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.