EBITDA, which we know will expand and compound. And we're believers in this plan because we are a compound grower. And our growth is low risk because of our current market share. And we are asset light and generate a lot of cash, which we reinvest back into growth. And our benefits we generate with scale are continuing to grow. And our business model works well in all economic cycles. And finally, we execute and do what we say we're going to do. You can see this very clearly in our 2021 results and our momentum heading into 2022. Driven is growth and cash. I'll now turn it over to Tiffany for a deeper dive into the Q3 financials and 2021 guidance. Tiffany.

Thanks, Jonathan, and good morning, everyone. We have now delivered three consecutive quarters of strong performance since our IPO in January. We are proud of our entire team, from franchisees to store-level employees, brand support teams, and corporate office personnel. Everyone has shown tremendous flexibility and a relentless focus on operational excellence, which has produced great results year to date, and we expect to end fiscal 2021 strong. For the third quarter, system-wide sales were $1.2 billion, from which we generated revenue of $371 million. Adjusted EBITDA was $98 million, and as a percentage of revenue, adjusted EBITDA margin was 26%. Adjusted EPS was $0.26 for the third 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. We have tremendous white space to continue growing our store count in this $300-plus billion highly fragmented industry. And as Jonathan discussed, our franchise, company greenfield, and M&A pipelines are all robust, and we are aggressively growing our footprint. In the quarter, we added 53 net new stores. Same store sales growth was 13% for the quarter, with consistent performance across the three months. Now that we have celebrated the anniversary of the ICWG acquisition in early August, car wash was included in our consolidated same-store sales calculation on a prorated basis for the third quarter. We once again outpaced the industry across all business segments, continuing to gain market share. And our same-store sales were comprised of positive car count and average ticket. Car count was driven by our best-in-class marketing and customer experience, and average ticket continued to benefit from the increasing complexity of vehicles. 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. As always, this is provided on our infographics, which is posted on our investor relations website. When you put unit growth and same-store sales growth in the blender and account for our franchise mix, our reported revenue in the quarter was $371 million, an increase of 39% 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 drove four-wall margins of 39% at company-operated stores. And above shop, SG&A as a percentage of revenue was 20% in the quarter, over 200 basis points of improvement versus last year. This resulted in adjusted EBITDA of $98 million for the quarter, an increase of 42% versus the prior year, and a $5 million beat to our internal forecast. Depreciation and amortization expense was $28 million versus $16 million in the prior year. This increase was primarily attributable to the growth in company-operated stores. Interest expense was nearly $18 million in the quarter. and we recorded income tax expense of nearly $12 million, which was an effective tax rate of approximately 26%. For the third quarter, we delivered adjusted net income of $44 million and adjusted EPS of 26 cents. 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 third quarter results by segments. the maintenance segment posted positive same-store sales of 17%, once again, the strongest in the portfolio. Maintenance continues to benefit from more targeted digital marketing, which led to an increase in car count from both new and repeat customers in the quarter. And from a profitability perspective, strong top-line performance resulted in higher flow-through on incremental sales. While the national labor shortage continued into the third quarter, the situation has improved since Q2 in many of the markets that we serve. And we estimate that the margin benefit from running slightly later on labor than intended was 11 basis points in the third quarter, down from 50 basis points in Q2. The car wash segment posted positive same-store sales growth of 6%. As Jonathan discussed, we made a lot of progress since the acquisition. One of the highlights is the improvement in Wash Club subscriptions under our ownership. Subscriptions increased to over 49% of sales, and the number of Wash Club members grew by an additional 43,000 in the third quarter. This is up 700 basis points, or 175,000 members, since the acquisition a year ago. And 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. Non-wash club revenue per wash is up more than 14% versus last year. From a profitability perspective, we renegotiated our chemical contract immediately after the acquisition, 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 benefit. But as Jonathan also said, there is still a long way to go to fully optimize this business. We'll continue to drive results with the items I just mentioned, while supercharging our marketing and branding efforts to drive even stronger revenue and profitability going forward. The paid collision glass segment posted positive same-store sales in the quarter of 11%. This is the second consecutive quarter of positive same-store sales for this segment since the start of the pandemic. An improving VMT trend is an important tailwind for this business. And although 30% of collisions occur during rush hour and that congestion hasn't fully returned, we have added an additional 570 direct repair programs with insurance customers so far this year, resulting in performance that continues to outpace the industry. And finally, the platform services segment posted positive same-store sales growth in Q3 of 16%. Platform services is the segment most exposed to supply chain pressures. And as you know, every aspect of the supply chain is challenged right now, from manufacturing to the ports to trucking. We have leveraged our scale and leadership in the industry to turn this into a strength and differentiator for Driven. We contract with multiple suppliers, while most of our competitors, 80% of the industry that is independent operators, rely on one primary supplier. We leverage the strength of our balance sheet to place orders earlier. And we have the team dedicated to relationship management and ensuring we keep close watch on every step of the supply chain. This is translated into more inventory in stock at 1-800-RADIATOR than many of our competitors. and customers have been willing to pay a premium, driving continued record sales levels within the quarter. We were pleased with our strong operating results in the quarter, which resulted in significant cash generation that allowed us to further invest in the business. That cash generation, together with our revolving credit facilities and access to the debt capital market, is important for our strategic growth plans. And as we've consistently stated, investing in our business and growing our footprint is our number one priority. We ended the third quarter with $115 million in cash, and we had $153 million of undrawn capacity on our revolving credit facilities, resulting in total liquidity of $268 million. Subsequent to the end of the quarter, we closed on a $450 million whole business securitization issuance, The notes were priced at a fixed rate of 2.791% and have a seven-year tenor, improving the weighted average fixed rate of our overall debt portfolio to 3.71%. The proceeds from the securitization issuance were used to repay the outstanding balance on our revolving credit facility, and the remainder will be used for general corporate purposes, including continued M&A. Pro forma for the securitization issuance, our net leverage ratio at the end of the third quarter was 4.15 times. You can find a reconciliation of our net leverage ratio posted on our investor relations website. We intend to continue using our balance sheet to capitalize on the substantial light space in a $300-plus billion consolidating industry. Now, looking ahead, we have delivered three strong quarters in 2021. and we expect a strong fourth quarter as well. We continue to be bullish on the state of the consumer, tailwinds from recovering DMT, and demand for our services this holiday season. Research suggests that 25% of consumers plan to travel for the holidays. That's up five points from 2020. And 70% of these consumers plan to use their car, with the majority planning to get a car wash or oil change before they do. In this morning's earnings release, we raised our four-year guidance to account for our strong operating performance in the third quarter, while maintaining our guidance for the fourth quarter. For the year, we are on track to open approximately 200 net new stores across the portfolio, a combination of franchise and company-operated locations, as well as the tuck-in M&A we've completed to date. We expect positive same-store sales growth across all of our segments. And on a consolidated basis, we expect approximately 15% same-store sales growth. That will drive revenue of approximately $1.4 billion, adjusted EBITDA of approximately $350 million, and should result in adjusted EPS of approximately 84 cents based on 165 million weighted average shares outstanding. In closing, we expect the strength of this portfolio to continue to deliver best-in-class results. We are focused on our proven formula with a platform that is scaled and diversified. Our formula is simple. We add new stores, we grow thanks to our sales, and we deliver stable margins. This results in significant cash flow generation that we reinvest in the business. While we won't release fourth quarter results until February of 2022, we hope that you all have a great holiday season, and we look forward to connecting with you over the course of the next few months. 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 the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Liz Suzuki with Bank of America. Your line is open.

Great. Thanks very much. So you've added 145 stores year-to-date, and the new guidance is for 200 total for the year. I think previously you had broken it out by 80 to 90 in maintenance, which you've already exceeded, 20 to 30 in car wash, which you've exceeded, and 60 to 70 net in PCG. It looks like there's been a net reduction in PCG year-to-date. So were there some stores reclassified into maintenance, and how should we think about that net store growth by segment now for the next quarter?

Hey, Liz. It's Jonathan. Good morning. Yeah, look, I think you got it generally right. I'll tell you that. The good news is we have all these different levers to grow unit count. We actually took it upon ourselves to, let's say, prune some underperforming operators in our collision business in Q3. We get the importance of our large insurance carriers and performance of our franchisees. So once in a while, we need to send a message to the system, and we took out some underperforming operators. So I think that was something that happened in Q3. I think it's a one-time event. It sends a little message to the rest of the system the other thing I would remind you Liz is like when you think about the collision units from an economic contribution perspective they're massively lower than let's say our car wash our maintenance businesses so I think you know you'll see a little bit of softness they are self-imposed in terms of the collision just because we're making sure that our franchisees understand the importance of delivering to our insurance partners

Okay, great. That's helpful. And then, you know, you took up the full-year EBITDA estimate by the amount of the beat in 3Q versus your internal estimates, you know, and so your 4Q outlook hasn't really changed. Do you think you're baking in a, you know, decent buffer of conservatism, just given all the unknowns with regard to the trajectory of miles driven, labor shortages, other headwinds that pop up?

Hey, Liz, I'll take this one. Sorry, Jonathan. Let me start, and then if you want to punch away, that's great. So listen, Liz, we've continued to provide a measured and conservative approach to our guidance. As you said, we raised our fiscal 2021 guidance by the $5 million beat to our internal forecast in Q3, and we held our 4Q forecast. That brought fiscal 2021 adjusted EBITDA to 350, which frankly implies for Q4 that we'll do same-store sales somewhere in the 10% range with adjusted EBITDA of 73 million. Frankly, we're pleased with October performance, and we continue to see strength across all segments. So October is off to a great start. Q4 is off to a great start, I should say. We expect solid demand for our services this holiday season. However, as you call out, we're not yet out of the woods on inflation and supply chain disruption. And while we're excited to welcome John Teddy back to Driven Brands to lead our U.S. car wash business, change is inevitably disruptive in the short term. For those reasons, we're holding our Q4 guidance, and that's consistent with our conservative approach to guidance over the course of the year. But I do want to be very clear that we did not lower our 4Q guide today. Hopefully that answers your question, Liz.

Yes, it does. Thank you very much. You bet.

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

Hi, guys. This is Michael Kessler on for Simeon. Thank you for taking our questions. I wanted to ask about the car wash segment. If we look at the same sort of scale on a two-year geometric stack, it looks like there was a bit of a slowdown, about 10 points slowdown, versus Q2, off of a very strong Q2. I just wanted to ask, you know, what did you see in that business to the extent that there was a slowdown driven by anything in particular, whether it was Delta, maybe the miles driven, you know, mid-quarter slowdown, any commentary there would be great.

Hey, Michael, Jonathan here. Look, we posted 6% in Q3. There's always a bit of noise with the consumer right now, whether there's you know, funky things happening with Delta, you know, different things, you know, there was some sort of crazy weather stuff going on this summer, but we don't ever talk about that. But the business is in great shape, Michael. We have you know, owned it for 14 months. We're even more bullish about it than we ever have before. We've got, you know, a bunch of new stores that we've added, a bunch of stores in both our M&A and Greenfield pipelines. So there's nothing that concerns us whatsoever about the long-term potential for this business. This remains an incredible asset with incredible white space in front of it. So nothing whatsoever concerns us.

Okay. Okay, great. And my follow-up on the median segment, it was another, I think you guys called out a little bit of a benefit from the understaffing. You know, the grand scheme of things, it sounds pretty minor relative to the level of margin expansion that we were seeing in that segment, especially versus a year and especially two years ago. So I'm just wondering how we should be thinking about the margin here. I would anticipate or expect it could maybe continue to expand as the mix of the business shifts more to franchise. And is that right? And should we be looking at, I would say, both maintenance and the whole companies, even if that margin is potentially rebasing on this new higher level that we're likely going to end 2021 with?

Yeah, Michael, great question. So on the point about the labor piece, so you're right, we're seeing improvement in uh in labor trends right so we called out 50 basis points of benefit in q2 we're seeing 11 basis points of benefit from the labor shortage in q3 so definitely seeing improvement while we're still seeing a tight labor market um as we think about a greater mix of franchise in the maintenance space you're absolutely right we should continue to see that margin expand And then, you know, if you just look at the trend, we ended 2020 with overall consolidated margins of 23%. We're forecasting overall margins of 25% for driven this year based on our guide. And as we continue to increase the amount of traffic to our sites and increase the benefit of the top-line flywheel, we should drop more profitability to the bottom line. It's a 60-46 variable model. The margins should expand over time.

Okay. Thank you, guys. Good luck in Q4.

Your next question comes from the line of Chris Horvath with J.P. Morgan. Your line is open.

Thanks. Good morning. So my first question, just following up on the fourth quarter guide, I guess two parts to it. On the second quarter, you talked about sort of mid-single-digit-ish comps. in the back half with 4Q slightly better, and now you're talking about 10. So it feels like you did raise the sales outlook, but then didn't really flow that through to the EBITDA line. So is there something changing on the cost side, and is there something unique about 4Q EBITDA margin seasonality?

Hey Chris, back to what I said to Liz a few minutes ago. Nothing is fundamentally changing other than we're taking a conservative stance because there are some moving pieces as it relates to inflation and supply chain. So we're just giving ourselves a bit of wiggle room and staying consistent with our conservative approach to guidance, but nothing to be alarmed about. And we expect Q4 to be strong.

Okay. And then on the long term, quick math suggests you just raised the algorithm to the high teens from low double digits. So is that accurate? And then As you think about what's on top of that, does that assume any margin expansion core business? And can you talk about typically what sort of margin synergies you could extract from that $250 million of pre-synergy acquisition?

Sure, Chris, great question. So a couple of points to make there. So when we're talking about long term and the at least $850 million of EBITDA by 2026, basically what we're doing there is keeping our long term algorithm intact. So we're saying double digit revenue and adjusted EBITDA growth with $350 million of EBITDA as the jumping off point coming out of 2021. We're suggesting that if you wanted to build in a layer of M&A, $50 million a year that compounds at that same long-term algo would be appropriate based on history. And then Jonathan's giving you a bit of insight today into the pipeline, right? So that's effectively how we've built it. Now, if you remember back to when we talked about the algorithm earlier this year heading into the IPO, That algorithm was based on pretty conservative assumptions around same-store sales, which were 2%. and a very conservative assumption around EBITDA margin, which was essentially holding it flat. As we've talked about before, the whole purpose of that long-term algorithm was to show the power of the drone portfolio and the fact that we could be a double-digit grower with conservative assumptions. And that's the purpose, frankly, of Jonathan's statement around at least $850 million, right? So again, the point is, with conservative assumptions, we could get at least $850 million. and there's plenty of upside there as, you know, we get synergies on the acquisitions as we expand margins and as, you know, we expect same-store sales to be somewhere above 2% just based on history.

And then on the synergies that you've experienced historically, is that 400 or 500 basis points of potential margin benefit there?

Yeah, we typically get about two to three turns of synergy improvement on the acquisitions that we acquire, Chris.

Okay. All right. Thanks very much.

You bet. Your next question comes from a line of Peter Benedict with Baird. Your line is open.

All right, thanks. Thanks, guys. Two questions. First, just back on inflation, is there any way to quantify the impact it had in 3Q, maybe across the top line, and how you're thinking about that in 4Q? And then on the 570 DRPs you added year to date, how many do you have currently in total? And just kind of curious where you think you can get that maybe over the next few years. Thank you.

Jonathan, why don't I take the first part and you take the second? So on inflation, Peter, thanks for the question. So what I would say is we've experienced mid single digit cost inflation year to date between oil and wages. Those are the two big categories. We've successfully passed that through to the consumer. Obviously, we provide needs-based essential services, and our average ticket, particularly in the maintenance business, which is where we're seeing most of that inflation from a company and store perspective, is $78. So we're having pretty good success year-to-date. I would say if you think about the average ticket of the maintenance division, though, and just what that means from an average ticket increase, still 80% of the average ticket is coming from NICS. So price increases that we've been able to take as a result of our pricing power are is still a relatively small percentage of the average increase in ticket. Jonathan, you want to address the ERP?

Hi, Peter. Good morning. Yeah, look, the DRP ads, Peter, is really coming from, you know, as our large insurance partners want to do, you know, more business with, you know, fewer large scale providers. So as we bring on stores or add stores to, you know, one of our insurance partners programs, you know, they get added to that DRP. So we think there's a great sort of long term growth here for you know, additional insurance work with our great insurance partners for our franchisees. So we'll get back to you, Rachel. We'll get back to you with the total number of DRPs that we have. Peter, I don't have it on hand, but, you know, we see sort of this continual addition of DRPs to new stores that we add and existing stores that are expanding their insurance relationships.

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 my question. I wondered if you could help us with quantifying some of the market share gains. Was there a particular business where you saw more market share gain than not and any quantification around that? And then my second unrelated question was with regards to supply chain disruption that we're seeing. I know your platform services are in a much better position than peers, but just curious what inventories look like right now and if there's anywhere you'd like to see more.

Hi, Kate. So I'll take the first part on market share, and maybe, Jonathan, you can address the second part. So in terms of market share, we're actually seeing great performance across all of our segments. We're taking share across all four. You know, obviously our higher growth segment is – higher growth segments, I should say, are car wash and maintenance. maintenance is performing quite well. We're seeing fantastic results there. So we're seeing outsized performance. We're doing quite well in car wash as well. So we're leaning into both of those segments, but again, seeing good performance across all four.

Yeah. And just building on that, Kate, good morning, by the way, it's Jonathan. If you look at sort of maintenance, you know, close to that sort of 20% same store sales, you know, you know that You know, we have one great competitor in that space. I don't know what their numbers are, but obviously, you know, when we look at some of the smaller independents or small chains, we know that they're not delivering those numbers, so we're taking share from them. Same in car wash, like 6%, same store sales comp is terrific, probably ahead of the overall industry. But then if you look at the unit count growth that we're experiencing car wash, that's obviously leading to share gains through, you know, incremental units. In terms of supply chain, Kate, I mean, I think it's amazing what's happening right now is that if you look sort of at the entire supply chain, it's disadvantaged at every level, whether it's at the production level, whether it's at the transportation level, and then whether it's at sort of the last mile level. So that is affecting literally every aspect of people's lives, I think, all over the world. You know, we see patches of that in various parts of our business. But again, I go back to our scale allows us to have really great contracts and be very important to our suppliers. So we're going to get sort of put into the front of the line when there is supply shortages. or distribution shortages. We've got contracts in place, multi-unit contracts that cover some of the pricing pressure that may exist in the market. And again, I go back to what Tiffany said earlier, we provide for the most part needs-based services. So our ability to pass on price through both our company stores and our franchisees is evident in the sort of same store sales, 13% that we delivered. So I think What I would say is that, you know, supply chain is definitely disadvantaged. You know, haven't seen any green shoots of improvement yet. We think it's going to last for some time. But when you're one of the biggest and most sophisticated in the market, generally you can leverage that supply chain advantage, you know, over sort of the fragmented industry that we operate in.

Thank you.

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

Hi, good morning. Thanks for the detail on the development pipeline and your expectations for next year. I was wondering if you could talk about what your expectations are for maintenance and PC&G in 22. I know you talked about 50 for car wash. And then just to clarify, I think there's some confusion as to whether or not you're falling short of your organic growth plans for 2021. Maybe if you could clarify how that's kind of shaping up relative to your initial expectations.

Yeah. Hey, good morning, Sharon. Relative to 2022, I think we will give sort of a breakdown by segment, you know, in the call in February. But You know, I think you'll see growth, you know, for all the segments as you sort of foot back to that 250 unit that I referenced in my remarks earlier. In terms of the organic pipeline, I think I mentioned it. I think it was to... maybe Peter earlier, but we definitely took the time to, I would say, send a message to some of our collision franchisees with sort of calling some underperforming stores. So that's intentional. We have the ability to do that because we've got so many levers to grow the business. So we took the time to actually get some underperforming franchisees out of that business. that will obviously have a, I suppose, short-term negative impact to unit growth. However, the economic contribution from franchise collision stores is a lot less than some of our other stores. In terms of the other Greenfield components, I think car wash Greenfield, we'd sort of guide it to 20 to 30. I think it'll be slightly less than that just because of if you like, sort of the labor and supply chain issues in terms of getting those stores open. We feel really good about those stores. They're under construction, but we're seeing a little bit of delay just in construction time frames. So that'll just bleed into Q1. So overall, two things are happening. A little bit slower opening on the car wash because of permitting inspections, some equipment supply chain issues within that industry, and then secondly, proactively sending a message to some of our collision franchisees. So those are the two things Again, what I would say Sharon though is, You know, we look at this bolt-on acquisition machine that we've built. It's really interchangeable, right? We don't at the end of the year say how many stores came from this, how many stores came from that. We're looking to grow units, and we look at bolt-on M&A as simply another way to add new units to our portfolio. So I think over time, you know, that's something that we'll be talking more about is just the total unit count, including what we think of as bolt-on and, you know, traditional greenfield in that calculus.

Thank you. That's very helpful.

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

Hi. Thanks. Good morning, everyone. Jonathan, I was hoping you could provide a historic perspective on rising gas prices as we seem to be moving in that type of environment. Has that impacted demand for your services with your core middle-income customer historically?

Hey, Peter, great question. I think we're all dealing with a pretty dramatic increase in gas prices. It definitely probably impacts people a little bit. I think it's offset by a couple of things, though, Peter. One is, I think consumers have a lot more money in their pockets now than they did when there was the last massive raising gas prices. I think that's an offset. I think the second thing that's pretty interesting in our space is if you look at what's happening with new car sales and used car sales, right? So new car sales, massively disadvantaged for all the supply chain issues. We know used car prices are up very significantly. And what are our core customers doing? Well, they're not buying new cars. They're holding onto those cars and putting more maintenance dollars into those vehicles. So I think you can't look at just gas prices as one impact. you have to look at the overall market. So I would say, you know, no material impact when you look at sort of the offsetting factors going on as well.

Okay, that's helpful. I was going to ask about the shortage of new cars. So it gets implied in your answer is that shortage is a benefit, and we'll see how long that lasts.

Yeah, and look, everything we see, Peter, is that, you know, that supply chain is not going to be unclogged or declogged for some time, right? I think you're going to see, you know, deep into 2022 before sort of that supply chain gets unclogged.

Yeah, okay. And then a separate question I had was some interesting comments you had on the franchise commitments. You're up to 800. It sounds like you've added about 200. in the last year or so. Is that typical, or has there been a step up this year that may be related to the GoPublic process?

Yeah, I think we've talked about this a little bit before, Peter, but I think what's happening is people are really starting to understand and appreciate the resiliency of automotive aftermarket services. So, you know, it's needs-based services. People, you know, it does really well in all economic conditions, I think. you know, franchisees from other industries. Maybe we, you know, sort of took a second or third look at this industry over the last 18 months. So I think this is sort of an awakening of how good the unit-level economics are in this space, and I would expect to see this trend continue, you know, as we look forward over the next sort of five years. So I think it's really just an overall appreciation and awakening of the power of this industry that we operate in.

Okay. That's helpful. Thanks a lot.

Your next question comes from the line of Karen Short with Barclays. Your line is open.

Hi, thanks very much. I just wanted to ask a little bit more about guidance for fourth quarter, or implied guidance for fourth quarter. So when you look at the incremental operating margins relative to the prior 1Q through 3Q, there's obviously a meaningful difference deterioration in implied 4K margins. So wondering if you could just give a little more color around that, because it does seem highly conservative based on what you've been doing for the last three quarters. And then I had one other question.

Yeah, thanks, Karen. So it's absolutely conservative, right? And we're being conservative because we're not yet out of the woods on inflation and supply chain disruption. So we just want to make sure that we're being very prudent as we think about the fourth quarter and have an opportunity to navigate the uncertain environment and be able to make sure that we can at least, you know, certainly meet, if not exceed your expectations as we get through this next 90 days.

Okay. And then, okay. And then as it relates to like bigger picture, um, when you think about inventory broadly and or labor broadly, I guess the only thing I'm confused about is I don't see how labor would actually impact you. I realize that all of your franchisees are impacted by the labor component of what's going on in the macro, but why would that actually directly impact you?

Yeah, I'll take it, Karen. And one, just to reiterate what Tiffany was saying, look, I think on the Q4 guidance, I don't know how more clearly we can say it, and I think hopefully you'll see that from the previous quarters that we've announced. we have intentionally been extremely conservative so far this year which is the right thing to do for a new public company and that conservatism is absolutely built into our q4 guidance that we gave so i just want to put a fine point on that secondly in terms of labor karen great great question um obviously our franchisees are amazing owner operators so you know we're not exposed to their overall labor issues but they do a great job of hiring people A lot of times they've got deep connections within the community. Across our industry, Karen, we have variable compensation, which is very much a norm. So, you know, we're well beyond sort of that $10 to $12 standard. wage issue that people were talking about 12 or 14, 12 or 15 months ago. So our effective wages are much higher. We also have, in many cases, better operating hours than some of the alternatives out there. Most of our stores are sort of open and operating during daylight, if you like. Lastly, we've got a lot of our employees have a passion or an interest in automobiles, so I don't think they have a passion for some other sort of equivalent wage-paying jobs that may be out there. So our franchisees do an amazing job. Within our company-operated businesses, our two company-operated businesses are Car Wash and Quick Lube. And I think as we've talked about before, those are amazing businesses. One of the reasons they're amazing is the incredibly efficient labor model that we have. So if you think about a car wash, You know, it's three, maybe four people at peak. At Quick Lube, same thing, three to four people at peak. So, you know, we're doing a terrific job of, you know, keeping those stores up and running, driving, obviously, terrific results, as you saw in Q3. So I think we're, you know, not immune to the labor challenges that are out there, but probably more favorably positioned than many folks.

Okay. That's helpful. Thank you. Your next question comes from the line of Chris O'Cole with Steeples. Your line is open.

Thanks. Good morning, guys. I was wondering if you could provide some color on the business segment mix you anticipate when you reach that $850 million long-term target.

Hey, Chris. It's Tiffany. So when we think about the continued growth in our portfolio over the next couple of years, I mean, obviously, we're continuing to grow franchise licenses as well as a nominal amount of company-owned stores in the maintenance space with our Take 5 Quickly business. And we're obviously continuing to lean into the car wash businesses. That's the newest business in our portfolio. So we're growing that both from an M&A and a company greenfield perspective. So those are the two businesses that are probably highest growth at this point. Of course, we look for continued collision, conversion opportunities. So I wouldn't say that the portfolio mix changes dramatically between now and 2026. So if you're thinking about the percentage of franchise versus company owned, it'll be slightly heavier franchise overall, but not dramatically different today versus tomorrow.

Do you all have a target for how much Car Wash could represent as a percentage of the EBITDA of the overall company?

We don't have a target, Chris, other than it is an incredible business with incredible unit-level economics and a massive amount of white space, and we've grown unit count by 44% in 14 months. So we think there is just a tremendous runway for that business.

Fair. And then I just had one other question regarding the Car Wash Take 5 rebranding opportunity. I understand the thesis relates to the long-term power of having a single brand that they're growing, but I'm wondering what the company hopes to learn from the test and how long you will need to make a decision before deciding to convert all the locations and maybe start a plan to rebrand new locations once you acquire them.

Yeah, I think it's like anything, Chris. It's... You know, the implementation of the signage, the implementation of the merchandising, possibly retraining some of the crew members, right, seeing what the consumer reaction is. making sure that when these stores are rebranded, it's not just a re-signage, but there's other things for the consumers. So I think it's not really questioning the validity of the hypothesis. It's making sure that we're nailing all the little things that go into a rebranding, which is not as simple as just putting a sign on a building. There's lots of sort of people, process, and systems that go along with that. So look, I think you can infer pretty easily that we've gone from five to 25 stores. So, you know, we like what we're seeing. And really, we're trying to find is there a reason not to do this? And to date, we have not seen a reason why we wouldn't continue this.

Great. Thanks, guys.

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

Hey, guys. Thank you for squeezing me in. I had a quick follow-up question on M&A, especially related to the $250 million incremental EBITDA over the next five years. Is it safe to assume that most of it is going to be car wash related? Or just if you can give us a sense of some of the near-term pipeline that you're seeing regarding M&A. Thank you.

Yeah, it's a good question. Look, we're not going to break down because we're not going to give guidance on where that M&A is going to come from. But I think it's a fair assumption that a good portion of that could come from car wash. We certainly don't talk about other potential platforms or additional M&A targets that we may be looking at. But I think it's fair to assume that a good chunk of it could come from car wash.

Got it. And just a quick follow-up, especially on the labor piece here. We spent some time looking at the maintenance business on the call today. But if I look at the collision side of the business, there have been some of the competitors out there talking about technician availability issues. I'm just trying to think about how is that impacting Driven specifically in its franchise locations. Thank you.

Yeah, I go back to what I said to, I think it was Karen asked about labor. Look, our franchisees are amazing individuals. They're owner operators. They've had a team of people for, in many cases, our average franchise tenure is 17 years. So they've had teams together for a long, long time. They take care of those employees. So look, we talk to our franchisees every day. There's no question that there's some challenges out there, but I think franchise locations are inherently very well equipped to deal with labor. because of their embeddedness in both the store, the community, and their relationships with people. So I would say our franchisees are dealing with it in a very positive way. Great.

Thank you.

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

Thank you all. We appreciate it. And I'm very happy with Q3. Again, reiterating the conservatism of our Q4 guidance. So anyway, thanks all. Look forward to speaking to you in the future. Bye-bye.

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