Good morning. My name is Ludy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Driven Brands Q4 and Fiscal 2023 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. I will now turn the call over to Joel Arnao, Senior Vice President of Finance. Joel, you may begin your conference.

Good morning, and welcome to Driven Brands fourth 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 and fiscal year 2023. 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

Good morning. We appreciate everyone joining us to discuss Driven Brands fourth quarter and full year 2023 financial results. I want to acknowledge the hard work and strong execution by our more than 10,000 Driven Brands, team members and our amazing franchisees for how they continue to navigate an extremely dynamic macroeconomic environment. Now, it's been several months since we last communicated, and I'm pleased to report that we delivered on our latest guidance for Q4 and fiscal year 2023. Let me review some of our fiscal year 2023 highlights before turning it over to Danny, who will discuss our operating segments and Gary who will detail our fourth quarter financial results and full year 2024 outlook. For fiscal year 2023. We delivered 13% revenue growth versus prior year supported by 7% same store sales growth and 4% net store growth, achieving adjusted diluted EPS of $0.93. We continue to be pleased by the performance of our Take 5 Oil Change and franchise businesses, all being key contributors to fiscal year 2023 growth. I want to take a few moments to speak about one of the key drivers of our performance Take 5 Oil Change. We have grown this business from less than 60 solely company operated locations in 2016 to over 1000 locations today comprised of approximately 65% company stores and approximately 35% franchise stores. Looking back on some 2023 milestones for Take 5 Oil Change, we celebrated our 1000 store opening our 300 franchise store opening and we exceeded $1 billion in annual system wide sales, all while maintaining an industry leading Net Promoter Score of approximately 77%. Take 5 Oil Change system wide sales grew by 26% year-over-year, driven by 14% same store sales and 18% unit growth. We opened 98 franchise locations and 59 company locations…

Thanks, Jonathan. During the fourth quarter, our team really rolled up their sleeves and got to work on the commitments we made to finish 2023 strong and set the foundation for growth in 2024. I'd like to thank our team members and franchisees for all their hard work and for a strong fourth quarter, as Jonathan has said, Driven his growth and cash when it comes to running the businesses, I think and manage them accordingly. Businesses like Take 5 Oil Change, Auto Glass Now and platforms like Driven Advantage are managed to deliver accelerated growth in terms of revenue, adjusted EBITDA, and new units. Cash businesses, like Meineke, Maaco, CARSTAR and 1-800-Radiator managed to deliver strong margins and cash flow. With that background. Let's dive into Take 5 Oil Change, Home of the Stay In Your Car 10 Minute Oil Change. This quarter on a year-over-year basis, Take 5 delivered over 9% revenue growth, same store sales growth of about 7% adjusted EBITDA growth of almost 14%. And we expanded adjusted EBITDA margins by about 150 basis points. Moreover, Take 5 opens an additional 54 stores in the fourth quarter 28 company locations and 26 franchise locations. Once again, Take 5 Oil Change has met or outpaced our competition. Take 5 Oil Change has delivered positive same store sales growth for 14 quarters in a row by delivering fast, friendly and simple oil changes with a net promoter score in the upper 70s. We also remain poised to continue to grow Take 5 Oil Change by over 150 units per year for the foreseeable future, with a majority of those sites being asset light franchise locations. Special congratulations to Mo Khalid, President of Take 5 Oil Change and our Take 5 team members and franchisees on opening their 1000th…

Thanks, Danny and welcome everyone. Before diving into our results, I would like to start out by discussing two administrative points. First, we are making a change to how we report our non-GAAP financial measures. Starting with the filing of our 10-K we will no longer add back straight line rent to arrive at adjusted EBITDA. Adjusted income and adjusted EPS. As a reminder, this adjustment consisted of the non-cash portion of rent expense. This adjustment in FY 2023 was $18.2 million. And the approximate quarterly breakout is as follows. Q1 $4.4 million, Q2 $4.6 million, Q3 $5.2 million. And in Q4 $4 million, we estimate that in FY 2024 for the adjustment would approximate $15 million. We're using this earnings release as an opportunity to smoothly transition to our revised reporting. You will see it reported both ways in our earnings release for both total company and segment adjusted EBITDA. To minimize confusion. I will primarily use the previous methodology in my remarks until I start discussing the full year 2024 outlook. Second, we will no longer be providing the same store sales growth metric for the Platform Services segment as an only applied to 1-800-Radiator, a small portion or approximately 15% of the segment's revenue for the fourth quarter and therefore is not a representative indicator of the segment's performance. However, system wide sales for 1-800-Radiator are still available in our filings. Now I will discuss our results. I joined Driven Brands just over nine months ago, and we've been laser focused on delivering the outlook we provided in early August, while also stabilizing parts of the business in order to set ourselves up to deliver a strong 2024. I am pleased to say that we met or exceeded all the financial metrics that we provided in an…

Thank you. And, ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] Your first question comes from the line of Peter Benedict from Baird. Your line is open.

Hey, guys, good morning. Thanks for taking the question. First, maybe Gary, just as you think about the ‘24 EBITDA guidance, growth in the range of $20 to $50 million roughly. Maybe talk about the buckets driving that. I assume the majority of that is coming from maintenance, but just maybe if you can break that down a little bit more. And as you think about Car Wash, do you think that EBITDA is down year-over-year or can that be flat? Just any color around? That would be would be helpful. Thank you.

Yep, you got it. Yeah. So, we don't guide specifically to segment EBITDA, we haven't in the past. We don't plan on going forward. But when -- based on themes we've talked about so far, obviously, a lot of our growth is coming from Take 5 Oil, right? So maintenance, you'd expect obviously to be a little bit higher. And in Car Wash, the US Car Wash, and US collapse, as I mentioned are probably going to come along stronger as the year progresses. So I don't -- Danny, you have anything you want to add there. But I think that's as far as I want to get with the segment projections.

Nothing to add there.

Okay, now that's fine. And then the second question would be really around the capital you guys expect from monetizing the Car Wash pipeline? I don't know if he can speak to the timing of that or magnitude just an update on that process. And when you think we'd have that kind of wrapped up. Thank you.

Pete, it's Jonathan. Yeah, we kicked that off into the queue, late Q3, early, early Q4 last year. We've divested the first of those pipeline sites in early this year. I think it'll happen throughout the course of the year and meaningful, for me, it's north of $100 million of capital. That should come back over the course of the year, but it'll be fairly spread out throughout the course of the year.

Okay, thanks, Jonathan. Good luck, guys.

Thank you.

Your next question comes from the line of Seth Sigman from Barclays. Your line is open.

Hey, good morning, everyone. I wanted to focus on the maintenance segment and the profitability, the margins there have been impressive. They've generally exceeded I think, expectations that you laid out from the very start. Can you just elaborate on the drivers and remind us how you think about the opportunity from here?

Yeah. Hey, Seth, this is Danny. Thanks for the question. So look, yeah, we're super happy with the Take 5 business, as Jonathan mentioned in his opening remarks, Mo Khalid and the team has done an amazing job, not just driving revenue, but also to your point, kind of managing the lower P&L. So look, most of the major drivers there, we continue to manage labor quite effectively, that's been a practice that's been going on for probably year and a half now. And Mo and the team have done a really nice job managing labor. Also managing our commodity costs in the middle, the P&L is something that the team has been focused on. And we've been using price quite effectively for the course of the last 18 months. So really happy with that business, really happy with the work that that Mo has been doing, and also really happy with the shift that we've been seeing in PEMEX [ph], right. So we've been seeing customers kind of buying the upper end of our offerings there. And that trend has continued for some time now. So just really happy with the work that the team has been doing.

Okay, very helpful. So then I'll give Peters question, another shot here. As we think about the guidance, right? I realize you don't want to break down the segments, but it would seem like based on the performance of maintenance, and based on the trajectory that it pretty much drives all of the EBITDA growth. So if that's right, can you just help us frame some of the offsets? Thank you,

Seth, Jonathan, I'll try and take this one. Really, if you look at the EBITDA growth for 2024 it's very much in line with sort of the three year outlook that we gave at Investor Day, where the majority of the growth was coming from maintenance, supported by US Glass and then supported by our procurement efforts and driven advantage. So those are the three areas that are consistent with the Investor Day as we think about growth in 2024, which obviously supports the thesis on the three year outlook as well.

Okay, thanks, guys.

Thank you. And your next question comes from the line of Chris O'Cull from Stifel. Your line is open.

Yes, thanks, Danny, mentioned Take 5 comps were up 7%. I'm just curious how much of that is coming from car count growth versus check growth? And how do you expect the comp will break down over the course of this year for that business? And then also, is there going to be any new services offered in ‘24? To kind of help grow the check?

Hey, Chris, thank you for the question. So look, as far as comp growth is concerned, we don't get into the details of exactly which part how much of it is traffic versus check. But suffice it to say the team has been growing both sides of that equation pretty healthily here for a long period of time. So we feel really good about the fact that number one, we're growing comps, and number two, that we have the healthy balance in that growth via both car count and check size. From a new services perspective, we continue to really focus in on PEMIX, I would say and then Big Five attachment. So PEMIX for us, think in terms of the types of oil that folks are buying. So, whether it's kind of the lower end of the spectrum or the upper end of the spectrum. For some time now we've been delivering successfully growing that PEMIX into the upper end of the spectrum. So Mo and the team have done a really nice job with that. And I see that continuing through 2024. Towards the end of last year, we did add one item which is which is a fuel additive service. Hence we're calling a Big Five now as opposed to Big Four historically, that has been a nice kind of growth lever for us this year. It's an easy service, it fits in really nicely with our fast, friendly and simple model. So the team has done a nice job driving that and will continue to drive that through 2025. And the team also starting in Q4 of last year started to focusing a little bit more on CoolIT, which is an existing service that we've been doing for some time. And we've seen nice growth out of that service. And that's a really healthy margin service for us. So, we'll see more of that continue in 2025.

That's helpful. And then just quickly on Car Wash, can you help us understand what the margin recovery potential is from variable saving or variable cost savings? I'm just trying to understand where the cost savings kind of max out and sales recovery is needed to get back to that 30%-plus wash margin.

Yeah, Chris is Jonathan, I'll take a shot at that, look, we're pleased with the progress the sequential progress at a segment level from 17% to north of 23 in Q3 to Q4, as we think about 2024, at a minimum, we'd expect to sort of hold on to that sort of 23%, consolidated margin. And then obviously, as Danny continues to work on the business, hopefully get that expanded again, that's on a total Car Wash segment. So I would hope that that 23% is sort of a floor number. And that will continue to chip away at that throughout the year.

Thanks, guys.

Thank you. And your next question comes from the line of Jason Haas from Bank of America. Your line is open.

Hey, good morning, and thanks for taking my questions. Maybe sticking with the Car Wash segment. I'm curious if we could hear a little bit more on what's being done in what's needed to be done to get those comps back to positive. I don't know if you could give us a timeline. But curious if that's a possibility for this year?

Sure, Jason, this is Danny. So look, I'd say number one, as we look at Q4 for those specifically not for the US Car Wash business, we really focused in on the variable cost structure that business, we wanted to get that right, and we set out for it from the outset that we're going to focus in on that part of the business. I think the team did a really nice job with a laser focus on mostly, let's say labor in determining costs. And we saw that 600 bps improvements sequentially there in Q4. Coming into 2024, we're going to do kind of two things. Right. So number one is let's hold on to that variable cost structure improvement that we delivered in Q4 and then shift our focus into really driving predictable revenue both on the retail side and the membership side. So, more to come and 2024 as we really lean into to that part of the business.

That's great. Thank you. And then as a follow up, unfortunately I missed it. But I wanted to follow up on Platform Services, it looks like the franchise sales were down quite a bit in 4Q I think the revenue was actually up year-over-year. So wasn't sure exactly what sort of the dynamic was there? A positive but was there any commentary on what was driving that system wide sales and it was driven by the franchise sales being beaten down?

Yeah, that mean that's the 1-800-Radiator business, which is a small piece of that I totally think in my script about 15% of the revenue of that segment.

Got it, okay.

With growth and everything else.

Okay, that's helpful. Thanks.

Thank you. And your next question comes from the line of Christian Carlino from JPMorgan. Your line is open.

Hi, good morning. Thanks for taking our questions. I was wondering if you could talk about how membership penetration has been tracking in the Car Wash business. And have you seen any improvement in there since the locations have been rebranded to Take 5, and you've done some of the cross marketing work there. And then to clarify when you talk to improvement in Car Wash and Glass comps is the expectation that they should come positive or just less negative in 2023?

Hey, Chris, Danny again. So as far as the Car Wash membership question, like we don't get into specific KPIs on the membership side, I will say we're happy with the fact that in 2023, we did grow members. So that's good. We are right now we're really focused on making sure that we have the right membership structure. So it's less about the number of members that we have, but having the right members at the right price, you're going to see us continue to experiment with that here in the beginning of 2024. Once we feel like we've got the right structure and program in place, and you'll see us accelerate that through the back half of the year.

Got it. That's helpful. And then can you talk about the path forward for Glass? Do you still expect to be able to pick up some of the regional insurance business later this year? Or is that more of a 2025 story? And, you've talked about 10% calibration penetration, not looking for guide specific guidance here. But what where could you see this realistically going over the next year or two?

Yeah, great. So, from a Glass perspective, look, I think, first and foremost, super excited about the fact that as Jonathan mentioned in his opening remarks, as of today, the integration work is behind us, right. So very excited that the team can actually focus now on growing the business into 2024. I think the path forward looks really good. If we talk about the revenue side of the business, we've talked about this before, there's basically three sides of that. So you've got retail, you've got commercial and insurance. We grew all those in 2023. And we're going to really lean in and since 2024, and grow that side of the business. Particularly excited about seeing Auto Glass Now really lean into the insurance side, to your point with the regional insurance, particularly in 2024. From a calibration perspective, calibration continues to be a tailwind for us. So part of the integration work that we did was really making sure that we had the stores outfitted with the right equipment that the team was trained and that we were able to capitalize on that part of the business. That's been a nice tailwind for us in 2023. And we expect it to continue to be a nice tailwind for us going into 2024.

Got it. Thank you very much. Best of luck.

And your next question comes from the line of Peter Keith from Piper Sandler. Your line is open.

Thanks. Good morning, everyone. Thanks for taking the question. Just focusing on the Take 5, I don't want to scoff at a 7% comp. But it did slow rather meaningfully, sequentially from Q3 at 14. And I'm wondering if this lap in price increases or if you give any color on continued deceleration? Are we going to settle out here at about 7%?

Hey, Peter, thanks. Thanks for the question. Yeah, you look, you hit it on the head, right. So really, the majority of that slowdown was just lapping over price increases that we took Q4 of 2022. So nothing systemic, they're just lapping over some price increases.

Okay, very good. And then just on the 850 EBITDA target, maybe you can put some context around the straight line rent adjustment, does that make it harder to reach the target? And it sounds like the guidance for this year is a little bit below what you thought because of some divestiture. So how does that kind of play into the three year 850? Target?

Hey, Peter, Jonathan here. Yeah, I think the guidance for 2024 is literally exactly what we said it would be at Investor Day. So if you go back and look at that, the notes and comments from that, I think it's very much in line with that. In terms of the 850 the only change would be the, whatever it is the $15 million, the rent adjustment that would be the only change to how we think about the 850 at this point.

Yeah, Peter, the only place where that the EBITDA I said we would hold the only place where the adjustment you mentioned impacts was on the revenue side some sales and stuff, so that did have revenue slightly lower, but even guys that will have cost savings that will make sure that we will get to the 24 number.

Okay, very good. Thanks so much.

Thank you. And your next question comes from the line at Brian McNamara from Canaccord Genuity. Your line is open.

Good morning, this is Nancy Madison [ph] on for Brian thanks for taking my questions. How much industry capacity is expected to come around corrosion 2024 in the next few years and which markets are the most saturated? And how many more location do you expect to close? Thanks, guys.

Madison your line was a little choppy, but I'll do my best to answer what I think your question was. I think, broadly, what we've said on prior calls is we expect sort of new unit growth in the US market sort of in that 700 range in 2023, we expect sort of a similar number in 2024. So, I think there's definitely some markets, you know, generally not necessarily for us that have some saturation characteristics. In terms of, I think your next question was store closures, other than normal day to day management of our multi-unit retail businesses we don't foresee at this point in time any sort of wholesale closures within our US Car Wash business at this point.

Thanks so much.

Thank you. And your next question comes from the line of Simeon Gutman from Morgan Stanley. Your line is open.

Hey, guys, good morning. My question is first on EBITDA margin. If the math is right on the adjustments, it looks like the implied margin should grow by about 50 bps. And if that's not right, and correct it. And can we think about that relative or proportionate to the sales growth by each business? Or is there a disproportionate given cost savings or efficiency in one or more of the segments?

Yeah, okay. That's a good question to make my head work early this morning, is the when if I think of the different segments, I mean, you can expect just start with corporate go bottoms up I don't see that being a big change from year-to-year. So that's been and obviously the maintenance segment would be the biggest driver, as we mentioned. And then in the middle it's just a matter of how it falls out. So I can't guide you to specific segments for the year. But as we mentioned before the biggest driver will be maintenance. And, and if you look through the thing all the way down to corporate, I mean, corporate will probably it won't detract but it probably won't add necessarily in the year.

But I mean, just to put a fine point on it, you're 50 bps expansion is correct.

Okay, and then one follow up on Car Wash, I want to ask about this premiumization. That's happening, not everywhere. Obviously, one competitor is doing it, but there do seem to be higher price points out in the marketplace. Curious, does that help you in that your price points may be lower? Or are you are you creating new services to match that from a differentiation perspective, like how did that play into the Car Wash business in the next year or so?

Yeah, the pricing in the industry has been pretty consistent Simeon over the last number of years that we've been in the space. So we've not seen any major movement. Certainly in terms of lowering price, we've seen the addition of premium products in there. So you've seen at the top end of the range, higher price points, I think that it's important that we have a solid barbell strategy when it comes to pricing so that we've got the right entry level pricing that will drive trial and acquisition, which is obviously the feeder for getting people to become members. So I think we are continuing to sort of focus on a barbell strategy there. And as Danny mentioned, we're working on some tests right now, which we think could be interesting to leverage pricing in a accretive way to make sure that we have the right members in place in that car wash business. So I would say we constantly look at it, but again, sort of this barbell approach is how we're thinking about it.

Okay, thanks, guys. Good luck.

Thank you. And your next question comes from the line of Phillip Blee from William Blair. Your line is open.

Hi, this is Sabrina on for Phillip. Thanks for taking my question. How do you view the health of the retail customer in the fourth quarter? And then what are some of the key growth drivers for improvement in 2024?

Thanks, Sabrina, I would say that we continue to be pleased with the overall health of our retail customer. Again, I think it's important to remember the balance of the system wide sales and driven in that 50% of our customer base is, commercial or B2B. We've not seen anything that would tell us that we've got stress coming with the US consumer, the retail consumer. However, we watch it very closely. But at this point, we're sort of not seeing any major signs, major movement in sort of the health of the US consumer at this point.

Okay, thank you. That's helpful. And then a quick follow up your guide for the new Car Wash openings are only international. So can you talk to us about the performance and then growth drivers of that segment going forward?

Yeah, we don't split out sort of the details on US versus International. All I will tell you is that, Tracy and the team in Europe have done an exceptional job over the last three years in terms of managing that business. And there is a lot of whitespace in Europe. And I think that we are putting some capital to work there to open. I think we guided to about 5 to 10 new store openings this year. So obviously that business continues to perform very strongly. And we are not going to put incremental capital into the US business until we feel that business is performing to the expectations we expect.

That is helpful. Thank you.

Thank you. And ladies and gentlemen, our Q&A session has now ended. This concludes this conference call. Thank you all for participating. You may now disconnect.