Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Driven Brands' Q3 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Kristy Moser, Vice President of Investor Relations, you may begin.

Thanks very much and welcome everybody to Driven Brands third quarter earnings conference call. In addition to the earnings release, there is a leverage ratio reconciliation in infographic available for download on our website at investors.drivenbrands.com, summarizing our third 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. 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 the reconciliation to the most directly comparable GAAP financial measures on the company's Investor Relations website and in its filings with the Securities and Exchange Commission. Please be advised that during the course of this call, management may also 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. Our team delivered another quarter of strong performance in Q3. Another top to bottom beat with 39% revenue growth, inclusive of 12% same-store sales growth, translating to 32% adjusted EBITDA growth. Tiffany will share more on the results in just a few minutes. Those results together with our asset-light business model generated strong cash flow, which we used to reinvest in the business and gain market share. All credit goes to our incredible team, our amazing franchisees and our loyal long-term customers. The $350 billion automotive aftermarket industry continues to grow, Driven brands continues to grow and our customer database of 29 million unique customers continues to grow. Despite the current economic environment, the category is once again proving its resiliency given that it is highly needs-based. Our business remains stable and resilient and our team is executing. This quarter, our team did an excellent job of managing inflationary impacts operating through continued supply chain disruption and navigating the evolving consumer landscape. We've had success passing through input cost increases given the pricing elasticity in our business and we're leveraging our scale and supply chain capabilities as a competitive advantage on behalf of ourselves and our franchisees. The diversification and the breadth of our offering not only provides significant benefits of scale but also provide a natural balance and additional resilience to our business. This is the power of the Driven platform, multiple levers to grow both organically and through acquisitions. We entered the fourth quarter with momentum and excellent visibility into our expense base. We remain very confident in our strategy and growth outlook as our business continues to be highly cash flow generative, creating capacity to reinvest in growth. Our pipeline of future openings continues to expand, giving us visibility into multi-year growth.…

Thanks, Jonathan, and good morning, everyone. Building our performance in the first half of 2022, we exceeded expectations again in the third quarter with another strong print from Driven Brands. Our team executed well, delivering best-in-class needs-based services to both consumer and commercial customers. And we continue to gain share in the category with a focus on the key growth areas that Jonathan just outlined. In the fourth quarter, we will remain both nimble and resolute in our efforts to capitalize on consumer demand in this resilient category, drive strong growth, continue to gain market share, and deliver on behalf of our customers. Now diving into the specifics of our third quarter results. System-wide sales were $1.5 billion from which we generated $517 million of revenue. Adjusted EBITDA was $129 million and adjusted EPS was $0.32, another top to bottom beat. System-wide sales growth in the quarter was driven by same-store sales growth as well as the addition of new stores. We have tremendous white space to continue growing our store count in this $350 billion highly fragmented and growing industry. Our franchise company greenfield and M&A pipelines are all robust and we are aggressively growing our footprint. In the third quarter, we added 101 net new stores. Same-store sales growth was 12% for the quarter. We continue to benefit from the increasing complexity of vehicles as well as retail pricing action to offset the cost of inflation. Importantly, performance across the months of the quarter was relatively consistent on a consolidated basis, and we once again outpace the industry across our business segments. Now remember, over 75% of our locations are franchise, so not all segments contribute to revenue proportionally. For example, PCMG was over half of systemwide sales this quarter, but only about 20% of revenue because it’s…

Thank you. [Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Hi. Good morning everyone. My first question is on car wash. The EBITDA deleverage that occurred in the quarter. Can you speak if that's directly tied to the comp underperformance, I assume there's some FX in there, is there any other thing related to that deleverage? And then should – is it appropriate to run rate this quarter's EBITDA for the next four? Is that the right way to think of it? Or it could be volatile and snap back on a whim? Or are we in a steady environment now that we should model what happened in the third quarter? Thank you.

Hi. Simeon thanks for the question. So here is what I would tell you about car wash segment adjusted EBITDA performance. It contracted in total, so this is total car wash now, it contracted about 280 basis points year-over-year due to a couple of things. One is certainly the outsized impact of FX in the quarter and then it's also softer retail volumes as well as some promotional activity in the U.S. So obviously, we've got to watch FX rate as we move forward. And we're, I think, appropriately guiding there. And then certainly, as the Take 5 quickly – excuse me, Take 5 Car Wash brand is prevalent across the entire state, we expect that to drive incremental volume over time. So I think it's going to be – I think it could bounce around. I wouldn't necessarily take this quarter's margin and forecast it out, but just keep those couple of points in mind.

Perfect. Maybe the follow-up on the PC&G business. Can you say where the EBITDA would have been or the proper run rate if we had the full quarter of the acquisition? And then thinking about incremental margins, I guess I'll leave it open ended. We wanted to ask how we should think of incremental margins in that business going forward with these new acquisitions and I guess some changing mix of business.

Sure, Simeon. So with the PC&G business, if you look at the contraction year-over-year, it's driven by two things. One is we acquired in September of last year, 10 Seattle locations that obviously as we think about a company-owned business versus the franchise business dragged down the performance of the collision segment. However, we have resold those company-owned stores, and so that's no longer a part of the future run rate. From a glass perspective, glass is a fantastic business, it's generating 35% four-wall EBITDA margins, but when you mix that glass business in with the remainder of the PC&G segment, you are seeing some dilutive effect. The glass is a fantastic business, great cash-on-cash return. And so I think this is a good run rate for you – for the PC&G segment over time.

Perfect. Okay. Thank you. Good luck.

Thanks, Simeon.

Your next question is from Liz Suzuki with Bank of America. Your line is open.

Great, thank you. I think you may have mentioned this and I might have missed it, but just how much did inflation impact your comps and/or margins across your various categories? And then on the other side of that, do you have any expectations for how deflation or disinflation might impact your business if we start to see some of those input prices falling?

Hi, Liz. Yes, thanks for the question. So in terms of inflation, the team has done just an absolutely excellent job managing inflationary impacts. And we've had really good success passing through input cost increases given the pricing elasticity in our business. If you take our Take 5 quick lube business as an example, we've experienced a double-digit rate of inflation, and we've taken four price increases in the past 18 months. But as I said in my prepared remarks, NPS scores have remained strong and repeat rates have improved 5% year-over-year. So importantly here, we're operating in a need space and a very resilient category.

Hi, Liz. It's Jonathan. Good to hear from you. I'll talk about the – your deflation question. So a couple of thoughts. One is, first, obviously, we only control pricing for our company-owned stores. Our franchisees control their own pricing. However, they are incredibly nimble and agile in terms of managing price effectively. As Tiffany said, look, we've been very active in both price and revenue mix management over the last two years. I think we've been very thoughtful on not maximizing that price, but making sure we're taking enough price to offset sort of the input costs that we've been facing. In this category, I would say, historically, price increases have been very sticky following periods of inflation. So I think if costs do come down over time that we think it would be likely a very slow process, and then sort of the flip side of that, if we have some deflation, obviously, that could lead to a decline in interest rates, which lowers the cost of capital. So that's how we're thinking about deflation.

Great. And if I might ask one more question just on car wash in the U.S. was the decline there? Because, I mean, I guess, there was the impact from FX, but you would still be seeing the U.S. business down year-over-year. And was that the effect of more of those retail customers choosing not to come in? Did you find some of that discretionary demand starting to pull back?

Yes. Look, again, Tiffany mentioned sort of the two big factors, right? There's FX certainly in the international business. But in the U.S. business, I think there's a couple of things. Look, one, we're incredibly pleased with almost doubling the size of the portfolio over the last two years. Secondly, we've got a massive greenfield pipeline now of about over 200 locations. We have undertaken the rebranding strategy and are now almost 40% – 40% changed over to Take 5 Car Wash with a view that will be finished at the end of 2023. I think when you look at the actual business, you'll see that we've made great progress in migrating people into our Wash Club program, over 600,000 folks in that program right now with an LTV, lifetime value of 5 to 1 versus retail customers. So I think we're very pleased with it. We also have a broad-based customer demographic where we've got sort of the three tiers there, sort of the lower, the middle and the higher. And I'd say that we still see that there's going to be some noise in the retail space, as Tiffany mentioned, in Q4. But overall, we're incredibly pleased with the operations of the car wash business.

Okay, than you.

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

Hi. Good morning. I guess first question for Tiffany. There seems to be maybe some confusion on the context for about $2 billion. So if you could kind of clarify that. And specifically for the fourth quarter, I think you can get to double-digit full year comps on any positive comp in the fourth quarter, but it sounded like you've got some pretty strong momentum. So maybe any insight into what we should expect in the fourth quarter even by a segment basis, if there's any variation to think about? And then secondarily, just curious on the franchise pipeline, is there any discernible impact from rising rates there and maybe a franchisee or urgency to open? Thank you.

Hi, Sharon, I'll take the first question and then Jonathan will answer the second one. Here is how you think about our guidance. We raised our guidance for the beat in Q3, right? So we raised our full year expectation by that beat. We kept our expectations for Q4 unchanged. And it's important to know that we've absorbed about $4 million of FX headwinds in the second half and that's using a 9/30 spot rate for Q4. So if I double click on that for just a minute, we started the year with adjusted EBITDA guidance of about $465 million, and the benefit of year-to-date M&A, net of any SLB transactions is $24 million. So that means we expect to beat our organic guidance for the year by $14 million. So we're really proud of the team, particularly given an operating environment that's different from where we started the year. And the last thing I'll tell you relative to the confusion you note on the revenue guide is all of this is approximately, right? So I think keep in mind that we're rounding and giving you approximate numbers as we guide at a high level.

Hi, Sharon, Jonathan, I'll talk about the franchise pipeline and your question around discernible impact. The answer is categorically no. I think the results and resiliency of our category continue to become even more attractive for prospective franchisees. And certainly, if you look at our pipeline, it continues to grow. So the biggest headache we have right now is just making sure that we can open based on some of the resource issues in terms of local permitting and jurisdictions, making sure that all the supply chain pieces are moving, but there is zero discernible impact to our franchise pipeline or franchise energy around opening locations.

Thank you.

The next question is from Chris O’Cull with Stifel. Your line is open. Chris O’Cull: Thanks. Good morning guys. I was hoping you could provide some details around CapEx spending this year outside of acquisition spending and maybe just bucket the CapEx around unit development, maintenance and tech or corporate? And then do you have a target for this year as well? And has the higher rate environment made generating positive free cash flow, a higher priority for the company?

Hi, Chris. Thanks for the question. So quickly on our CapEx guidance. Total CapEx for the full year is expected to be $400 million and you can split that between gross CapEx of $360 million and maintenance CapEx of $40 million. And that gross CapEx of $360 million includes the car wash rebranding, so we'll be at half of the estate by the end of this year and it also includes some, what I would call, corporate projects such as this idea of unlocking the digital potential. So that's how you think about guidance for the year. As we think about free cash flow, I think it's important to take a look at a couple of things. One is, if you took cash from operations and subtracted CapEx, so sort of a traditional definition of free cash flow, you would see contraction year-over-year. But I think when you think about us being an aggressive growth company and the tremendous opportunity in a growing and consolidating environment, subtracting out gross CapEx and then importantly, thinking about that $56 million success fee that we paid in the first quarter when we acquired AGN, you get to a, what I would call an adjusted or normalized free cash flow level, that's actually grown quite nicely. So the business – the punchline here is the business is incredibly strong. It's incredibly resilient, and we continue to be pleased with our performance. Chris O’Cull: Okay, great. Thank you.

The next question is from Peter Keith with Piper Sandler. Your line is open.

Hi. Good morning everyone. Nice results. I want to dig in a little bit on the glass comments. I think a lot of investors are eager for you to open up that insurance opportunity, probably double the TAM, but you're talking about that not until late 2023, early 2024. I guess what's the delay on lining up the insurance contracts? And on the calibration opportunity, does that kind of come hand-in-hand with insurance or can calibration start to ramp earlier?

Hi, Peter, Jonathan. Look, we love this glass business, right? And in the space of less than 12 months, we've become the second largest provider in the industry with multiple hundred locations, multiple hundred mobile capabilities. The glass business is worth understanding is that there's – from our view, there is at least two types of customers. There's what I would call retail non-insurance customers, there's commercial customers and then there's actually insurance customers. So those are three categories. And then there's two methods of delivery, they're sort of in-shop and mobile. So sitting here today, we're very much focused on the commercial customer and the retail customer. And as we build scale in our business, that will allow us to leverage the amazing insurance partnerships that we have today through our Collision business. So I think we are being appropriately prudent in sort of the timing of unlocking that insurance opportunity. So I think that’s just us being again, appropriately prudent. In terms of the calibration opportunity, Peter, we are making sure that all of our stores have the calibration equipment and the training and the capabilities to offer calibration. Calibration really doesn’t matter what type of customer it is as more and more vehicles require calibration, we’ll be capturing that opportunity. So I think those things are separate in terms of the insurance opportunity will continue to grow our calibration opportunity in the meantime.

Okay, that’s great. Thank you. I also wanted to pivot over to labor. So we’re just hearing about constant labor constraints in the industry. And it seems like it’s a bit of a structural problem as younger people just aren’t getting the proper training on auto service and repair. Are your sites seeing any challenges with hiring and perhaps maybe your scale and ability to offer benefits? Is it offering you any advantages here?

Yes, Peter, I mean, I think it’s a really interesting question. First of all, if you think about our large scale company assets within quick lube, car wash and glass, we don’t require specialized labor, right? So we don’t need ASE certified technicians or mechanics. We have labor that can be trained in-house to operate in those stores. That’s number one. Number two is all those three models I talked about are highly labor efficient. We’re talking about running these locations with three, four, five people. So we’re not talking about 10, 12, 15 people. So that’s the second thing. As we’ve talked about in the past, we do have people that want to work in automotive, so it can be an attractive space versus some of the alternatives at the same sort of wage levels. We obviously offer, I think very competitive benefits to our employees. And then I think what’s really important is that we are in all three entities in our company, glass, car wash, and quick lube. We are growing and because we’re growing so much, we offer great promotion and advancement opportunities for those employees that join Driven Brands. So I think when you put all that together, we’ve got a really nice sort of set of advantages in the labor model, not denying that things are still tough. But I think we’ve got some structural advantages that are allowing us to continue to win.

Okay. That’s very helpful. Thank you. Good luck.

The next question comes from Kate McShane with Goldman Sachs. Your line is open.

Hi, good morning. Thanks for taking our question. Just back to the commercial and insured opportunity, I know you mentioned the commercial opportunity when we spoke with you last fall. But we were wondering if there’s been a change in how big you are thinking this opportunity can be versus maybe what you originally incorporated in your 2026 outlook?

Hi, Kate. Look, I think it’s just highlighting how big that opportunity is. We’re not going to sort of frame exactly, is it, what percentage, but it continues to grow and has grown very nicely over the last sort of five to seven years. And commercial customers are amazing, right? So they have big books of business, they can be harder to win, but typically they are stickier customers because the friction cost of them changing is quite high. So, and you’re seeing now the benefit of this deep commercial customer expertise within Driven, we’ve talked about the massive partnership we have in the insurance space with our Collision business, which we’re now able to parlay that over into our Glass business. So, this just remains a very important part of Driven both today and in the future. But I wouldn’t sort of size it. I would just say that our optimism around this space is the same as when we talked about it before.

Okay, thank you. And then our follow-up question was just about the marketplace test that you mentioned. Is there any more detail that you can provide us about how the mechanics work and what you might be providing the franchisees that you didn’t provide before?

Yes, I think, it’s the ultimate sort of transaction flow is the same. Our franchisees will ultimately buy products or services through Driven Brands. Really what we’re doing is providing a sort of a better, more efficient, more holistic platform for them to do that. So, you could think about Amazon, which is probably the world’s greatest marketplace on the planet, not suggesting that we’re becoming Amazon, but it’s that technology, it’s that central place. It’s the ability to provide multiple options which are best for the franchisees. It’s a great place for vendors to be consolidated. So, this is something that we’ve been working on for quite a while. As Tiffany mentioned, or I mentioned, we’re going to be in test this November. And we’re pretty excited about this is only going to accelerate deep and widen sort of the procurement offering for our franchisees and ultimately drive incremental profitability for both them and for Driven. So pretty excited about it and we’ll certainly keep you updated next year as we get through the test and move into hopefully commercialization.

Thank you.

The next question is from Justin Kleber with Baird. Your line is open.

Yes. Good morning, everyone. Thanks for taking the question. Tiffany, just to clarification on the guide, you mentioned leaving 4Q unchanged a few times. Obviously, you’ve done M&A during 3Q. So if you’re leaving your 4Q guide unchanged, doesn’t that imply your organic assumptions have come down or is the M&A that you completed during 3Q not in the full year guide?

Yes, Justin, thanks for the opportunity to clarify. So any M&A that we’ve done through the third quarter. And when we take that M&A, we take it net of SLB because they go hand in hand. Any year-to-date M&A is in the guide. So the way that that breaks down is about $11 million of benefit expected in Q4. So again, if you look at our guidance, we said we started the year at 465. [ph] Obviously, we’ve beat the last three quarters. We’ve rolled in that M&A year-to-date. And we’ve taken the offset from FX because of course FX is different now than it was at the end of the second quarter. And all of that would suggest that for the full year, we expect to beat our organic guidance by $14 million.

Okay, that’s helpful clarification, thank you. And then just a follow-up, somewhat unrelated on the Car Wash business. You mentioned in response to Simeon’s question promotions in the U.S. Can you elaborate a bit more on that? Are you discounting the membership program or what type of promotions were you alluding to? Thank you.

Yes. Thanks, Justin. Look, promotions are something that we do across all of Driven Brands, right? So I don’t want people to start thinking that, oh my God, they’re all of a sudden promoting because there’s a little bit of softness. This is part of day to day consumer facing brand stewardship, marketing and customer acquisitions. So, this is something that we do across all of our businesses. We expect to continue to do it across all of our businesses. This is not a reaction to short-term reaction. This is about customer acquisition, building long-term incremental customer accounts, and ultimately building more folks moving into our car wash membership program, which is now 600,000. And again, we talked about the lifetime value being five to one. So this is very normal practice for us across Driven Brands, something that we’ve been doing very well for more than a decade. So I want you to think about it more about lifetime value customer acquisition versus sort of a short-term reaction to something that people may be reading into.

Got it. Makes sense. Thank you both.

Our final question is from Christopher Horvers with JPMorgan. Your line is open.

Excellent, thank you. So a couple follow-ups. First on the Car Wash business, was there any disruption to comps and EBITDA from the remodeling in the U.S. and the volumes slowdown from a macro standpoint? Did that get worse over the quarter and into the fourth quarter?

Hey Chris. De minimis impact in terms of the rebranding, I mean, sort of so small that we didn’t even sort of split it out. But definitely, I would say de minimis. And then in terms of, within Q3 trajectory, no, we didn’t – let’s just say we didn’t see a worsening of the comp profile within Car Wash. So again, I just reiterate, Car Wash is an unbelievable business model with great unit level economics. We’ve doubled the size of the U.S. business in two years since we’ve owned it. And we’ve got a greenfield pipeline now of 250 stores, which is exactly the strategy that we laid out when we first talked about Car Wash. M&A to start to build scale, a balance of M&A and greenfield in 2022, and a migration to probably more greenfield and less M&A in 2023. So I think we’ve been very consistent in terms of talking about the strategy and now executing that strategy.

Got it. And then a follow-up on the M&A side, you mentioned, Jonathan, that deal pipeline remains robust. Can you talk about how returns are changing given the intersection of multiple and funding costs?

Yes, I mean, Chris, I think the question is probably more related to Car Wash. So – but I’ll sort of break down Car Wash and Glass a little bit for you. So, in Car Wash, this has sort of been a hot space, Chris, you’ve written about it multiple times. There are probably 20 institutional capital investors in this space right now and they’re all chasing M&A because very few of them have greenfield capabilities like we do. So we’re not yet seeing multiple moderation or multiples coming down in the Car Wash space. So I do expect we will see that as you see the rising cost of debt. But we’re not seeing that yet, which is again, why we’re heavily focused on the greenfield side. In the Glass business where we’ve obviously sort of running our playbook to build scale in the first year. We’ve done a handful of nice acquisitions there. I think the multiples are certainly more moderated than the Car Wash space, simply because we don’t have sort of the volume of institutional capital in the Glass space. And quite frankly, when you look at the size of the opportunity there, you have to get into smaller deals very quickly, which is again, sort of a core competency that Driven Brands is executed against for like the last decade. So that’s sort of my commentary on M&A.

And then I just had a one quick follow-up. The recent Glass deal was that a franchise acquisition and how do you think about the balance of greenfield versus acquisition and Glass over the coming let’s say 2023?

Sure. Yes. No, it wasn’t franchise Chris. I don’t know how that got out there. But no, it wasn’t franchise. Again, going back to the growth playbook, right, sort of the first year is building scale. And we do that through platform M&A and then bolt-on M&A. And as we look at 2023 and beyond, I think you’ll see a migration towards greenfield growth within our Glass space. I’m not saying we’ll get rid of M&A. Obviously, we’ll remain active in that space. But you’ll see the shift to greenfield, which I think will come through in 2023 and 2024.

Great. Thanks so much.

I will now turn the call back over to Mr. Fitzpatrick for any closing remarks.

Yes, and thank you all for joining today and for your time. We appreciate it. On the back of a strong third quarter, we continue to have conviction around the strength of our business model and the continued momentum of our business. Our team is executing and we’re successfully navigating the evolving market dynamics. The benefits of our scale and breadth of our offering deepen our competitive moat and differentiate our business, which is driving unit expansion, same-store sales growth and cost savings. Our results are a testament to the resiliency of this needs-based service offering and our ability to drive sustainable growth and cash flow leveraging a proven playbook. As always, investor relations with Kristy Moser will be available after the call if anyone has any further questions. But again, thank you for your time this morning.

This concludes today’s conference call. You may now disconnect.