Driven Brands Holdings Inc.

Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Driven Brands Q3 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, 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, please press star followed by the number two. Thank you. I would now like to turn the call over to Joel Arnell, SVP of Finance. Joel, you may begin your conference.

Good morning and welcome to Driven Brands' third quarter 2023 earnings conference call. The earnings relief and 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, Danny Rivera, Executive Vice President and Chief Operating Officer, and Gary Ferreira, Executive Vice President and Chief Financial Officer. In a moment, Jonathan, Danny, 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 these reconciliations to the most directly comparable GAAP financial measures on the company's investor relations website and in its filings with the Securities Exchange Commission. During the course of this call, we may also make forward-looking statements in regard to our current plans, beliefs, and expectations. These statements are not guaranteed for 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 results and events contemplated by these forward-looking statements. We see our earnings release and our filings with the Securities and Exchange Commission for more information. Today's prepared remarks will be followed by question and answer sessions. We will ask you to limit yourself to one question and one follow-up. Now, I'll turn it over to my partner, Jonathan.

Thanks, Joel, and we appreciate everyone for joining us to discuss Driven Brands' third quarter 2023 financial results. Now, 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 continue to navigate an extremely dynamic macroeconomic environment. I'm sure that many of you had a chance to attend our investor day in September. I hope the insights we shared were valuable to you and that you left the event with a better understanding of the power of the driven platform and our commitment to unlocking the true value of our business. Now, our platform creates many benefits, such as enhancing our competitive advantages, diversification, and generating robust cash flow. We are making progress on the actions we have taken to improve Driven's performance and continue to act with urgency to accelerate the pace of improvement in our car wash and U.S. glass businesses. We outlined a multi-year strategy, created a chief operating officer position, made leadership changes within U.S. glass and U.S. car wash, and shared our strategic plan to maximize the return on our investments through disciplined capital deployment and portfolio management. We have a platform that generates high steady state returns with a long runway for reinvestment at exceptional returns. And we're incredibly motivated to see our valuation mirror our results over time. Now let me review some of our third quarter highlights before turning it over to Danny, who will discuss take five oil change, car wash and glass, Next, Gary will detail our third quarter results and full year 2023 outlook. For the quarter, we delivered 12% revenue growth versus prior year, supported by 6.4% same-store sales growth and 6% net store growth, achieving adjusted diluted EPS of $0.20 per share. We continue to be pleased by the performance of our quick lube, and our franchise businesses across all metrics, all being key contributors to this quarter's growth. Now, let me give you an update on our U.S. car wash business. Danny, Gary, and I have spent a lot of time reviewing all aspects of the U.S. car wash business over the last 90 days. Danny is laser focused on operational opportunities, and he will discuss those in more detail shortly. Now, after our detailed review in Q3, we decided to close 29 U.S. car wash locations, which began in Q4. Generally, these locations were on average more than 13 years old, had suboptimal real estate, and had significant competitive intrusion. On an LTM basis, these locations had negative same-store sales and traffic and negative EBITDA contributions. Consequently, we will see some small benefit in Q4 for closing these 29 loss-making locations. Additionally, we are actively reviewing our pipeline for new car wash locations. Now, this is in line with our commitment to stop all capital and not to open new stores until we determine the base businesses performing. We expect that over the next two to three quarters, we will likely see a return of capital from selling these pipeline sites. We are making steady progress on the U.S. car wash business and getting the U.S. glass integration behind us. And as I have said previously, this will likely take several quarters. Gary will provide an update on the impact to fiscal 2023 store openings shortly. Now, as a reminder, our short-term focus is to deliver our guidance for 2023 and set the company up for a strong 2024. This means improving the U.S. car wash business, getting the U.S. glass integration challenges behind us, a very disciplined strategy for deploying capital, which will primarily be used to open Take-5 oil change company stores, a focus on free cash flow generation, and generally using excess free cash flow to pay down debt. Now, I want to reiterate that we have taken several steps to improve Driven's performance. Gary and I are responsible for strategy and capital allocation. The creation of the Chief Operating Officer role is an important one, as Danny is responsible for all the operating segments. Simply put, he owns the P&Ls. Danny is responsible for the day-to-day decision-making, finding and executing on growth opportunities, and ultimately, delivering segment-level revenue and profits. Danny has been my partner for 10 years at Driven, and most recently, he served as president of our maintenance segment. So with that, let me hand it over to Danny, our chief operating officer, to discuss our key business segments.

Thanks, Jonathan. Before I begin, let me introduce myself. I met many of you at our investor day, but for those of you I've not met, I've been a part of the Driven Leadership team for over a decade. Throughout that period, I've been president of Meineke, president of Take 5 Oil Change, and group president of our maintenance segment. While Jonathan and Gary focus on strategy and capital allocation, my job to ensure that the capital they have allocated realizes the returns we underwrote. I am focused on executing our operating playbook, which enables Driven, over time, to take acquired businesses and turn them into high-growth engines that deliver predictable and scalable results. Driven's operating playbook has been developed over the past 10 years. We've implemented it across all of our businesses, both company and franchise. The playbook has several chapters, all of which are important and build upon one another. Those chapters include culture, people, brand positioning, process, and continual improvement. We are repeating the very same playbook that has been successful at our most mature growth business, Take 5 Oil Change, with both our Take 5 Car Wash and Auto Glass Now. With that background, let me discuss Driven's three primary growth levers, Take 5 Oil Change, Take 5 Car Wash, and Autoglass Now. This quarter, Take 5 Oil Change, both company and franchise locations, continued to drive customer acquisition and delivered strong same-store sales of 14%. We continue to outpace the competition as our differentiated 10-minute stay-in-your-car oil change model builds brand recognition with top quartile MPS scores and increasing repeat rates. Further, We grew our footprint over 23% year-over-year, and our franchise pipeline remains robust at more than 750 units. We expect asset-like franchise store growth to drive our footprint growth moving forward. Our franchisees remain excited about the performance of their stores and, of course, the returns they're generating. I'm also excited that in Q4, we will be celebrating our 1,000-store opening, and we just recently opened our 300th franchise location. Let's now switch over to our car wash business. We are experiencing softer retail volumes in the U.S. car wash segment, driven by a challenging macro environment for our most discretionary business and continued competitive intrusion. However, our international car wash business continues to perform well despite challenging conditions in Europe. As Jonathan mentioned, I have been leaning into operational opportunities in the U.S. car wash business. The following are some of the actions that we have taken. First, I've made a series of leadership changes, including changes in marketing, operations, and a change in president. I have also made changes to how our teams are structured, their priorities, and our management processes against those priorities. Our immediate priorities are twofold, to be the best at the basics, and to improve margins. Regarding being the best at the basics, we're focused on a handful of operational KPIs and processes that ensure we're open and operating, we're reducing downtime due to equipment failure, we're winning on must-win days, and we're delivering our fast, friendly, and convenient promise in order to delight our customers. Regarding improving margins, we have implemented a data-driven approach to identify opportunities for better operational and financial performance. For example, we are taking a more disciplined approach to our promotional strategy to ensure we are reducing discounting while focusing our marketing efforts on attracting long-term customers. We are also implementing an improved pricing strategy that we will begin rolling out in Q4. enabling us to better capture the value that our different levels of WASH offer. Finally, from an operational perspective, we are taking a close look at costs, particularly variable costs, and identifying outliers and implementing operational guardrails to help obtain proper variable margins. These actions, along with the closing of 29 unprofitable locations, give me confidence that we can improve the business over the next several quarters. As I mentioned at the investor day, we are also excited to roll out Take 5 Rewards, our new loyalty program that will initially focus on Take 5 oil change and car wash. We will be testing this new program in Q4 of this year. Our new platform will offer a Take 5 oil change subscription and a combo subscription across both Take 5 oil change and car wash. Our subscriptions will also be coupled with a loyalty program designed to drive frequency across both businesses. Lastly, let's cover our U.S. glass business, an important component of our longer-term growth. As Jonathan mentioned on the last earnings call and at our investor day, we have encountered a series of challenges integrating the 12 businesses we acquired that ultimately make up the glass business. These integration challenges have resulted in underperformance of our U.S. glass business in 2023. We also said that it will take several quarters to get through these challenges. We are continuing to make progress and our goal is to exit Q1 of 2024 with these integration challenges largely in the rear view mirror. Some of the progress we've made with the integration include, we completed the rollout of our new point of sale system. We completed the rollout of our new centralized call center. We are in the process of centralizing all product purchasing and plan on being fully rolled out by Q1 of 2024. more than 95% of our locations have calibration capabilities, and all employees are now on one payroll and benefits platform. We have also made the decision to slow down new unit growth in Q4 and in 2024 to make sure that the base business is performing at the levels we expect. We remain extremely bullish on our U.S. glass business and look forward to a strong 2024 as we put the mountains of integration work behind us. As I mentioned at Investor Day, car wash and glass have many similarities to our Take 5 oil change business and, as such, should be performing similarly. I am confident in the driven playbook as we have successfully proven it with our Take 5 oil change business. It will not happen overnight, but the vision is clear, our priorities have been cemented, and we have the team in place to execute. In my newly created role as COO, I look forward to taking the success of our Take 5 oil change business and methodically spreading those best practices and those results throughout Driven. And with that, I will now turn it over to my partner, Gary.

Thanks, Danny, and welcome, everyone. Today, I will share with you our third quarter financial performance and outlook for the remainder of the year, as well as how our focus on cash flow, disciplined growth, and strategic capital allocations is shaping our future. On a consolidated basis, we had another strong quarter of top-line growth versus Q3 2022. Our system-wide sales reached $1.6 billion, representing a 10% increase from the prior year period. This growth was driven by a 6% increase in same-store sales and a 6% net store growth. This translated into reported revenue for the quarter of $581 million. an increase of over 12%. This growth was primarily led by our maintenance segment, followed by our paint, collision, and glass segment. Adjusted EBITDA was $127 million, or 22% of revenue, versus $129 million, or 25% of revenue, in the same quarter last year. This margin decline and the resulting slight decline in adjusted EBITDA is directly attributable to the car wash in TC&G segments, with approximately $7 million of the impact on car wash being driven by increased rent expense from sale leasebacks. Both the maintenance and platform services segments experienced significant growth in adjusted EBITDA, as well as margin expansion in the quarter versus the prior year. I'll now focus on our performance by segment. we are pleased with the positive same-store sales growth of 9% in maintenance, our largest segment. Revenue from the segment grew an impressive 22% over the prior year period. This was primarily driven by our Take 5 oil change business, which continues to perform strongly across both our franchise and company-owned locations. As we mentioned before, industry tailwinds, including an aging car park, an increased vehicle complexity drive average check, and a flight to trusted brands. Take 5 oil change continues to benefit from these trends, as we saw another quarter of positive car count trends. Maintenance segment adjusted EBITDA margin increased by over 110 basis points versus Q3 2022. Due to flow through from strong top line performance, as well as a continued focus on operational efficiency, This drove an increase in segment-adjusted EBITDA of over 25% for almost $18 million versus Q3 2022. In our car wash segment, we experienced the same-store sales decline of 4% versus the prior year period. This decline was entirely driven by our U.S. car wash operations. Total segment revenue, including the international business, increased 2%. The car wash segment adjusted EBITDA margin decreased to 17% in the quarter versus 28% in Q3 2022, resulting in a decline in adjusted EBITDA of approximately $15 million. The U.S. portion of the business experienced higher costs primarily due to the fixed costs associated with ramping locations, including the 57 new stores opened during the last 12 months, while experiencing soft retail demand and increased competition. As I mentioned earlier, approximately $7 million of these fixed costs can be attributed to increased rent expense from sale leaseback activity versus Q3 2022. We are making significant operational improvements and closing underperforming stores to improve the financial performance of our U.S. car wash business. In our paint, collision, and glass segment, we achieved positive same-store sales growth of 9%. and segment revenue growth of 14%. However, segment adjusted EBITDA margins decreased to 25% from 34% in Q3 2022, resulting in a $6 million decline in adjusted EBITDA. The U.S. glass business drove this decrease as paint and collision delivered increases over the prior year quarter. As Danny mentioned previously, he and his team are working through the integration issues related to the 12 U.S. glass In our platform services segment, revenue increased 8% over the prior year period. 1-800-RADIATOR saw sequential improvement from negative 11% in Q2 to down less than 5% in Q3. As a reminder, 1-800-RADIATOR comprises only about 25% of the revenue for this segment. platform services adjusted EBITDA margin increased to 40% from 38% in the prior year period, resulting in segment adjusted EBITDA of $22 million. Now I will focus on some key components below adjusted EBITDA. Depreciation and amortization expense totaled $46 million in the quarter, reflecting a $9 million increase from the prior year, mainly due to an increase in company-operated store count. Additionally, interest expense reached $41 million, a $14 million increase from Q3 2022, primarily due to an increase in total debt levels driven by our securitization issuance in Q4 2022, as well as by higher interest on our term loan and revolver, which are our only outstanding debt tranches with variable rates. Net loss for the third quarter was $799 million versus net income of $38 million, in Q3 2022 due to the non-cash goodwill and asset impairments in our U.S. car wash business of approximately $960 million. During the quarter ended September 30, 2023, we conducted an in-depth review of our U.S. car wash operations. This review focused on assessing underperforming stores and their local competitive environment understanding new store growth patterns and identifying opportunities for potential revenue and expense optimization. As a result of this analysis, we decided to close 29 stores. These closures began in Q4. We've also put a pause on opening new stores and have initiated the process of selling assets we won't be utilizing. Due to these actions and in the course of our review of our results during the quarter, we decided to recognize non-cash impairment charges totaling $111 million associated with property, equipment, and right of use assets. In light of these factors, and using current higher interest rates in our discounted cash flow analysis, we determined that the carrying value of our U.S. car wash reporting unit within the car wash segment surpassed its current market value. Consequently, we registered a non-cash goodwill impairment charge of $851 million. Adjusted net income was $34 million for the quarter, resulting in adjusted diluted EPS for the quarter of 20 cents versus 32 cents in the prior year period. Cash flow from operating activities for the nine months was $212 million, an increase of 26% from $158 million from the prior year period. At the end of the third quarter, We had $387 million in liquidity, surprising $211 million in cash and cash equivalents, along with $176 million of undrawn capacity on our variable funding securitization senior notes and a revolving credit facility. Our liquidity does not account for the additional $135 million of variable funding notes, which could be utilized at the company's discretion if specific conditions continue to be met. This liquidity, along with our ability to continuously generate strong cash flows from operations, provides us flexibility in executing our long-term growth plan. As you may recall, in August, we announced a $50 million share repurchase authorization, recognizing the opportunity to purchase shares at what we view as an advantageous level. We completed the repurchases and retired 3.6 million shares during the quarter. This impacted our net leverage ratio for the quarter by just under 0.1 times, and it is now 4.8 times for the quarter versus 4.7 times in Q3 2022. As we stated in our recent Investor Day, we were extremely focused on generating excess cash flow and deleveraging in 2024. As a reminder, our debt structure is over 75% fixed. with that portion of the debt at an interest rate of approximately 4.3%. The remainder is made up of term loan and revolving credit facility with a total blended interest rate of approximately 5.2%. I will now turn to our fiscal 2023 full year financial outlook. We are reaffirming the outlook that we provided on our second quarter earnings call of revenue of approximately 2.3 billion adjusted EBITDA of approximately $535 million, and adjusted EPS of approximately $0.92. We also continue to expect same-store sales growth of 5% to 7%. This guidance reflects continued strength in our maintenance, paint, and collision businesses, partially offset by weakness in our U.S. car wash and U.S. glass businesses. As we discussed during our investor day, we are very focused on disciplined growth and driving cash flow. Therefore, we made the decision to slow new unit growth from what was provided earlier in the year. We are now expecting 2023 new unit growth to approximate 250 units versus our original outlook of 365 units, primarily driven by fewer new units in our U.S. car wash and U.S. glass businesses. I wanted to wrap up with a couple of accounting-related matters. First, in Q4, we converted certain pre-IPO equity to time-based vesting from vesting that was based on the achievement of certain sponsor returns after the sponsor owned less than 50% of our outstanding stock. This conversion results in a non-cash stock compensation expense charge of approximately $43 million, which we will recognize ratably over the 18-month vesting period. including approximately $5 million in Q4 2023. Second, related to our review of the U.S. car wash business, we transferred assets on our balance sheet amounting to $271 million from property and equipment to assets earmarked for sale. In closing, I just wanted to take a moment to thank all the teams across the organization for being laser focused on driving operational efficiencies during the quarter. so that we can deliver on our commitments for the remainder of the year and set ourselves up for a strong 2024. Thank you all for your time this morning. That concludes our prepared remarks. I will now turn it back over to the operator for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift your hands up before pressing any keys. Kindly note that we are requesting our analysts to limit yourselves to one question and one follow-up. Our first question comes from the line of Peter Benedict from Baird. Please go ahead.

Oh, hey, guys. Good morning. Thanks for taking the question. First one, just around the car wash business, you talked about a new pricing structure. Danny, I think you mentioned that. Can you maybe expand on that? Maybe a number of tiers you're thinking about, any clarity there? And related to that, the new leadership in U.S. car wash, is that internally sourced, folks? Anybody from the outside? Just curious kind of your views on how it's different to operate a car wash than an oil change business. That's my first question.

Hey, Peter. Thank you for the question. Appreciate that. So, yeah, related to the first question around pricing, look, ultimately the team and I are super focused on operations and improving margins. Part of both of those is focused on pricing. And our changes, we think, will lead to improved margins as we capture kind of more value from across all of our packages and our wash packages vis-a-vis our consumers. As far as leadership changes, operationally our leadership changes, we did bring over an individual from our Quick Lube business who was a seller operator for us there and brought him over to our car wash business. Ultimately, the two businesses are different, but ultimately they're also retail businesses. And when it comes to people and leadership and operations, we believe there's a lot of similarities and we think that that individual is going to be very helpful to us in our car wash business.

Okay, thank you. And then maybe, Gary, just on the car wash and PCG segment margins, obviously down a lot in 3Q. How should we think about in the fourth quarter? I mean, is 3Q the bottom in terms of those segment margins? Should you get some improvement, at least sequentially there? And then just on the car wash openings for next year, I mean, I think you were saying maybe 20. Is that now zero? Just so we level set for next year on the new car wash units. Thank you.

Yeah, let me answer the first part of the question, which I've already forgotten because I'm over 60. But the margins, when you go into the next quarter, obviously never say bottom, right, because it jinxes us. But the plan is, as you can see from the numbers we've put out, if we hit our guidance, it means you'd have a slight margin improvement in Q4. And so, you know, how that's going to mix between the segments, obviously, we don't guide to that. But Danny's doing a lot of work with his team to try to get margins short up there. So I think it will more translate into, you know, where we come out in the top line.

Yeah, Pete, Jonathan here on the openings. Yeah, we're sort of actively working through, you know, what locations in our pipeline we can exit or sell. So I think the 20 number that we gave at the investor day will likely be lower. Sort of a work in progress here, but we'll update throughout the year. But definitely lower than the 20 we gave.

Understood. Thanks, guys. Good luck. Thank you.

Your next question comes from the line of Seth Sigmund from Barclays. Please go ahead.

Great. Good morning, everyone. I wanted to focus on the maintenance business. I think you gave us the quick lube, the 14% comms, very strong. What's happening in the rest of the maintenance business? I know there have been some mixed messages out there across the industry, but it does seem like you're outperforming pretty nicely here. So if there's any more perspective on the rest of maintenance and what you're seeing from a consumer perspective, and then I have one follow-up. Thank you.

Hey, Seth, it's Jonathan. Yeah, look, Take 5 Oil Change represents over 90% of our maintenance segment. The balance is our minor key business, which is a pure franchise business and continues to perform very steady. And, you know, we're not seeing any sort of major trend changes in that minor key business. But, again, take file for all changes is more than 90% of that segment. So that's the key driver in it.

Perfect. And then just from a margin perspective, you know, both quarter over quarter and year over year, nice improvement here. And, in fact, the last couple of quarters, you've seen a big step up in the profitability segment. of the maintenance segment. Can you just talk about the drivers there and maybe some perspective on whether that's starting to reach a ceiling or do you feel like there's still more room to go? Thanks.

Yeah, Seth, look, you know, like we talked about at the investor day, this, this take five oil change business is one of the greatest multi-unit businesses that I've ever been involved with. We've got, you know, significant same store sales growth, positive traffic. You know, we've also got natural ARO or check growth in that business. The team has executed phenomenally well with our attachment rate of our big four items. You know, our NPS scores are still in the high 70s, which is, you know, top two box and likelihood to refer. And then, obviously, we've got, you know, a significant amount of new stores that are ramping, contributing to, you know, same-store sales growth, obviously, when they hit sort of month 13. So, we're incredibly proud of the team that Mo and the team and all the efforts they're doing there. So, We expect to see continued growth in that maintenance segment, specifically with Take-5 oil change.

Okay, thanks for that, and congrats on the progress. Thanks, Ben.

Your next question comes from the line of Simeon Gutman from Morgan Stanley. Please go ahead.

Hey, good morning, everyone. I wanted to focus on car wash for a minute. So margins are a bit lower where we are today, obviously, versus prior. Can you talk about your confidence in a timeframe in which margins stabilize? And it feels like it's a little bit beyond even sales deleverage. I think we have 10 to 15 points of lower margin. So how do you separate that out between weaker sales, you know, higher rent or other miscellaneous things within the margin?

Morning, Simeon. Look, I think nothing's dramatically changed from what we talked about at, you know, Investor Day. We do have headwinds in the U.S. car wash business in terms of macro consumer demand along with the competitive intrusion that we've spoken about before. We've also seen incremental margin pressure from the approximately seven plus million of sale and leaseback expense that's on the business this year. We've also got 57 stores that are less than one year old which are ramping and therefore they tend to be sort of margin dilutive as they get to their ramp cycle. And Danny's been really focused on sort of that middle part of the P&L to make sure that we're managing margins, you know, on a go-forward basis. So, you know, I think we are really working hard on the things that we can control. And, you know, we're optimistic that we'll see margin improvement, you know, over the next several quarters in that car wash business, again, on the things that we can control.

And may I ask on the glass business, I think Danny mentioned a couple of things. both in terms of revenue outlook and then in terms of, I don't know, profit normalization or the streamlining of some of these acquisitions, you know, respecting, you know, could take some time, but curious what the timeframe, the pace of progress, and again, not getting ahead of yourselves, but just what's a realistic timeframe for, you know, the margin rate of that business to ramp and then, you know, move up and to the right.

We are dealing with self-inflicted execution issues on the integration, Simeon, and we hold ourselves fully accountable for that. But stepping back, when I look at the underwriting thesis for Driven Brands getting into the glass business in the United States, nothing, and I repeat, nothing has changed in our conviction around the long-term opportunity there. There is an opportunity for us to be a really large-scale player We've got the ability to execute on retail customers, commercial customers, and grow our insurance business. The unit economics will be very powerful in this business. The capital required to open new stores will be very attractive. So nothing has changed in terms of our long term optimism around this business. And as Danny said, we hope to have the majority of these integration challenges behind us as we exit Q1 of next year. So we remain really, really bullish on the long-term opportunities for this glass business.

Okay, thanks guys. Good luck.

Your next question comes from the line of Liz Suzuki from Bank of America. Please go ahead.

Great, thank you. Just to follow up on the car wash business a bit, you mentioned that the international operations are performing a little better than the U.S. Can you help us quantify that in terms of comp growth in the U.S. versus international? And then additionally, what the U.S. car wash comp would have looked like excluding the 29 underperforming stores that you're closing?

Hey, Liz, it's Jonathan. Yeah, look, first of all, I just – you know, congratulate Tracy and the European team for just continuing to deliver really solid results in fairly challenging economic conditions in Europe. That European team has really delivered a really good sort of first three quarters of the year and expect them to sort of finish the year strong. Liz, we don't dissect, you know, sort of the comps within the sub-segments within Car Wash. I will tell you that, you know, very proud of the European business, but the The landscape there is generally different and doesn't have some of the sort of competitive natures and forces that the U.S. business has. In terms of, so I would stop there, but we're not, and in terms of the store closures, Liz, you know, we're going to close 29 stores, U.S. car wash stores in Q4. Those stores were 13 years of age on average. The vast majority of them had competitors open up within a close proximity to those stores. Every one of them on an LTM basis had negative same-store sales, negative traffic, and therefore also negative EBITDA. As I mentioned, we'll have a nominal benefit, small benefit in Q4, and we'll reap the full benefit of those closures on the financials in 2024. But we're not disclosing this specific amount, but it's... Again, nominal in Q4, and we'll see some full-year benefit next year.

Understood. And just on the competitive environment in car wash, what do you think has really changed in the last couple of quarters as you've been talking about it more? And are you seeing irrational competitive behavior coming from any of the larger chains? Is it smaller competitors? Where are you seeing the bad actors in that sector? Sure.

Yeah, look, I wouldn't call any of my competitors bad actors. We're all fighting for our share in the market. I think, Liz, what's happened as we've been in this industry now for over three years, it has, at least from our perspective, changed from a competitive dynamic when we first got into this industry back in late 2020. I think I've mentioned before that we now have almost 20, I think the exact number we've reported is 19 quote-unquote platforms in car wash with sort of institutional capital behind them. So what we've seen is just a pretty seismic shift in the number of new units that have opened over the last three years. We do think that that's likely to continue, although moderate, as we look into 2024 and 2025. So I think we've just got a lot more competition within the U.S. car wash space than we did three, four years ago. So I don't see that dramatically changing, but I wouldn't call any of my competitors bad actors.

Okay, thank you. Your next question comes from the line of Kate McShane from Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking our question. At the Investor Day, you outlined expectations for adjusted EBITDA growth to more than double in 2024. Is that still how you're thinking about the business next year, especially in the context of the car wash asset sales?

Hey, Kate, Jonathan. Yeah, look, we're obviously not going to give 2024 guidance at this point, but nothing has changed in our narrative from the Investor Day. So I can reaffirm what we said in Investor Day, but We're not going to give 2024 guidance just yet.

Okay, and then if we could just ask a follow-up question also on Car Wash. We just wondered if you could talk about what you're seeing in the subscription growth or what you saw in the third quarter for subscription growth with Car Wash.

Yeah, trends have been pretty similar there, Kate. We've seen net membership growth in Q3, you know, very similar to what we've seen over the past. I think what Danny's doing, and appropriately so, is looking at the discounting and promotional activity that has been used in the past to drive some of those new members and really looking at the economic lifetime value of what those memberships are based on discount levels. So we have seen still net member growth in Q3, but I think one of the things that we're working through is what is the right pricing, promotion, discounting strategy both for retail customers and on the membership side. So more to come on that, but we did see net growth in members.

Thank you. Your next question comes from the line of Christopher Horvath from J.P. Morgan. Please go ahead.

Hi, good morning. It's Christian Carlino for Chris. We were just wondering, are there any particular markets where the car wash closings are concentrated in? And any early reads from the cross-marketing, the car wash locations at the Quick Looms?

Hey, Chris, it's Jonathan. Yeah, there's no one market where we're over-concentrated. Some of our, as I mentioned, some of those assets were 13 years old. They were typically some of the legacy assets that we purchased back in August of 2020. So you see probably a little over-indexing in some of the, I'll call it the southeast markets, but there's not one market in particular. So that's data point number one. Data point number two on the loyalty platform that Danny and team will be rolling out, you know, that test will start in Q4. We're excited about, you know, getting that up and running and look forward to reporting on that as we sort of progress the, you know, hopefully test into full rollout. And we'll certainly be updating as we go through the quarters next year.

Got it. That's helpful. And then just to clarify on an earlier question, you know, some of the parts retailers are talking about deferred maintenance. Um, the macro is, you know, it's a pressure and even non-discretionary services will see deferral into a recession before you see, you know, things snap back. Um, you're clearly gaining share, but are there any signs of this, you know, any reads into the consumer?

Other than our, uh, sort of less discretionary carwash business in the U S Chris, um, You know, as Gary mentioned earlier, obviously the maintenance business is performing exceptionally well, and the rest of our franchise businesses are continuing to generate very good returns. So I would say at this point in time, outside of U.S. car wash and self-inflicted integration challenges with U.S. Glass, we are not seeing trajectory change in terms of the consumer deferring service.

Got it. Thank you very much.

Your next question comes from the line of Peter Kiss from Piper Sandler. Please go ahead.

Hi. Thanks. Good morning, guys. I just was trying to think more about that $850 million goodwill charge on car wash. And you were talking about you ran your DCF, and it certainly seems like you've taken down the long-term value of that segment. So I guess here as investors, how should we think about the real opportunity to drive growth there with that type of write-down?

Yeah, Peter, so as we said on Investor Day, we gave our long-term guidance for the entire company, including U.S. Car Wash, and said on that call that we did not expect much of that to be driven by U.S. Car Wash. And so when you take that model and put higher interest rates on it and multiples coming down in the sector when you've got to do your impairment analysis, that's what kicks out. I don't think we said anything about, you know, not believing in the space over the longer term. It's just, you know, when we do the math, that's what we come out to.

Hey, Peter, it's Jonathan. I would just follow up and say, you know, nothing has changed in terms of our multi-year strategy with U.S. Car Wash. We still think it's a very, very good sector to be in. However, what we stated at Investor Day, and I'll state it again today, is we will not be deploying incremental capital into that business until we've got the base business performing to a level that we believe it deserves incremental capital. So, you know, more to come there, and obviously we're working incredibly hard, you know, Danny and his team, you know, to control the things that we can control in that U.S. car wash business, and we're optimistic that we can get it back to the point that it deserves incremental capital.

Okay. Very good. I want to pivot over to the PC&G segment. So the comp growth is strong, but it did step down sequentially, nearly by four points. So I was wondering if you could help unpack that a little bit, because we do hear about very strong trends in collision, particularly with ticket growth. And I'm guessing now you have some of your glass business that's rolled into comp base. So is it the glass businesses that you've acquired are comping negative, or what's driven the slowdown overall?

Yeah, look, I think the theme is very similar to what Gary said at the start of the call, Peter, is that our P&C subsegments are performing very well. We're very pleased with our collision business, and you mentioned we're seeing strong demand from our insurance partners in that space. The only negative in the PC and G segment is the U.S. glass business, which you're right, some of those businesses are coming into the comp set right now. Our focus is getting that integration challenges behind us, primarily in the rearview mirror by the end of Q1. So I think we're very pleased with many parts of our business, but we've got two soft spots right now, which is kind of the beauty of Driven Brands is that we're still able to deliver top-line revenue, EBITDA growth, despite not having all parts of the business working at one point. So we're excited about 2024 and getting the U.S. Glass challenges behind us.

Okay. Very good. Thanks so much, guys.

Thank you.

Your next question comes from the line of Chris O'Call from Stifel. Please go ahead.

Yeah, thanks. First, Gary, if the company sells assets, what are the requirements under its debt agreements to use the proceeds, and maybe how many locations are included in that $271 million of assets held for sale?

Yeah, so obviously our debt structure is multifaceted, so different things fall in different buckets. U.S. car wash is very much tied to the term loan. So, I mean, the thought process here is we'll either – use it to pay down debt or general corporate purposes, but it's not overly specific depending on every sale we make. So it's very covenant light on that term loan.

And I would just follow up, Chris. None of those, the vast majority of that pipeline are not open and operating stores. So there is no debt obligations in terms of where the proceeds would have to go from the sale of pipeline. So just to confirm that.

Okay. And then how many locations were there in that 271? Over 130. Okay. And then, thanks. Danny, you mentioned focusing on improving margin at the car wash with fewer promotions and pricing changes, which would seem to create some problems for the top line. Are you expecting the comp trend to weaken as you reduce promotions and try to improve the margin?

So, Chris, thanks for the question. Look, ultimately, when it comes to the car wash business, I'll just reiterate, we're focused on operations and improving margins. We discussed a series of things that we're focused on. I mentioned in my prepared remarks. And don't see that being tied to declining sales. We're just focused on, like I said, improving the operations and improving the margins of the business and making sure that we drive both of those.

Okay, great. Thanks, guys.

There are no further questions at this time. I would now like to turn the call back over to Mr. Jonathan Fitzpatrick, CEO, for any closing remarks.

Thanks, everyone, and I appreciate you joining us today. And just a reminder that our short-term focus is on delivering 2023 guidance and then obviously setting Driven up for a really strong 2024. So thank you all. We look forward to talking to you on our Q4 earnings call.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.