Q3 2021 Driven Brands Holdings Inc Earnings Call
Okay.
Good morning, and welcome to Jordan brands third quarter 2021 earnings Conference call.
The name is to me and I will be your operator today.
As a reminder, this call is being recorded.
Joining the call. This morning are Jonathan Pantry, President and Chief Executive Officer.
Tiffany Mason Executive Vice President and Chief Financial Officer.
And Rachel Webb, Vice President of Investor Relations.
During today's call management will refer to certain non-GAAP financial measures you can find the reconciliations to the most directly comparable GAAP financial measures on the company's Investor Relations website and in its filings with Securities and Exchange Commission.
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 actual results may differ materially from these expectations.
Factors that may cause actual results to differ materially from expectations are detailed in the company's SEC filings, including the form 8-K filed today containing the Companys earnings release.
Information about any non-GAAP financial measures referenced including a reconciliation of those measures to GAAP measures can also be found in the company's SEC filings and earnings release available on the Investor Relations website.
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.
Please press star one to be placed in the queue.
I'll now turn the call over to Jonathan. Please go ahead.
Thank you and good morning, we had another great quarter across the board our third as a public company and are excited to share the results over the course of today's call.
Driven brands as the largest automotive services company in North America, and our diversified portfolio of services gives us many levers to grow same store sales and units, which ultimately drive profit growth.
We've consistently taken share for the past decade, and yet we are less than 5% of this massive and growing fragmented market.
We will continue to take share and win in this industry because of our core competitive advantages our sheer scale.
Our ability to collect and then use our customer data to drive higher frequency and deeper penetration.
Our ability to open new units either franchise or company.
But over the long term driven has and will consistently deliver organic double digit revenue growth and double digit.
Digit adjusted EBITDA growth.
And because of our asset light business model, we generate a ton of cash. We then use that cash to further accelerate our growth by layering on acquisitions, which as we have proven has massive incremental upside to our model.
Said simply driven is growth and cash.
And we're pleased with our Q3 results that we released this morning, and all credit goes to our team and our amazing franchisees.
Compared to Q3 of 2020 consolidated same store sales were positive 13%.
Revenue increased 39% to $371 million.
Adjusted EBITDA increased 42% to $98 million.
And adjusted EPS increased 30% to <unk> 26, a share.
Another top to bottom beat.
And we are very proud of these results and remain optimistic about the remainder of this year and more importantly, about 2022 and beyond.
Now in Q3, we gained market share across all segments, we continued to lead into our competitive advantages our data marketing operation store growth and supply chain.
<unk> led to more cars more sales and more profits for our franchisees and for driven.
We drove same store sales through a healthy balance of new customers increased or peak rates better mix and our ability to take price.
All of this combined led to 13% same store sales.
We continue to see strength in our consumers and their driving behavior and 2021.
Vehicle miles traveled continues to be a tailwind this.
The summer started strong.
And in July with a first months at DMT was flat to 2019, and then in August DMT softened slightly likely around concern for the Delta Varian.
September rebounded nicely to a similar pattern experienced in June and July and that trend is continuing into Q4.
2022 is set up to be a very strong year for driven brands.
Consumer outlook for 2022 is positive, which should return DMT to pre pandemic levels.
First party data is getting more and more valuable as we continue to shift from mass marketing to personal one to one engagement and a call to action.
Now, we see tremendous opportunity from the customer data we are continuously capturing.
While we've always done a great job of collecting customer data I'd say, we've only done a good job of digesting and commercializing it.
And to that end I'm excited to welcome Matt Meyer to the driven brands team as chief data and digital officer.
Matt joined Us from Whirlpool, where you expanded their offerings to include industry, leading Iot connected appliance experiences expanded their direct to consumer digital platforms and led their global data and advanced analytics competency.
Matt will be working with Suzanne Smith, our senior Vice President of marketing analytics, and intelligence to unlock even more customer frequency and penetration opportunities across driven.
We currently have 20 million unique customers in our data Lake and we're adding about 900000 each quarter.
This customer data will continue to be foundational to our market share gains over the next decade.
We've been leveraging data to drive higher customer frequency and increased penetration.
Now, we're starting to test cross marketing and driving more customers to our digital platforms.
But this is just the tip of the iceberg.
This will allow us to lower acquisition costs of new customers.
And increase the wallet share of existing customers by continuing to cross market and provide complementary products and services.
As we look across driven segment the opportunity for incremental sales from targeting and cross marketing is huge and we're just starting to unlock this.
And all of this with minimal costs. Thanks to the data infrastructure, we have already built and the plug and play model that can be applied across customers.
And none of this is built into our long term guidance, but the opportunity is significant.
Now moving to unit growth in the third quarter, we added 53 net new units.
This was a balance of franchised and company store openings and tuck in acquisitions and I'll break down these complementary levers for you.
But to us they're interchangeable our goal is to own the best Street corners in the best market.
And the best fastest and highest return on investment we can.
Our organic new unit pipeline continued to grow into Q3.
Our total organic new unit pipeline now sits at over 1000 units, that's up by 10% versus the prior quarter through a combination of both company and franchise locations.
Break that down a bit.
Our company store pipeline is strong with over 220 locations also up 10% since Q2 and continues to build.
This provides very strong visibility into 2022 and 2023 openings.
The franchise pipeline is also growing every quarter today, we have more than 800 commitments to open franchise sites.
Looking back at our first public call. This franchise pipeline with 600 sites, which gives you a sense of just how quickly it is growing.
And these 800 commitments provide visibility into unit growth over the next four years and we have locations identified for nearly 300 of these already.
Based on the well developed pipeline we are confident in opening at least 250 locations in 2022 and those are all organic openings.
That is before we include any sites in the M&A pipeline, which will obviously add to the overall visibility for unit growth.
Now supplementing our strong organic pipeline is are equally robust M&A pipeline.
Scale matters in our industry and M&A is one of the highest and best uses of our cash flow, which will compound over time driving higher returns for all stakeholders.
M&A is a core strength it driven in all transactions to date have been accretive to earnings.
We make the businesses, we acquire better and they make us better.
The fragmentation in this industry allows for highly accretive acquisitions for many years to come.
2021 has been a busy year, particularly for car wash acquisitions. So far this year, we have acquired 70 Carwash units for a total of 87 units since adding the car wash business to the driven brands portfolio in August 2020.
This brings our total Carwash unit count to 288 units in the United States.
This is a 44% increase in store count in only 14 months.
And these acquired stores will continue to benefit from our scale and data marketing operations supply chain and purchasing.
And they will have a full year impact in 2022 and beyond.
This is M&A augmenting our compounding organic growth algorithm.
Now let me give you a few details about our carwash acquisitions to date.
The average transaction includes two six locations.
60% are proprietary deals being generated by our internal business development team.
The <unk> acquisition is one 3 million.
Purchasing synergies are significant with a 40% average reduction in chemical costs.
Our pipeline is strong and we feel very good about this growth lever for years to come.
And remember that is before we layer on Greenfield car wash growth, which we expect to be about 50 units in 2022.
If you look at the average of the trailing three years, driven has acquired more than $50 million of pre synergy EBITDA annually.
Every acquisition is integrated and in all cases, the business has improved under driven ownership.
Synergies typically translates into a two to three turn reduction in purchased multiple post acquisition.
And these synergies come from better use of data that our marketing at our operations and better purchasing.
We won't provide annual guidance for M&A, However, I.
$250 million of incremental pre synergy EBITDA over the next five years to driven organic long term growth algorithm would be a very reasonable assumption for your models.
We've now going into car wash business for a little over one year.
Looking back to when we acquired the business in August of 2020, there were fewer than 200 locations in the United States. We now have 288 as our teams apply the driven growth playbook through both greenfield openings and acquisitions.
The Carwash business has been highly accretive to both our top and bottom lines and we have made significant changes to improve its foundation, which has resulted in higher subscription rates and healthy same store sales and we are opening and acquiring new units.
But there is still a long way to go.
And I'm, even more optimistic about this business, but when we bought it a year ago, but we will continue to optimize it.
And I'm delighted to announce that John <unk> has joined driven brands to run our U S Carwash business.
John spent the bulk of his career driving transformation and growth in multi unit retail and consumer services businesses.
Most recently he was head of strategy and corporate development at Lowe's.
Previously John also worked at the home depot and John is no stranger to driven he was a key member of the take five team where he helped grow our business significantly from 2017 to 2020, we're thrilled to welcome John back to the drilling team.
Now I've been asked about our long term strategy and competitive moat for car wash.
When I think about the long term potential for this business. Its simple we are going to be the biggest car wash company in the industry.
Now, while we intend to have the most stores we are equally committed to having the best stores, we want stores that have great real estate and then we commit to offer customers the best experience when they come to one of our locations.
This is core to everything we do at driven we want the customer to trust that our brands will always offer a great experience with first class customer service.
That's our long term vision for the car wash business and were only 14 months into that journey.
We recently started testing rebranding our car washes to the take five brand name.
And it is still very early innings, but I wanted to give you an uptake now.
The hypothesis is straightforward, having one national brand allows for efficiencies across marketing real estate operations people and subscription member benefits.
So why does it take five name while our take five brand name stands for fast friendly quality and simple.
And that is what customers want in a car wash experience.
Take five has industry, leading NPS scores of over 80% and repeat rates of over 70%.
Our customers trust the take five name.
It also accelerates the growth of our take five brand recognition across the country, while enabling cross promotional synergies between our two most frequented brands.
There are also many markets, where our car Washington quick lube businesses overlap.
And future development will in many cases in the same markets and even on shared real estate driving further brand connection and efficiencies.
We started with five take five branded car washes and have since expanded to 25, and we will keep you posted as our test progresses.
Now, let me share my thoughts about the rest of the year and beyond is very positive.
We remain bullish on 2021 and feel very good about achieving our updated guidance for adjusted EBITDA of $350 million for 2021.
This is up 23% from the original $285 million estimate ahead of our IPO less than 12 months ago.
More importantly, we feel really good about the momentum in our business heading into 2022.
We've added 145 stores so far this year, they will ramp and have a full year impact in 2022.
And all of our store pipelines continue to grow.
Unit count growth should accelerate in 2022, and 250, new units feels very achievable and.
And M&A will continue to be an additional accelerator to our results.
Tiffany will give full 2022 guidance on our Q4 earnings call in February 2022.
As a private company when I joined driven in 2012, we generated less than $40 million in EBITDA.
In 2015, we announced our first five year plan with a goal of $200 million in EBITDA.
We achieved that early and have increased our target to $300 million, which we have also achieved ahead of schedule.
Our new Dream Big plan is now targeting adjusted EBITDA of at least eight.
$850 million by the end of 2026.
That means continuing to deliver on our long term organic low double digit revenue growth and low double digit adjusted EBITDA growth.
The $250 million of pre synergy acquisition, EBITDA, which we know will expand and compound.
And we're believers in this plan because we are a compound grower.
And our growth is low risk because of our current market share.
And we are asset light and generate a lot of cash, which we reinvest back into growth.
And our benefits, we generate with scale are continuing to grow.
And our business model works well in all economic cycles, and finally, we execute and do what we say we're going to do.
You can see this very clearly in our 2021 results and our momentum heading into 2022.
Driven as growth and cash.
I'll now turn it over to Tiffany for a deeper dive into the Q3 financials and 2021 guidance Tiffany.
Thanks, Jonathan and good morning, everyone. We have now delivered three consecutive quarters of strong performance since our IPO in January.
Out of our entire team from franchisees to store level employees brand support teams and corporate office personnel.
Everyone has shown tremendous flexibility and a relentless focus on operational excellence, which has produced great results year to date, and we expect to end fiscal 2021 strong.
For the third quarter system wide sales were $1 $2 billion from which we generated revenue of $371 million.
Adjusted EBITDA was $98 million and as a percentage of revenue adjusted EBITDA margin was 26%.
Adjusted EPS was <unk> 26 for the third quarter exceeding our expectation as a result of strong sales volume, which allowed us to leverage our expense base driving significant flow through.
This is the power of the driven brands platform.
Grilling highly franchise business with a diverse needs based service offering that delivers very attractive margins.
Now, let me break things down a bit more.
System wide sales growth in the quarter was driven by same store sales growth as well as the addition of new stores.
We have tremendous white space to continue growing our store count in this 300 plus billion dollar how fragmented industry.
And as Jonathan discussed our franchise company Greenfield and M&A pipeline are all robot.
Aggressively growing our footprint.
In the quarter, we added 53 net new stores.
Same store sales growth was 13% for the quarter with consistent performance across the three months.
Now that we celebrated the anniversary of the IC WG acquisition in early August Carwash was included in our consolidated same store sales calculation on a prorated basis for the third quarter.
Once again outpaced the industry across all business segments, continuing to gain market share.
And our same store sales were comprised of positive car count and average ticket.
Car count was driven by our best in class marketing and customer experience and average ticket continued to benefit from the increasing complexity of vehicles.
Now remember we are over 80% franchised.
That all segments contribute to revenue proportionately.
For example, P. Sand gave was roughly half from system sales this quarter.
15% of revenue because it's effectively all franchise with lower average royalty rate.
Maintenance and Carwash or a mix of franchised and company operated contributing approximately 40% and 35% of revenue respectively.
As always this is provided on our Instagram, which is posted on our Investor Relations website.
When you say unit growth and same store sales growth in the blender and account for our franchise mix.
Revenue in the quarter was $371 million, an increase of 39% versus the prior year.
From an expense perspective.
<unk> continued to carefully manage site level expenses across the portfolio and.
In fact prudent expense management together with the strong sales volume just four wall margins of 39% at company operated stores.
And if that shop SG&A as a percentage of revenue was 20% in the quarter as there are 200 basis points of improvement versus last year.
This resulted in an adjusted EBITDA of $98 million for the quarter, an increase of 42% versus the prior year.
$5 million beat to our internal forecast.
Depreciation and amortization expense was $28 million versus $16 million in the prior year.
This increase was primarily attributable to the growth in company operated stores.
Interest expense was nearly $18 million in the quarter and we recorded income tax expense of nearly $12 million, which was an effective tax rate of approximately 26%.
For the third quarter, we delivered adjusted net income of $44 million and adjusted EPS of <unk> 26 cents.
You can find a reconciliation of adjusted net income adjusted EPS and adjusted EBITDA in todays release.
Now a bit more color on our third quarter results by segment.
The maintenance segment posted positive same store sales of 17% once again the strongest in the portfolio.
Maintenance continues to benefit from more targeted digital marketing.
Led to an increase in car count from both new and repeat customers in the quarter.
And from a profitability perspective strong top line performance resulted in higher flow through on incremental sales.
While the national Labor shortage continued into the third quarter. The situation has improved since Q2 in many of the markets that we serve.
And we estimate that the margin benefit from 19th slightly later on later than intended was 11 basis points in the third quarter down from 50 basis points in Q2.
The car wash segment posted positive same store sales growth of 6%.
As Jonathan discussed we made a lot of progress since the acquisition.
One of the highlight is the improvement in wash club subscription under our ownership.
Subscriptions increased to over 49% of sales and the number of <unk> members grew by an additional 43000 in the third quarter. This.
This is up 700 basis points or 175000 members since the acquisition a year ago.
And this is a great recurring revenue stream that provides a level of predictability to this business.
Non wash club revenue per wash continues to increase as well.
Results of a simplified menu board and the focus that our teams are placed and improved selling technique.
Non watch called revenue per loss is that more than 14% versus last year.
From a profitability perspective, we renegotiated our chemical contract immediately after the acquisition achieving our significant cost reduction, while increasing the service level and associated growth incentives.
Similar to our oil program the more volume, we do the greater the benefits.
But as Jonathan also said there is still a long way to go to fully optimize the business.
So continue to drive results with the items I, just mentioned, while supercharging, our marketing and branding effort to drive even stronger revenue and profitability going forward.
The take original glass segment posted positive same store sales in the quarter up 11%.
This is the second consecutive quarter of positive same store sales for this segment.
Part of the pandemic and.
And improving DMT trend is an important tailwind for this business.
And almost 30% of collisions occurred during rush hour and that congestion hasnt fully return we have added an additional 570 direct repair programs with insurance customers. So far this year.
Resulting in performance that continues to outpace the industry.
And finally, the platform services segment posted positive same store sales growth in Q3 of 16%.
Phone services is the segment most exposed.
The supply chain pressures and as you know every aspect of its supply chain is challenged right now from manufacturing to the port to checking.
We have leveraged our scale and leadership in the industry could turn this into a strength and differentiator for driven.
The contract with multiple suppliers, while most of our competitors, 80% of the industry that is independent operators rely on one primary supplier.
We leverage the strength of our balance sheet to place orders earlier.
And we have the team dedicated to relationship management and ensuring they keep close watch on every step of the supply chain.
This is translating into more inventory in stock at one 800 radiator than many of our competitors and customers have been willing to pay a premium driving continued record sales levels within the quarter.
We were pleased with our strong operating results in the quarter.
This resulted in significant cash generation that allowed us to further invest in the business.
That cash generation together with our revolving credit facilities and access to the debt capital market is important for our strategic growth plan.
And as I've consistently stated investing in our business and growing our footprint is our number one priority.
We ended the third quarter with $115 million in cash and we had $153 million.
Undrawn capacity on our revolving credit facility.
Resulting in total liquidity of $268 million.
Subsequent to the end of the quarter.
On a $450 million whole business securitization issuance.
So priced at a fixed rate of 279, 1% and have a seven year tenor and.
Improving the weighted average fixed rate of our overall debt portfolio to 371%.
The proceeds from the securitization issuance were used to repay the outstanding balance on our revolving credit facility and the remainder will be used for general corporate purposes, including continued M&A.
Pro forma for the securitization issuance, our net leverage ratio at the end of the third quarter with $4 one five times.
You can find a reconciliation of our net leverage ratio posted on our Investor Relations website.
We intend to continue using our balance sheet to capitalize on the substantial white space and a $300 million consolidating industry.
Now looking ahead, we have delivered three strong quarters in 2021, and we expect a strong fourth quarter as well.
We continue to be bullish on the state of the consumer tailwind from a covering DMT and demand for our services. This holiday season.
Research suggests that 25% of consumers planning to travel for the holidays.
That's up five points from 2020.
And 70% of these consumers plan to use their car with the majority planning to get a carwash oil change before they do.
In this morning's earnings release, we raised our full year guidance to account for a strong operating performance in the third quarter, while maintaining.
Maintaining our guidance for the fourth quarter.
For the year, we are on track to open approximately 200 net new stores across the portfolio a combination of franchised and company operated locations as well as the tuck in M&A, we've completed to date.
We expect positive same store sales growth across all of our segments.
And on a consolidated basis, we expect approximately 15% same store sales growth.
That will drive revenue of approximately $1 4 billion.
Adjusted EBITDA of approximately $350 million.
And should result in adjusted EPS of approximately 80% based on 165 million weighted average shares outstanding.
Enjoy the day, we expect the strength of this portfolio to continue to deliver best in class results.
We are focused on our proven formula with a platform that has scaled and diversified.
Our formula is simple, adding stores, we grow same store sales and we deliver stable margins there.
This results in significant cash flow generation that we reinvest in the business.
While we won't release fourth quarter results until February of 2022, we hope that you'll have a great holiday season, and we look forward to connecting with you over the course of the next few months.
Operator, we'd now like to open the call up for questions.
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 well pause for just a moment to compile the Q&A roster.
Your first question comes from the line of least Suzuki with Bank of America. Your line is open.
Great. Thanks, very much. So you added 845 stores year to date and the new guidance is for 200 total for the year I think previously you had broken it out by 80 to 90 in maintenance that you've already exceeded 20% to 30 and Carwash achieve exceeded 60 to 70 net in PCT. It looks like Theres been a net reduction in P. C G.
Year to date, so where theres some stores reclassified into maintenance and how should we think about that net store growth by segment now.
For the for the next quarter.
Hey, Liz as Jonathan Good morning.
Yeah look I think you've got a generally right I'll tell you that.
The good news is we have all these different levers to grow unit count we actually took it upon ourselves to let's say prune some underperforming operators in our collision business in Q3.
We get the importance of our large insurance carriers and performance of our franchisees. So once in a while we need to send a message to the system. When we took out some underperforming operators. So I think that was something that happened in Q3, I think it's a one time event. It sends a little message to the rest of the system. The other thing I would remind you lose is like when you think about the collision units from <unk>.
<unk> contribution perspective, they are massively lower than let's say our car wash our maintenance businesses. So I think you'll see a little bit of softness there self imposed in terms of the collision just because we're making sure that our franchisees understand the importance of delivering to our insurance partners.
Okay. Great. That's helpful. And then you took up the full year EBITDA estimate by the amount of the beat in <unk> versus your internal estimates.
I'd say that your <unk> outlook hasn't really changed do you think youre baking in a decent buffer of conservatism just given all the unknowns with regard to the trajectory of miles driven labor shortages are there headwinds that could pop up.
Hey.
Alright, let me, let me start and then I'm sorry, that's great. So that's a nice.
We've done we've continued to provide a measure of a conservative approach to our guidance.
As you said, we raised our fiscal 2021 guidance by $5 million beat to our internal forecast in Q3, and we held our <unk> forecast.
Fiscal 2021, adjusted EBITDA to 315, which implies Q4 same store sales somewhere in the 10% range with adjusted EBITDA of $73 million.
Frankly, we're pleased with Keith with October performance, and we continue to see strength across all segments with October off to a great start.
Q4 is off to a great start I should say, we expect solid demand for our services with holiday season. However, as you call out we're not yet out of the woods on inflation and supply chain disruption and while we're excited to welcome John <unk> driven brands to lead our U S car wash business changes inevitably disrupted disruptive in the short term.
For those reasons, we're holding our Q4 guidance and that's consistent with our conservative approach to guidance over the course of the year, but I do want to be very clear that we did not lower our <unk> guide today.
Hopefully that answers your question, but yes. It does thank you very much.
You bet.
Your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.
Hi, guys. This is Michael Kessler on for Simeon. Thank you for taking my questions.
I wanted to ask about the car wash segment.
We've looked at the famous hotel on it too.
Geometrics back it looks like there was a big slowdown.
About 10 points go down versus Q2.
Very strong Q2.
In Q3, I just wanted to ask.
What did you what do you see in that business.
To the extent that there was a slowdown driven by anything in particular, whether it be delta maybe the miles driven mid quarter slowdown any commentary there would be great.
Hey, Michael Jonathan here.
Look we posted 6% in Q3.
There is always a bit of noise with the consumer right now, whether there's funky things happening with Delta.
The different things that there was some sort of crazy weather stuff going on this summer, but we don't ever talk about that but the business is in great shape, Michael we have.
Owned it for 14 months, we're even more bullish about it than we ever have before we've got.
A bunch of new stores that we've added a bunch of stores in both our M&A and Greenfield pipeline. So there's nothing that concerns us whatsoever about the long term potential for this business. This remains an incredible asset with incredible white space in front of it so nothing whatsoever concerns us.
Okay, Okay great.
My follow up on the maintenance segment.
Another.
Call that a little bit of a benefit from the understaffing.
The Grand scheme of things it sounds pretty minor relative to the level of margin expansion that we were seeing in that segment, especially versus the euro, especially two years ago.
I'm wondering how we should be thinking about the margin here I would anticipate or expect it could maybe continue to expand.
The mix of the business shifts more to franchise is that right and should we be looking I would say both maintenance and the whole company's EBITDA margin potentially re basing on this new higher level.
Likely going to end 2021 west.
Yeah, Michael Great question so on.
On the point about the labor piece, so you're right we're seeing improvement in.
In labor trends right. So we called out 50 basis points of benefit in Q2, we're seeing a 11 basis points of benefit from a labor shortage in Q3, so definitely seeing improvement, while they're still saying a tight labor market.
As we think about a greater mix of franchise in the maintenance space, you're absolutely right. We should continue to see that margin expand and then.
If you just look at the trend we ended 2020 with overall consolidated margins of 23%. We're forecasting overall margins of 25%. Since you are in this year based on our guide and as we continue to increase the amount of.
Traffic to our sites and increase that.
The benefit of the topline flywheel, we should drop more.
<unk> ability to the bottom line, it's a $6 six variable model the margins should expand over time.
Okay. Thank you guys. Good luck in Q4.
Your next question comes from the line of Chris <unk>.
With J P. Morgan your line is open.
Yeah.
Good morning.
My first question just following up on that on the fourth quarter Guide.
Two parts to it.
The second quarter, you talked about sort of mid single digits ish comps.
In the back half with <unk> slightly better and now you're talking about 10. So it feels like you did raise the sales outlook.
But then didn't really flow that through to the EBITDA line. So is there something is there something changing on the cross side and there is there something unique about <unk> EBITDA margins to seasonality.
Hey, first back to what I said to lose a few minutes ago nothing's fundamentally changing other than we're taking a conservative stance because there are some moving pieces as it relates to inflation and supply chain. So we're just giving ourselves a bit of wiggle room, I'm staying consistent with our conservative approach to guidance, but nothing to be alarmed about and we.
Expect Q4 to be strong.
Okay, and then on the long term.
Quick math suggests you you just raised.
The algorithm to the high teens from.
Low double digits, so is that accurate and then.
As you think about whats on top of that does that assume any EBITDA margin expansion in the core business and can you talk about typically what sort of margin synergies.
Good.
Extract from that $250 million of a pre synergy acquisition.
Sure Chris Great question, So a couple of points to make there so when when you're talking about long term in the at least $850 million.
2026, batesville or getting married with keeping our long term algorithm intact. So, we're saying double digit revenue and adjusted EBITDA growth.
$350 million of EBITDA as the jumping off point coming out of 2021.
We're suggesting that if you wanted to build in a layer of M&A $50 million a year that compounds at that same long term algo would be appropriate based on history.
And then Jonathan is giving you a bit of insight today into the pipeline right. So.
That's effectively how we built it now if you remember back to when we talked about the algorithm earlier this year heading into the IPO that algorithm was based on pretty conservative assumptions around same store sales, which was 2%.
And a very conservative assumption around EBITDA margin, which was essentially holding it flat.
As we've talked about before the whole purpose of that long term algorithm was to show the power of the German portfolio.
The fact that we could be a double digit grower with conservative assumption.
We certainly are.
And that's the purpose frankly, Jonathan statement around at least 850 million right. So again the point is with conservative assumptions, we could get at least $850 million.
And there's plenty of upside there.
As you know we get synergies on the acquisition as we expand margins and as we expect same store sales to be somewhere above 2% just based on history.
And then on the on the synergies that you've experienced historically is that for a 500 basis points.
Central margin benefit there.
Yeah.
Yes, I would just like to go ahead.
Get about two to three turns of a synergy improvement on the acquisitions that we acquire aircrafts.
Alright, thanks very much.
You bet.
Yeah.
Your next question comes from the line of Peter Benedict with Baird. Your line is open.
Alright, thanks, guys.
Questions first just background because inflation is there any way to quantify maybe the impact it had.
Two maybe across the top line and how youre thinking about that in <unk> and then on the.
570, <unk> you added year to date.
How many do you have.
Currently the total and just kind of curious where do you think you can get that maybe over the next few years. Thank you.
Jonathan why don't I take the first part meets at the second.
On inflation Peter Thanks for the question. So what I would say as we've experienced mid single digit cost inflation year to date between oil and wages. Those are the two big categories. We have successfully passed that through to that.
On the consumer.
Honestly, we provide needs based essential services and our average ticket, particularly in the maintenance business, which is where we're seeing most of that inflation from a company owned store perspective is $78.
<unk>.
We're having pretty good success year to date I would say if you think about the average ticket of the maintenance division, though and just what that means from an average ticket increase.
Still 80% of the average ticket is coming from mix. So prices price increases that we've been able to take as a result of our pricing power is still a relatively small percentage of the average the average increase in ticket.
Jonathan will then address Thearchy.
Yeah, Hi.
Peter Good morning, Yeah look the DRP as Peter is really coming from.
As our large insurance partners want to do more business with fewer large scale providers. So as we bring on stores are odd stores to one of our insurance partners' programs. They get added to that that the ERP. So when you think there's a great sort of long term growth here for us.
Additional insurance work with our great insurance partners for our franchisees. So we will get back to you Rachel will get back to you with the total number of <unk> that we have Peter I don't have it on hand, but we see sort of this continual addition of <unk> to new stores that we add in existing stores that are expanding their insurance relationships.
Okay, great. Thank you.
Your next question comes from the line of Kate Mcshane with Goldman Sachs. Your line is open.
Hi, good morning, Thanks for taking my question.
Wondering if you could help us with.
Quantifying some of the market share gains was there.
Particular business release on more market change market share gains and not.
And any quantification around that and then my second unrelated question was with regards to supply chain disruption that we're seeing I know on your platform services or in a much better position than peers, but just curious what inventories look like right now and if theres any way you'd like to see more.
Okay.
Okay. So I'll take the first part of the market share and maybe Jonathan you can address the second part so in terms of market share we're actually seeing.
Great performance across all of our segments, we're taking share across the floor.
Obviously, our higher growth segment is higher growth segments, I should say, our carwash and maintenance maintenance.
Maintenance is performing quite well, we're seeing fantastic results. There. So we're seeing outsize performance.
We're doing quite well and carwash as well so we're getting them into both of those segments that again I'm seeing good performance across all four.
Yeah, and just building on that Kate good morning by the way it's Jonathan.
We'll give you look at sort of maintenance close to that sort of 20% same store sales you know that we.
We have one great competitor in that space I don't know what their numbers are but obviously when we look at some of the smaller independents or small chains, we know they're not delivering those numbers. So we're taking share from them same and car wash like 6% same store sales comp is terrific probably ahead of the overall industry. But then if you look at the unit count growth that we're experiencing.
Aaronson Carwash, that's obviously leading to share gains through incremental units in terms of the supply chain I mean, I think it's amazing what's happening right. Now is that if you look sort of at the entire supply chain. It's disadvantaged at every level, whether it's at the production level, whether it's at the transportation level and then whether it's app.
The last mile level so.
That is affecting literally every aspect of People's lives I think all over the world.
We see patches of that in various parts of our business, but again I go back to our scale allows us to have really great contracts and be very important to our suppliers. So we're going to get sort of put into the front of the line. When there is supply shortages or distribution shortages, we've got contracts in place multiunit contracts that.
Cover some of the pricing.
Pressure that may exist in the market and again I go back to what Tiffany said earlier, we provide for the most part needs based services. So our ability to pass on price through both our company stores and our franchisees as evidenced in this sort of same store sales, 13% that we delivered so I think what I would say is that supply chain is definitely there.
Disadvantaged.
Haven't seen any green shoots of improvement yet we think it's going to last for some time, but when you're one of the biggest.
And most sophisticated in the market generally you can leverage that supply chain advantage over sort of the fragment fragmented industry that we operate in.
Thank you.
Yeah.
Your next question comes from the line of Sharon Zackfia with William Blair. Your line is open.
Hi, good morning.
Thanks for the detail on the development pipeline and your expectations for next year I was wondering if you could talk about what your expectations are for maintenance in <unk> and 'twenty. Two I know you talked about 15 for Carwash and then just to clarify I think there's some confusion as to whether or not you are.
Falling short of your organic growth plans for 2021.
Maybe if you could clarify how that Sam.
Shaping up relative to your initial expectation.
Hey, good morning, Sharon relative.
Relative to 2022, I think we will give sort of a breakdown by segment in the the.
Call It in February, but I think you'll see growth.
For all the segments as you sort of put back to that 250.
250 unit that I referenced in my remarks earlier in terms of the organic pipeline I think I mentioned it I think it was too.
Maybe Peter earlier, but we definitely.
The time to I would say send a message to some of our collision franchisees with sort of culling. Some underperforming stores. So that's intentional we have the ability to do that because we've got so many levers to grow the business. So we took the time to actually get some underperforming franchisees out of that business that will obviously have a I suppose short term.
The negative impact to unit growth. However, the economic contribution from franchise collision stores, there's a lot less than some of our other stores.
In terms of the.
The other greenfield components, I think Carwash Greenfield, we had sort of guided to 20 to 30, I think it'll be slightly less than that just because of if you like sort of the labor and supply chain issues in terms of getting those stores open feel really good about those stores are under construction, but we're seeing a little bit of delay just in construction timeframe so that.
Will just bleed into Q1, so overall two things are happening a little bit slower opening on the on the carwash because of permitting and inspection some equipment supply chain issues within that industry, and then secondly, proactively sending a message to some of our collision franchisee. So those are the two things again, what I would say Sharon though is.
We look at this bolt on acquisition machine that we've built it's really interchangeable right. We don't at the end of the year say, how many stores came from this how many stores came from that we're looking to grow units and when you look at bolt on M&A is simply another way to add new units to our portfolio. So I think over time.
That's something that we'll be talking more about is just the total unit count, including what we think of as bolt ons and traditional greenfield in that in that calculus.
Thank you that's very helpful.
Your next question comes from the line of Peter Keith with Piper Sandler Your line is open.
Hi, Thanks, good morning, everyone.
Jonathan I was hoping you could provide the historic perspective on rising gas prices are as we seem to be moving that type of environment is that.
Impacted demand for your services with your core middle income customer historically.
Hey, Peter Great question, I think look I think we're all sort of dealing with a pretty pretty dramatic interest sort of increase in gas prices. So.
Definitely probably impacts people a little bit I think it is offset by a couple of things, though Peter one is I think consumers have a lot more money in their pockets now than they did when there was the last massive raising gas prices. So I think thats sort of an offset I think the second thing that's pretty interesting in our spaces. If you look at what's happening with new car sales and used car sales right.
New car sales massively disadvantage for all of the supply chain issues. We know used car prices are up very significantly and what are what are our core customers doing well there theyre not buying new cars are holding on to those cars and putting more maintenance dollars into those vehicles. So I think you can't look at just excuse me gas price.
<unk> is one impact you have to look at the overall market. So I would say no.
No material impact when you look at sort of the offsetting factors going on as well.
Okay. That's helpful. I was going to ask about the shortage of new cars. So I guess implied in your answers that shortage.
It was a benefit and we'll see how long that lasts.
Yeah and looked at everything we see Peter is that that supply chain is not going to be on cloud or D. Clogged for some time right I think youre going to see.
Deep into 2022 before sort of that supply chain gets unplugged.
Yeah, Okay, and then a separate question I had was some interesting comments you had on the franchise. Then you are up to 800 sounds like you've added about 200.
In the last year or so is that is that typical or has there been a step up this year that may be related to the go public process.
Yes, I think we've talked about this a little bit before Peter but I think what's happening is people are really starting to understand and appreciate the resiliency of automotive aftermarket services. So.
It's needs based services people.
It does really well in all economic conditions I think you know franchisees from other industries, maybe we sort of took a second or third look at this industry over the last 18 months. So I think this is sort of an awakening of how how good the unit level economics are in this space and I would expect to see this trend continue.
As we look forward over the next sort of five years. So I think it's really just an overall appreciation and awakening of the power of this industry that we operate in.
Okay. That's helpful. Thanks, a lot.
Your next question comes from the line of Karen short with Barclays. Your line is open.
Hi, Thanks, very much I, just wanted to ask a little bit more about guidance for fourth quarter. So.
Guidance for first quarter. So when you look at the incremental margins relative incremental operating margins relative to the prior <unk> through <unk>.
There's obviously a meaningful.
Terry ration.
Implied for <unk> margins.
So wondering if you could just give a little more color around that because it does seem highly conservative based on what you've been doing for the last three quarters and then I had one other question.
Yes, thanks, Gary so.
It's absolutely conservative right and we're being conservative because we're not yet out of the woods on inflation and supply chain disruptions. So we just want to make sure that we're being very prudent as we think about the fourth quarter and have an opportunity to navigate the uncertain environment and be able to make sure that we can at least certainly meet if not exceed your expectations as we get through the next 90 days.
Okay and then.
Okay, and then as it relates to like bigger picture.
When you think about inventory broadly and where labor broadly I guess, the only thing I'm confused about is I don't see how labor would actually impact you I realize that all of your franchisees are actually impacted by the labor component of what's going on in the macro but why would that actually directly impacted.
Yeah, I'll take it Karen.
Just to reiterate what Tiffany was saying look I think on the Q4 guidance.
I don't know how more we can more clearly we can say it and I think hopefully youll see that from the previous quarters that we've announced we have intentionally being extremely conservative. So far this year, which is the right thing to do for a new public company and that conservatism is absolutely bill.
Into our Q4 guidance that we gave so I just wanted to put a fine point on that secondly in terms of labor great Great question.
Honestly, our franchisees are amazing owner operators. So we're not exposed to their overall labor issues, but they do a great job of hiring people a lot of times, they've got deep connections within the community across our industry.
We have variable compensation, which is very much a norm. So we're well beyond sort of that 10 to $12. A wage issue that people were talking about 12 to 14 12 or 15 months ago. So our effective wages are much higher we also have in many cases better operating hours than some of the alternatives out there most of our store.
Or is there sort of open and operating during daylight. If you like lastly, we've got a lot of a lot of our employees have a passion or an interest in automobiles. So I don't think they have a passion for some other sort of equivalent wage paying jobs that may be out there. So our franchisees do an amazing job within our company operated businesses.
Our two company operated businesses our car wash in quick Lube and I think as we've talked about before those are amazing businesses. One of the reasons are amazing is the incredibly efficient labor model that we have so if you think about a car wash.
Three maybe four people at peak a quick lube same thing three to four people at peak, so we're doing a terrific job.
Keeping those stores up and running.
Driving obviously terrific results as you saw in Q3, so I think we're not immune to the labor challenges that are out there, but probably more favorably positioned than many folks.
Okay. That's helpful. Thank you.
Your next question comes from the line of Chris <unk> with Stifel. Your line is taken.
Thanks, Good morning, guys.
I was wondering if you could provide some color on the business segment mix you anticipate when you reach that $850 million long term target.
Okay.
Yeah.
Okay.
Hey, Chris It's Tiffany so when we think about the continued growth in our portfolio over the next couple of years I mean, obviously, we're continuing to grow our franchise.
Franchise licenses as well as.
Domino amount of company owned stores in the maintenance space with our take tactical business.
And we're obviously continuing to lean into the car wash business is that the new business in our portfolio. So we're growing that base.
From an M&A and in a company company Greenfield perspective.
So those are the few businesses that are probably highest growth at this point of course those up to continue.
Collision conversion opportunity. So you know I don't.
Didn't say that.
Portfolio mix changes dramatically between now and 2026.
Thinking about the.
Percentage of franchise versus company island, it'll be slightly heavier franchise overall, but not dramatically different today versus tomorrow.
Do you all have a target for how much carwash could represent as a percentage of the EBITDA of the overall company.
We don't have a target Chris other than it is an incredible business with incredible unit level economics, and a massive amount of white space and we've grown unit count by 44% in 2014 months. So we think there is.
Just a tremendous runway for that business.
Sure.
I just had one other question regarding the Carwash take five rebranding opportunity I understand the thesis relates to the long term power of having a single brand growing but I'm wondering what the company hopes to learn from the test and how long you will need to make a decision before deciding to convert all the locations and maybe start a plan to rebrand new location.
Once you acquire them.
Yes, I think it's like anything Chris it's.
The implementation of the signage the implementation of the merchandising, possibly retraining some of the crew members right seeing what the consumer reaction is making sure that when these stores or rebranded its not just a re signage, but theres other things for the consumers. So I think it's it's not really questioning.
The validity of the hypothesis that making sure that we're nailing all the little things that go into our rebranding which is not as simple as just putting a sign on the building there's lots of sort of people process and systems that go along with that so look I think you can infer pretty easily that we've gone from five to 25 stores. So.
We like what we're seeing and really we're trying to find is there is there a reason not to do this and to date, we have not seen a reason why we wouldn't continue this.
Great. Thanks, guys.
Our last question comes from the line of Tim <unk> with.
I had a quick follow up question on <unk>.
M&A, especially related to the $250 million incremental EBITDA over the next five years.
Is it safe to assume that most of it is going to be Carlos related or just if you can give us a sense of some of the near term pipeline, but just seeing regarding M&A. Thank you.
Yes, it's a good question look we're not.
We're not going to break down because we're not going to give guidance on where that M&A is going to come from but I think it's a fair assumption that you know.
A good portion of that could come from Carwash.
We certainly don't talk about other potential platforms or additional M&A targets that we may be looking at but I think it's fair to assume that a.
A good chunk of it could come from Carwash.
Got it and just a quick follow up especially on the labor piece. You'll have you spent some time looking at the maintenance business on the call today, but if I look at the collision side of the business. There have been some of the competitors out there talking about technician availability issue I'm just trying to think about how is that impacting driven specifically into the franchise locations. Thank you.
Yes, I'd go back to what I said to I think it was Karen asked about labor and look our franchisees are amazing individuals their owner operators they've had a team of people for in many cases, our average franchise 10 years 17 years. So they've had teams together for a long long time, they take care of those employees. So look we talk to our franchisees.
Every day there is no question that there are some challenges out there, but I think franchise locations are inherently very well equipped to deal with labor because of their embeddedness in the in the both the store the community and our relationships with people. So I would say our franchisees are dealing with it.
And a very positive way.
Great. Thank you.
I will now turn the call back over to Mr. Fitzpatrick.
Yeah.
Thank you all we appreciate it and.
I'm very very happy with Q3 and.
You know again reiterating the conservatism of our Q4 guidance. So anyway. Thanks, I'll look forward to speaking to you in the future.
This concludes today's conference call you may now disconnect.
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Yeah.