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 speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Joel Arnao, SVP of Finance. Joel, you may begin your conference.

Good morning, and welcome to Driven Brands third quarter 2023 earnings conference call. The earnings release and the leverage ratio reconciliation are available for download on our website at investors.drivenbrands.com. On the call today with me are Jonathan Fitzpatrick, President and Chief Executive Officer; Danny Rivera, Executive Vice President and Chief Operating Officer, and Gary Ferrera, 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 and Exchange Commission. During the course of this call, we may also make forward-looking statements in regards to our current plans, beliefs and expectations. These statements are not guarantees for future performance and are subject to a number of risks and uncertainties and other factors that can cause actual results and events to differ materially from the results and events contemplated by these forward-looking statements. Please see our earnings release and our filings with the Securities and Exchange Commission for more information. Today's prepared remarks will be followed by a question-and-answer session. We 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 US Glass businesses. We outlined a multiyear strategy, created a Chief Operating Officer position, made leadership changes within US Glass and US 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 5 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…

Thanks Jonathan. Before I begin, let me introduce myself. I met many of you at our Investor Day. But for those of you I have 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 focused on strategy and capital allocation, it's 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 Auto Glass 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 stainer car old change model builds brand recognition with top quartile NPS 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-light franchise store growth to drive our footprint growth…

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 allocation is shaping our future. On a consolidated basis, we had another strong quarter of topline 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 and TC&G segment 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 segment 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 90% in Maintenance, our largest segment. Revenue from this 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've mentioned before, industry tailwinds including an aging car park and increased vehicle complexity drive average tech and a flight to trusted brands. Take 5 Oil Change continues to…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Peter Benedict from Baird. Please go ahead.

Hey, guys. Good morning. Thanks for taking the question. First one just around the Car Wash business you talked about a new pricing structure Dan I think you mentioned that. Can you maybe expand on that maybe a number of number of tiers you're thinking about? Any clarity there? And related to that, the new leadership in US Car Wash is that internally sourced folks? Anybody from the outside? Just curious kind of your views on how it's different to operating waste an oil change business. That's my first question.

Hey, Peter thank you for the question. Appreciate that. So yes 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 a focus on pricing. And our changes we think will lead to improve margins as we capture kind of more value from across all of our packages and our wash packages vis-à-vis our consumers. As far as leadership changes – operationally, our leadership changes we did bring it over an individual from our Quick Lube business who is a seller operator for us there and brought them over to our carwash business. Ultimately, the two businesses are different but ultimately they're also retail businesses. And when it comes to people and leadership and operations there's certainly a lot of -- 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 PC&G 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 is 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 inks with us. But the plan is as you can see from the numbers, we've put out if we hit our guidance means you'd have a slight margin improvement in Q4. And so how that's going to mix between the segments, obviously, we don't guide to that. But Danny is doing a lot of work with his team to try to get margins short up there. So I think, it will more translate into where we come out on the top line. Jonathan?

Yeah, Pete, Jonathan here on the openings. Yeah, we're sort of actively working through what locations in our pipeline we can exit or sell 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 Sigman from Barclays. Please go ahead.

Great. Good morning, everyone. I wanted to focus on the maintenance business. I think you gave us the quick loop the 14% comp is 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, just 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 Minonk business which is a pure franchise business and continues to perform very steady and we're not seeing any sort of major trend changes in that mining key business. But again Take 5 Oil Change is more than 90% of that segment. So that's the key driver in it.

Perfect. And then just from a margin perspective, 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 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..

Yes, Seth look like we talked about at the Investor Day, this Take 5 Oil Change business is one of the greatest multiunit businesses that I've ever been involved with. We've got significant same-store sales growth, positive traffic. 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. Our NPS scores are still in the high 70s which is top two and likelihood to refer. And then obviously, we've got a significant amount of new stores that are ramping, contributing to 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 that are doing there. So, we expect to see continued growth in that maintenance segment specifically with Take 5 Oil Change.

Thanks for that. And congrats on the progress.

Thanks, Seth.

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 the time frame 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 margins. So, how do you separate that out between weaker sales, higher rent or other miscellaneous things and within the margin.

Good morning, Simeon. Look, I think nothing has dramatically changed from what we talked about at Investor Day. We do have headwinds in the US 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 $7-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. Danny has been really focused on sort of that middle part of the P&L to make sure that we're managing margins, on a go-forward basis. So, I think we are really working hard on the things that we can control and we're optimistic that we'll see margin improvement, 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, respecting it could take some time, but curious what the time frame, the pace of progress and again, not getting ahead of yourselves, but just what's a realistic time frame for the margin rate of that business to ramp and then move up into 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 a follow-up on the Car wash business. You mentioned that the international operations are performing a little better than the U.S. Can you help us 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. Yes. Look, first of all, I'll just 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 sort of the comps within the subsegments within car wash. I will tell you that very proud of the European business, but 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, 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 the 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 competitors? Like where are you seeing the bad actors in that sector?

Yes. 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, "platform" 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. Operator: 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. Yes 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 at 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.

Yes. Trends have been pretty similar there, Kate. We've seen net membership growth in Q3 very similar to what we've seen over the past. I think what Danny is 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 Horvers from JPMorgan. Please go ahead.

Hi, good morning. It's Christian Carlino on for Chris. We were just wondering, are there any particular markets where the Car Wash closings are concentrated in? And any early read from the cross marketing – the Car Wash locations at the Quick Lube?

Hey, Chris, it's Jonathan. Yes, 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. That test will start in Q4. We're excited about getting that up and running. And look forward to reporting on that as we sort of progress the hopefully, test and to 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 some of the parts retailers are talking about deferred maintenance. The macro is – it's a pressure and even nondiscretionary services deferral into a recession before you see things snap back. You're clearly gaining share but are there any signs of this? Any read into the consumer?

Other than our sort of less discretionary Car Wash business in the US Chris, 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 US Car Wash and self-inflicted integration challenges with US Glass, we are not seeing a trajectory change in terms of the consumer deferring service.

Got it. Thank you very much.

Your next question comes from the line of Peter Keith 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 around your DCF, but 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 at Investor Day, we gave our long-term guidance for the entire company including US Car Wash and said on that call that we did not expect much of that to be driven by US 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 got to do your impairment analysis that's what kicks out. I don't think we said anything about not believing in the space over the longer term. It's just when we do the math that's where we come out to.

Hey and Peter it's Jonathan. I would just follow-up and say nothing has changed in terms of our multiyear strategy with US 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 more to come there. And, obviously, we're working incredibly hard, Danny and his team to control the things that we can control in that US Car Wash business and we're optimistic that we can get it back to the point that it deserves incremental capital.

Okay. Very good. And then 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 the 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 sub-segments 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&G segment is the US glass business which you're right, some of those businesses are coming into the concept 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 US glass challenges behind us.

Okay. Very good. Thanks so much, guys.

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

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?

Yes. So obviously, our debt structure is multifaceted. So different things fall in different buckets. US 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 like 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 million?

Over $130 million.

Okay. Thanks. And then 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.