Driven Brands Holdings Inc.

Good morning and welcome to Driven Brand's second quarter 2022 earnings conference call. My name is Chris and I'll 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 Christy Moser, 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 look forward to looking at 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 file 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's SEC filings and the earnings release available on the Investor Relations website. Today's prepared remarks will be followed by a question-and-answer session. We ask that you limit yourself to one question and one follow-up. Please press star one to be placed in the queue.

I'll now turn the call over to Jonathan. Please go ahead, sir. Thank you and good morning.

We had another great quarter across the board. Our sixth as a public company and are excited to share the results over the course of today's call. Driven is the largest automotive services company in North America. Our diversified portfolio of needs-based services provides many levers to grow revenue and profit through same-store sales, new units, and M&A. Our total addressable market is massive, $350 billion and growing, and we have less than a 5% but growing share in that highly fragmented market. We will continue to grow and generate cash because of our core competitive advantages. are multiple levers to open new units. We can franchise, build, or buy. Our supply chain capabilities that keep us in stock and allow us to take share in price when others cannot. Our scale, which is growing, is a sustainable and increasingly significant 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. That growth together with our asset-life business model means we generate a ton of cash. And our needs-based services and franchise business model helps insulate our profits 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. Our dream big plan of at least $850 million of adjusted EBITDA by the end of 2026 is on track. Exceeding that plan is our primary focus, and we continue to make great strides. Driven is growth and cash. I want to take a moment to highlight our Q2 results. All credit goes to our team, our amazing franchisees, and our loyal and long-term customers. Compared to Q2 of 2021, consolidated same-store sales were positive 13%. Revenue increased 36% to $509 million. Adjusted EBITDA increased 34% to $135 million. And adjusted EPS increased 40% to $0.35. Another top-to-bottom beat, our sixth in a row as a public company. In addition to the strength of our brands and quality of our service offerings, there are several benefits that come from having multiple categories of auto services together in a portfolio, which have helped drive the continued growth of driven brands and distance us from our competition. We have invested heavily in shared services, which provides each brand with more resources, generating better results than any individual brand could achieve on its own. Let me explain a few of these shared services that benefit from our scale and position driven for continued growth. The three areas I want to highlight are fleet, procurement, and direct-to-consumer digital marketing. We have a dedicated fleet team that works across our portfolio. We have significant opportunity to continue to grow this category, and it's a key priority for us. We estimate the size of our addressable fleet market to be more than $20 billion. Our fleet business today is about $250 million in system sales annually and is growing by about 30% each year. This does not include our B2B insurance collision business, which is $2 billion in system sales annually. Many of our fleet customers are buying multiple services, painting collision, repair and maintenance, oil changes, and now glass. This ability for our fleet customer to consolidate multi-category purchases with one provider is a unique competitive advantage for Driven. And we'll continue to deliver growth in fleet because more units means more locations to service our partners. The addition of glass and car wash creates additional revenue opportunities. our large national fleet partners are actively consolidating their vendors to increase efficiency. And delivering fleet volume to acquired locations makes M&A even more accretive to Driven. Now let's talk about how Driven benefits from our scale and specifically our procurement capabilities. We pool our purchasing power across multiple categories, leveraging our strong relationships with our vendor partners and working with them to get the best terms and conditions for our company and franchise locations. This centralized, large-scale procurement operation serves to mitigate rising input costs and keeps our stores in stock when independents are not. Put simply, the more we procure, the greater the benefits for all parties. In the first half of 2022, we generated approximately $52 million in revenue and approximately 22 million in EBITDA from internal product sales and rebates. This is a 50% improvement over the first half of 2021. We're also close to launching our new procurement marketplace, which will go live in late 2022. This cutting-edge technology platform will expand our product offering, make it easier, faster, and stickier to do business with Driven, enable increased purchase volume, and like a flywheel, it will feed itself, increasing our scale and purchasing power, which will further improve prices. We believe this new marketplace will provide significant value to our franchisees and vendor partners, and provide meaningful revenue and EBITDA growth for Driven for many years to come. Lastly, I want to explain how Driven is leveraging direct-to-consumer digital marketing to drive incremental sales and profits to our company and franchise locations. This is enabled by the investment we have made in people, process, and systems over the last three plus years, as well as our 27 million plus unique customers in our data lake, which has increased by 20% over the last 12 months. In the first half of 2022, DTC Digital Marketing delivered 36 million highly personalized customer contacts, resulting in 545,000 transactions across our business segments, which generated $76 million in system-wide sales, 37 million in revenue, and an ROI of 12x. To put this in context, it generated approximately 4% of driven revenue in the first half, and we expect this to continue to grow over time. This is a growing strategic capability which will compound over time. Three great examples of how the driven shared service platform enables growth and market share gains. This is the power of our growing scale and sophistication in this highly fragmented needs-based industry. and it adds to our confidence in our ability to deliver on our short, medium, and long-term goals. As I mentioned on our last call, we are not immune to the inflationary challenges. To date, we have not seen any material change in consumer engagement or spending habits. Nevertheless, we continue to monitor all of our businesses very closely and have levers to mitigate potential impacts. In the meantime, Growth has continued at Driven. We continue to franchise, build, and buy new stores. And we've made significant progress across our three priority growth levers, Quick Lube, Car Wash, and Glass.

We are growing all three businesses at the same time.

This is the power of the Driven model, multiple complementary levers to grow company, franchise, and M&A. And we have the track record of doing this successfully over time. This is why we are so confident in our end of 2026 goal of at least $850 million of adjusted EBITDA. Now, these businesses share several 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. Let's start with Car Wash. As a reminder, we have approximately 1,100 locations globally with about 350 company-owned locations in the U.S., and the U.S. business has nearly doubled in size over the past 18 months. Our car wash teams are focused on direct digital to consumer marketing, subscription revenue, pricing, and labor management. And we continue to grow our unit count through greenfield openings as well as M&A. We're playing to win over the long term, and that means more units and more customers. When we acquired ICWG in August of 2020, we had multiple brands in the U.S. and that brand proliferation has increased with acquisitions. We've recently made the strategic decision to migrate our U.S. car wash assets to the Take 5 car wash brand. We've been working on this effort for more than six months, so let me share our thought process. Our 700-plus Take 5 quick lube locations share a lot of the same markets as our car wash business. Take 5 has strong brand equity. awareness, and high NPS scores. So leveraging the Take 5 brand for our U.S. car wash business makes a lot of sense, and we validated that with consumer research. The Take 5 brand name for our car wash customers stands for fast, friendly, and convenient. In Nashville, we tested the rebranding of our 15 car wash locations to Take 5. We're about 90 days into that test, and we like what we see. On average, we expect to spend approximately $185,000 per location across technology, exterior, new branding, and deferred maintenance. Our Nashville test locations are delivering strong performance, roughly in line with our expectations. Comparing the Nashville locations versus a control set of stores, we delivered the following. Volume increase of 12%. Revenue lift of 11%. membership conversion more than doubled. Now, if you set aside deferred maintenance spend, this implies an approximate IRR of 30% and a payback of about three and a half years. And our guidance has already contemplated the capital for transitioning approximately half of our locations to the Take 5 grant. We expect that it will take approximately 24 months to complete this rebranding initiative. In the meantime, all new Greenfield stores are opening as Take 5 Car Wash. All future M&A conversions will be Take 5 Car Wash. And we continue to co-develop QuickLube and Car Wash on the same real estate under the Take 5 brand. And we see significant cross-selling opportunities as we leverage data between the two concepts. In summary, this is the right investment for our Car Wash business, our customers, our employees, vendor partners, and shareholders. Now to our newest growth priority at Driven, Glass. A quick refresh on why we are so excited about the opportunity. We completed the acquisition of Auto Glass Now in late December 2021. Auto Glass Now was 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, and a simple building. This translates into strong unit level economics, AUVs of a million dollars, mid 30% four wall EBITDA margins, and cash and 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. Our thesis on the glass opportunity is pretty simple. This is a $5 billion plus growing market in North America. It's highly fragmented like all parts of the auto aftermarket. There's tailwinds with increasing need for calibration. Glass replacement is required for all vehicle types. And we can leverage our unique same-store sales levers including our 27 million plus unique retail customers, our deep insurance relationships, and our fleet customers 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 unlocking the opportunity we underwrote with this business. Our consumer positioning for this segment is anchored on value that is fast and friendly. We will compete in both the retail and insurance categories and deliver service both in-store and through mobile vans. We also have a massive B2B opportunity with glass, insurance, fleet, and other commercial business. This is something we already do across Driven. We are focused on leveraging our existing partnerships and experience to pursue this B2B opportunity with glass. And we ended fiscal 2021 with zero glass locations in the US. And in the first half of 2022 alone, we have grown our U.S. glass business to 120 stores, 350 mobile units, and more than 750 employees operating across 27 states, now making us the second largest auto glass replacement business in North America. And we also completed the acquisition of K&K Glass on July 6th, adding significant insurance and mobile capabilities. I'm very pleased with our progress in Glass over the first 180 days. We have the right team in place to run and grow this business. We expect the balance of 2022 to be busy in terms of additional bolt-on acquisitions at attractive multiples. We have made good progress in terms of new unit pipelines, which is growing weekly. We guided to approximately 35 new locations in 2022, and that is very much on track. We've opened our first six new stores. We've also opened our first new fleet locations with national rental car partners at large airports. We're making good progress with Driven's existing fleet and insurance partners and introducing them to our glass capabilities. We're repeating our proven growth playbook and getting better each time we do it. Finally, take five quick loops. the stay-in-your-car 10-minute oil change, which was recently recognized as number one in customer satisfaction for Quick Lube by J.D. Power in 2022. Our Take 5 Quick Lube business continues to grow revenue, same-store sales, units, and profits. This is a superior operating model with best-in-class unit-level economics. This is why we have a pipeline of approximately 750 stores, mostly franchised, which will open over the next three to four years. Our company stores are generating four-wall EBITDA margins of 40%, and we are on track to open about 50 new units in 2022. And our Take-5 franchisees are on track to open approximately 100 units in 2022. We will continue to open significantly more franchise and company units in the future. In summary, the QuickLube business is performing extremely well on all fronts, and we expect this to continue for many years to come. K5 QuickLube is the blueprint that we are applying to our newer growth assets, Car Wash and Glass. Now, we feel really good about the momentum in our business because the team and strategy are in place. It's about execution. Every segment is performing well. growing, taking share, and generating cash. Our pipeline for unit growth, franchise, company-owned, and M&A is very strong. The digital and data unlock is underway and driving growth. Our scale gives us a competitive advantage, which continues to expand and compound. Our dream big plan of at least $850 million of adjusted EBITDA by the end of 2026 is very much on track. and we're confident in our ability to beat it. And the addition of the U.S. glass business 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 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 Q2 2022 and year-to-date results. Momentum continues to build. Driven is growth and cash. I'll now turn it over to Tiffany for a deeper dive into the Q2 financials and our guidance for 2022. Tiffany.

Thanks, Jonathan, and good morning, everyone. Our performance in the first half of 2022 exceeded expectations with another strong print from Driven Brands in the second quarter. For the first half of the year, we beat our own adjusted EBITDA plan by approximately $14 million, driven by demand for our needs-based service offerings coupled with strong execution. And M&A provided an additional $3 million of upside. The entire Driven Brands team worked diligently to capitalize on consumer demand. delivering strong growth and positioning us to continue to gain market share as we enter the second half of the year. Driven Brands provides best-in-class, needs-based services to both consumer and commercial customers in an efficient manner. Now, diving into the specifics of our second quarter results, system-wide sales were $1.4 billion, from which we generated $509 million of revenue. Adjusted EBITDA was $135 million. And adjusted EPS was 35 cents, another top-to-bottom beat. 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 $350 billion, highly fragmented and growing industry. Our franchise, company greenfield, and M&A pipelines are all robust. and we are aggressively growing our footprint. In the second quarter, we added 80 net new stores. Same-store sales growth was 13% for the quarter, driven by average tickets. We continue to benefit from the increasing complexity of vehicles, as well as retail pricing actions to offset the cost of inflation. And we once again outpaced the industry across our business segments. 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 20% of revenue because it's predominantly franchised with lower average royalty rates. Maintenance and Car Wash are a mix of franchised and company-operated, contributing approximately 40% and 30% of revenue, respectively. As always, this is provided on our infographic, 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 $509 million, an increase of 36% versus the prior year. From an expense perspective, we continued to carefully manage site level expenses across the portfolio. In fact, Prudent expense management together with the strong sales volumes drove floor wall margins of over 40% at company operated stores. And above shop, SG&A as a percentage of revenue was 20% in the quarter, 180 basis points of improvement versus last year. This resulted in adjusted EBITDA of $135 million for the quarter, an increase of 34% versus the prior year. Adjusted EBITDA margins was 27%. Depreciation and amortization expense was $38 million. This nearly $12 million increase versus the prior year was primarily attributable to the growth in company-operated stores. In the quarter, we recognized a $125 million one-time non-cash impairment charge related to intangible assets as a result of our decision to rebrand our U.S. car wash business. And interest expense was $26 million. This nearly $10 million increase versus the prior year is primarily attributable to increased debt levels as we lean into opportunities across our quick lube, car wash, and glass businesses. For the second quarter, we delivered adjusted net income of $60 million and adjusted EPS of 35 cents. You can find a reconciliation of adjusted net income, adjusted EPS, and adjusted EDICA in today's release. Now, a bit more color on our second quarter results by segment. The maintenance segment posted positive same-store sales of 15%. Maintenance continues to benefit from enhancements to targeted digital marketing, and we have passed along a series of retail price increases while maintaining our premium oil mix, driving an increase in average tickets. In the second quarter, we also had a 41% attachment rate of ancillary products, such as engine air filters, wiper blades, cabin air filters, and coolant exchange, also contributing to a higher average ticket. The car wash segment posted negative same-store sales of 2.7%. However, foreign exchange rate movement had an outsized impact this quarter, excluding the impact of foreign exchange rate movement Car Wash Stain Store sales were positive 2.6%. We continue to be pleased with this business. We have added 95 net new stores over the past year through acquisitions and greenfield development. We have improved four-wall profitability by exiting heavily discounted promotions in favor of higher value offers. We have made the decision to rebrand the U.S. Car Wash business, Take 5, and will have completed nearly half of the estate by the end of the year. And we continue to be excited about the opportunity to increase Wash Club members. In the second quarter, the number of Wash Club members grew by an additional 36,000, representing approximately 50% of sales. This is an increase of over 350,000 members since the acquisition in August 2020. It is a great recurring revenue stream that provides a level of predictability to this business. The paint collision and glass segment posted positive same-store sales of 16%. We added over 195 direct repair programs with insurance carriers in the second quarter. Our expanding commercial partnerships are a testament to the strength and scale of Durban Brands and the ease of working with one large national provider. The recovery in the collision business continues. In fact, estimate counts for the industry continue to grow. and our shops have consistently outpaced the industry. We are also excited to expand our glass offering into the U.S. Glass repair complexity is increasing due to the necessary calibration, which provides a ticket tailwind. And finally, the platform services segment posted positive same-store sales of 12%. Platform services is the industry segment most exposed to supply chain pressures. 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, 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 markets, is important for our strategic growth plan. And as we've consistently stated, investing in our business and growing our footprint is our number one priority. We ended the second quarter with $198 million in cash and cash equivalents. And we had $290 million of undrawn capacity on our revolving credit facilities, resulting in total liquidity of $488 million. Our net leverage ratio at the end of the second quarter was 4.7 times. You can find a reconciliation of our net leverage ratio posted on our investor relations website. It is important to note in this rising interest rate environment that 80% of our debt portfolio is fixed rate. In fact, the weighted average interest rate of our debt portfolio is currently 3.7% with a seven-year weighted average maturity. We intend to continue using our balance sheet to capitalize on the substantial white space in a $350-plus billion consolidating industry. Now, looking ahead, we remain optimistic about the balance of the year, but continue to monitor macroeconomic fundamentals. Vehicle miles traveled were up approximately 2% in the first half of 2022 compared to the prior year, and the forecast for the second half is for VMT to remain positive. Used car sales increased approximately 30% in the first half of 2022, and the lack of new car inventory isn't expected to resolve in the near term. We serve both consumer and commercial customers, and our services are diverse and needs-based. This allows us to better withstand any volatility that comes with a weakening economic environment. We're also navigating the inflationary environment and supply chain challenges better than most in the auto aftermarket, given our scale and sophistication. And finally, our proven M&A playbook is delivering across our car wash and glass businesses. As a result, in our earnings release this morning, we raised our fiscal 2022 guidance. We now expect low double-digit same-store sales growth on a consolidated basis driven by continued industry tailwinds, as well as our key competitive differentiators, including commercial partnerships and marketing capabilities. We expect net store growth of approximately 340 units across the portfolio. This forecast includes organic growth for the full year and M&A for the first half. We expect to deliver revenue of approximately $2 billion. and adjusted EBITDA of approximately $495 million, which should result in adjusted EPS of approximately $1.17 based on 167 million weighted average shares outstanding. Breaking this down a bit more into its component parts. As I shared at the start of my remarks, we beat our adjusted EBITDA plan by 14 million in the first half of 2022 before M&A. We have taken that beat and rolled it into our updated guidance for fiscal 2022. That original guidance included the acquisition of AGN, which was completed in early Q1. In the first half, we acquired additional EBITDA, which provided $3 million of unmodeled upside and will contribute approximately $9 million in the second half of this year. Keep in mind that our guidance does not assume any future M&A It simply includes what has already closed. And finally, we have modestly increased our organic assumptions for the second half of the year based on our strong competitive positioning. Delivering $495 million of adjusted EBITDA for fiscal 2022 will be an increase of 37% over fiscal 2021 and a great milestone on the path to at least $850 million by the end of 2026. Now, as you update your models, it will be helpful to have a few other data points. First, we now anticipate depreciation and amortization of approximately $145 million as a result of the growth in the portfolio from M&A. Second, interest expense is expected to be approximately $105 million. And lastly, our effective tax rate is now expected to be 25%. We had favorability in the first half of the year, largely driven by the intangible asset impairment, and we expect some mild favorability to continue into the back half. 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 same-store sales, and we deliver stable margins. This results in significant cash flow generation that we reinvest in the business. Operator, we'd now like to open the call up for questions.

Thank you. At this time, I'd like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the questions. The first question comes from the line of Chris Horvers with JP Morgan. Your line is open.

Thanks.

Thank you, and good morning.

So my first question is, can you talk a little bit about what you're seeing in terms of unit counts and the quick lube in the car wash business? How has that been affected by gas prices? Is there any variability there? And then my follow-up question for you, Tiffany, on the guide is, can you talk about how FX plays out in the P&L industry? And to what degree is the updated guidance impacted by FX headwinds, both on the comp and EBITDA level?

Hey, good morning, Chris. Jonathan here. I'll let Tiffany handle the FX piece. In terms of, I'm assuming you're talking about traffic counts when you talked about unit counts for car wash and quick lube. Yeah, no problem. Look, we're still seeing a really nice mix within the same store sales component, right? If you look at QuickLube, I think the team have executed amazingly well over the last two years. We've certainly taken price to offset some of the both labor and commodity cost pressures that we've had. But Tiffany mentioned a 41% attachment rate in Q2, which is just phenomenal execution from the team. We've also seen a really nice increase in premiumization of oil over the last 18 to 24 months. So I think the team is doing a phenomenal job of managing cost pressures and then sort of, you know, executing in terms of attachment rate and then sort of building on the premiumization of oil tailwind that we have. In terms of car wash, I think Tiffany mentioned earlier, you know, we consciously sort of got rid of, I'd say, heavy discounting and promotion activity from a year ago, really focused on, you know, long-term more... more valuable customers. We're not seeing any movement in churn rates in our subscription members. In fact, we're growing subscription members. So we're very pleased with that. And then obviously a lot of focus over the last two quarters on sort of getting the right branding and operational pieces in place for long-term sort of car wash continued growth. So very pleased with how things are in both of those businesses. And I'll let Tiffany cover the FX.

Sure. Thanks, Jonathan. Morning, Chris. Thanks for the question. So as we think about FX, Chris, as we talked about on the call today, the only thing, the only segment that's really had an outside impact from FX is the car wash business, and specifically our international car wash footprint. As we think about the back half of the year, I mean, obviously we're cognizant of the significant rate movement in Q2. We've done a lot of scenario modeling as we think about the back half. what it could mean if rates move in our favor, you know, if they move in our favor, if they continue to move out of our favor. And as we guide for the back half of the year, we give ourselves room to navigate based on any potential volatility in that rate environment. So, you know, I think that's probably all I can say at this point in time, but suffice it to say we're being, you know, certainly cautious as we think about the back half of the year. but cautious as it relates to FX rates and the consumer, but confident in the fact that we are well positioned from a competitive situation and certainly have competitive advantages in the industry.

So just as a follow-up on that, can you remind us of what the footprint looks like internationally in terms of locations at the country level? And then have you seen any impact given all the, you know, challenges that are going on in Europe currently?

Yeah, Chris, if you think about our international business, we're in 13 countries, but really two matter the most. About 75% of our business internationally is in the UK or Germany. And I'll tell you, Tracy Gellum and the team over in Europe are just operating at an incredibly high level. in incredibly difficult operating circumstances, Chris. You know, FX is one thing, but then think about, obviously, the terrible war that's going on over there. You've got inflationary pressures. You've got, you know, concerns about gas and utilities and all that kind of stuff. So I will tell you that Tracy and her team are operating at an incredibly high level, but most of our stores are domiciled in the UK and Germany.

Got it. Thanks very much.

The next question is from Simeon Gutman with Morgan Stanley. Your line is open.

Good morning, everyone. My first question, a little bit longer term. I guess going into 22, we had initially modeled something around $315 million of EBITDA. We're getting closer to $500 now. And we have this $850 million target by 26. Can you speak to it? It feels like it's going quicker than... you laid it out. Can you talk about whether it's front end loaded or not? And then we talked about the procurement piece today on the call. Is that the synergy or the savings that you get? Is that factored into that 850?

Morning, Simeon. You are trying to goad me into giving you an answer that I don't intend to give you. What we've always said is that at least $850 million by the end of 2026, and we feel really good about the trajectory of the business for that. It's a really nice combination of organic growth, the new units, they start ramping, and then obviously we layer in the M&A that we've been so effective at. So I think all I would say is that we're very confident in our ability to meet or exceed the $850 by the end of 2026. And we talked about procurement today a little bit, Yeah, clearly procurements, you know, base case procurement is built into that number. But obviously, as we continue to grow units, franchise, company, and M&A, that increases the sort of the flywheel effect of the procurement.

Okay, fair enough. And then maybe moving to glass. Can you talk about the space that you're occupying within the industry? Can you also talk about what percentage of the business with glass would be insurance versus customer pay? And then you know, back to that first part, the space that you play, how you're positioned versus some of the other competitors?

Yeah. Look, you know, the initial platform entry point was Autoglass now, AGN, which was predominantly a, you know, consumer out-of-pocket pay business. I would say that was, you know, 75, 80 plus percent was consumer out-of-pocket. We've been very busy on the M&A front over the last six months, so we've added, you a bunch of different businesses, which sort of, you know, combine, blend a more balanced sort of retail out-of-pocket with insurance. You know, we have deep insurance relationships to our collision business. One of the things that we're working towards is getting the scale, both the national footprint, so that we can become even better partners for our insurance partners on the glass side. So I think as you look forward, you know, we continue to play in the retail space But I think insurance over time will become a really important part of that, the growth in that area.

Okay. Thanks, everyone. The next question is from Liz Suzuki with Bank of America.

Your line is open.

Great, thank you. I'm just curious if you could talk about multiples for acquisition targets, especially in car wash. I think earlier in the year they were looking pretty lofty at the time. Have they gotten any more attractive? And then what does the M&A pipeline look like today versus about a year ago?

Yeah, good morning, Liz. You guys are pretty familiar with the car wash space, but what I will tell you is that we're We're seeing some moderation at what I would call the platform level, so the bigger car wash assets that are trading, which is typically 15 plus units. So we're seeing some moderation there. We've seen a couple of busted processes in the space. So people are actually looking deeper at the quality of the assets, and we've seen some of those processes busted out. That being said, Liz, when you look at the flow of institutional capital into the car wash space, I think there's 10 plus private equity type funds that have come into the space over the last two years. Most of them are coming in buying some sort of platform, whether it's 10, 15, 20 stores, whatever the case is. And because they don't have any greenfield capabilities and it takes multiple years to build out that greenfield capabilities, they're then still trying to buy some of the smaller assets to sort of feed their growth model. So I would say in summary, moderation at the platform level, still sort of pretty frothy when you get down into the less than 10 store acquisitions. And our perspective is we've been doing the same thing for almost two years we've been in car wash. We're very surgically and tactically buying the right assets in the right markets for our business. and maintaining sort of a very diligent approach to the multiples that we're willing to pay. In terms of our pipeline, Liz, we feel really good about our pipeline. We have a dedicated team that has been doing small bulk on M&A for seven, eight years right now, so we've got a really good machine for doing that. Our pipeline for car wash is very robust as we look at it now through the back half of the year. And then obviously, you know, we've been very busy on the glass side as well, and our pipeline there looks very robust as well. So hopefully that answers your question.

Great. Yeah, no, that's great. And on the franchise side, are you seeing any potential franchisees backing out, you know, if they were already planning to take on locations and now they're reconsidering that due to concerns about recession?

no actually on the contrary liz i mean our franchise pipeline continues to build uh we keep adding you know new franchisees or existing franchisees taking taking down additional development agreements i think what our franchisees and folks coming from outside this industry are seeing that you know we're needs based we're auto we're very low on sort of the funnel of discretionary spend and where people will stop the resiliency of our business the the simple operating model the unit level economics so I feel incredibly good about our franchise pipeline. And, you know, as I've told you in the past, Liz, we've seen this really nice inflow of potential franchisees from non-automotive aftermarket into our space. So it feels really good about where we stand today.

Great. Thank you.

The next question is from Sharon Zakfia with William Blair. Your line is open.

Hi, good morning. Just a few questions on the maintenance space and then one on car wash. So in maintenance, did you take further price increases in the quarter? And can you give us kind of some color around the average ticket increase in the second quarter relative to what you saw in the first quarter? And how do we think about the pricing you've taken and the potential margin lift additionally if oil normalizes? Like do you roll back prices or Or do we see another lift as inflation hopefully abates? And then second question, I don't think you mentioned this, but with the take five conversion of car wash, how are you thinking about franchising in that segment?

Hey, Sharon, lots to unpack there. Let's start with maintenance. So yeah, I think Danny Rivera and the team who run that business have done an exceptional job of thinking about price when to take price, how much price to take, and then really managing consumer feedback. So monitoring NPS scores, Google ratings to make sure that customers continue to pay that small incremental price. And I think part of that is because of the exceptional operating service that we offer to our consumers. So we did take a little bit of price in Q2. And I think we will continue to sort of look at price very tactically throughout the balance of the year. So we're not afraid to take price. And I think one of the reasons that we can take price and maintain our customer counts and our loyalty and our repeat business is because the operating model and the execution is so good. In terms of if and when oil prices moderate, we're watching that very closely, Sharon. I mean, I think we've got some – you know, some views that there's probably some price that we would, you know, give back perhaps. So we've got sort of some service charges in there right now that if things moderate in the past, maybe there's an opportunity to reduce that. But, you know, don't sort of see that happening in the next sort of six to 12 months at this point. In terms of the conversion of the car washes, remind me, Sharon, what the question was there on the conversion? Oh, Francia. Yeah. Just wondering on the plans of franchising. Yeah. Look, what I've said all along is that the car wash business is a phenomenal business. It has got all the characteristics that you would need to potentially franchise a business in that the unit level economics are very strong. It's a simple operating model. It's very efficient from a labor perspective. So I think what we said before is like we did with Take 5 Quick Lube, we want to get that business to the place we're happy with it in terms of having the operating model, obviously having the branding in place, and then sort of thinking through is there a right time to franchise that. So what I'd say is consistent with the past is that it is franchisable, but we have not sort of laid plans in place right now to franchise it in the short term.

Can I just ask, have you had Take 5 franchisees ask about the car wash business?

Every day, Sharon, every day. And I'll tell you that we're, the team are doing a really nice job of, you know, we've mentioned before where we develop, you know, quick lube and car wash on the same piece of real estate. You know, this year, I don't know the exact number, but we have multiple car wash locations where we're sharing real estate with a take five quick lube franchisee. And that continues to grow and sort of, there's a continued momentum there. So, A lot of our Take 5 franchisees are very familiar and aware with the opportunity within Car Wash.

Thank you.

The next question is from Peter Keith with Piper Sandler.

Your line is open.

Hey, thanks. Good morning and great results, everyone. Jonathan, in the script, you had talked about not seeing any change in consumer behavior, and you also teased out that you have potential levers to offset impacts from the economy. I was hoping you could expand upon that. I guess you also mentioned you have a 12x ROI on ad spend, so perhaps it means you can lean into ad spend. But what are the levers you're thinking about if some weakness does emerge?

Yeah, so thanks, Peter. We're obviously tracking all the businesses on a daily, weekly, monthly basis. I don't want to get into specific plans in terms of what levers we would pull because that may be not so helpful to our competitors. But obviously, we look at sort of revenue. We look at the ability to use price, to use promotion, obviously, wrapped with margin management and not giving up margin the ability to leverage our direct-to-consumer digital marketing capabilities, the ability to leverage our fleet opportunity there. So lots of different things, but I don't want you to infer that this means that we lower price and increase discounting to get more customers in and be margin dilutive. So lots of different things that we can pull and we're watching it very closely. In terms of the ROI on the direct-to-consumer digital marketing, Look, it's an amazing opportunity within Driven, right? We've got 27 million unique customers that's growing at approximately a million customers a quarter. The ability to put those customers into our data lake and then funnel through our CRM machine is pretty amazing. The cost of doing that is fairly low, as you saw from the ROI. You know, I mentioned the 4%, you know, represents about 4% of revenue for Driven Brands. that's a pretty conservative number when you think about a big part of that revenue comes from our collision business, which is sort of non, you know, retail consumer facing. So I think the number is even better. So I think the ability to continue to lean into that, continue to develop even more curated personalized messaging is going to be sort of a, you know, great, great tailwind that we have as we look forward.

Yeah. Okay. Sounds interesting. Um, Maybe it's a little bit related, but on the car wash rebranding, so you noted that there's a 12% increase in volume lift for those units that have been rebranded. I guess what's driving that initially out of the first six months? And I would think that you're going to get better around cross-marketing, take five car wash. So could we expect that maybe that 12% volume increase improves over the coming quarters as you leverage that direct performance marketing?

Look, we were obviously optimistic that we're only 90 days into the sort of post results and we're pleased with the performance. So I'm not saying that you should expect increase than the 12%. But look, we love the business. We think there's massive power in having one national brand. There's a network effect there. There's a massive employee and vendor benefit as well there. So, you know, look, we're playing the long ball in car wash just like we've done with Quick Lube. You know, we started that business from zero in 2016, and it's now a massive growing business. And that's how we feel about car wash. So, you know, we think that we're very pleased with the early results. And, you know, we would be optimistic that we'll continue those results and hopefully build on them.

Okay. That sounds great. Thank you very much. The next question is from Chris O'Call with Stifel. Your line is open. Thanks.

Good morning, guys. Tiffany, based on where your consolidated comps, same-store sales, have come in so far this year, the full-year guidance in the low double-digit would seem to imply mid- to high single-digit comps in the back half of the year. So I was just hoping you could provide some context around how we should be thinking about that. Have you seen evidence that consumer spending could slow down or be a drag on comps in the back half, or should we just interpret this as maybe just prudent conservatism given the environment?

Hey, Chris, thanks for the question. So here's how we're thinking about the complexion across the quarters of the year. I mean, and it's not that different than what I said at the start 180 days ago when we first issued guidance, right? So we certainly expect, and we expected then and we expect today for first half same store sales to be stronger than second half same store sales. Some of that has to do with the complexion of last year and the easier comps first half versus second. I do want to highlight for you that third quarter in particular, we do expect to be the lowest comp in quarter of the year. Some of that is just consumers adjusting to overall spending and summer travel ending, though we still expect third quarter to be high single digit. So we'll put some emphasis there. Second half comps, while slightly lower than first half, are not significantly lower. And then as we think about margin complexion, the second half, if you think about our full year guide of flat EBITDA margin, implies second half somewhere in that 24% range to average out to flat margins relative to 2021. So, you know, I think we're seeing a pretty nice, relatively even spread over the course of the year with a couple of those nuanced remarks.

Yeah, that's helpful. Thank you. And then, Jonathan, thank you for updating us on the rebranding work at the Take 5 locations in Nashville. I was hoping you could provide us with some more details around how the customer experience might have changed and if customer satisfaction or intent to return has improved for those locations. And also, there's not as many Take 5 oil change locations in the Nashville market. So I was wondering... if you expect with more Take 5 brand points that it might benefit new or existing oil change locations? And then just lastly, are you planning to convert the glass locations to the Take 5 brand after acquiring them?

Yeah, Chris, good stuff there.

Let's start with sort of customer reaction in Nashville. So, you know, look, early days, but, you know, the experience for the customer is, is significantly better pre and post, I'll call it rebranding. So, you know, number one, they see that now this is part of 15 take five car washes in the Nashville market. Number two, you know, any deferred maintenance that was there is done. So the equipment's working beautifully. The stores are physically looking better. So there's landscaping, there's lighting, there's parking lots, you know, anything that was not sort of quote unquote perfect has been addressed. The team physically looks different because they're now all branded in this Take 5 uniforms. Obviously, we've got the signage. We've put in some new technology into the stores as well, Chris. We've put in a really great sort of camera system which provides really interesting benefits both in terms of data collection and sort of managing sort of claims, and you do get some of that. We've also put in improved and updated merchandising and point-of-sale materials. Some of that includes digital merchandising boards. So I think as a customer, when you go through these stores, they're like, wow, this feels different, it looks different, and it's operating at a very high level. And we're seeing very nice consumer feedback in terms of Google ratings or other feedback that we get. So very pleased with sort of the consumer reaction on an early basis. You're right, Chris, we don't have a lot of take-five quick loops in that Nashville market. And I think based on the phenomenal brand equity that has been built with Take5, when we remodel stores or rebrand stores in markets with a heavier Take5 brand equity or brand awareness, that will only be a positive. So pretty pleased about how that could shape up. In terms of Glass and Take5 Glass, not necessarily looking at sort of, are looking to disclose what our branding strategy may or may not be with Glass as we look forward. You know, we're very busy right now building and buying and integrating and building scale in that glass business. What I will tell you, though, Chris, is that I'm a big believer in one brand name. I think there's a power in having brand names, thinking about sort of national scale. So I think over time, we could, in fact, get to one brand name for glass, but certainly not indicating that it would be Take 5 Glass at this point.

Okay. Thanks, guys.

Our final question is from Peter Benedict with Baird. Your line is open.

Okay, thanks, guys. Yeah, a lot have been asked here. Just, Tiffany, you mentioned kind of scenario analysis on the back half of the year, and Jonathan, you alluded to the levers. Just curious how you guys think about this business in the event of a recession. It's a question we get on all the companies we cover. We know you're resilient. We know your needs are faced. I think as we look over the next four years, the implied EBITDA taggers kind of mid-teens to get you to that 850. I know you think that's conservative. Just curious, you know, if you play a scenario of recession in 2023, any reason why that path to kind of 850 would be material disrupted? Just how you're thinking about that.

Yeah. Hey, morning, Peter. I'll start. Tiffany would love us to give additional color commentary. We're not concerned about our ability to meet or exceed the 850 regardless of what may or may not happen in 2023. So let's start there. That is a very definitive statement and we'll stick by it. And part of that, Peter, is that we've got so many levers to grow this business, right? We've got company stores, we've got franchise stores, we've got M&A. Even if we head into, quote unquote, a defined recessionary period, We think that provides opportunity for us, right? So we think there'll be incremental opportunities with M&A. We think when we think about greenfield development, real estate prices will moderate. We'll be able to get into even better real estate locations at better prices. We know from history that, you know, this is a needs-based service business. So our core customer still uses their vehicle to live their everyday lives. And when we think about sort of the consumer discretionary funnel, we're pretty low in terms of you know, the services that people can get rid of. So I think there's lots of other areas where probably people will sort of look at, you know, their spend. So, you know, we are incredibly optimistic around, you know, the ability to meet or exceed that 850. And, you know, despite some of the choppiness that may be ahead, we're not moving off that guidance and we'll not move off that long-term guidance.

And Peter, I think the only thing I'd add to what Jonathan said, and I wholeheartedly agree, is you have to remember that 850 was built on a pretty conservative algorithm, and that algorithm was low single-digit same-store sales growth and low double-digit revenue growth. And I think the fact that in the early years of that long-term guide, we're putting up better performance, you know, running ahead right now gives us some room to maneuver in the out years should we hit some less than optimal economic time. So, I wholeheartedly agree with Jonathan. I don't think the 850 is at risk.

Okay. And then thanks for that. And just on the interest expense, I appreciate the guidance you gave there. Just curious on the floating piece, have you done any hedging on that, Tiffany, or just what's kind of your assumption as you think about LIBOR, et cetera, over the back half of the year? Thanks. Okay.

Sure, Peter. So the only floating piece we have is the revolving credit facility and then the term loan that we just did in December. So again, it's only 20% of the total debt portfolio. And of course, the revolving credit facility isn't a continually outstanding piece, right? That's opportunistic when we need it. So no hedging in place today, but certainly have the opportunity to... to hedge and swap floating to fixed should we need it. As we think about funding future growth, you know, we certainly think about leveraging first and foremost our securitization vehicle, which would be, you know, at fixed rates. And we have the ability in that case, you know, to look out the curve and locking rates where we need to.

Okay, great. Thank you very much. Appreciate your comments. Thank you.

And I'll just wrap it up here, folks, real quick. So, look, thanks for your time today. We appreciate all the questions and engagement on our business. You know, our team is executing and we're pleased to deliver these strong results in Q2. Look, these results are a testament to the resiliency of our needs-based service offering and our ability to drive sustainable growth and cash flow, leveraging, you know, a proven playbook. We will continue to invest in the flywheel of growth, and we feel like we've got really significant momentum across our business. We're delivering against our long-term plan, and our increased guide reflects our confidence in the business model. And as always, investor relations with Christy will be available after the call if anyone has any further questions. But thank you again for your time this morning.

This concludes today's conference call.

You may now disconnect.