Driven Brands Holdings Inc.

Good morning, and welcome to Driven Brand's fourth 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 8-K filed today containing the company's earnings release. Information about any non-GAAP financial measures referenced, including a reconciliation of those measure-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 1 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. Our fourth as a public company and are excited to share the results over the course of today's call, but even more importantly, our guidance for 2022 of adjusted EBITDA of $465 million, an increase of almost 30% over 2021. Driven is the largest automotive services company in North America. Our diversified portfolio of needs-based services provides many levers to grow revenue, through same-store sales, units, and M&A, which drive profit growth. Our total addressable market is massive. It's over 300 billion, and yet we have less than 5% share in this highly fragmented industry. We will continue to grow and generate cash because of our core competitive advantages. Our multiple levers to open new units. We can build, buy, or franchise. Our supply chain capabilities that keep us in stock and allow us to take share and price when others cannot. Our scale, which is growing, is a significant and sustainable competitive advantage in our highly fragmented industry. Over the long term, Driven has and will consistently deliver organic, double-digit revenue growth and double-digit adjusted EBITDA growth. Now, that growth together with our asset-light business model means we generate a ton of cash. And our needs-based services and franchise business model helps insulate our profit from the impacts of inflation. We then invest that cash to further accelerate our growth by building new units and layering on acquisitions, which, as we have proven, adds massive incremental upside to our model. On our Q3 call, we announced our dream big plan of at least $850 million of adjusted EBITDA by the end of 2026. Exceeding that plan is our primary focus, and we are making great strides already. Driven is growth and cash. Before I jump into 2022 and beyond, I want to take a moment to highlight our Q4 results. As always, all credit goes to our team and our amazing franchisees. Compared to Q4 of 2020, consolidated same-store sales were positive 16%. Revenue increased 36% to $392 million. Adjusted EBITDA increased 29% to $85 million. And adjusted EPS increased to 18 cents from just one cent a year ago. another top to bottom beat, our fourth in a row as a public company. For fiscal 2021, we increased revenue 62% to $1.5 billion and increased adjusted EBITDA 76% to $362 million. And as I take a step back to reflect on the how and why of 2021, So much of this success is attributable to our benefits of scale in this highly fragmented industry. Despite COVID, depressed vehicle miles traveled, supply chain disruption, and labor challenges, we grew and took share. We had product when others didn't because of our supply chain capabilities, which then allowed us to take price to offset commodity and people costs. We staffed our locations. We could market when others didn't have the people or funds to do so. We grew our real estate and license pipeline significantly. And we acquired new stores at accretive prices. This is the power of the growing scale and sophistication of driven brands in a world where 80% of our competition remains small chains and independents. Scale is truly a compounding, long-term, sustainable competitive advantage, which most of the industry will never achieve. Tiffany will give more detail regarding 2021, but let's turn to our growth plans for 2022. I want to spend time on the three highest growth priorities at Driven, Quick Lube, Car Wash, and Glass. These businesses share several unique characteristics, simple operating models, highly fragmented competition, significant white space in terms of unit growth, and very strong unit level economics. These highest growth businesses are supported by the rest of our highly cash generative and asset light businesses. This is what makes Driven such a powerful engine, growth and cash. Now let's start with take five quick loop. The stay in your car 10 minute oil change. We were attracted to the simple and differentiated operating model. A simple menu, a simple building, and of course the phenomenal unit level economics. High 30% four wall EBITDA margins and approximately 65% cash on cash returns. When we acquired the QuickLoop brand in 2016, we have since grown that business in more than 13 times. Less than 50 units to over 700 with 23% franchised. And system-wide sales from 43 million to over 625 million in 2021. We've grown through same-store sales, new company units, new franchise units, and M&A. The pipeline for Take5 today sits at over 700 commitments, with the majority being franchised. Like in 2021, in 2022, we will open more franchise locations this year than company-owned. We expect this brand to continue growing aggressively, both in terms of same-store sales and new units. Take5 QuickLoop is the blueprint we were applying to our newer growth assets, Car Wash and Glass. Now, we're just getting started with Car Wash, and like our Quick Glue business, this is a phenomenal, simple operating model with terrific unit-level economics, high 30% four-wall EBITDA margins, and cash-on-cash returns of approximately 40%. We love the operating model, subscription revenue component, white space, and the opportunity for massive growth. You can clearly see why we're so excited about this business. As we mentioned last quarter, John Teddy rejoined Driven to run the US business. And over the past 100 days, he has enhanced his leadership team, visited every market, implemented some early action plans, and has developed a long-term strategy and vision for the business. Despite all of these changes, the car wash segment delivered 6% same-store sales growth in Q4. Now, while I am pleased with this performance, I know there is upside. And I'm eager to see John deliver on his plans over the course of 2022 and beyond. Our development team has done a tremendous job of building a greenfield pipeline of over 150 sites for car wash. from just zero 15 months ago. In 2021, we added 114 car wash locations in the United States, bringing our current total store count to 330, an increase of more than 50% over 2020. And we remain disciplined in a rising price environment, and we've been paying single digit purchase multiples. In 2022, we will remain acquisitive with Car Wash and we'll supplement that with at least 45 Greenfield locations. The future is very promising for our Car Wash business in terms of same-store sales, units, M&A, and profit growth. And now we will apply this same proven playbook to our most recent growth acquisition. We completed the acquisition of Auto Glass Now, or AGN, in late December. AGN is a great starting platform for our entry into the U.S. glass market because, just like our quick lube and car wash businesses, it has a simple and differentiated operating model, a simple menu, simple building, and strong unit-level economics. AUVs of approximately $1 million. mid 20% four wall EBITDA margins and cash on cash returns we are excited about because of the low initial investment. AGN is a business where we can leverage our growth blueprint and significantly accelerate our presence in this segment. And our thesis on the grass opportunity is simple. This is a $5 billion plus growing market in North America. It's highly fragmented like all parts of the automotive aftermarket. There are tailwinds with the increasing need for calibration. Glass repair and replacement is required for all vehicle types. We can leverage our existing same store sales levers, including our 20 million plus unique retail customers, our deep insurance relationships, and our fleet customers all to grow this business. We've learned a lot about the Glass operating model since we entered the Canadian market in 2019. And Michael Macaluso and his team are hitting the ground running on unlocking the opportunity we underwrote with this business. The new unit team is already building a robust pipeline like we have with Car Wash and QuickLoop. And as you can imagine, we will be highly acquisitive in this space. We're repeating our proven growth playbook. and getting better each time we do it. 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. Glass will be no different. We're excited to continue to reinvest into the business in 2022. We have world-class people, processes, and systems for unit growth, and that is why we're so bullish for the future. In total, we plan to spend about $275 million in capex in fiscal 2022, with about 90% of that earmarked for growth. Growth capital will be spent on new company units for quick lube, for car wash, and now glass. Remember, we have plenty of available capital and look forward to growing all three businesses. And we get lots of additional store growth from our powerful franchise machine. Between company and franchise stores, our pipeline currently sits at over 1,200 locations. We have also budgeted capital to invest into the existing U.S. Car Wash store base. We'll be investing in store remodels and upgrades, and we'll continue to invest in having one national car wash brand, Take 5 Car Wash. As always, we will continue to be acquisitive, and you can expect additional growth capital to be deployed into car wash and glass. Now, pulling everything together into 2022 guidance and our longer-term outlook, We're bullish on 2022 and confident in achieving our guidance for adjusted EBITDA of $465 million. We feel good about the momentum in our business because the team and strategy are in place. It's about execution. Our businesses are all performing well, growing, taking share, and generating cash. Our pipeline for unit growth company franchise and m a is very strong the digital and data unlock is underway nothing is modeled but it will absolutely provide upside our scale gives us a competitive advantage which continues to expand and compound the industry is still dealing with some noise around covid vehicle miles traveled inflation and supply chain like in 2021 However, that doesn't change our overarching confidence in our business model and our ability to consistently deliver growth and cash. A dream big plan of at least $850 million of adjusted EBITDA by the end of 2026 is very much on track. The team and I are relentlessly focused on beating it. And the addition of the U.S. glass business simply adds to our conviction. And we're believers in this long-term plan because we are a compound grower. Our growth is low risk because of our current market share. We are asset light and generate a lot of cash, which we reinvest back into growth. Scale is driving even bigger competitive advantages. 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 confidence around 2022. Momentum continues to build. Driven is growth and cash. I'll now turn it over to Tiffany for a deeper dive into the Q4 financials and 2022 guidance. Tiffany.

Thanks, Jonathan, and good morning, everyone. Our fiscal 2021 results are a testament to the power of driven brands, a scale and an integrated platform, and a growing business with a diverse needs-based service offering that delivers very attractive margins. For the year, we posted $1.5 billion in revenue and drove adjusted EBITDA of $362 million, a 76% increase over the prior year. Adjusted EBITDA margins reached 25%, approximately 200 basis points of expansion from fiscal 2020, and we delivered adjusted EPS of 88 cents. This was the result of $4.5 billion in system-wide sales, with 17% same-store sales growth and 6% net store growth. Adjusting for driving style in both the current and prior year period, we added 247 net new stores in fiscal 2021. We are proud of the entire team who continued to adapt to an ever-changing landscape, exceeding our expectations and delivering industry-leading results. We delivered on our commitments this year both organically and inorganically, and we exceeded the first year of our IPO model by nearly 30%. By all accounts, Driven Brands had a great year. Now, diving into our fourth quarter results specifically, System-wide sales were $1.2 billion, from which we generated $392 million of revenue. Adjusted EBITDA was $85 million, and adjusted EPS was 18 cents, another top-to-bottom beat. We delivered this strong outcome despite continued supply chain disruption and inflationary pressure, as well as yet another COVID variant. 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. As Jonathan discussed, our franchise, company greenfield, and M&A pipelines are all robust, and we are aggressively growing our footprint. In the fourth quarter, we added 102 net new stores as we continued to lean into opportunities in the quick lube and car wash businesses. We are in the process of selling the Drive & File business, which is a mobile reconditioning service for both the interior and exterior of vehicles. In fiscal 2021, Drive & File generated approximately $250,000 of revenue but posted a loss. This business is not core to our strategy, and we are actively marketing it. As a result, it is considered held for sale and has been excluded from our ending store count. Same store sales growth was 16% for the quarter, with relatively consistent performance across the three months. 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 increase in complexity of vehicles, as well as our ability to pass through the cost of inflation. Now remember, we are approximately 80% franchised, so not all segments contribute to revenue proportionally. For example, PC&G was over half of system-wide sales this quarter, but only about 15% of revenue because it's effectively all franchise with lower average loyalty rates. Maintenance and car wash are a mix of franchise and company operated, contributing approximately 40% and 30% 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 $392 million, an increase of 36% 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 strong sales volume, drove full-on margins of 38% at company-operated stores. And above shop, STMA has a percentage of revenue with 20% in the quarter, over 400 basis points of improvement versus last year. This resulted in adjusted EBITDA of $85 million for the quarter, an increase of 29% versus the prior year. Adjusted EBITDA margins were 22%, 100 basis points lower than last year, as a result of the mix of our business. The maintenance and car wash segments contributed more of the EBITDA dollars this year versus last. Depreciation and amortization expense was $34 million. This increase versus the prior year was primarily attributable to the growth in company-operated stores. And interest expense was $24 million in the quarter. This decreased average interest costs on outstanding debt. For the fourth quarter, we delivered adjusted net income of $31 million and adjusted EPS of 18 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 fourth quarter results by segment. The maintenance segment posted positive same-store sales of 26%. 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. We were able to pass along a price increase while maintaining our premium oil mix, which drove average tickets. From a profitability perspective, segment adjusted EBITDA margins year over year with Slack, However, margin contracted from the third quarter to the fourth quarter due to a combination of product cost increases and excess of retail price increases, and alternative supply costs incurred to mitigate oil supply constraints. The overall impact was approximately 200 basis points. By Q4, we had largely overcome the effects of the national labor shortage, which had provided a margin benefit in Q2 and Q3 as we ran leaner on labor than intended. The car wash segment posted positive same store sales of 6%. Wash Club subscriptions have increased to 50% of sales and the number of Wash Club members grew by an additional 31,000 in the fourth quarter. This is up nearly 800 basis points or 200,000 members since the acquisition in August of 2020. This is a great recurring revenue stream that provides a level of predictability to this business. Non-wash sub-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. As Jonathan discussed, we are testing the rebranding of some of our car wash locations to the trusted Take 5 brand name. This test will help determine the go-forward brand strategy for our U.S. car wash business. Rolling the Take 5 brand nationally to a large proportion of the estate means that there could be a non-cash impairment charge in a future period of up to 130 million dollars associated with the write-off of intangible assets for any retired brand we'll be sure to keep you updated on our progress the paint collision and glass segment posted positive same store sales of 11 percent we added over 650 direct repair programs with insurance carriers this year The recovery in the collision business continues. Estimate counts for the industry continue to grow, and our shops have consistently outpaced the industry. We are optimistic about what that means for fiscal 2022. We are also excited to expand our glass offering into the U.S. with the acquisition of Auto Glass Now. Glass repairs are growing as the percentage of auto repairs and repair complexity is increasing due to the necessary calibration. This provides yet another exciting avenue for growth, leveraging our proven playbook. And finally, the platform services segment posted positive same-store sales of 35%. Platform services is the segment most exposed to supply chain pressures. And as you well know, every aspect of the supply chain is challenged right now, from manufacturing to the ports to trucking. We ended the fourth quarter with $523 million in cash and cash equivalents. 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 just one primary supplier. We leveraged 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 performance 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 consistently stated, investing in our business and growing our footprint is our number one priority. In December, we closed on a $500 million term loan, the proceeds from the issuance will be used for general corporate purposes, including acquisition. We had $397 million of undrawn capacity on our revolving credit facilities, resulting in total liquidity of $920 million. Our net leverage ratio at the end of the fourth quarter was 4.4 times. Pro forma for the AGN acquisition, our net leverage ratio was 4.7 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 white space in the $300-plus billion consolidating industry. Now, looking ahead at fiscal 2022, disposable personal income is forecasted to be flat, but still well ahead of 2019. And VMT is expected to continue its recovery despite a near-term blip from the latest COVID variant. As a result, demand for our needs-based services are expected to be strong in fiscal 2022. In fact, so far in the first quarter, we are pleased with our performance. As we laid out in this morning's earnings release, we expect mid-single-digit same-store sales growth on a consolidated basis in fiscal 2022. driven by continued industry tailwinds, as well as the strength of our scale and sophistication when it comes to our key differentiators, our commercial partnerships, and our marketing capabilities, which include cross-marketing opportunities. And we expect to open approximately 225 net new stores across the portfolio, which is all organic growth. Our take five quick food franchise is strong while Greenfield development continues. We spent the past year building out our car wash Greenfield pipeline, and we're excited about glass expansion in the US. We expect to deliver revenue of approximately $1.9 billion and adjusted EBITDA of approximately $465 million, which should result in adjusted EPS of approximately $1.04 based on 167 million weighted average shares outstanding. We are guiding adjusted EBITDA margin rates flat to fiscal 2021. While we were successfully able to navigate the inflationary environment last year and expand margins, we think it's prudent to approach fiscal 2022 cautiously. Given the widespread inflationary pressure that we're laughing and that is expected to continue most of the year, we want to ensure that we continue to drive growth in car count while managing our margin. Now, there are just a few other items to mention as you model fiscal 2022. First, we anticipate depreciation and amortization of approximately $135 million. Second, interest expense is expected to be approximately $100 million. And lastly, our effective tax rate is expected to be approximately 30%. Also keep in mind that fiscal 2022 is a 53-week year. The impact of the extra week is expected to yield approximately $16 million in revenue four million in adjusted evita and two cents in adjusted eps and finally because we were a new public company last year and there was significant volatility associated with year-over-year code comparisons we updated our guidance every quarter rolling in each beat and updating our outlook for the year our expectation for this year is a bit different we shared our annual guidance today and we don't expect to update it again until the end of Q2. At that time, we'll roll in all M&A activity for the first six months of the year, plus organic performance to date, and we'll share our latest forecast for the second half of the year. We believe this is a transparent and very reasonable approach for fiscal 2022. 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 things for sales, and we deliver stable margins. This results in significant cashflow generation that we reinvest in the business. We look forward to speaking with you again in late April when we release our first quarter results and operator, we'd now like to open up the call for questions.