Good morning, and welcome to the Driven Brands First Quarter 2021 Earnings Conference Call. My name is Tamia, and I will be your operator today. As a reminder, this call is being recorded. Joining the call this morning are Jonathan Fitzpatrick, President and Chief Executive Officer; Tiffany Mason, Executive Vice President and Chief Financial Officer; and Rachel Webb, Vice President of Investor Relations. During today's call, management will refer to certain non-GAAP financial measures. You can find the reconciliation to the most directly comparable GAAP financial measures on the company's Investor Relations website in its filings with the Securities and Exchange Commission.

Thank you, Tamia, and good morning, everyone. We had a great quarter across the board and are excited to share the results. Before we jump in, though, let me explain the power of Driven Brands. Driven Brands is the largest automotive services company in North America. Our 4 operating segments provide diversification to our business model, diversity across our brands, geographies and needs-based service categories. We have scale in an industry where scale matters. And we marry this scale with sophistication, which allows us to leverage our massive growing data capabilities, to drive more cars to our shops through more effective marketing, to identify the best possible real estate and to drive cost efficiencies through purchasing. That creates profitable growth for us and our franchisees, generating better returns than most independents could achieve on their own. Our industry is massive and extremely fragmented. It's roughly $300 billion and growing. And we're the biggest in our space today despite having less than 5% market share. Now we have consistently taken share in this industry for the past decade, and we will continue to do this for the next decade. We have many levers to grow organically. And because of our asset-light business model, we generate a ton of cash flow. Put all this together, we grow same-store sales and units and we generate a ton of cash. Over the long term, Driven will consistently deliver double-digit revenue growth and double-digit adjusted EBITDA growth. And this is before we layer on acquisitions, which we see as incremental upside to our model. This is the power of Driven Brands.

Thanks, Jonathan, and good morning, everyone. We delivered strong first quarter results, thanks to the hard work of the entire Driven Brands team. Their efforts allowed us to capitalize on some important industry tailwinds. Our consumer has more money in their pocket. Vaccine distribution is accelerating. Consumer sentiment is picking up, and vehicle miles traveled are beginning to increase. And that is all good news for Driven. We took important steps in 2020 to position ourselves to capture market share in 2021, and we are off to a great start. System-wide sales were a record $1 billion in the first quarter, from which we generated revenue of $329 million, an increase an increase of 83% versus the prior year. Adjusted EBITDA was $78 million, more than double that of the prior year. And as a percentage of revenue, adjusted EBITDA margin was nearly 24%. And finally, adjusted EPS was $0.19 for the first quarter, exceeding our expectations, as a result of strong sales volumes, which allowed us to leverage our expense base, driving significant flow-through. This is the power of the Driven Brands platform: a scaled, growing, highly franchised business with a diverse need-based service offering that delivers very attractive margins. Now let me break things down a bit more. System-wide sales growth in the quarter was primarily driven by the addition of new stores from acquisitions as well as new franchise and company-operated stores. We have tremendous white space to continue growing our store count in this roughly $300 billion highly fragmented industry. Our franchise, company greenfield and M&A pipelines are all robust, and we are aggressively growing our footprint. Since Q1 last year, we've added 1,157 net new stores. In the first quarter of this year alone, we added 22. Same-store sales were positive 0.5% for the quarter despite the fact that vehicle miles traveled were still down roughly 10%. Our Q1 same-store sales improved 390 basis points sequentially from Q4 and on a 2-year stacked basis were nearly 3%, trending back toward our historical average.

Your first question comes from the line of Simeon Gutman with Morgan Stanley.

This is Michael Kessler on for Simeon. I guess, first, I wanted to ask about the cadence through Q1. There was clearly a step-up if you look at sales per store, the comp, the same-store sales themselves. If you could just talk about how that trended through Q1 and if you could dissect it on -- you mentioned stimulus, the reopening and miles-driven recovery, consumer confidence, your own share gains, if you can just kind of dissect how those interplayed and how you saw that play out through the quarter with the cadence of how trends went through Q1.

Michael, thanks for the question. It's Tiffany. So I'll give you qualitatively. We're not going to provide monthly comps here, but we'd be happy to talk about it qualitatively. January was solid. We had strong growth in Maintenance and in Platform Services. Those comps were positive, certainly supported by stimulus and pent-up demand from Q4. Obviously, in Q4, we were dealing with the second wave of COVID. We saw some folks sit on the sidelines as it related to deferred maintenance on their vehicles. These folks came back with some extra money in their pockets in Q1. And so those categories or those segments of our business certainly benefited. February was the low point. And then in March, we had double-digit positive same-store sales overall as vaccine distribution picked up, as consumer sentiment was improving and vehicle miles traveled was increasing. If you were to normalize our monthly comps on a 2-year basis, it looks just like you'd expect. January is positive. February is just slightly negative, March is positive and certainly the strongest month of the quarter. And that follows pretty well with VMT, when you compare VMT month-by-month in 2021 versus 2020. And so I think really good signs. And certainly, that momentum that we saw in March, as Jonathan said in his prepared remarks, continued into April.

Great. That's very helpful. And a quick follow-up, I guess, on your expectations for the rest of the year. And I mean how -- I guess you incorporated the improving trends into the raised guidance. And I mean, is there, I guess, a change in your expectations for the rest of the year? Are we more kind of just flowing through the Q1 beat versus what you were expecting? Just kind of your thoughts there. And I guess also, should we interpret -- I guess the fact that April has also been strong, has there been a further acceleration versus March or more consistent now that we're at the stage of the reopening?

Yes. Michael, thanks for the question. So I want to be really clear here. We have rolled the beat from Q1 into our guidance, and we have held our expectations for the balance of the year. I think it's really important early in this reopening to not get ahead of our skis. What I would say is one quarter doesn't make a trend. I think there's a lot of volatility potential in Q2. As you know, Q2 is the low point or the sort of peak of the pandemic a year ago. We have strong momentum in April, but I think we need to see Q2 play out before we feel good about giving you a new full year outlook for 2021. So we've rolled in the beat. We're bullish on 2021 overall. We think things are trending in the right direction. And we want to stay focused, deliberate and resolute as we finish out the second quarter.

Your next question comes from the line of Liz Suzuki with Bank of America.

Just can you provide any details on regional differences in segment performance? So in areas that opened up earlier, are segments that are more sensitive to miles driven seeing a greater recovery?

Liz, it's Jonathan. I'll take that, and Tiffany can obviously come in over the top if she wants to. Look, it's pretty obvious, right? I mean places in the South, Texas, Florida, the Carolina, people were driving more than places in the Northeast, right, and the West, to some extent. So we're definitely seeing a correlation in terms of those markets doing better than some of the northern markets, I would say. And I would include Canada in the northern markets. But we think that, obviously, as things are starting to open up now, and CDC just released some sort of positive guidelines yesterday, I think we'll see more and more driving throughout all of our geographies. But definitely, we saw some increased movement in our sort of broadly southern markets.

Great. And just a follow-up on that. Are you -- oh, go ahead.

Sorry, Liz. I didn't jump in there fast enough. I think the only thing I was going to add is, just keep in mind, our services are essential, right? So in most cases, anytime you see a shutdown or a temporary restriction of some sort, it's going to delay on occasion, but it's not going to be a lost occasion. So that's the only thing I'd add to the commentary there.

Yes. Yes, of course. And just curious if your -- if interest from franchisees are following any of those regional trends as well. So in the areas that have opened up quickly, are you seeing that there's more interest from potential franchisees to start new businesses?

Interest is pretty widespread, Liz. I mean you see the pipeline numbers that I talk about. It's the biggest it's ever been in the 9 years that I've been at Driven Brand. So we're seeing interest from far and wide because I think people understand the resiliency of our business models, that we perform well in all cycles. There's money to be made, massive fragmentation in the industry. So we're not seeing a correlation to franchise interest in only those states that are opening up but in all places.

Your next question comes from the line of Chris Horvers with JPMorgan.

So you talked about a number of positive factors, but you also had a couple of headwinds during the quarter in terms of the weather in Texas, in that region, in February. And then you talked about Canada. Is there a way to sort of diagnose how much of a headwind that might be in terms of like, I don't know, regional sort of store exposure or percentage of sales? And then did you talk about the overall 2-year comp trend in March in terms of how that was relative to the overall quarter?

Go ahead, Tiffany.

Sorry, Jonathan. So yes, I was just going to say -- and Jonathan, feel free to jump in. I would say in terms of weather, I mean certainly, we saw some pretty extreme weather, to your point, in Texas and in the Gulf Coast states towards the middle and latter part of February. You can certainly see that reflected in our monthly comp. And so when I said the February comp was the weakest of the 3 months, that's partly why that is the trend. Texas is about 14% of our footprint. So just to give you some magnitude there, when you think about Canada and its relative size for PC&G, that's about 20%. So when you think about lockdowns in Canada, that's having an impact certainly. So to give you some magnitude in that regard. But the beauty of the Driven Brands platform is diversification, right? We operate in Canada. We operate in just about every part of the U.S., and we have now with the Car Wash business an international footprint. So diversification is a beautiful thing, not only in terms of geography but in terms of diversification as well.

And then in terms of the 2-year trend in March relative to the overall quarter?

So 2-year is -- it was the strongest on a 1-year basis, and it's certainly the strongest on a 2-year basis.

Got it. And then the other question is just more specific around modeling. The Corporate/Other line, can you help us -- obviously, your revenues and comp came in much better than expected. This line item from a dollar perspective was also higher, but obviously, the great flow-through overall. What drives that line item? Was there any sort of like incentive comp sort of accrual that was a contributory factor to that? And just is it -- or is it just the variable cost side of relative to revenues?

Yes. Chris, the only thing that's in Corporate/Other would be shared services, so corporate office expenses. And then advertising flows through that line as well. So we can follow up in calls this afternoon and kind of work through the details there, but there's nothing out of the ordinary.

Your next question comes from the line of Peter Benedict with Baird.

First question, we noticed the 62 PC&G stores that were reclassified over the Maintenance in the quarter. Can you just give us a sense for what was behind that adjustment?

Sure. Peter, yes, I'd be happy to. So those 62 stores are for a brand called Drive N Style. That is a brand that's actually managed by Daniel Rivera, who runs our Maintenance segment. And so we reclassed those stores to align with all of the other brands that he manages in the Maintenance portfolio. Drive N Style, in terms of financial results, is pretty insignificant. So it really doesn't move the needle in terms of financial performance. Put it at 62 stores in terms of unit count that moves from PC&G to Maintenance as of the 1st of the year, immaterial to the segment as a whole. Yes, of course.

Yes. Yes. No, understood. I guess my other question is just -- there's a lot of, obviously, moving parts here. But just as we think about EBITDA going forward, I mean is there any reason why the second quarter wouldn't be larger than the first quarter? I mean is there anything from a seasonality standpoint? I'm not sure how stimulus -- you're thinking about stimulus. I mean I know you're not giving specific guidance, but it would certainly seem that the trajectory should continue to grow. But I just wanted to make sure we aren't missing something, whether it be Canada or something else that we need to think about in the second quarter.

Yes. Peter, I think you're thinking about it the right way. This business is roughly 60% fixed, 40% variable. So the beauty of this business is as we get the flywheel working, right, so as you get the volume running through the top line, we get phenomenal fixed cost leverage, and therefore, flow-through in the business. So again, we've rolled in the beat from Q1 into the outlook or into the guidance for the full year, and we've held Q2 through Q4 steady. To the extent we see continued improvement in consumer sentiment from vaccines and which causes vehicle miles traveled to continue to improve and the business outperforms our current expectation, then I would agree you'll start to see just even better flow-through on the business.

Your next question comes from the line of Sharon Zackfia with William Blair.

I have a question on the Maintenance segment, where the margins have been kind of in that 30% range for most of the last year. And I think during due diligence, we talked about ongoing margins in the mid-20% range. Has something changed there? I mean is the business just more profitable at this point? And should we be thinking about kind of 30% as the new normal?

So Sharon, Maintenance is a mix, as you know, of 2 important brands. So one is Take 5, which is the Quick Lube business. The other is Meineke, which is a fully franchised total car care business. As -- Meineke has been around since the mid-'70s. Take 5 is a relatively new brand and new growth vehicle for us. It is -- Take 5 is a mix of company-owned and franchised. Both are growing really well. In fact, franchised will eclipse company-owned growth this year. That business has phenomenal margins, mid-30% margins. And so as that business continues to do well, continues to grow in terms of store count, it mixes the entire margin profile of the Maintenance segment higher. So I think that's the most important thing to keep in mind as you think about that segment.

Yes. Tiffany, I would just add -- Sharon, I would just add specifically on the Take 5, Daniel Rivera and the team did an amazing job in 2020 sort of relooking at the operational efficiency of the business. And when we think about that business, it's incredibly labor-efficient, and we sort of have made it even more labor-efficient as we sort of have to in 2020 with some -- when demand went down in March of 2020, we matched our labor to that. And we've kept that labor very consistent even though we're doing more cars. So the business is an amazing labor-efficient model. And I think that, combined with the growth in the franchise, is what you're seeing this sort of change in margin profile in that segment.

Your next question comes from the line of Kate McShane with Goldman Sachs.

This is somewhat open-ended question. But do miles driven have to be positive for the collision business to comp positively? Or can you get to a spot where miles driven still down from the year before, but with the combination of market share gains, we could still see a positive comp?

You nailed it, Kate. Look, miles driven are still a little bit depressed, certainly in Canada more so than the U.S. They're coming back pretty strong in Canada. But our play over the next 5 years here is regardless of what happens to miles driven, we're going to continue to take share in this industry. And we saw in 2020 this sort of inflection point, where I think the insurance carriers and our partners, we fixed hundreds of millions of dollars of cars of repairs on their behalf, they now absolutely see the benefit of doing business with fewer scale providers. So I think as you look at the next 5 years, we're not so focused on miles driven, but we're focused on share gains, right? So I think -- obviously, we hope that miles driven come back, and we expect they will. But really, our focus is on continuing to take share in that industry. So we feel very good about that.

Okay. And then my second question is on platform. It sounds like -- in your prepared comments, you noted that from an inventory standpoint, you were in stock and had inventory versus maybe some of your competitors. How do you expect that to play out for the rest of 2021? Is that an area where you'll continue to have a disadvantage over your competitors?

Yes. Look, that business -- a big part of that Platform Services business is our 1-800 business, which is a really unique business in that it's a franchise distribution business, and we specialize in a handful of product lines. The team at 1-800 led by Kyle Marshall have just done an incredible job of managing our supply chain, in-stock inventory levels, making sure our franchisees have what they need to sell. So we feel really good about the future in that segment because we've got embedded skills to manage our supply chain and in-stock levels. So we feel really good about the future for that business. And quite frankly, I think we've got capabilities there that a lot of our competitors don't have when it comes to inventory and supply chain management.

Your next question comes from the line of Karen Short with Barclays.

Just a couple of questions. I wanted to just clarify with respect to the comp in terms of April. You're talking about the comp in April being in line with March, correct, not in line with the quarter?

I don't think we actually gave, Karen, specific guidance for April comp. I think what we said is that we're very pleased with how April is performing so far.

Okay. And then I was wondering if you could maybe give a little bit more color on the repeat rates that you talked about with respect to the retail and commercial customers. You talked about how that had been improving. I just was wondering if you could give a little bit more directional color on that, where it is today versus where it's been in the past.

Sure. I'll give Take 5 as an example, Karen. When we -- and we talked about driving trial -- awareness and trial in our business. So when we get people into our stores, they have this incredible 10-minute stay in your car oil change experience. We've got extremely sort of high industry-leading NPS scores, Net Promoter Scores. So when we get customers to visit the first time, there's a high likelihood they're going to come back. So as we drive trial and awareness in 2020, those customers come back because they need 2-plus oil changes a year. So that's how we drive our peak rates through great marketing and even better operational execution. In terms of our commercial customers, I think you've heard before that we have a very dedicated team that focuses on delivering great service to our insurance partners. As the insurance partners see the capabilities of our franchisees, they give us more business, right? So that's how we win more business. It's a really meritocratic system. So that's how we're gaining share and repeat customer rates both with commercial and retail customers.

Right. But any way to just give some progress in terms of what repeat rates may be today versus where they've been in the past?

I think they're accelerating, I think, within the Take 5 business. And we typically don't want to give business-level metrics, Karen. But I will tell you that within the Take 5 business, we've seen sort of 500 basis points of improvement in repeat rates. And we've seen, obviously, when you look at our Paint, Collision & Glass business, when we look at our same-store sales performance versus the industry metrics, you can see that we're sort of 500 basis points better than the industry. So there would be some data points that I'd point you to.

Our last question comes from the line of Peter Keith with Piper Sandler.

I wanted to ask you, Jonathan, about your advertising spend. So it's clear there seems to be some sequential improvement happening in the business. Can you now, I guess, press the gas pedal on your advertising spend? Do you have cash that you feel like you can allocate to that? And secondly, just now that you've integrated Car Wash, has there been some type of unlock in terms of the cross-marketing opportunities across the different segments?

Yes. Great questions, Peter. The answer on advertising spend is, thankfully, we're not like Henry Ford, who used to say, "50% of my marketing works, I just don't know which 50%." So we have a data-driven marketing team, and we're able to very quickly test and learn and quantify which programs work, which promotions work. So as we find things that work, we lean into those more heavily. And when we think about advertising investment, we think of it like any other investment at Driven Brands: we look at return on investment. So if there's an opportunity to lean in more heavily to an investment because we know it works, we will do so and have been doing so. So that's sort of question number one. Question number two, in terms of the Car Wash unlock. Look, it's a phenomenal business. We bought a really terrific business in August. We integrated it very quickly, specifically on the U.S. business. Gabe Mendoza and the team there are just doing wonderful things in terms of focusing on the key levers of that business. So the key levers are: how do we further improve Wash Club membership rates, and Tiffany has talked about the benefit of recurring revenue streams; how do we maximize revenue per wash, and we're doing that through great merchandising and great selling techniques. So we've owned this business for 7 months, and I will tell you that I couldn't be more pleased with the team and the progress that we've made over the first 7 months. And I think there's just tremendous opportunity for us as we look ahead.

Okay. That's great. Maybe a quick follow-up on Car Wash then, and maybe it's a bit nitpicky. But you showed last quarter really strong improvement in the subscriber base as a percent of revenue from 41% to 45%. Now it sounds like Q1, you're still trending at 45%. I was wondering if you can comment on that. Maybe it's just a function of nonsubscription revenue has really bounced back strongly. But any color there would be appreciated.

Yes. It's kind of a champagne problem, Peter, in that we have continued to add incremental Wash Club subscriptions, but we've increased revenue per wash for non-Wash Club subscriptions at a faster rate. So we're growing both. And we don't back off from our long-term view around sort of 60% Wash Club subscriptions over time. But we're just growing Wash Club -- non-Wash Club revenue per wash at a faster rate in this quarter.

So we did add 50,000 Wash Club members, Peter, in the quarter, which is still phenomenal. Yes, agree.

I will now turn the call back over to Mr. Fitzpatrick.

Thanks, Tamia. And I think that wraps up our earnings call for Q1. We look forward to talking to many of you over the next coming days and when we announce Q2 earnings. Thank you, all.

Thank you. This concludes today's conference call. You may now disconnect.