Driven Brands Holdings Inc.

thanks very much and welcome everybody to driven brands fourth quarter and fiscal 2022 earnings conference call in addition to the earnings release there is a leverage ratio reconciliation and infographic available for download at our website at investorrelations.drivenbrands.com summarizing our fourth quarter results on the call with me today are jonathan fitzpatrick President and Chief Executive Officer, and Tiffany Mason, Executive Vice President and Chief Financial Officer. In a moment, Jonathan and Tiffany will walk you through our financial and operating performance for the quarter and year. Before we begin our remarks, I'd like to remind you that on this call, management will refer to certain non-GAAP financial measures. You can find reconciliations to the most directly comparable GAAP financial measures in the company's Investor Relations website and in its filings with the Securities and Exchange Commission. Please advise that during the course of this call, management may also make forward-looking statements in regards to our current plans, beliefs, and expectations. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties and other factors that could cause actual results and events to differ materially from the results and events contemplated by these forward-looking statements. These risks and uncertainties include those set forth in our earnings release and our filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof and, except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events, or otherwise. Today's prepared remarks will be followed by a question and answer session. We kindly ask that you limit yourself to one question and one follow-up. With that, I'll now turn the call over to Jonathan.

Thank you and good morning. 2022 was a year of record performance and significant strategic progress for Driven Brands. We deepened our competitive moat by expanding our network benefits and our differentiated offerings resonated with our customers. We are redefining the industry by embracing simplicity, and a customer-first mindset, making car care faster, friendlier, and more convenient. We continue to gain significant share in this large, growing, and highly fragmented $350 billion automotive aftermarket category, leveraging our proven playbook to drive long-term sustainable growth. Since 2019, we've tripled our revenue and quadrupled our adjusted EBITDA. while significantly expanding our footprint. In 2022, we delivered results ahead of our guidance, with 39% revenue growth supported by 14% same-store sales growth and 9% new store growth, which translated to 42% adjusted EBITDA growth. We continued to navigate a challenging macro environment, demonstrating our consistent execution and the resilience of our needs-based service offerings. That generated strong cash flow, which we used to reinvest in the business and gain further market share. Now, all credit goes to our 11,000 Driven Brands team members, our amazing franchisees, and our loyal long-term customers. Our business remains resilient. Our team is executing. and we continued to deliver strong growth on both the top and bottom line in the fourth quarter, including the seventh consecutive quarter of double-digit same-store sales growth. We entered the first quarter of 2023 with momentum and excellent visibility into our expense base. Our 2023 guidance released this morning reflects that momentum and our continued confidence in our diversified platform the resilience of the automotive services category, and a strong track record of execution. We remain highly cash flow generative, creating capacity to reinvest in growth. Our pipeline of future openings continues to expand, giving line of sight into multi-year growth. And we have multiple levers to deliver that unit growth, franchise, build, or buy. The power of bringing these businesses together on the Driven platform is tangible. The diversification and the breadth of our offering provide significant benefits of scale, as well as a natural balance and additional resilience to our business. This diversification is complemented by the significant network benefits that our brands collectively create through scale and a carefully curated offering. The network benefits include driving more value for and sales for our commercial customers, delivering revenue growth and cost savings from procurement, and unlocking the share of wallet benefits from the largest database in the category with 30 million unique customers. These network benefits continue to compound as we grow our diversified platform. and we look forward to sharing more on that at our upcoming Analyst Day in May. Our continued execution, combined with the strength of our business model, gives us confidence that we are on track to meet or exceed our dream big plan of $850 million of adjusted EBITDA by the end of 2026. As our consolidated business drove strong performance and cash flow, we continue to make significant progress across our key growth categories, quick lube, car wash, and glass, leveraging our proven playbook for growth. And from a customer's perspective, our solutions-oriented approach to simplifying and enhancing the experience is resonating across our growth segments, supporting our market share gains and strong unit-level economics. Now, starting with quick lube, Take 5 Oil Change, our differentiated 10-minute stay-in-your-car quick lube model, continues to drive customer acquisition and best in category same store sales, which further accelerated in the fourth quarter to over 25%, driven by both ticket and traffic, continuing to outpace the competition. As our unit count has grown, so has our unaided brand awareness. Take 5 is now the second most recognized quick glue brand in the US, just six years after driven brands entered the category. As consumers become more aware there is a faster, friendlier, and simpler alternative for their oil change at a more cost-effective price than dealerships, we continue to gain market share. In addition to our strong same-store sales performance, we grew our footprint 20% year over year to 850 North American locations, including close to 250 franchise locations. Our pipeline has continued to expand to 950 units, primarily made up of franchise locations, giving us a long runway for sustainable and predictable growth. And we're on track to grow our footprint by an additional 20% in 2023. Shifting to Car Wash, we are the largest provider of Car Wash services globally, with over 1,000 locations comprised of a single branded more established international business, and what has quickly become the largest express car wash provider in the US with a growing footprint of almost 400 locations. The long term opportunity within the car wash business remains compelling with strong profitability and cash on cash returns. As we cautioned last quarter, we continue to experience some headwinds in the fourth quarter related to foreign exchange and softer retail volume as a result of the macroeconomic environment that Tiffany will discuss shortly. Our scale and experience will remain a significant competitive advantage as the current environment is beginning to rationalize the competitive intensity of new entrants. Additionally, as we look to past cycles, the industry remained resilient relative to the broader retail industry. Our greenfield pipeline for openings in the U.S. remains robust at over 250 locations, with roughly 65 expected to open in 2023, enabling us to be more selective with tuck-in M&A following our proven playbook for growth. As we migrate our footprint under the Take 5 brand, which was approximately 50% complete as of year end, we are elevating our brand awareness, standardizing our market positioning, operations, system, and customer experience. This in turn allows us to integrate our Take 5 Unlimited program and enhance our data capture capabilities. In fact, we grew our total Wash Club members to 675,000 subscriptions. By the end of the quarter, in aggregate, locations where rebranding was complete delivered positive same-store sales and mint single-digit higher adjusted EBITDA margin than the locations yet to be rebranded. If you combine our 850 quick lube locations with our nearly 400 car wash locations that will soon operate entirely under the Take 5 brand and include growth plan for 2023, we will have over 1,400 Take 5 branded locations. we remain bullish around the long-term synergies of leveraging one brand across two great businesses. Now, wrapping up with Glass. In the fourth quarter, we continued to enhance our position as the second largest player in the highly fragmented $5 billion U.S. auto glass servicing category, ending the year with over 188 locations and over 800 mobile units in the United States. and we're following the same growth playbook that we used in QuickLoop and Carwash. We're now shifting towards smaller tuck-in acquisitions and Greenfield mobile and store openings, which have the best cash-on-cash returns in our portfolio, given the compelling unit-level economics. In addition to strong unit growth, store volumes continue to increase as we begin to see the early benefits from our implementation of calibration services and expanding our commercial relationships. And as we migrate our footprint under Auto Glass now, that not only strengthens our brand recognition with consumers, it also upgrades our systems and standardizes our operating procedures that enables us to further capture commercial volume. We expect to continue to grow commercial volume at our locations through the year with the addition of fleet and regional insurers in the short term and large national insurers in late 2023 and 2024. The benefits of scale from further growth and the increase in commercial business as we mature our footprint over the next year will provide a tailwind to the already compelling economics. And with a current footprint that covers approximately 20 percent of U.S. consumers today, there remains significant white space for continued expansion over the next several years. We couldn't be more excited about the long-term potential of the glass business. Now, looking across driven brands, our robust development pipeline has continued to grow to over 1,600 locations, which are approximately 35% site-secured or better, giving a strong visibility into sustainable, predictable unit growth over the next few years. Within this large and highly fragmented category, there remains significant white space, creating a long runway for unit growth, same-store sales growth, and market expansion in the future. And we believe there is no one better positioned to capitalize on that opportunity than Driven Brands. Beyond the breadth and strength of our brands, our scale and our shared service capabilities create significant network benefits that deepen our competitive moat and differentiate our business, further enabling unit growth, incremental store profits, same store sales growth, and cost savings. We continue to leverage data, technology, and scale. Over time, these network benefits will include simplifying car care and rewarding our customers so they can focus on the road ahead. So let's talk about some of these network benefits. Beginning with commercial business, our B2B sales continue to represent approximately half of our system-wide sales, including the top 20 insurance carriers, regional and local insurance carriers, and a large and growing fleet business, creating an additional layer of resilience to our business. Within our collision business, our B2B volume for the top 10 carriers was up 38% in Q4. and our estimates are up high single digits from the start of the year. Our expanding relationship with our insurance partners continue to give us confidence in glass. Continuing to expand our offering with B2B partners, including fleet and insurance, will remain a major focus for Driven Brands in 2023 across all of our segments, a tailwind to same-store sales. Now, shifting to procurement. We continue to generate network benefits from our centralized procurement function. This helps to optimize input costs and keeps our stores in stock, which will continue to be a differentiator for driven brands even as the market begins to stabilize. In 2022, procurement contributed approximately 45 million of adjusted EBITDA, up 43% year over year. And we recently launched the pilot of our new marketplace, branded Driven Advantage, which will begin to roll out over the course of 2023. It's still early days, but the 65 location test is performing in line with our expectations. In addition to being a great growth driver for Driven Brands, we continue to believe it will provide significant value to our franchisees. Giving franchisees buying through Driven Brands the opportunity to save tens of thousands of dollars annually per location by expanding our offering from 10,000 SKUs to over 160,000 SKUs. Value to our vendor partners by driving volume through a one-stop shop and value to Driven Brands providing cost savings and revenue generation without a material impact to working capital. We will continue to learn and validate our assumptions as we complete our test over the first quarter. We continue to be excited by the potential for it to generate meaningful revenue and even the growth for Driven over time. And now turning to share of wallet. Another component of leveraging our network benefits is to unlock the power of our data ecosystem that is generated from all our brands to grow wallet share. This is a strategic priority for our business. underpinned by one of the most robust databases in the category with more than 30 million unique customers, which has grown by 25% year over year. We are driving tangible results today through direct to consumer marketing, which contributed over 80 million in revenue, which equates to 4% of total revenue or 8% of consumer revenue in 2022. We're integrating our differentiated QuickLube and Car Wash services under the Take5 brand, bringing brand awareness to our Car Wash business and serving as a low-cost customer acquisition point for QuickLube. We're only beginning to scratch the surface of the long-term potential to drive customer acquisition, retention, and share of wallet across our platform, which will be a focus for us in 2023. Now, bringing all that together, the power of our growing scale and network benefits will enable continued future growth and market share gains in this highly fragmented needs-based industry. And we are still in the early innings of these capabilities, with a long runway of incremental value, volume, and profitability benefits to the business, giving us further confidence in our ability to deliver on our short, medium, and long-term goals. On the back of a strong 2022, momentum has continued in the first quarter. We are growing, taking share and generating cash, which we are reinvesting into the flywheel of growth. Our scale gives us a competitive and compounding advantage. We have a proven playbook and multi-year visibility into unit growth that gives us confidence in the significant opportunities ahead of us. Our green big plan of at least $850 million of adjusted EBITDA by the end of 2026 remains very much on track and we're confident in our ability to beat it. Now with that, let me turn it over to Tiffany for a deeper dive into the Q4 full year 2022 financials and 2023 guidance. Tiffany.

Thanks, Jonathan. Good morning, everyone. Driven Brands has delivered another strong print in 2022. In fact, we ended the year 10% ahead of our original adjusted EBITDA guidance. Our team executed well, delivering best-in-class, needs-based services to both consumer and commercial customers. We continued to build on our strong track record of organic and inorganic growth. As Jonathan mentioned earlier, since 2019, we have tripled revenue growing at a 50% CAGR and quadrupled adjusted EBITDA growing at a 63% CAGR. Our business continues to be incredibly resilient, and the fourth quarter unfolded much like we anticipated. We have entered 2023 with strength, delivering same-store sales and unit growth in this resilient category as we execute on behalf of our customers. Let me begin with the highlights of the full year. System-wide sales were $5.6 billion, up 24% versus prior year. The growth was driven by both the addition of 393 net new stores and 14% same store sales growth. We continued to benefit from market share gains, the increasing complexity of vehicles, and retail pricing actions to offset the cost of inflation. When you account for our franchise mix, our reported revenue for the year was $2 billion, an increase of 39%. 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 four-wall margin of 39% at company-operated stores. And above shop, SG&A as a percentage of revenue was 20% for the year, improving 129 basis points, largely driven by leverage on our growth. This resulted in adjusted EBITDA of $514 million for the year, an increase of 42%. Adjusted EBITDA margin was 25%, 62 basis points ahead of the prior year. Pulling that together, we delivered adjusted net income of $208 million and adjusted EPS of $1.22, which were up 41% and 39% year-over-year respectively. The 53rd week in fiscal 2022 contributed $25 million of revenue, $6 million of adjusted EBITDA, and two cents of adjusted EPS to those results. You can find a reconciliation of adjusted net income, adjusted EPS, and adjusted EBITDA in today's release. Our strong performance during the year resulted in significant cash generation that allowed us to continue to invest in the business. In 2022, we delivered $197 million of cash flow from operations. While cash flow generation remained strong on an absolute basis, it decreased approximately $87 million from the prior year, primarily due to the one-time $56 million success fee related to the AGN acquisition paid in the first quarter and higher interest expense year over year. That cash generation, together with our revolving credit facilities and our real estate portfolio, provide us more than enough capital to fuel our strategic growth plans in 2023. Our number one priority continues to be investing in the business given the strong return profile and this highly fragmented $350 billion category. In fact, we ended the year with $618 million of liquidity comprised of $227 million in cash and cash equivalents and $391 million of undrawn capacity on our revolving credit facilities. This does not include the additional $135 million of variable funding notes issued in the fourth quarter, which can be exercised at the company's discretion, assuming certain conditions continue to be met. At the end of the year, our net leverage ratio was 4.5 times. You can find a reconciliation of our net leverage ratio posted on our investor relations website. Now, double-clicking on our fourth quarter results. System-wide sales were $1.5 billion. up 24% versus prior year, from which we generated $540 million of revenue, up 38% versus prior year. System-wide sales growth in the quarter was driven by the addition of 98 net new stores and 11% same-store sales growth. From an expense perspective, we drove four-wall margin of 37% at company-operated stores, and above shop, SG&A as a percentage of revenue was 21% for the quarter, increasing 172 basis points from the prior year driven by two items. First, a $15 million true-up related to the tax receivable agreement that we entered into at the IPO as a result of filing our 2021 tax returns. Second, $7 million of incremental equity-based compensation expense based on outperformance on the earlier grants and layering in another annual grant. These items, both of which are adjustments to EBITDA, were partially offset by leverage on our growth. Adjusted EBITDA was $130 million for the quarter, an increase of 54% from the prior year. Adjusted EBITDA margin was 24%, up 250 basis points from the fourth quarter of 2021. Depreciation and amortization expense was $40 million. This $5 million increase versus the prior year was attributable to the growth in company-operated stores. Interest expense was $35 million. This $12 million increase versus the prior year was primarily attributable to increased debt levels as we lean into opportunities across our quick leave, car wash, and glass businesses, and the adjustment in mid-December of our floating rate term loan debt from an initial 12-month LIBOR of 50 basis points plus a 300 basis point spread to a three-month LIBOR of 474 basis points plus a 300 basis point spread. Our 38% effective tax rate in the quarter was elevated as a result of a change in our tax strategy. The change allows us to optimize the NOLs that we can recognize in the U.S., providing cash tax savings going forward despite the one-time rate impact in the quarter. For the fourth quarter, we delivered adjusted net income of $42 million and adjusted EPS of 25 cents, which were up 35% and 39% year-over-year, respectively. Now, a bit more color on our fourth quarter results by segment. The maintenance segment posted positive same-store sales of 16%. Take-Five QuickLoop continues to benefit from enhancements to targeted digital marketing, driving increased car count. And we've successfully passed along retail price increases while maintaining our premium oil mix year over year, driving an increase in average ticket. The attachment rate of ancillary products such as engine air filters, wiper blades, cabin air filters, and coolant exchange remained strong at nearly 40%, also contributing to a higher average ticket. Despite retail price increases over the past 24 months, our net promoter score remains stable while repeat rates have increased 5% year-over-year. The expansion in segment-adjusted EBITDA margins year-over-year is primarily the result of lapping higher alternative supply costs incurred in 2021 to mitigate oil supply shortages. The car wash segment posted negative same-store sales of 10%. Foreign exchange rate movement continued to have an outsized negative impact versus the prior year of roughly 400 basis points. In the U.S., we are evolving to a single brand and operating standard. We had approximately 50% of our car wash business operating under the Take 5 banner as of the end of the year, which are outperforming the footprint yet to be rebranded, as Jonathan mentioned earlier. We are on track to rebrand the rest of the estate by the end of fiscal 2023. While retail volume is soft again this quarter, we continue to drive mixed shifts to higher dollar washes and grow our subscription programs. We now have over 675,000 Take 5 unlimited subscriptions in total, and the retention rate has remained steady. This is not only a great recurring revenue stream that provides a level of predictability to this business, but it's also proving to be a sticky customer and an important focus for driven brands. The compounding effect of a five-time tire LTV from Take 5 unlimited members versus retail customers is compelling. Software retail traffic was the primary driver of the segment-adjusted EBITDA margin decline year-over-year. The paint collision and glass segment posted positive same-store sales of 14%. We are excited about the significant expansion of our glass offering in the U.S. after entering the market just 14 months ago. Glass repair complexity is increasing due to the need for calibration of the windshield camera associated with the advanced driver assistance systems that govern a vehicle's safety features. As these features grow as the proportion of the car park and as our mix of commercial customers increase, we expect to see a tailwind to both ticket and margin. Also, 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 added 229 direct repair programs with insurance carriers in the fourth quarter. Our expanding commercial partnerships are a testament to our strength and scale. and the ease of working with one large national provider is a clear differentiator for driven brands. The decline in segment adjusted margin year over year is the result of the build-out of our new U.S. glass business. This business has scaled rapidly, and we're investing to support future growth. While that pressures margins today, we expect to expand glass margins as we increase the mix of commercial customers and the penetration of calibration services. And finally, the platform services segment posted positive same-store sales of 4%. We have leveraged our scale and leadership in the industry to ensure our franchisees are consistently in stock despite supply chain disruption, creating long-term customer loyalty for the 1-800-RADIATOR brand. While we continue to benefit from the customers we acquired as a result of the supply chain disruption, average selling prices year over year have begun to normalize. Looking ahead at fiscal 2023, we remain well positioned. Our team is executing well, and the category is proving its resilience versus other categories in retail. Vehicle miles traveled were up approximately 1% in 2022, and the forecast for 2023 is for VMT to grow 3% to 4%. 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 changes in the economic environment. Our scale and sophistication provide us a competitive advantage as we continue to navigate the environment. And finally, our proven playbook for growth is delivering across our key growth areas. As a result of our continued strong performance in 2022 and the momentum with which we have entered 2023, in our earnings release this morning, we proudly issued our fiscal 2023 guidance. In 2023, we expect to deliver revenue of approximately $2.35 billion, driven by 5% to 7% same-store sales growth, and net store growth of approximately 365 units. This is organic growth. We have not included future M&A in our guidance. We expect adjusted EBITDA of approximately $590 million, adjusted EBITDA margin is expected to remain stable at approximately 25%. And we expect adjusted EPS of approximately $1.21 based on 167 million weighted average shares outstanding. As you update your model, it will be helpful to have a few other data points. First, equity-based compensation expense is expected to be approximately $26 million as we layer on the third annual grant post-IPO. Second, we anticipate depreciation and amortization expense of approximately $180 million as a result of new store growth. Third, interest expense is expected to be approximately $150 million as a result of our recent capital raise and the rate adjustment of our floating rate term loan debt. The term loan is our only floating rate debt instrument outside of our revolving credit facilities. And finally, our effective tax rate is expected to be approximately 30%. We expect to deliver approximately $300 million of cash flow from operations, a 64% kegger since 2019. Gross capital expenditures are expected to be approximately $470 million as we follow our playbook for growth in glass and car wash, shifting our focus to more organic growth complemented by selective and opportunistic tuck-in M&A. That CapEx is expected to be partially offset by approximately $250 million of sale leasebacks of our owned real estate, primarily in car wash as new locations open. This results in net CapEx of $220 million. As a result, we do not expect to add any incremental debt in fiscal 2023. And with the projected growth in adjusted EBITDA, we expect to naturally deleverage. With regards to how we expect the year to unfold, we anticipate a fairly tight range of same-store sales performance across the quarters, with only about a two-point range between the high and the low. We expect adjusted EBITDA margin rates to be lowest in the first quarter, likely 300 basis points lower than the rate for the full year, as a result of the timing of our car wash rebranding activity, as well as the integration of recent acquisitions in our U.S. glass business. In closing, delivering $590 million in adjusted EBITDA for fiscal 2023 will be an increase of 15% over fiscal 2022, a great milestone on the path to at least $850 million by the end of 2026. We expect this differentiated portfolio to continue to deliver strong results outperforming the market. 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.