Driven Brands Holdings Inc.

Good morning. My name is Joelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Driven Brands Q2 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the two. Thank you. I will now turn the call over to Joel Arnao, SVP of Finance. Joel, you may begin your conference.

Thank you very much and welcome to Driven Brands' second quarter 2023 earnings conference call. The earnings released and the leverage ratio reconciliation are available for download on our website at investors.drivenbrands.com. On the call today with me are Jonathan Fitzpatrick, President and Chief Executive Officer, and Gary Ferreira, Executive Vice President and Chief Financial Officer. In a moment, Jonathan and Gary will walk you through our financial and operating performance for the quarter. Before we begin our remarks, I'd like to remind you that management will refer to certain non-GAAP financial measures. You can find reconciliations of the most directly comparable GAAP financial measures on the company's investor relations website and in its filings with the Securities and Exchange Commission. 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 for future performance and are subject to a number of risks and uncertainties and other factors that can cause after results and events to differ materially from the results and the events contemplated by these forward-looking statements. Please see our earnings release and our filings with the Securities and Exchange Commission for more information. Today's prepared remarks will be followed by a question and answer session. We kindly ask you to limit yourself to one question and one follow-up. With that, I'll now turn it over to Jonathan.

Thank you for joining us to discuss our second quarter 2023 financial results. I want to start by welcoming Gary Ferreira, our new Chief Financial Officer, to the Driven Brands team. We're excited to have Gary on board and have already seen the added value his extensive financial experience and expertise brings to the team since joining in May. I'll start this morning with a review of our second quarter highlights, then touch on our objectives for the remainder of 2023, before turning it over to Gary to discuss our second quarter results and full year 2023 outlook in more detail. As always, I want to acknowledge the hard work and strong execution by our more than 11,000 Driven Brands team members and our amazing franchisees for how they have navigated an extremely dynamic macroeconomic environment. Now, let's discuss our second quarter results. Compared to Q2 of 2022, we delivered 19% revenue growth, supported by 8% same-store sales growth and 7% unit growth. achieving adjusted diluted EPS of 29 cents per share. We are pleased by the performance of our QuickLube and our franchise businesses across all metrics, both being key contributors to our overall success this quarter. The platform that we've intentionally built had positive same-store sales in a climate that many consumer businesses did not. Over the course of ever-changing economic cycles, some of our businesses may be challenged and some strengthened, The benefit of the platform is that it provides diversification. Car wash and US glass are challenged currently, while all other categories are neutral to up. The core macro dynamics of our industry, including aging car park, fragmentation, importance of scale, digital and technology penetration, remain tailwinds for driven brands. We remain bullish on the needs-based $350 billion auto aftermarket service industry, where we have unique and growing brands with service differentiation. Our investment thesis and growth algorithm are working. As a reminder, our long-term growth algorithm is same-store sales growth plus unit growth plus M&A. We have a best-in-class model of attracting franchisees based on our higher returns versus peers, confirmed by our 900-plus unit pipeline for new locations furthermore we have the ability to reduce our investment capital by assailing leasebacks and capital light franchise growth given our superior economic profile which in turn will allow deleveraging management is highly incented with driven stock we continually assess multiple options for value creation and are fully aligned with shareholders and thinking about the long-term. Our long-term adjusted EBITDA target of at least $850 million by the end of 2026 remains fully intact. I will now discuss the three primary growth levers of the business. We are building national brands with Take 5, both oil change and car wash, and auto glass now to take market share positioning us to win long term. Now, while our investments in building the U.S. car wash and glass platforms have been capital intensive, we believe that diversification is an essential value driver as the car park evolves. We have invested significant capital over the last 24 months into glass, car wash, and oil change, which we expect to deliver significant EBITDA and cash flow over the next three to five years. We will share more details at our upcoming investor day on September 20th in Charlotte. We remain very disciplined with our deployment of capital. Our average invested capital for car wash locations after sale and lease back is 500,000. Our average invested capital for take five oil change locations is 950,000 for leased real estate and $200,000 when we buy the real estate and do a sale and lease back. Finally, our average invested capital for a glass location is $150,000. And we do not deploy capital unless we believe we can generate cash-on-cash returns of 30% to 40%. Now let's discuss each business. Starting with Take 5 Oil Change, our most mature growth lever. This quarter, Take 5 Oil Change, both company and franchise locations, continued to drive customer acquisition and delivered same-store sales of 17%. We continue to outpace the competition as our differentiated 10-minute stay-in-your-car quick-loop model builds brand recognition with top quartile NPS scores and increasing repeat rates. We extended market share gains as customers become aware of TakeFive's faster, friendlier, and simpler alternative for their oil change at a more effective price point than dealerships. And we're particularly pleased with the nice balance of traffic and check, our continued Big Four attachment rate of more than 40%, and industry-leading NPS scores. This quarter, we grew our footprint over 19% year over year, and our pipeline remains robust at approximately 900 units. We expect to grow our footprint by over 13% in 2023, mainly driven by asset light franchise store growth. And as we look over the medium term, the majority of new store growth will be franchised. Take five oil change is a scaled national and differentiated stay in your car model which continues to deliver industry-leading same-store sales growth, unit growth, and cash quarter over quarter. And moving on to car wash. On our first quarter earnings call, we noted softer retail volume in U.S. car wash. We continue to see this softness in Q2. The U.S. consumer, particularly at car wash, pulled back more than we anticipated. Our international car wash business continues to perform against a backdrop of challenging macroeconomic factors in Europe. There are a number of challenges that this segment uniquely faces, primarily in the US, that the team is working hard to overcome. We have seen retail traffic softness in the first half, and we are expecting that trend to continue for the remainder of 2023. Retail traffic customers are important both to drive our member flywheel and because they are our highest margin rate customers. Secondly, the car wash segment, unlike any of our other segments, has seen significant competitive unit growth in the last two years as the industry has added approximately 1,500 locations. And as consumers are presented with double or triple the options to wash their cars, it is only natural that we will see some temporary market share decline. 32% of our U.S. car wash locations have had a competitor open within three miles over the last two years. And these locations represent some of the oldest sites in our portfolio, part of the original acquisition in 2020. Consequently, these older sites are absorbing an outsized impact. We expect this impact to moderate as we finish our rebranding and fully activate the power of the Take 5 brand to drive new customers and take share. We believe there is still significant white space in select markets for express car washes. We continue to see undisciplined short-term growth from small chains and entrepreneurs. Large scale, single branded, well capitalized, Long-term focused owners like Driven Brands will win, take share, and consolidate over the medium to long-term. And this is before you consider the incremental value of approximately 900 and growing Take 5 oil change locations, which provides significant opportunities to drive incremental customers and revenue to our Take 5 car wash locations. The third factor which has impacted our U.S. car wash business is weather. And it doesn't matter how good of an operator you are. If it's raining outside, most consumers will not wash their cars. When we look at the first half and examine the core selling days, Thursday, Friday, and Saturday, we saw that these days were negatively impacted by weather versus prior year. And we know that over time, weather will have puts and takes, but the first half has definitely been a negative. When you combine these factors, consumer slowdown, competitive intrusion, and first-half weather, this is a major driver for our updated overall guidance for fiscal 2023. We have taken several decisive actions during the quarter and will continue to do so in the second half. Regarding retail traffic, we have implemented cross-brand promotions to drive car wash customer acquisition. In Q2, we marketed to $2.5 million existing Take 5 Quick Lube customers, which resulted in 125,000 new customers and 13,000 new members at our Car Wash locations. 90% of our Take 5 Oil Change locations now have at least one Take 5 Car Wash in their markets. This is only the beginning of turning on the full power of the Take 5 brand across both Car Wash and Oil Change. We are reviewing all aspects of our marketing, pricing, promotion, and brand positioning strategies to ensure they align with current market conditions. We are also focused on optimizing the expense side of the business to enhance operational efficiency. And finally, we are conducting a thorough review of underperforming locations, markets, and our pipeline of new locations to identify opportunities for improvement. On the positive side, Rebranded Take 5 car wash stores are outperforming non-rebranded locations. Our core rebranded markets, those with density, continue to generate relatively stronger performance. Our priority is to build density and brand awareness in key markets with a focus in markets with Take 5 oil change presence. Over time, scale and one brand will matter as this market matures and consolidates. We are making progress towards having a unified tech stack across all of our Car Wash locations. This creates the foundation for our Take 5 digital platform, which will cover both Car Wash and Quick Group. This platform will enable Take 5 brand level loyalty and membership programs. We expect to have this in market in late 2023. This quarter we have seen both our conversion rates and member counts continue to rise. We now have over 700,000 monthly members. This will continue to drive brand loyalty and can serve as a hedge to weather volatility. Lastly, the opening of our greenfield stores is going well. Stores are ramping and are in line with our underwriting. We are on track to reach our target of approximately 65 greenfield openings in 2023. Most of these locations included underlying real estate and will be sold in the Salem leaseback market to make sure that we are recycling that capital. In summary, we remain confident in the long-term outlook for this sector, given its strong profitability, cash-on-cash returns, and cash flow generation. And specifically, our scale of one brand will ensure long-term success. Now onto the glass business. one of our biggest growth drivers in our PC&G segment. We continue to make progress integrating our 12 acquisitions under the Auto Glass Now brand. Remember, our strategy was to build a platform through a significant number of acquisitions in a short period of time to become the clear number two in this industry. The known risk was the potential level of complexity of integrating numerous acquisitions simultaneously. As a result, we are currently a few quarters behind where we anticipated. This is also contributing to our updated guidance for fiscal 2023. The benefit of our strategy was we paid attractive multiples and significantly reduced the opportunity for other potential consolidators to enter this space. This was a calculated decision that we believe was the right strategy. Similar to Car Wash, we have taken several decisive actions during the quarter and will continue to do so in the second half. We appointed Nick Womet to lead the U.S. glass business about 100 days ago. Nick previously held the number two position at Take 5 Oil Change, and we believe his experience and success at Take 5 Oil Change will transfer to the glass business. Under Nick's leadership, we are actively investing in people, process, and systems as we are building a scalable platform for long-term growth. There are several positive aspects of the US glass business to highlight. We have made significant progress in rolling out a standard tech stack, ensuring uniformity and efficiency across our operations. Approximately 25% of our stores have completed the Auto Glass Now rebranding process, aligning them with our one national brand strategy. In 2023, We have opened 39 Greenfield stores at an average capital investment of 150,000 and sales are in line with our underwriting. At the end of Q2, we had 780 mobile units expanding our reach beyond our bricks and mortar stores. Demand from commercial insurance and retail customers remains strong. We are now averaging more than 10,000 inbound calls a week. And finally, our calibration rates continue to grow, which is a long-term tailwind. We are pleased with the scaled glass business that we are building and remain excited with the compelling economics, capitalized investment, and long-term vision. And with that, I will now turn it over to Gary to discuss the second quarter financial results and provide additional detail on our 2023 outlook. Gary.