Good morning. My name is Karina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Driven Brands' Q1 2024 Earnings Call. [Operator Instructions]. 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' First Quarter 2024 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; Daniel 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 the reconciliations to 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 regard 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 result 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. [Operator Instructions]. Now I'll turn it over to my partner, Jonathan.

Good morning. We appreciate everyone joining us today to discuss Driven Brands' First Quarter 2024 financial results. To begin, 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. I will start with a review of some of our first quarter 2024 highlights and then turn it over to Danny, who will discuss our operating segments and then Gary, who will detail our first quarter financial results and full year outlook. For Q1 2024, we delivered 1.7% revenue growth versus the prior year, supported by 144 net new stores and 0.7% same-store sales growth, achieving diluted adjusted EPS of $0.23. We continue to be pleased by the performance of our Take 5 Oil Change and franchise businesses all being key contributors to a solid Q1 2024. Now on our last earnings call, I mentioned the effects of extremely challenging weather conditions on our business in January. And despite these challenges, we were still able to deliver a solid first quarter and feel confident about the balance of the year. Now before we dive in, I want to spend a moment on Gary. And as you likely saw in our earnings release, Gary has decided to pursue another opportunity in order to be closer to his family in Colorado. He will be working closely with a former colleague who is known for decades. Joel Arnao, our Senior Vice President of Finance, who many of you know, will assume the role of Interim CFO while we conduct a search for Gary's successor. We are focused on finding the right person for the role and we appreciate that Gary will make himself available to support the transition, which we…

Thank you, Jonathan. I wanted to start by formally welcoming 2 new leaders to Driven, Tim Austin and Missy McKinley. Tim joins us as our new President of Take 5 Car Wash. Tim built his career at Walmart, where he grew from a store manager to Regional Vice President. He also held several leadership roles at Sears before becoming COO at Lucid Hearing, helping to grow the company to over 500 locations in 5 countries. Missy is our new Vice President of Field Operations for Take 5 Oil Change. Missy joins us from Scooter's Coffee, where she served as President of Operations. Before Scooter's, she held operational leadership positions at several great retailers, including CVS, Dollar Tree and Circle K. Welcome, Tim and Missy to the Driven team. Switching gears to Q1 performance. Q1 was a difficult quarter with a few headwinds from weather and a softer retail environment. However, I'm happy with the results our team achieved. First, weather was not our friend in the first quarter, particularly in January. January was the tenth wettest on record in the United States and multiple major winter storms force us to lose over 200 retail days due to store closures. Second, as other major retailers have recently mentioned, we saw some moderate softness with consumer demand, particularly from lower income households. Despite these headwinds, the team was able to deliver a very solid quarter with year-over-year increases in system-wide sales, same-store sales, revenue, EBITDA and EBITDA margin and new units. That's the power of Driven diversified platform while some of our businesses, which I'll discuss shortly, may not be hitting on all cylinders, others are more than making up the slack. Before I jump into the segments, it's worth spending a moment on Driven's highly franchised businesses. Maaco, CARSTAR, Meineke and…

Thanks, Danny, and welcome, everyone. This morning, I will review our first quarter financial performance and discuss our outlook for the rest of the year. Before I start, I just want to take a moment to thank Jonathan and Danny for being such great partners. It's been an honor to work alongside both of you, the rest of the executive team, our Board of Directors and all of our incredible employees. I joined Driven Brands a year ago. And while 2023 was a bit of a challenge, we adjusted cores where it needed and delivered on a revised outlook. The team is now focused on accelerating growth in 2024 while remaining hyper focused on generating cash flow and delevering. While I will miss working with everyone, I look forward to being able to spend more time with my family in Colorado. I'll be joining a private company, and as Jonathan mentioned, partnering with a long-term friend. Importantly, I believe here knowing that Driven Brands is in very capable hands and has a bright future ahead. Now turning to our results. As Jonathan and Danny discussed, we had extremely challenging weather during the quarter, especially in the U.S. during January. Additionally, we experienced some moderate softness with consumer demand particularly from lower income households. Even with these challenges, we still delivered our 13th straight quarter of positive same-store sales growth. Adjusted EBITDA and adjusted EBITDA margin for the quarter increased both sequentially and year-over-year, and cash flows from operations increased approximately 64%. I am proud of how well our team executed in a dynamic environment, especially how they manage the bottom line. For the first quarter, our system-wide sales were $1.6 billion, up 6.7% versus the prior year. This growth was driven by 144 net new stores year-over-year and 0.7% same-store…

[Operator Instructions] Your first question comes from Simeon Gutman from Morgan Stanley.

I wanted to ask about car wash in this environment. I heard you mentioned international positive. So U.S. is a little bit weaker. Can you talk about just the competitive set and curious because it seems like maybe the membership models are maybe performing a little bit better or little stickier right now. Is that a disadvantage? I'm not sure how much that matters in this or if it's weather because, call it, the retail or the occasional customer just didn't have a reason to show up this quarter.

Simeon, I'll start and Danny can certainly chime in. Look, I think the 3 contributing factors on the loss or lower revenue in Q1 really were that sort of extreme weather conditions definitely some softness with the retail consumer. And obviously, competitive intrusion hasn't really changed. I think what Danny mentioned is this new pricing promotion effort that we kicked off and tested in Q1 targeting membership is showing some nice early results. So Danny, I don't know if you want to add anything?

No. I think I'd just echo what Jonathan just said. I mean the pricing kind of changes that we're leaning into value a little bit more, and we're seeing a nice positive change to member conversion into retention. So it's early innings there.

Okay. And then I guess my follow-up is, I guess, complexion on the path to higher EBITDA. I'm reluctant to say the 850 number given maybe it's a moving target. But thinking about the pieces where we talk about maturing businesses and then sort of the growth pieces and then the different contributions among the different businesses. This is only a quarter into this year, but clearly, maintenance is leading the charge. Is that sort of different or expected in the way that you thought the progression would look in 2024 and the pieces moving around is paint collision and glass going, it looks like a positive or sort of a negative to that contribution path, if that makes sense.

Yes. Thematically, Simeon, the growth that we've seen in the maintenance segment is what we've underwritten for the multiyear growth profile. So there's nothing different there in terms of maintenance leading the charge. Obviously, our Driven Advantage platform continues to do really, really well. And then over time, we're excited about the opportunity to grow that Glass business. So thematically, nothing different to what you're seeing in Q1, still some volatility certainly within the U.S. Car Wash business. But again, our focus right now is the outlook that we gave on the last earnings call, and Gary reiterated this morning is all about delivering a really great 2024. But thematically, you're not seeing anything different in the trajectory of the business.

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

Gary, good luck. I guess a quick follow-up on Simeon's question. Just the changes you're doing in Car Wash, I'm not sure if you can give us a little bit more detail on what exactly you're doing, what you tried? What's working there? And what's kind of baked into your outlook now from that? Have you assumed the improvement that you've seen initially and rolled that through the balance of the year? Or if those impacts were to play out, would that be incremental to your view with Car Wash for the balance of the year? That's my first question.

Yes, I'll start, Pete. It's a test. We're rolling this out to a number of stores as we continue to see positive momentum from the test. We're not changing at this point any outlook for 2024 at a driven or a carwash level. Our focus is, again, is on hitting the outlook that we've given, and we reiterated that this morning. I think the test that Danny and Tim Austin, our new leader, have been running really is thinking about how do we develop higher levels of membership, which obviously is very important to create predictability and reduce volatility in sort of the revenue stream. So that's our focus. And I still think that we're still seeing softness in general retail, but our focus is on building that membership base to sort of create incremental predictability in this segment.

Okay. Fair enough. And then one of the three focus areas that you mentioned, Jonathan, was managing the portfolio. I'm curious how the performance of the U.S. Car Wash business kind of impacts your -- kind of your confidence in realizing at least, I guess, it's $100 million of proceeds from asset disposition this year. Does it make it more motivated? Does it make it harder to do? Just kind of curious where your mindset is today relative to 90 days ago?

Yes. The assets held for sale are the sort of dispositions that we're working on really is completely isolated from the day-to-day running of the business, Pete. So I think we're pleased with the $33 million of proceeds in Q1. Our target is still at least $100 million for the balance of the year. So that really is managed completely separately and distinctly from the day-to-day running of the business. I think I'll let Danny talk about the efforts and how he feels about the U.S. Car Wash business, then obviously with Tim on board now.

Yes. As far as the U.S. Car Wash business, I mean, I'd just reiterate, there's really 2 things that the team is focused on that we laid out in Q4. So let's preserve the variable cost improvements that we made in Q4, which Tim and the team have done a really nice job doing and we preserve that going into Q1. And I mentioned, although you'll see a sequential degradation in margins, it's entirely due to some rebates in Q4. So if you double-click into that, Tim has done a really nice job and the team preserving what we did in Q4. And then growing the membership revenue, which we've talked about. The test is encouraging. We're seeing increased conversion rates. We're seeing reduced churn rates. So we're seeing all things we want to see.

Your next question comes from Robbie Ohmes from Bank of America.

Jonathan. My first question was if we could get a little more color on sort of low income consumer weakness. And I think I'd be curious when you look at the segments, historically, when the low-income consumer is weakening, which segments do better and which segments do worse? And so for example, does the Auto Glass segment have more negative exposure to low-income consumer weakness or not? Any kind of thoughts on that would be really helpful?

Yes. Great. Thanks, Robby. Really, what we're saying is I'm not calling out any of our individual businesses as having direct impact at this moment with the lower income households. What I'm saying is that given sort of the inflationary environment, we do believe that, that customer cohort is likely to be the most challenged throughout the balance of the year. So that's sort of number one. I think when you think about Driven in our portfolio, there's a couple of things that are naturally in our favor. Number one, we mentioned on the last call, about 50% of our sales come from commercial or B2B customers. So that's a really nice hedge. And obviously, there's no household income impacts there with that B2B customer set. I think the other thing is if you look across our portfolio, the majority of our businesses, Robby are needs-based businesses. So it's very hard to put those off. You really have to get those done. If you look at the history of Driven Brands, and obviously, we've only been public a couple of years. If you look at the last 2 major sort of financial stress points, the '07, '08 time and obviously, March of 2020, because of our needs-based businesses, we see very minimal impact over time in those 2 time periods. So I'm just calling out that I think there is likely incremental challenge to those lower household incomes with the inflationary environment, but I think Driven is uniquely positioned to sort of manage through that. So that's what I would say.

Got you. That's really helpful. And then just a follow-up, just on Take 5 with the online appointments. I'm just curious, how do you manage that if that takes off like a rocket, and you just get a ton of online appointments. Does that interfere at all with the drive-up customer?

No. Robby, this is Danny. I appreciate the question. No, it doesn't interfere. So the team has done a really nice job of accounting for. Our model predominantly is we want folks to come in at any time, no appointment necessary. The way that we've rolled out appointments that accounts for our business model, and it won't interfere. So it's pretty intelligently laid out, and we like what we're seeing so far.

Your next question comes from Seth Sigman from Barclays.

I wanted to focus on the Maintenance segment and the demand trends. Any more color on just the cadence after that difficult January? I guess, what did you see the rest of the quarter and then even early here in the second quarter? Any more perspective on that end customer, based on the issues you talked about, is that just driving lower transactions, just less frequency? Or is there a trade down that you're seeing as well?

Seth, Jonathan again. And I just want to reiterate, we're saying that we think lower household income customers could be challenged with the sort of ongoing inflationary conditions. We're not pointing to any of our businesses that have seen impact yet. So I think we're just being prudent around the balance of the year. Within Q1 and maintenance, I think we did see very challenging weather conditions in Q1. I think most retailers in the United States saw that. The good news about our Maintenance segment, both our Meineke business and our Take 5 Oil Change business, it is a truly needs-based category. So while we did see some challenge in Q1, we obviously think that we catch up those customers that we're looking for those services. So nothing at this point in that segment that concerns us. Obviously, we're keeping an eye very closely on how the consumer reacts throughout the balance of the year.

So just fair to think that as the weather has normalized in certain markets, you've seen evidence of that pent-up demand is coming through, I guess that. And then just I have a follow-up question there around the guidance, I think I heard you say most of the comp growth is expected to come in the second half of the year. That's overall across the business segments. So does that imply second quarter will look a lot like the first quarter?

Yes. I would say that on your first question on same-store sales for maintenance segment, we're very pleased with how the business finished the quarter and excited about the next 3 quarters for that business. And then I'll let Gary talk about the guidance.

Yes. I mean we don't give specifically quarterly guidance. I mean, I think I was pretty directed where I thought at least adjusted EBITDA will come out in Q2 and that in the second half of the year is where we expect to see most of the growth because just the comps and the lapping of the comps. Q2 is usually our largest quarter on an adjusted EBITDA basis. We don't see that changing. I think that's it.

Your next question comes from Brian McNamara from Canaccord Genuity.

This is [ Madison Hwang ] on for Brian. The CFO changes just really typically aren't well received by the market. It was 2 changes in the year regardless of the region or circumstance will naturally concerns investors. Will you guys reassure investors concerned by the recent turnover in the seat?

Well maybe I'll start with Gary, and then I'll sort of follow up, but...

Yes. I'd repeat what I said is go into an opportunity to work with someone I've known for 3 decades and move my family back to Colorado or be back with my family in Colorado. But loved working with Jonathan and Danny. And Joel has been by my side ever since I walked in the door. So the 2 of us have done everything done together, and Mike has been here for a few years and knows the company in and out. So I think transition should be pretty smooth.

Yes, Madison, I think it's a good question. We've got a strong bench of talent here. Joel is going to do an amazing job as Interim. Michael Beland is our fabulous Chief Accounting Officer. Gary has got a phenomenal opportunity and a lot of this is personal decisions. And I would remind you that there is no one person that's overly important in Driven Brands, and we feel really good about the year. And again, I would just thank Gary for all the partnership over the last 12 months.

Your next question comes from Christian Carlino from JPMorgan.

Just wanted to follow up on some of the competitive dynamics in Car Wash. Are the recent pricing changes is that a result of maybe some pressure from peers in certain markets where you need to lean into value? And just given the development pipelines in the Car Wash business are quite long. Do you see the industry continuing to slow unit growth into next year? Or does it seem like we've found maybe a local bottom?

Yes, I'll start with sort of the development view, Christian, and then Danny can probably talk a little bit about the other question. I think I've said it on multiple occasions. I think we've seen a massive increase in the number of car washes over the last sort of 3 to 4 years while we've been in this category, somewhere between 2,000 and 3,000 new express tunnel car washes have come online in the United States, which is obviously a massive impact. I have said in the past that we think that will moderate in 2024. But again, with the sort of long lead times on the pipeline, I think we'll see further moderation in 2025. And then, Danny, on the first question.

Yes. Christian, on the first question, look, I think we've mentioned before, we're under indexed as it relates to membership in our U.S. car wash business, and memberships obviously a hugely important part of that business because it just creates predictability in that business. So leaning into value just seemed like a natural thing to do to build up our membership base. And the result is exactly what we're hoping for, increased member conversion and reduced churn. So we're happy with what we're seeing, and it's doing exactly what we hoped it would.

Got it. That's helpful. And I think last quarter, you said the lower end of the guide implies continued pressure from weather and some macro overhang. And you talked about inflation continuing to pressure at least low income consumer for the balance of the year. So while you reiterated the range, is it now biased more towards the low end? Or are you outperforming in other areas where you think you can still achieve the EBITDA you laid out at the Analyst Day?

Yes. No, I think everything we talked about earlier, when we set the range this year, the top end of the range was [ there on ] what we said on Investor Day, right? So we don't have any questions on 2026. I mean that's still our goal is everything will drive towards, of course, consumer confidence and things like that will obviously impact us as we move through the year. But everything we're looking at, whether it's adjusted EBITDA, debt paydown, et cetera, we're still all on track for plan for 2026.

Your next question comes from Kate McShane from Goldman Sachs.

Are you still expecting to open between 205 and 220 stores this year? And how should we think about the cadence of store openings, especially in the maintenance segment?

Yes, nothing has changed in terms of our guidance that we gave on the call about 90 days ago. So we're reiterating the major financial numbers along with the same-store sales and unit count assumptions that we gave on that call. So I would just say nothing has changed there. And we do expect that typically, you see a little bit more of weighting of stores in the back half of the year, but nothing has changed in terms of our overall unit count guidance.

Your next question comes from Chris O'Cull from Stifel.

My question is about the Car Wash segment. Jonathan, can you explain how the U.S. and the international car wash businesses strategically support each other? And then I had a follow-up.

Sure. I think, obviously, there are 2 different geographies. There's 2 different operating models because our European Car Wash is what we call an independently operated model or you could think almost franchise-like. But the teams do spend a lot of time together talking through pricing strategies, promotion strategies, the right equipment, the right chemical. So it's really more of sharing best practices, what's working, what's not working with both teams, understanding opportunities, whether it's value engineering of the buildings, the chemistry, again, the marketing and promotions. So that's really how we sort of leverage the leadership between both groups.

Part of the driven thesis is that you have a national consumer platform for auto services. So how does an International Car Wash business support that strategy?

Our international business run by Tracy Gehlan is a fabulous business that continues to deliver really solid results. And we bought that business as part of our initial entry into the U.S. Car Wash market in August of 2020. So I would just say that Tracy and the team continue to deliver great results, very stable predictable results. And of course, naturally, it doesn't necessarily impact our U.S. business. But again, there's lots of learnings and best practices that we leverage between each other.

Okay. Fair enough. And then lastly, I know the Car Wash EBITDA in the U.S. was impacted by the weather. But can you guys describe how the U.S. Car Wash profitability looked after January or once you got through that weather period?

Yes, Chris, we don't get into periods or subsegment reporting within periods. I will tell you that we've seen as we've gotten through the difficult weather periods in January. And like I said on the prepared remarks, we're seeing a nice trends in April, certainly with our International Car Wash business. And I think Danny and Tim Austin are pretty happy with how the business is performing right now in the U.S.

[Operator Instructions] Your next question comes from Peter Keith from Piper Sandler.

I wanted to dig into 2 different segments, 1 negative, 1 positive. I'll do the negative one first. Could you talk about PC&G where the comp was 1.3%? I'm not sure if weather played a role in that, but we've seen pretty steady comp deceleration there. I know the Glass is in turnaround, but I tend to think about the collision business as being really steady and quite robust from a ticket standpoint. So, could you flesh out some of the fundamentals that's dragging on the sales there?

Sure, Peter. This is Danny. Look, I think what you said is pretty spot on. I mean, if we look at the PC&G segment, the Paint and Collision side of that segment continue to do quite well. Those are franchise businesses, mature business. They're very steady, delivering north of 50% margins and they continue to do so. The Glass part of that business, as Jonathan indicated in his comments, we're looking at that as a kind of mid- to long-term play for us. Just got through the integration. We're very focused on growth, both bottom and top line, like we mentioned. And we're just in early innings, and we're excited about the future there.

Okay. I guess that won't answer my question, I guess, is this low -- you don't want to guide comp for the segments, but are we in a low single-digit comp environment now for this area of the business?

Pete, I think we're reiterating our full same-store sales guidance for the year, which Gary mentioned, which is a range of 3% to 5%. And we're very comfortable with that at a full driven level. And again, we don't guide on a segment level, but we're reiterating 3% to 5% for the full year.

All right. Let's pivot to the positive segment. So maintenance I guess what intrigued me there is the EBITDA improvement. Year-on-year margins expanded nicely, even the EBITDA growth accelerated quite a bit, and you did so off of a very similar comp to Q4 to be operationally, help unpack that for us? What's driving the profitability improvement there?

Yes. So I think, Mo Khalid and the team are doing an amazing job kind of on 3 fronts. So I'd say, number one, just ongoing expense management. So that's one obvious positive. The second one is improving our P mix. So specifically, and we've talked about this in the past. The teams are really leaning into our coolant services, and that becomes a more important part, let's just say, of our product mix. And that's a very profitable service for us. So that's going to grow margins over time. And then the last thing is just looking naturally as the business gets more heavily weighted to be a franchise business as we continue to open kind of 2/3 of our openings will be franchise based. That will naturally lead to an increase in margins as well.

There are no further questions at this time. That concludes today's conference call. Thank you for your participation. You may now disconnect.