Q4 2020 Driven Brands Holdings Inc Earnings Call
<unk> the call. This morning are Johnathan Fitzpatrick, President and Chief Executive Officer.
Mason Executive Vice President and Chief Financial Officer, and Rachel Webb, Vice President of Investor Relations.
On today's call management will refer to certain non-GAAP financial measures.
Can find the 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. Please.
Please be advised that during the course of this call management May also make forward looking statements that reflect expectations for the future.
These statements are based on current information and <unk> actual results may differ materially from these expectations factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the form 8-K filed today containing our earnings release.
Information about any non-GAAP financial measures referenced including a reconciliation of these measures to GAAP measures can also be found in our SEC filings in the earnings release available on our website too.
Today's prepared remarks will be followed by a question and answer session. We ask that you limit yourself to one question and one follow up. Please press one star one to be placed into the queue I will now turn the call over to Jonathan. Please go ahead Sir.
Thank you Denise and good morning, everyone I'm thrilled to be joining you on our first earnings call. Following our IPO in mid January.
With a focus on myself Tiffany and our entire team has always been to consistently deliver great results.
And that focus has only been further amplified now that we're public.
We remain incredibly excited about capitalizing on the white space in front of us and ensuring we drive value for all our stakeholders.
2020 was quite a year.
We carefully manage through the pandemic and drove strong results acquired and fully integrated International Carwash group the largest acquisition in driven history, we completed two debt offerings and launched our IPO.
And I want to thank our franchisees and our employees for their unwavering dedication and commitment to delivering exceptional service to our customers.
Our industry is strong and we are optimistic about a rebound in trends as consumers more fully reengage in their daily activities and drive more.
The strength of our results is a testament to our business diversification and amazing franchisees.
You saw our results for Q4 and fiscal 2020 released this morning.
While same store sales declined five 6% for the year our performance outpaced the industry as we continued to gain market share largely from independent and small chains.
We added a total of 1121 locations across our portfolio in 2020, representing net store growth of 36%.
And I am proud to report that we hit the top end of our expected range for fiscal 2020 with revenue of over $904 million adjusted EBITDA of $205 million and acquisition adjusted EBITDA of $269 million.
Tiffany will get into more detail regarding those results. In addition to our guidance for fiscal 2021.
But I'm pleased to share that so far into our first quarter were on plan.
Now, let me take a minute to remind people who wouldn't want driven brands is drew.
Driven as an integrated platform diversified across multiple brands geographies and needs based services.
Operated primarily by our incredible franchisee base.
We are the largest automotive services company by store count in this extremely fragmented $300 billion industry.
Our brands and our franchisees are made even stronger as part of the driven platform.
Our franchisees get to be in business for themselves, but not by themselves.
And we have scale in an industry where scale matters.
And we use our massive growing data capabilities to make smarter decisions.
Which helped drive store count same store sales growth and revenue growth across all of our businesses.
We have many levers to grow organically and through acquisitions and because of our asset light business model, we generate significant cash flow.
Our long term organic growth algorithm is simple and it's what we've been doing for the last five years.
Grow revenue from a combination of same store sales growth and new stores and.
And deliver attractive and consistent margins, which resulted in adjusted EBITDA growth and significant cash generation.
This is how we think about the business.
Let me take a few minutes and dive deeper into the component parts of our long term growth model.
I'll start with revenue growth, which is comprised of same store sales and unit growth.
We have numerous levers to grow same store sales and I'll hit on just a few.
First our $90 million marketing fund and data analytics engine to benefits of the scale driven platform have been critical in helping us drive customers to our shops and keep them coming back.
Our data analytics continue to make us smarter about how and when we target customers, both new and existing across our brands.
In our maintenance segment, specifically the take five brands, we shifted our media strategy in 2020.
We launched a new campaign, emphasizing our contract contactless customer experience and deployed our media dollars in a very targeted local approach.
As a result in 2020 take five gained share and these gains are continuing in 2021.
The online estimate our tool deployed for our pink collision in glass segment allows customers to get real time estimates for their paint jobs without leaving their homes.
This helped attract a different customer skewing more female and slightly younger.
Because this is a digital platform the cost of acquiring customers is very attractive and as importantly, we capture perspective customer information, which can be used for future direct to consumer marketing.
Since the acquisition of car wash in August 2020, we've integrated over 17 million new customer data elements.
We're using that data to drive new customer acquisition and revenue per wash across our stores.
We are excited about early results.
Staying with Carwash another lever to grow same store sales is the subscription model, we're able to drive more predictable revenue by increasing the percentage of wash club subscriptions.
Since August we have implemented new operational sales tactics and retrained all personnel on selling memberships in the United States.
In the fourth quarter, we increased our wash club membership from 41% to 45%.
This ramped throughout the quarter and we expect this percentage to continue to increase.
The final example of growing same store sales is by increasing the number of commercial partnerships.
We continued to add additional insurance and fleet agreements and renew existing agreements in the fourth quarter.
For the full year, we added more than 1200 direct repair programs with insurance carriers, which is up over 50% versus 2019.
We also expanded our fleet programs, both in terms of adding new fleet customers as well as expanding existing fleet relationships driving incremental customers to our shops.
As a one stop shop for commercial providers. This growth is testament to the quality service and performance of the driven platform.
Now moving to the second major driver of revenue store growth.
First organic store growth, we opened over 190 stores across the driven system in 2020.
40 of these were company operated stores and our franchisees opened a 151 new locations.
Put simply driven will continue to grow EBITDA and generate a lot of cash.
Let me talk about M&A for a moment.
We have previously discussed this is not included in our long term growth model.
But as you can see from our history it will be part of our future.
We acquired fixed auto USA in April 2020, and fully integrated them into the driven system.
This acquisition added more than 150 locations to our collision business and expanded our footprint on the west coast.
Our most significant acquisition of 2020 was the international Carwash Group, which we acquired in August and was fully integrated in early Q4.
This acquisition added over 900 locations to our system.
We acquired 19 additional stores through our tuck in strategy, most of which were carwash acquisitions.
Overall, driven ended 2020 with more than 4200 locations almost 40% more stores than at the end of fiscal 2019.
And we believe there is room for more than 12000 stores in North America alone trip.
Triple that of our current store base. So we have a lot of runway for growth.
Now looking ahead to 2021 and beyond our franchise pipeline is strong with over 600, new store commitments more than double our pipeline at the end of 2019.
This pipeline will open over the next three to four years and it has continued to grow in 2021.
This is testament to the power of the driven platform Fran.
Franchisees believe we can help them make more profit make them more profitable than they can be on their own.
We see particular strength and take five.
Our unique and differentiated operating model, our focus on customer service and quality combined with best in class cash on cash returns for our franchisees has resulted in a pipeline of over 350 additional locations.
And our franchisees are growing with us.
<unk> to even more new store openings.
One of our newer franchisees signed a five unit development agreement in May 2019 to Bill take volumes in Mississippi and Alabama.
He opened these five stores more than two years ahead of schedule. He has since signed a new development agreement for an additional five stores and will soon open his sixth location.
He's been thrilled with the returns you're seeing from the strong brand performance.
In fact take five home of the 10 minute oil change recently earned a J D Power award for the highest overall customer satisfaction score among all all change providers.
And three of our brands take five car star in Mako made the franchising top 500 ranking this year.
Our franchise and development team is making driven a franchise of choice.
Our franchisees are getting best in class returns continuing to build and are spreading the word to others are.
And we're finding interest from a variety of backgrounds not from just automotive.
As we look forward, we have significant opportunities for shareholder value creation.
Our focus is to capitalize on the recovery in trends across the industry, which we don't take credit for it but we're happy to benefit from.
Continue our playbook of consistent same store sales growth leveraging the strength of our platform marketing and data analytics capabilities customer satisfaction and commercial growth.
To grow both franchise and corporate stores and continue to target accretive M&A.
This is our long term growth algorithm, which will deliver revenue growth at attractive consistent margins.
Which leads to adjusted EBITDA growth and significant cash generation.
I'll now turn the call over to Tiffany for a closer look at our performance long term targets and guidance for 2021 Tiffany.
Thanks, Jonathan and good morning, everyone I'll begin with our performance in the fourth quarter. Then here highlights from fiscal 2020 before providing some context to accompany our guidance for fiscal 2021.
Looking in the rearview mirror at the fourth quarter.
<unk> sales were $935 million from which we generated revenue of $289 million, an increase of 58% versus the prior year.
Adjusted EBITDA was $66 million more than double that of <unk> 2019.
As a percentage of revenue adjusted EBITDA margin was 23%.
Revenue growth in the quarter was driven by the addition of new stores.
As Jonathan mentioned, we acquired <unk> in the second quarter of 2020.
<unk> added more than 150 collision shops to the portfolio.
And we acquired IC WG in the third quarter of 2020, which extended our service offerings to our fourth segment, adding over 900 car wash locations in the U S and Europe.
Over the course of the year. We've also added new franchise locations opened Greenfield company operated stores and completed tuck in acquisitions.
In the fourth quarter alone, we added 42 net new stores.
Needless to say our development team has been hard at work cultivating the franchised Greenfield and M&A pipeline.
While same store sales declined three 4% for the quarter our performance outpaced the industry as we continued to gain market share.
Our operators and franchisees navigated a second wave of Covid related lockdowns and disruption.
However, our breadth of service offerings geographic footprint and strong competitive positioning we're able to blunt the impact.
In fact, we posted same store sales of positive one 2% in our maintenance segment and positive nine 5% and our platform services segment while.
While our paint collision in glass segment was down seven 3%.
It's important to note that consolidated same store sales for the fourth quarter on a two year stacked basis were positive 2%.
As a reminder, carwash will not be included in our same store sales base until the anniversary of the acquisition in August of 2021.
Now from an expense perspective, we carefully manage site level expenses across the portfolio.
While above shop SG&A as a percentage of revenue was 24% in the quarter, a 450 basis points improvement versus last year.
All of this led to strong adjusted EBITDA performance in the quarter of $66 million.
Depreciation and amortization was $29 million versus $9 million in the prior year.
This increase was attributable to the IC WG acquisition.
In the fourth quarter, we finalized the purchase accounting step up which resulted in an incremental $7 million of expense.
Interest expense was $31 million in the quarter nearly double <unk> 19, as a result of two factors.
In July we issued $175 million of new notes with a coupon of three 9% under the whole business securitization structure.
Drove nearly $2 million of income.
Incremental interest expense in the fourth quarter.
Second in August we assumed a $722 million of debt as part of the IC WG acquisition. This drove nearly $10 million of incremental interest expense.
Then in December we took advantage of the lower interest rate environment and refinance the whole business securitization notes that we initiated in 2015 and 16.
This resulted in a $5 million noncash loss on extinguishment of debt, but a lower weighted average interest rate for the whole business securitization debt portfolio overall.
Income tax expense was $5 million in the quarter, largely driven by non deductible expenses in a foreign jurisdiction and the impact of changes to state tax rates on our deferred tax liabilities.
So for the fourth quarter, we posted a net loss of $7 million, but.
Adjusted net income of $2 million.
Now a bit more color on our fourth quarter results by segment.
The maintenance segment posted same store sales growth of one 2%.
Maintenance benefited from the new take five marketing campaign that launched in early 2020 as well as the improved media allocation that Jonathan mentioned.
We also benefited from our decision to overhaul take fives labor model, reducing labor hours per car.
And we continue to leverage the purchasing power of our platform to drive cost savings from oil purchases and associated volume rebates.
The car wash segment contributed $91 million of revenue in the fourth quarter.
As Jonathan mentioned watchful subscriptions now represent 45% of sales a 400 basis points improvement since August. This is a great recurring revenue stream that provides a level of predictability to this business.
From a cost savings perspective, we renegotiated our chemical contract achieving significant cost reduction, while increasing the service level and associated growth incentives.
Paint colors and glass posted a same store sales decline of seven 3% in the quarter.
This segment lags the others in terms of Covid recovery due to reduced collision trends, resulting from lower congestion on the roadways across much of the U S and Canada.
This is a unique challenge for P. Sanjay.
However, collision continues to gain market share as we add new commercial partnerships.
Importantly, while <unk> posted negative comps in the fourth quarter on a two year stacked basis, we drove sequential improvement from Q3 to Q4.
And finally platform services experienced the strongest same store sales growth in Q4 with a positive nine 5%.
The addition of exhaust to the product line at one 800 radiator has been a success.
This additional product offering added $11 million in system wide sales for the full fiscal year.
So that was the fourth quarter now let me hit some highlights from the unprecedented year, we just completed.
First and foremost we capitalized on the fragmentation in the industry in 2020, despite navigating the ever changing landscape of COVID-19.
Fiscal 2020, systemwide sales reached $3 4 billion.
We added a total of 1121 locations across our portfolio or net store growth of 36%.
We introduced the Carwash segment by acquiring and integrating ICD G. The largest acquisition in driven history.
And while same store sales declined five 6% for the year as a result of the pandemic. This is a strong recovery given that same store sales were down nearly 20% in the second quarter.
Overall, we captured significant market share. This quick road to recovery speaks to the needs based nature of our services.
The resilience of our business model was tested this year and has been proven.
All of this translated into revenue for fiscal 2020, just over $904 million an.
An increase of 51% compared to the prior year.
And we managed expenses carefully resulting in adjusted EBITDA of $205 million, an increase of 72%.
As a percentage of revenue adjusted EBITDA margin was 23%.
Acquisition, adjusted EBITDA, which assumes all 2020 acquisitions occurred on the first day of the fiscal year with $269 million.
You will recall from the recent development section of our S. One filing in January that this puts us at the top of our expected range.
We are very proud of our team and our franchisees for the year that they delivered.
Have shown resilience and grit and we are well positioned to increase our market share as the industry continues to recover in 2021.
And that brings me to our liquidity and capital structure.
We ended the year with just over $188 million in cash and cash equivalents as well as $156 million of undrawn capacity on our revolving credit facilities.
During our IPO in January we issued 31 8 million shares of common stock and received net proceeds of $652 million.
Together with cash on hand, we used these proceeds to pay down the debt we assumed in the IC WD transaction.
Bringing our year end net leverage on a pro forma basis to five times.
And lowering our annual interest expense on a go forward basis by nearly $40 million.
Following the exercise of the Green shoe in February we issued an additional four 8 million shares of common stock.
Received $99 million in net proceeds of $43 million of which was used to purchase 2 million shares of common stock from existing shareholders.
We intend to use the remaining $56 million of net proceeds for general corporate purposes.
We now have 167 4 million shares outstanding and a $1 5 billion whole business securitization debt portfolio with a weighted average fixed annual interest rate of 4% and a weighted average remaining term of six years.
We intend to use our balance sheet to capitalize on the substantial white space and a $300 billion consolidating industry while.
While maintaining an investment grade credit rating.
Now looking ahead, we are focused on our proven formula for growth with a platform that has scale and diversified.
Our formula is simple, we add new stores, we grow same store sales and we deliver stable margins.
This results in significant cash flow generation that we reinvest in the business.
Over the long term that translates into low single digit same store sales growth low double digit revenue and adjusted EBITDA growth and mid to high teens adjusted net income growth.
There is no change here those are the long term financial targets that we shared during our roadshow.
Now in this morning's release, we issued limited guidance for fiscal 2021, given the continued uncertainty related to the duration of the COVID-19 pandemic and its impact on consumer trends.
What we provided is what we can control.
Net store growth from a well developed franchise in Greenfield pipeline and a commitment to adjusted EBITDA margins.
We expect 160 to 190 net new stores across the portfolio with segment level expectations laid out in this morning's release.
There is essentially no M&A in our projections.
While M&A is a core part of the driven brands strategy it can be difficult to predict so we've excluded it.
We will continue to carefully manage expenses and expect to deliver adjusted EBITDA margins of approximately 23% consistent with fiscal 2020.
Now, while we can't predict the level of same store sales growth in fiscal 2021, we do expect positive same store sales.
Consumers financial health is in good shape.
They have been spending less and saving more over the past year.
That coupled with stimulus plus accelerating vaccine distribution will increase mobility.
All create tailwind for automotive services.
In terms of quarterly cadence, we expect Q1 to be the low point as we navigate the continuation of Covid.
Q2 to result in significant growth as we lap the depths of the pandemic last year.
And then a return to historic averages in the back half of the year.
The net result is same store sales growth for driven brands in fiscal 2021.
It's important to note that this outlook hasnt changed since our analyst day and as Jonathan shared we are on plan so far in the first quarter.
Now there are just a few other items to mention as you model fiscal 2021.
First we anticipate depreciation and amortization of approximately $110 million.
Second we have lowered our annual interest expense by nearly $40 million as a result of paying off the IC WG debt with IPO proceeds.
However, we will recognize approximately $45 million of noncash debt extinguishment costs associated with that repayment in the first quarter of 2021.
Third we anticipate an effective tax rate of approximately 30%.
And lastly, based on 160 to 190 net new stores, roughly 40, 40% of which are company operated.
Growth Capex will be approximately $75 million.
And given our highly franchise base maintenance Capex is minimal and is expected to be in line with our historic annual spend of approximately $10 million to $15 million.
In closing the strength of this portfolio continues to deliver best in class results and we have significant opportunity for growth in a fragmented and consolidating industry.
We are bullish on 2021, and we look forward to speaking with you again in late April when we release first quarter results.
Operator, we'd now like to open the call up for questions.
Yeah at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from Liz Suzuki with Bank of America. Your line is open.
Great. Thank you.
Part of the M&A driven brands has undertaken there's been relatively less industry consolidation than we might've expected in such a disruptive year. Some industry participants have talked about PPP loans kind of keeping these smaller businesses afloat. So my question is whether you think government support actually limited your M&A opportunities.
And that if in the next year or two you could see more opportunities for tuck in.
Hey, Liz it's Jonathan how are you good morning.
I think we were pretty active from an M&A perspective in 2020 right we did.
Auto in April and we did the Carwash deal in August. So I think we were we were pretty active I do think on some of the smaller chains and independents. There is a little bit of residual PPP funding or stability impact there but.
Our pipeline from M&A perspective feels really good.
I would say that we're not concerned about the opportunities going forward.
Great and then another one on <unk>.
Organic store growth, which segments of the automotive service do you think the U S market in particular is under stored or if it isn't under stored but it's kind of just stored incorrectly how do you see that as an opportunity for driven brands.
Hi, <unk> great to hear from you. This morning. So just a further jonathan's point that places we would expect to lean in we see tremendous opportunity in the maintenance segment.
Specifically in the quick lubes space, and we will continue our greenfield expansion as well as the franchising of that business that franchise pipeline is tremendous and we're <unk>.
We are pleased with the way that business is unfolding.
Secondly, Carwash, obviously is a brand new opportunity for us Super excited about the white space in that business as well, we took advantage of a <unk>.
Significant amount of tuck in activity in the in the fourth quarter as.
As we fold that business into our portfolio and we'll continue to.
Execute M&A transactions as well as build new Greenfield site in the Carwash space and then of course.
That's one.
With me on the paint colors and glass segment.
The franchising model fully franchising model and there's there's great runway there to continue to convert independent collision shops, two two are driven collision brands.
Great. Thanks, so much.
Thank you.
Your next question comes from Simeon Gutman with Morgan Stanley. Your line is open.
It was mentioned in 'twenty, one guidance positive same store sales.
I realize that's somewhat open ended is there any more specificity you can provide how does where that range could be that underlies the 30% EBITDA margin guidance that you also gave for the year.
Good morning, and great to hear from you as well thanks for the question, Here's what I would say.
Like I said in scripted remarks consumers.
Are in great shape financially right. Thanks, Ben.
Saving more spending less.
Vaccines are starting to roll that is going to improve mobility. So we think this business continues to recover over the course of the year.
As I said at the end of my remarks were really bullish on 2021.
Obviously Q1 is going to be the low point as we lap the last quarter.
Didn't have a COVID-19 impact last year.
Q2, I think we all expect to be gangbusters, just because we're lapping some pretty tough.
Tough comp last year, and then we will return to historic averages somewhere around the 4% Mark in the third and fourth quarter. So definitely positive for the year, we expect frankly positive comps across all of our segments.
And as we get further into this recovery further into vaccine distribution. The business just continues to get to get healthier and healthier.
Okay, and then maybe my follow up I'll make it a two parter and then I'll stop.
Can you just parse out the call. It the businesses that are more reopening than that versus the ones that steady and you said you expect to get these healthier run rates by the end of the year are all signs pointing to being on track to getting there and youre seeing signs of even in early.
And early places where vaccine distribution stepping up or miles driven improving are you seeing the right time and then the second part of it was how did carwash step up its loyalty so much in that in the quarter I think it was year over year I think it was maybe it was year over year, how does it step it up so much or was that from anything that legacy debt.
Our watch business had in place or it's driven.
Yes, great Simeon let me take the first part of that question I'll, let Jonathan talk about the subscription model for Carlos So as we think about segment performance. If you look across the business by quarter.
Obviously Q2 was tough we all know Q3, we started to see great rebound and so we posted positive comps in Q3 in the maintenance segment as well as in the platform services segment and as we've talked about pretty broadly paint collision and glass was a bit lagging in recovery because of collision miles.
Our lower excuse me congestion miles the lower congestion miles mean less collision risk right.
We roll from Q3 to Q4, we saw continued positive performance out of maintenance and platform services.
And importantly, with <unk>, while its still negative on a two year stack basis, we saw great sequential improvement. So we're seeing recovery across all of the businesses in which we operate and back to my comments about 2021 as things continue to recover more broadly in the industry. Our businesses will continue to perform very very well.
Hey, Simeon it's Jonathan I'll, just sort of answered the question on the subscription revenue and Carwash, Yes, I think we saw about 400 basis point improvement in Q4.
That was sort of continue.
I would say, we're continuing to see that in Q1.
How did we do that I think it's a couple of things. One is as you know you've heard us talk about before variable compensation is a huge element for us. So we made sure that all levels of the organization and Carwash had the right variable compensation plans in place secondly, we had a.
A highly focused effort on retraining people in terms of selling techniques.
And then lastly, obviously, Suzanne and the data analytics team leverage data to understand how to best execute against this.
Incremental subscription model. So we think it's very much.
Building on a good base that the IC WG team had pre acquisition, but we're sort of supercharging that and feel really good about sort of those trends as we look forward.
Okay. Thank you and good luck.
Thanks, Dan.
Your next question comes from Chris <unk> with Jpmorgan. Your line is open.
Thanks, Good morning, everybody can you talk a little bit about the.
Some of the segment comps during the fourth quarter.
Maintenance segment.
Plus one.
We're modeling a bigger number of plus seven on the other hand platform services clearly outperformed either did something surprised you in December in terms of what happened in maintenance and in terms of the COVID-19 spikes or or weather or what have you and then similarly, what drove the outperformance in platform.
Sure Chris Thanks for the question.
Let me start with maintenance posted a one 2% positive comp in Q4.
Good good positive comp very strong comp we continue to benefit in the maintenance segment from the new marketing campaign that Jonathan discussed in his prepared remarks right. So we released that in the early part of 2020 and continue to get great customer response, not only from existing customers, but in terms of new customer acquisition.
What's offsetting that.
<unk> effort to some extent was that second wave of Covid I mean, obviously as you as you look across our businesses we were dealing.
In multiple geographies with multiple levels of restrictions and there was some pressure there the beauty of the driven brands portfolio, though is our diversification, whether it's diversification in terms of geography or service occasion.
To help balance out the portfolio with the mix that we have so one positive and maintenance we continue to see great performance in the maintenance segment and are bullish about that business for 2021 platform services had a nine 5% comp as I mentioned in my prepared remarks, we actually issued are implemented a new product line with exhaust this year.
It's done.
Tremendous business for us So that's one positive and I would also tell you.
Obviously thought from services being primarily a distribution business, where we have very high in stock levels.
Throughout the Covid pandemic and into the fall and a lot of cases, we were the source for some of those heavy duty long tail items, that's independent operators needed to be able to repair cars silver there when our customers needed them and it's benefited our business in a big way.
It makes sense.
And then two.
To partner as a follow up so I guess more broadly have have you within the segments have you has your expectations changed in terms of.
How the performance might be relative to the analyst day, and then related to that can you talk about how stimulus affected your business, presumably last April probably wasn't much given locked down but then you had january and presumably stimulus it wasn't in your expectations.
Stimulus plan, that's about to be approved wasn't in the original expectations is that accurate.
Yes, that's right. So let me give you a few thoughts there so.
First thing I would say is our expectations for 2021 are largely in line with what we thought back in December when we had our analyst day. So no no dramatic shifts in overall performance nor in the makeup of our mix of the segments.
As we think about Q4 and rolling into Q1 for sure. So Nielsen in the Max that's a good tailwind for us.
As I mentioned is vaccines start to rollout that's an additional tailwind, but then of course, we were battling some other other.
Other related pressures out of coming out of Q4 and into Q1.
Whether it's Covid lockdown.
Severe weather in some parts of the country net net.
As we said we're on plan for Q1, and our expectations really aren't different than what they were in early December.
That's great. Thanks, very much thanks.
Thanks.
Your next question comes from Peter Benedict with Baird. Your line is open.
Alright, guys.
Good morning, I guess going back to the Carwash segment wondering if you can maybe talk a little about the competitive environment. There are a lot of people.
Kind of going after that segment.
You guys made some progress there in the fourth quarter.
With some tuck ins just just curious kind of what youre seeing there the level of competition when youre going after these tuck ins.
Kind of any view on the multiples that are being paid either specifically or just quality quantitatively. That's my first question.
Hey, Peter It's Jonathan I'll do my best to answer that look I.
I think you should think about what we've done with the take five business over the last five years, we started with 60 stores. We set a perfected the model. We grew company stores, we added franchising Super successful in terms of a really specialized M&A team here that knows how to buy the right assets at the right prices. So we like competition.
Because we generally beat it.
So we feel really good about the car wash business. Both in terms of what we've done since we've acquired it in the future for that business. So.
Feel really really bullish about the car wash opportunity.
As we look forward.
Okay. Thanks, Jonathan.
Then maybe just any broader comments around your franchise renewal rates, how they've been trending.
Like things were pretty positive on that front, but just just curious what you may be you can share.
On that more broadly thank you.
Telegraph, our franchisees did amazing in 2020, we're so proud of them. They stayed open 95% of our stores stayed open for the entire year franchisees managed.
<unk> changes in their business the labor model in their business, we help them in every way we could so we didnt lose one franchisee as a result of Covid impact in 2020. So our renewal rates are very good and have not changed and even more importantly, Peter if you look at our franchise pipeline radar franchise pipeline is bigger.
Than it's ever been so we see this renewed an incremental interest in people getting into the automotive space because quite frankly, they see the benefits of this industry. So our franchising.
Portfolio in general is in terrific shape.
Okay sounds good. Thank you very much good luck.
Thank you.
And your next question comes from Sharon Zackfia with William Blair. Your line is open.
Hi, good morning.
I guess two questions understanding the issues are.
Surrounding pink collision eyeglass, how how much of the increase kind of in miles driven are congestion do you think you need to start seeing that kind of inflect back into positive comp territory in I guess in person on that too is if I look at the segment margin is any kind of positive comps.
Your line to kind of translate into.
An improvement in margins in that business or because they went down so much in the second quarter of last year is there more of a gap that needs to be made up and then a second question on pipeline for both M&A and franchise development I'm wondering if you've seen an uptick in interest since going public.
That's great morning, Sharon So let me take the first two and I'll, let Jonathan addressed the franchise pipeline in that specific question. So in terms of vehicle miles traveled and its impact on <unk>.
Obviously vehicle miles traveled being down is a factor for that business more importantly, even is the the amount of congestion miles and so early in the independent Klan severe stay at home orders were in place we saw as much as a 70 or 80% decline in congestion miles, which put tremendous pressure on the collision business.
In the back half of the year that has recovered a bit right. So we're now down about 40 or so percent.
Our forecast for BMT and as we triangulate that with external sources would suggest that DMT returns to 2019 levels by late 2022.
But importantly congestion miles as vaccine distribution picks up and people become mobile again, we actually think congestion milestone to recover and get to a place where it's recovered by September of this year. So <unk>, while lagging the rest of the segment has been recovering and we continue to see solid momentum.
Solid progress in that space.
In terms of margins the only thing I would add would be.
Obviously <unk> is a franchise business so as those volumes come back and we record revenue on those system wide sales.
That that's a franchise business, where the profitability dropped straight through to the bottom line. So when you have that impact coupled with the fact that maintenance and platform services are performing quite well.
Maintenance has very healthy margins as thus carwash, that's why we're confident in our R. R.
Our expectation that we can deliver 23% EBITDA margins for 2021 Jonathan.
Jonathan do you want to touch topline again traffic yes.
Good question.
Talking about.
Let's talk about M&A first of all so and the question was.
Being public affected that.
We've been very.
Acquisitive for the last five plus years, we've done over 40 transactions, we're staffed to do.
To do M&A, we will be considered an acquirer of choice in this industry. So that's not changed since we've gone public. This is something that we're very good at and have a phenomenal track record of doing it and I would imagine that we will continue to do that in the future. So no real impact from being public there in terms of franchisee interests.
In our business really I don't think anything has changed since being public I think whats happened, though sharing over the last sort of 18 to 24 months. There is a couple of things one is people understand the power of the driven platform and the benefits that we bring to franchisees, whether thats scale, whether it's purchasing whether it's marketing whether it's data analytics I think.
Franchisees maybe from in other industries are understanding the power of the automotive aftermarket space and that it's needs based it's highly recession resilient quite frankly, they can make better returns of this space in other spaces. Its highly fragmented. So I think all of those things coming together really not to do it couldnt be in <unk>.
<unk> I think people are just recognizing the phenomenal industry that we operate in.
Thanks.
Yeah.
Your next question comes from Kate Mcshane with Goldman Sachs. Your line is open.
Hi, good morning, Thanks for taking my question.
No that data analytics is a big initiative and differentiator for you. So I wondered if there was anything new to discuss there or whether there are new measures are ways to leverage existing data to help drive 2021.
Thanks, Kate Jonathan here I will tell you that I think Jim you had mentioned it earlier you asked about the subscription model and Carwash.
No surprise that we're driving 400 basis point improvement in Q4, we're still seeing that improvement a lot of that is coming from our data analytics capabilities. So that's one specific example of how we're leveraging data to drive actual results in revenue and better cash in our business. So look we continue to have data analytics.
Influence across all things, we do and driven brands, whether thats same.
Same store sales, whether it's real estate models, whether it's M&A models, whether it's subscription model. So it really is just part of our DNA and part of our culture and as we continue this journey, it's only going to get more powerful.
Thank you and my second question unrelated just wondering if theres any way back to the same store sales guidance.
Comments, how youre thinking about organic market share gains in 2021, and how it compares to 2020.
Yes, Okay. Let me, let me take a shot at that and then you can tell me if you have a follow up.
Again first and foremost nothing in our outlook has really changed since the analyst day in December.
We feel great about our competitive positioning as we enter 2021.
As we said a couple of times. This morning, we're on plan in the first quarter.
And we expect positive same store sales in total and frankly positive same store sales across all four segments.
So obviously that would suggest.
A.
Total basis recovery by the end of essentially recover by the end of 2021.
We feel very good about our positioning and based on the comments around.
Data analytics driving additional traffic to the stores driving more insights that we can use to leverage the targeted marketing and continuing to drive the car while subscription model, we've got lots of effort and support behind driving same store sales.
In Canada, I would just sort of come over the top there and say look we are fully committed as we were in analyst day to delivering consistent organic same store sales growth and that sort of low single digit for many years to come right. So that's absolutely how we think about the business.
Thank you.
Thanks, Nick.
Your next question comes from Peter Keith with Piper Sandler Your line is open.
Hi, Good morning, everyone. Congrats on your first earnings call.
You had mentioned at the beginning of the script at your sales and adjusted EBITDA were at the high end of your expected range.
But if it looks like your adjusted net income didn't quite come in with the street expectations are and I would argue maybe or you expected that income from the analyst day.
So the core of the question is is there something non operating that changed from the analyst day that that potentially caused a bit of embedded campus.
Hey, Peter good to hear from you. Thanks for the question and I. Appreciate the question. So that we can ensure we clear the air here. So really important right. When we think of that operating performance to the point revenue and adjusted EBITDA and even acquisition adjusted EBITDA came in at the top end of the range to operating performance was very strong in the fourth quarter.
And for the fiscal year, there are some nonoperating things below the line things that I'll point out. So if you look at the midpoint of the net income guide and recent developments versus the net loss that we reported there are essentially three things driving that delta, it's about a $7 million delta $5 million of that has to do with.
With higher tax expense and as I said in my prepared remarks, we had a non deductible expense in our foreign jurisdictions, specifically related to Carwash. We also had the impact of some state tax changes on deferred tax liabilities, that's $5 million of tax and we had $7 million of higher depreciation and amortization associated with.
The purchase accounting that we finalized in the fourth quarter and related to the step up and associated useful lives for Carwash.
Offsetting those two negative impacts was a larger foreign currency gain to the tune of about $6 million as a result of rate move E&P 12, So all nonoperating items that caused that delta versus what our expectations.
Very helpful. Thank you for that.
My last question a bit of a follow up to Christmas question just on the stimulus.
The amount of checks of one element of the trucks coming out and then it looks like there's even going to be some child tax credit benefits in the back half of the year you guys serve a core middle income consumer and I'm wondering if you'd typically see any any sales bump from stimulus or.
Monthly checks to middle income.
Maybe taking a little more around the discretionary side of the business, which would be around carwash.
Historical observations would be helpful.
Hey, Peter It's Jonathan Luke we're Super bullish about the rest of this year I think that the return to mobility people driving more coupled with <unk>.
Stimulus checks that as you rightfully pointed out sort of hit our core customer our core customer has a household income of about $60000 that drive cars with about 100000 miles on them. Those cars are about 10 years old. So if you think about the sweet spot of where stimulus is going to impact we feel really good about sort of our core customer.
Being a beneficiary there so I would just reiterate that we're super optimistic about how 2021 is going to shape up in terms of return to mobility and driving more and clearly sort of over the top help as the stimulus package that looks like it's going to get passed.
Okay. Thanks, so much and good luck with the coming year.
Thank you.
Your next question comes from Karen short with Barclays. Your line is open.
Hi, Thanks, very much I actually was wondering if you could maybe give a little color on it.
The cadence of comps during the quarter.
Assuming weather would have had some negative impact on comps.
Some of the segments given the polar vortex and then wondering if you could give a little color on it.
Comp within the quarter to date, and then I had one follow up.
Hey, Karen sorry, Jonathan.
We don't talk about the W word.
We won't talk about it today, we won't talk about it in the future. We're very pleased with Q4 comps across the organization and just to sort of reiterate how we're feeling about.
Q1, I should say.
Like I said earlier, we are on plan for Q1 and look forward to.
Really good performance for Q2 and beyond in 2021.
Okay, and then I guess, maybe just a little more on the stimulus is there any way you could give some color in terms of what the stimulus would have gone into impact January relative to what the next stimulus will be because obviously its exponentially higher and then if you didn't want to answer that.
And to see if you could maybe talk a little bit about where you think the right leverage level would be.
Given all of the M&A opportunity and where you feel comfortable.
Yes, I'll just.
I'll just reiterate on the stimulus look this is going to be an unusual year in many respects like we are seeing the vaccinations get out there we're seeing more optimism that the consumer they've obviously save some money in 2020, so driving trends are going to continue to increase mobility is going to increase people may have more.
Money in their pockets. So we feel really good about 2021, I'm not going to specifically tell you what we think stimulus could or couldnt do to our business, but we're really optimistic about 2021, and then I'll, let Tiffany cover the leverage piece, yes. Good morning, Karen So as I said in prepared remarks, we ended 2020 on a pro forma net debt basis.
At five times and that's pro forma for the pay down of the IC WG that came from the proceeds of the IPO.
Are very comfortable at five times leverage it puts us in line with or better than our.
Highly franchised peers and so as we think about taking advantage of white space in the market.
Most of that's going to come through tuck in acquisitions in the segments that we talked about earlier in the call and most of that tuck in acquisition can be can be effectuate it with cash from operations. So.
I would say five times leverage it feels like the right place for US again puts us in a good spot relative to the peer set and we feel like we're very well positioned to take advantage of of the pipeline of M&A.
Great.
Thank you.
Okay. Andrew last question comes from Keith.
Seth Sigman with credit Suisse. Your line is open.
Thanks, a lot hey, everybody.
I wanted to follow up on the EBITDA margin guidance for this year, so flat at 23% of your guiding to positive comps I think that outlook is pretty consistent with what you said before which would.
Margins around 23% range, but can you just remind us some of the puts and takes to be thinking about here and how operating leverage I guess is hold back if theres offsets to be thinking about thank you.
Sure Seth good morning, so.
Let me make a couple of comments I would say first and foremost think about the mix of the business right. We've got a maintenance business that is a mix of company owned stores as well as franchised business. The margins on the company owned stores are in the mid 30% range.
And the franchise business, obviously, we collect a royalty and that royalty drops straight through to the bottom line.
Car wash in the U S. As company owned again mid 30% margins very healthy business.
Then from a <unk> perspective, all franchised, so Dan collect a royalty and the royalty rates dropped three profitability so to the point on.
Our expectation for 23% margin consistent with what we just delivered in 2020, obviously with the white space in our industry. We're focused on growth rates. Our focus is on growth and we want to make sure that we deliver stable consistent margins.
As we grow the business, having said that same store sales growth and new stores drive incremental EBITDA dollars.
And that allows us to leverage fixed costs and then of course, we're always looking for opportunities to improve margins through cost reduction strategies in efficiencies. So we're committed to delivering stable consistent margins, but we will continue to look for opportunities to drive improvement.
Okay perfect. That's helpful and there is no there are no major cost concerns I mean or at least.
You should have an ability to offset any cost pressures as it relates to supplies or anything like that you just comment on some of the levers that you may have there.
Yes, we'd be happy to do so I agree gives.
Given that we're a franchise or right in the majority of our stores are franchised. Thank.
That gives us a little bit of insulation from a cost perspective, whether youre thinking about labor or youre thinking about product costs and our ability to pass through any sort of inflation. There. So no concerns.
I think as you think about the company owned business and wages, obviously, our models require less labor than most of the multi unit franchise models, so with less labor in our stores as Jonathan mentioned earlier most of our employees are at a very healthy living wage now and some of that comes from the variable.
Comp and our commitment to that variable comp program and then because our average ticket is a bit larger than many multi unit models.
And our service levels are fantastic and an essential needs based environment, we do have as a last resort the ability if we need to to pass along inflation.
Two big product categories would be oil and paint.
I think in the oil space. This is obviously lubricant products. Our contracts are long term in nature. There are multiple commodities in a natural hedge in those agreements and they are also tied to indices. So we don't necessarily aren't locked into a fixed price for example over that long term contract.
On the paint side that paint we are selling to franchisees and again somewhat limited in the impact that it has to ask because reflecting royalties on that franchise business. So sunshine here Seth is no real concern from a cost perspective.
Okay. That's great. That's very helpful context, if I could just follow up on one other point I mean, a lot of conversation around demand and the impact of miles driven can you just give us a little bit more color on how immediate of an impact do you see when miles driven improves versus I guess, a lag from the cumulative wear and tear on a vehicle.
Cool.
And is your sense that there may be pent up demand.
From cars that have not been used as much but that will come back pretty immediately how are you guys thinking about that.
Hey, Seth as Jonathan Yes look.
Just reiterate right there's a lot of moving parts going on in 2021 rate we've got.
Increased mobility driving trends are going to pick up I think people are going to start returning to work at some point in 2021, we've obviously got stimulus checks I think there is probably some pent up demand in terms of some vehicle maintenance or vehicle service, it's not like a food occasion, where that's done and gone forever the car still there.
Again, our core customer a lot of our core customers has still been driving in working in 2020. So look I would just reiterate that we feel really bullish about 2021 and theres far more tailwind in our future than there are headwinds that's how we think about it.
Thanks, very much good luck.
Thanks Sarah.
I will now turn the call back over to Mr. Smith.
This is Patrick.
Thanks, Denise and thank you all for your time this morning.
We're incredibly proud of our team our franchisees and our results in 2020, and we look forward to a really great 2021, and we'll talk to you. All soon thank you all.
This concludes today's conference call you may now disconnect.
Okay.
Okay.
Okay.
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