Q3 2022 Driven Brands Holdings Inc Earnings Call

October 26, 2022

Investor Relations you may begin.

Thank you very much and welcome everybody to driven brands third quarter earnings Conference call. In addition to the earnings release, there is a leverage ratio reconciliation and info graphic available for download on our website at investors Dot driven brands Dot com summarizing our third quarter results on.

The call with me today are Jonathan Fitzpatrick, President and Chief Executive Officer, and Tiffany Mason Executive Vice President and Chief Financial Officer.

In a moment, Jonathan and Tiffany will walk you through our financial and operating performance for the quarter.

Before we begin our remarks I'd like to remind you that on this call management will refer to certain non-GAAP financial measures you can find the reconciliation 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 be advised that during the course of this call management May also make forward looking statements in regards to our current plans beliefs and expectations. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties and other factors that could cause actual results and events to differ materially from.

The results and events contemplated by these forward looking statements. These risks and uncertainties include those set forth in our earnings release, and our filings with the Securities and Exchange Commission. These forward looking statements are made only as of the date hereof and except as required by law, we undertake no obligation to update or revise.

Any of them, whether as a result of new information future events or otherwise.

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 with that I'll now turn the call over to Jonathan.

Thank you and good morning, our team delivered another quarter of strong performance in Q3, another top to bottom beat with 39% revenue growth inclusive of 12% same store sales growth translating to 32% adjusted EBITDA growth.

So if any will share more on the results in just a few minutes.

Those results together with our asset light business model generated strong cash flow, which we used to reinvest in the business and gain market share all credit goes to our incredible team are amazing franchisees and our loyal long term customers.

The $350 billion of automotive aftermarket industry continues to grow driven brands continues to grow on our customer database of 29 million unique customers continues to grow.

Despite the current economic environment. The category is once again proving its resiliency given that it is highly needs based.

Our business remains stable and resilient and our team is executing.

This quarter, our team did an excellent job of managing inflationary impacts operating through continued supply chain disruption and navigating the evolving consumer landscape.

We've had success passing through input cost increases given the price elasticity in our business.

And we're leveraging our scale and supply chain capabilities as a competitive advantage on behalf of ourselves and our franchisees.

The diversification and the breadth of our offering not only provides significant benefits of scale, but also provide a natural balance and additional resilience to our business.

This is the power of the driven platform more.

Multiple levers to grow both organically and through acquisitions.

We entered the fourth quarter with momentum and excellent visibility into our expense base, we remain very confident in our strategy and growth outlook as our business continues to be highly cash flow generative.

Creating capacity to reinvest in growth.

Our pipeline of future openings continues to expand giving us visibility into multi year growth and.

And we have multiple levers to deliver that unit growth franchise build or buy.

Our continued execution combined with the strength of our business model gives us confidence that we're on track to meet or exceed our dream big plan of $850 million.

Adjusted EBITDA by the end of 2026.

Okay.

As our consolidated business drove strong performance and cash flow, we continued to make significant progress across our key growth levers quick lube, carwash and glass leveraging our proven playbook.

These businesses share several characteristics.

<unk> operating models very strong unit level economics significant cash flow generation highly fragmented competition and significant white space for unit growth.

And from a customer perspective, our solutions oriented approach to simplifying and enhancing the experience is resonating with customers supporting our market share gains significant customer growth and strong unit level economics.

So let's start with quick loop.

We established our playbook for growth in our take five oil change business.

We use platform M&A to acquire the assets technology and capabilities to rapidly scale.

We immediately began building a greenfield pipeline and migrated to a combination of tuck in M&A and greenfield openings to densify quickly in key target markets.

That we standardized the operating model tools and technology to launch a franchise model.

And then began scaling that franchise pipeline.

That playbook has built the quick lube business to over 800, North American locations, including roughly 200 franchise locations.

Consistently strong unit growth coupled with double digit same store sales growth resulted in strong double digit revenue growth in Q3.

Given the compelling business model and unit level economics, our pipeline has continued to expand and is now roughly 950 units, giving us a long runway for sustainable and predictable growth.

And we're on track for our unit openings for the year.

Now shifting to Carwash, we're the largest provider of Carwash services globally with almost 1100 locations comprised of an impressive international business and a growing U S presence that has almost doubled over the past two years with 369 company owned <unk>.

Well the openings to densify quickly in key target markets.

Beyond that we standardized the operating model tools and technology to launch a franchise model.

And then began scaling that franchise pipeline.

Suppress locations.

That playbook has built the quick lube business to over 800, North American locations, including roughly 200 franchise locations.

We continue to find the long term opportunity and strong returns within the car wash business compelling.

Our single branded international business continues to deliver strong results on a constant currency basis, despite a challenging operating environment proving the strength of the model.

Consistently strong unit growth coupled with double digit same store sales growth resulted in strong double digit revenue growth in Q3.

And then the U S. We are leveraging our standard playbook for growth focus on building density in key geographies.

Given the compelling business model and unit level economics, our pipeline has continued to expand and is now roughly 950 units, giving us a long runway for sustainable and predictable growth.

We now have a presence in the majority of our target geographies and are focused on further densification.

We did experienced some headwinds in the third quarter related to FX and softening retail volume as a result of the macro environment that Tiffany will discuss in more detail shortly.

And we're on track for our unit openings for the year.

Now those headwinds were partially offset by strong execution from the team implementing price increases.

Shifting mix towards premium offerings, and converting customers to stickier recurring revenue with our <unk> program.

Express locations.

We continue to find a long term opportunity and strong returns within the car wash business compelling.

Nearly 40% of our U S locations are now Brian did take five Carwash and we're on track to have a single U S brands by the end of 2023 through.

Our single branded international business continues to deliver strong results on a constant currency basis, despite a challenging operating environment proving the strength of the model.

Through the rebranding we are standardizing our market positioning operations systems and customer experience, which in turn allows us to integrate our wash club program and enhance our data capture capabilities.

And then the U S. We are leveraging our standard playbook for growth focused on building density in key geographies.

We now have a presence in the majority of our target geographies and are focused on further densification.

Our greenfield pipeline for openings in the U S remains robust.

And has expanded to over 250 locations in just two years since we entered the carwash business, enabling us to be more selective with M&A.

We did experience some headwinds in the third quarter related to FX and softening retail volume as the result of the macro environment that Tiffany will discuss in more detail shortly.

Let's talk about glass.

Now those headwinds were partially offset by strong execution from the team implementing price increases.

Since entering the highly fragmented 5 billion U S auto glass servicing category at the beginning of the year. We have quickly become the second largest player as of the end of the quarter.

Shifting mix towards premium offerings, and converting customers to stickier recurring revenue with our wash club program.

Following that same growth playbook, we've used in quick lube and Carwash.

Nearly 40% of our U S locations are now branded take five carwash.

Adding our growing U S footprint to our existing Canadian business. We now have nearly 400 locations and over 700 mobile units across North America.

And we're on track to have a single U S brand by the end of 2023.

In addition to strong unit growth store volume.

To increase as we begin to see early benefits from the implementation of calibration services and expanding our commercial relationships.

Our greenfield pipeline for openings in the U S remains robust.

We expect to continue to grow commercial volume at our locations through the addition of fleet in the short term and large national insurers in late 2023 and 2024.

And has expanded to over 250 locations in just two years since we entered the carwash business, enabling us to be more selective with M&A.

The benefits of scale from M&A and the increase in commercial business will provide a tailwind to the already.

Let's talk about glass since.

Since entering the highly fragmented 5 billion U S auto glass servicing category at the beginning of the year. We have quickly become the second largest player as of the end of the quarter.

<unk> mid 30% four wall EBITDA margins.

We couldnt be more excited about the long term potential of the glass business and again, we're repeating our proven growth playbook and getting better each time, we do it.

Following that same growth playbook, we've used in quick lube and Carwash.

Adding our growing U S footprint to our existing Canadian business. We now have nearly 400 locations and over 700 mobile units across North America.

Beyond the breadth and strength of our brands the benefits of our scale and our shared service capabilities deepen our competitive moat and differentiate our business.

In addition to strong unit growth store volume.

Further enabling unit growth same store sales growth and cost savings.

To increase as we begin to see early benefits from the implementation of calibration services and expanding our commercial relationships.

In addition to the unique advantages that we have discussed previously on data and marketing a.

A few additional capabilities include our commercial <unk> business procurement and development.

We expect to continue to grow commercial volume at our locations through the addition of fleet in the short term and large national insurers in late 2023 and 2024.

Beginning with commercial we're uniquely positioned with a breadth of offerings that no other player in the category can offer.

The benefits of scale from M&A and the increasing commercial business will provide a tailwind to the already compelling mid 30% four wall EBITDA margins.

About 50% of our system wide sales are generated from commercial customers, including insurance and fleet.

Now that drive significant incremental volume to our locations a tailwind to same store sales and an additional layer of resilience to our business.

We couldnt be more excited about the long term potential of the glass business and again, we're repeating our proven growth playbook and getting better each time, we do it.

We have dedicated teams that work with these partners across our portfolio streamlining operations and ensuring a consistent customer experience.

Beyond the breadth and strength of our brands the benefits of our scale and our shared service capabilities deepen our competitive moat and differentiate our business.

Well, it's a meaningful contribution today, we have significant opportunity to continue to grow this part of the business and it's a key priority for us.

Further enabling unit growth same store sales growth and cost savings.

In addition to the unique advantages that we have discussed previously on data and marketing a.

More units means more locations to serve commercial customers.

The addition of glass and Carwash creates additional revenue opportunities for example, our glass business today is 80% the C with limited insurance volume as.

A few additional capabilities include our commercial <unk> business procurement and development.

Beginning with commercial we're uniquely positioned with a breadth of offerings that no other player in the category can offer.

As we build a national footprint and connect existing insurance customers to this new service offering we will drive significant additional volume to our locations.

About 50% of our system wide sales are generated from commercial customers, including insurance and fleet.

And delivering commercial volume to acquired locations makes M&A, even more accretive to driven.

Now that drive significant incremental volume to our locations a tailwind to same store sales and an additional layer of resilience to our business.

As we discussed last quarter, we leverage our significant scale across our company operated and franchise network through a centralized procurement function.

We have dedicated teams that work with these partners across our portfolio streamlining operations and ensuring a consistent customer experience.

This helps to mitigate rising input costs and keep our stores in stock when others are not.

Well, it's a meaningful contribution today, we have significant opportunity to continue to grow this part of the business and it's a key priority for us.

And we're still in the early days of the opportunity in front of us.

In November we are launching the pilot of our new marketplace, which we expect to fully rollout over the course of 2023.

More units means more locations to serve commercial customers.

The addition of glass and Carwash creates additional revenue opportunities for example, our glass business today is 80% B to C with limited insurance volume as.

We believe this new marketplace will provide significant value to our franchisees and vendor partners by creating a one stop shop for franchisees.

Expanding our offerings and improving the experience.

As we build a national footprint and connect existing insurance customers to this new service offering we will drive significant additional volume to our locations.

We will learn more in the coming months through this test, but we're excited by the potential to provide meaningful revenue and EBIT growth for driven over time.

And delivering commercial volume to acquired locations makes M&A, even more accretive to driven.

In addition to our M&A capabilities, one of our core competitive advantages is our Greenfield development competency.

As we discussed last quarter, we leverage our significant scale across our company operated and franchise network through a centralized procurement function.

We've got a team of experts working across all of our businesses that specialize in market planning site selection engineering and construction supporting both our company operated and franchise pipeline.

This helps to mitigate rising input costs and keep our stores in stock when others are not.

This is a very important internal capability that provides us with the flexibility to maintain our growth trajectory and to be very selective on acquisitions, when others don't have that luxury.

We're still in the early days of the opportunity in front of us.

In November we are launching the pilot of our new marketplace, which we expect to fully rollout over the course of 2023.

Over the last year alone our development team has secured purchased leased converted or opened almost 1200 locations.

We believe this new marketplace will provide significant value to our franchisees and vendor partners by creating a one stop shop for franchisees.

Expanding our offerings and improving the experience.

For our company operated stores that includes construction on almost 300 locations and about 120 rebranding.

We will learn more in the coming months through this test, but we're excited by the potential to provide meaningful revenue and EBIT growth for driven over time.

Also of our robust development pipeline of over 500 locations roughly 40% of those units are site secured are better.

In addition to our M&A capabilities, one of our core competitive advantages is our Greenfield development competency.

Giving us strong visibility into sustainable predictable growth over the next few years.

Within this large and highly fragmented category there remains significant white space, creating a long runway for unit growth and market expansion in the future.

And we believe there is no one better positioned to capitalize on that opportunity then driven brands.

This is a very important internal capability that provides us with the flexibility to maintain our growth trajectory and to be very selective on acquisitions, when others don't have that luxury.

As you can see the power of our growing scale and sophistication in the shared service capabilities enabled growth and market share gains in this highly fragmented needs based industry.

Over the last year alone our development team has secured purchased leased converted or opened almost 1200 locations.

And we are still in the early innings of maturing these capabilities with a long runway of incremental value volume and profitability benefits to the business.

For our company operated stores that includes construction on almost 300 locations and about 120 rebranding.

Giving us even further confidence in our ability to deliver on our short medium and long term goals.

Also of our robust development pipeline of over 500 locations roughly 40% of those units are site secured are better.

So when you pull all that together, we continue to have momentum entering the fourth quarter building on our strong performance year to date.

Our strong visibility into sustainable predictable growth over the next few years.

Although the operating environment may be different than we anticipated as we entered the.

Within this large and highly fragmented category there remains significant white space, creating a long runway for unit growth and market expansion in the future.

We're pleased with how we're navigating the market and remain very confident in the significant opportunities ahead of us.

We are growing.

And we believe there is no one better positioned to capitalize on that opportunity then driven brands.

Taking share and generating cash.

And our scale gives us that competitive on compounding advantage.

As you can see the power of our growing scale and sophistication in the shared service capabilities enabled growth and market share gains in this highly fragmented needs based industry.

We have a proven playbook and multiyear visibility into unit growth.

Our dream Big plan of at least $850 million of adjusted EBITDA by the end of 2026 is very much on track and we're confident in our ability to beat it because.

And we are still in the early innings of maturing these capabilities.

With a long runway of incremental value volume and profitability benefits to the business.

Our team is in place and executing against a proven growth plan.

Giving us even further confidence in our ability to deliver on our short medium and long term goals.

Our industry is needs based and highly fragmented.

So when you pull all that together, we continue to have momentum entering the fourth quarter building on our strong performance year to date.

We are generating cash, which we reinvest into the growth flywheel.

So with that let me turn it over to Tiffany for a deeper dive into the Q3 financials Tiffany.

Although the operating environment may be different than we anticipated as we entered the.

Thanks, Jonathan and good morning, everyone.

We're pleased with how we're navigating the market and remain very confident in the significant opportunities ahead of us.

Our performance in the first half of 2020.

Patients are down third quarter with another strong print driven brand.

Our growing taking share and generating cash.

And our scale gives us a competitive on compounding advantage.

Our team executed well delivering best in class.

All services, both consumer and commercial customers.

We have a proven playbook and multiyear visibility into unit growth.

And we'll continue to gain share in the category with a focus on the key growth areas with Jonathan just outlined.

Our dream Big plan of at least $850 million of adjusted EBITDA by the end of 2026 is very much on track and we're confident in our ability to beat it because ah.

In the fourth quarter, we will remain nimble and resolute in our efforts to capitalize.

Norm.

<unk> category.

Strong growth continued to gain market share and deliver on behalf of our customers.

Our team is in place and executing against a proven growth plan.

Now diving into the specifics of our third quarter results.

Our industry is needs based and highly fragmented.

System wide sale were $1 5 billion.

We are generating cash, which we reinvest into the growth flywheel.

We generated $517 million of revenue.

So with that let me turn it over to Tiffany for a deeper dive into the Q3 financials.

Adjusted EBITDA was $129 million.

Adjusted EPS was <unk> 32.

Right.

Thanks, Jonathan and good morning, everyone.

Leather bottom.

Building a performance in the first half of 2020.

System wide sales growth in the quarter was driven by same store sales growth as well as the addition of new stores.

Taking the <unk> third quarter with another strong client driven brand.

We have tremendous white space to continue growing our store count and a 350 billion dollar segment.

Our team executed well delivering Boston call.

Both consumer and commercial customers.

Growing industry.

And we'll continue to gain share in the category with a focus on the key growth areas, Jonathan just outlined.

Our franchise company Greenfield M&A pipeline are all robust.

We are aggressively growing their footprint.

In the fourth quarter, we will remain nimble and resolute.

In the third quarter, we added 101 net new stores.

Capital.

Lauren.

Same store sales growth was 12% for the quarter.

Brilliant category.

<unk> continue to gain market share and deliver on behalf of our customers.

We continue to benefit from the increasing complexity of vehicles as well as retail pricing action to offset the cost of inflation.

Now diving into the specifics of our third quarter results.

Importantly performance across the months of the quarter was relatively consistent on a consolidated basis.

Mr. Mike <unk>, one $5 billion.

We generated $570 million of revenue.

And once again outpaced the industry across our business segments.

Adjusted EBITDA $129 million.

And adjusted EPS was <unk> 32 from another.

Now remember over 75% of our location franchise, so not all contribute to revenue proportionately.

Another bottleneck.

System wide sales growth in the quarter was driven by same store sales growth as well as the addition of new stores.

For example.

I'm, David de La <unk>.

Systemwide sales this quarter, but only about 20% of revenue.

We have tremendous white space to continue growing our store count in the 350 billion dollar wholesale and growing industry.

<unk> franchise with lower average royalty rate.

Maintenance and call us or mix of franchised and company operated contributing almost 40% and 30% of revenue respectively.

Our franchise company Greenfield and M&A pipeline.

Robots.

Rapidly growing that footprint.

In the third quarter, we added 101 net new stores.

Although this is provided on our antibiotic which is posted on our Investor Relations website.

Same store sales growth was 12% for the quarter.

When you put unit growth and same store sales growth in the blender.

We continue to benefit from the increasing complexity of vehicles as well as retail pricing action to offset the cost of inflation.

Our franchise mix, our reported revenue in the quarter with $570 million.

An increase of 39% versus the prior year.

Importantly performance across the months of the quarter was relatively consistent on a consolidated basis.

From an expense perspective, we continue to carefully manage site level expenses across the portfolio.

And once again outpaced the industry across our business segments.

In fact prudent expense management together with a strong sales volume the four wall margin, 39% at company operated stores.

Now remember over 75% of our locations are franchise and not us.

Revenue proportionately.

And above shop, SG&A as a percentage of revenue was 17% in the quarter and proven over 350 basis points from the prior year, primarily due to leverage from asbestos.

For example.

<unk> <unk> with Evercore.

Sales this quarter, but only about 20% of revenue.

Dominantly franchise with lower average royalty rate.

No one can call us or mix of franchised and company operated contributing almost 40% and 30% of revenue respectively.

This resulted in adjusted EBITDA of $129 million for the quarter, an increase of 32% versus the prior year.

Although this is provided on our antibody, which is posted on our Investor Relations website.

Adjusted <unk> margin was 25%.

Depreciation and amortization expense was $37 million this $8 million increase versus the prior year, primarily attributable to the growth in company operated stores.

When you put unit growth and same store sales growth in the blender.

Our franchise mix, our reported revenue in the quarter with $570 million.

And interest expense was $27 million.

An increase of 39% versus the prior year.

Nearly $4 million increase versus the prior year was primarily attributable to increased debt levels as we lean into opportunity across our quickly carwash and glass businesses.

From an expense perspective, we continued to carefully manage site level expenses across the portfolio.

In fact prudent expense management together with the strong sales volume the four wall margin, 39% at company operated stores.

For the third quarter, we delivered adjusted net income of $55 million and adjusted EPS of <unk> 32.

And above shop, SG&A as a percentage of revenue was 17% in the quarter and proven over 350 basis points from the prior year, primarily due to leverage on our growth.

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.

This resulted in adjusted EBITDA of $129 million for the quarter, an increase of 32% versus the prior year.

The maintenance segment posted positive same store sales of 14%.

Take five quickly continues to benefit from enhancements targeted digital marketing driving increased car count.

Adjusted <unk> margin was 25%.

Depreciation and amortization expense was $37 million this $8 million increase versus the prior year, primarily attributable to the growth in company operated stores.

<unk> successfully passed along a series of retail price increases.

Maintaining our premium oil mix of nearly 90% driving an increase in average ticket.

The approximate rate of ancillary products, such as engine air filters wiper blade cabin air filters and cooling exchange.

And interest expense was $27 million.

Nearly $1 million increase versus the prior year was primarily attributable to increased debt levels as we land opportunity across our quickly carwash and glass businesses.

Main strong at nearly 40% also contributing to a higher average ticket.

Despite this noise of retail price increases over the past 18 months our net.

For the third quarter, we delivered adjusted net income of $55 million and adjusted EPS of <unk> 32.

Promoter scores remained strong and repeat rates have increased 5% year over year.

You can find a reconciliation of adjusted net income adjusted EPS and adjusted EBITDA in todays release.

The car wash segment posted negative same store sales of 9%.

Foreign exchange rate and this may continue to have an outsized negative impact this quarter of roughly 560 basis points.

Now a bit more color on our third quarter results by segment.

The maintenance segment posted positive same store sales of 14%.

Our more mature single branded international business delivered strong results on a constant currency basis, driven by strategic pricing.

Take five quickly continues to benefit from enhancements targeted digital marketing driving increased car counts.

Marketing and premium mix shifts despite a challenging operating environment.

Ended successfully pass along a series of retail price increases.

Maintaining our premium oil mix of nearly 90% driving an increase in average ticket.

In the U S.

So single brand and operating standards, we have nearly 40% of our car wash business operating under the <unk> banner today, and we will have completed nearly half of the estate I think under this year.

The attachment rate of ancillary products, such as engine air filters wiper blade cabin air filters and coolant exchange.

Main strong at nearly 40% also contributing to a higher average ticket.

With the expectation that all stores will be rebranded by the end of 2023.

Despite the series of retail price increases over the past 18 months, our net promoter scores remain strong and recent rate have increased 5% year over year.

While we experienced softer retail volume this quarter in the U S. We drove mix shift for higher dollar wash it and continue to grow our watch club program.

We are nearing 600000, Washington subscription in total and the retention rate has remained steady.

The car wash segment posted negative same store sales of 9%.

Foreign exchange rate and this may continue to have an outsized negative impact this quarter of roughly 560 basis points.

This is not only a great recurring revenue stream that provides a level of predictability to this business, but it is also proving to be a sticky customer and an important focus for driven brand.

Our more mature single branded international business delivered strong results on a constant currency basis, driven by strategic pricing within our marketing and premium mix shift despite a challenging operating environment.

Since the acquisition of GWG in August of 2020, we have added 170 net new stores in the U S through acquisitions and Greenfield development and as a result, we are the largest express car wash operator in the U S.

In the U S. We are evolving to a single brand and operating standards, we have nearly 40% of our carwash business operating under the <unk> banner today, and we will have completed nearly half of the estate I think under this year.

The paint colors and glass segment posted positive same store sales 16%.

We added 206 direct repair programs with insurance carriers in the third quarter Alright.

With the expectation that all stores will be rebranded by the end of 2023.

Alright standing commercial partnerships are a testament to our strength and scale.

While we experienced softer retail volume this quarter in the U S. We drove mix shift for higher dollar wash it and continue to grow our watch club program.

And the ease of working with one large national provider as a clear differentiator for driven brands.

Recovery in the collision business continued.

We are nearing 600000, Washington subscription in total and the retention rate has remained steady.

In fact estimate accounts for the industry continue to grow in our.

Our shop has consistently outpaced the industry.

This is not only a great recurring revenue stream that provides a level of predictability to this business.

We are also excited about the continued expansion of our glass offering in the U S, including three acquisition in the third quarter alone.

It is also proving to be a sticky customer and an important focus for driven brand.

Glass repair complexity is increasing due to the need for calibration of the windshield camera associated with advanced driver assistance systems.

Governor vehicles.

Thank you feature like brake assist and lane departure warning.

These features grow as a proportion of the car park and it's all a mix between commercial customers increase.

The paint colors and glass segment posted positive same store sales of 16%.

Which generally require calibration, we expect to see a tailwind to both ticket and margin.

We added 206 direct repair programs with insurance carriers in the third quarter Alright.

And finally, the platform services segment posted positive same store sales of 9%.

Alright, expanding commercial partnerships are a testament to our strength and scale.

We have leveraged our scale and leadership in the industry to ensure our franchisee that consistently in stock despite supply chain disruption, creating long term customer loyalty for the one 800 radiator brand.

And the ease of working with one large national provider as a clear differentiator for driven brand.

The recovery in the collision business continued in.

In fact estimate accounts for the industry continue to grow in our.

Our shop has consistently outpaced the industry.

We were pleased with our strong operating performance in the quarter, which resulted in significant cash generation that allowed us to continue to invest in the business.

We are also excited about the continued expansion of our block offering in the U S, including three acquisition in the third quarter alone.

That cash generation together with our revolving credit facility.

Last repair complexity is increasing due to the need for calibration of the windshield camera associated with advanced driver assistance systems.

Real estate portfolio that can be monetized and access to the debt capital market.

Our strategic growth plan, which remains our number one priority given the strong returns on investment.

Governor vehicles and vans.

Thank you feature like brake assist and lane departure warning.

These features grow as a proportion of the car park and as our mix of commercial customers increase.

We ended the third quarter with $190 million in cash and cash equivalents, and we had $97 million of undrawn capacity on our revolving credit facility.

Which generally require calibration, we expect to see a tailwind to both ticket and margin.

Resulting in total liquidity of $288 million.

And finally, the platform services segment posted positive same store sales of 9%.

Subsequent to the end of the third quarter, we closed on a $365 million whole business securitization transaction.

We have leveraged our scale and leadership in the industry to ensure our franchisees are consistently in stock despite supply chain disruption, creating long term customer loyalty for the one 800 radiator brand.

Thats were priced at a fixed rate of seven 4% and have a five year tenor.

We hedged the interest rate on this transaction, resulting in an effective interest rate of six 8%.

We were pleased with our strong operating performance in the quarter, which resulted in significant cash generation that allowed us to continue to invest in the business.

Although the cost of capital is higher than it was a year ago. The return on investment of our three growth businesses remain highly compelling given their attractive unit level economics.

That cash generation together with our revolving credit facility.

Real estate portfolio that can be monetized and access to the debt capital markets.

The proceeds from the securitization transaction were used to repay the outstanding balance on our revolving credit facility and the remainder will be used for general corporate purposes, including continued greenfield opening and M&A.

Our strategic growth plan, which remains our number one priority given the strong returns on investment.

We ended the third quarter with $190 million in cash and cash equivalents, and we had $97 million of undrawn capacity on our revolving credit facility.

The pro forma weighted average interest rate of our debt portfolio is now four 2% with a five year weighted average maturity.

And our debt portfolio is approximately 80% fixed rate.

Resulting in total liquidity of $288 million.

At the end of the third quarter, our net leverage ratio was four seven times.

Subsequent to the end of the third quarter, we closed on a $365 million whole business securitization transaction.

You can find a reconciliation of our net leverage ratio posted on our Investor Relations website.

For priced at a fixed rate of seven 4% and have a five year tenor.

In addition to the ability to raise capital through the debt markets. We have a real estate portfolio that can be sold and leased back providing roughly $500 million of incremental financing.

We hedged the interest rate on this transaction, resulting in an effective interest rate of six 8%.

Although the cost of capital is higher than it was a year ago. The return on investment of our three growth businesses remain highly compelling given their attractive unit level economics.

This is an important additional lever in a rising rate environment.

We intend to continue using our balance sheet to capitalize on our substantial white space in a 350 plus billion consolidating industry.

Looking ahead, we remain optimistic about the balance of the year vehicle miles traveled are up approximately 1% year to date compared to the prior year and our forecast for the fourth quarter is positive.

The pro forma weighted average interest rate of our debt portfolio is now four 2% with a five year weighted average maturity.

We serve both consumer and commercial customers and our services are diverse and need based.

And our debt portfolio is approximately 80% fixed rate.

This allows us to better withstand any volatility that comes with a weakening economic environment.

At the end of the third quarter, our net leverage ratio was four seven times.

Our scale and sophistication provide us a competitive advantage as we continue to navigate an inflationary environment and supply chain challenges.

You can find a reconciliation of our net leverage ratio posted on our Investor Relations website.

In addition to the ability to raise capital through the debt markets. We have a real estate portfolio that can be sold and leased back providing roughly $500 million of.

And finally, our proven playbook for growth is delivering across our key growth areas.

As a result in our earnings release. This morning, we raised our fiscal 2022 guidance, reflecting our outperformance in the third quarter, while keeping our expectations for the fourth quarter unchanged.

Incremental financing.

This is an important additional lever in a rising rate environment.

We intend to continue using our balance sheet to capitalize on our substantial white space in a 350 billion consolidating industry.

Even as we absorbed FX headwinds.

We now expect to deliver revenue of approximately $2 billion.

Looking ahead, we remain optimistic about the balance of the year vehicle miles traveled were up approximately 1% year to date compared to the prior year and our forecast for the fourth quarter is positive.

Driven by low double digit same store sales growth.

And net store growth of approximately 370 units across the portfolio inclusive of organic growth and M&A through Q3.

We serve both consumer and commercial customers and our services are diverse and need based.

We expect adjusted EBITDA of approximately $503 million.

This allows us to better withstand any volatility that comes with a weakening economic environment.

And adjusted EPS of approximately $1 21.

Based on 167 million weighted average shares outstanding.

Our scale and sophistication provides us a competitive advantage as we continue to navigate an inflationary environment and supply chain challenges.

As you update your models it will be helpful to have a few other data points.

First we continue to anticipate depreciation and amortization expense of approximately $145 million.

And finally, our proven playbook for growth is delivering across our key growth areas.

Second interest expense is now expected to be approximately $115 million as a result of the recent debt raise.

Our effective tax rate is now expected to be approximately 30%.

Even as we absorbed FX headwinds.

We now expect to deliver revenue of approximately $2 billion.

Delivering $503 million of adjusted EBITDA for fiscal 2022 will be an increase of 39% over fiscal 2021 with stable adjusted EBITDA margin year over year.

Driven by low double digit same store sales growth.

And net store growth of approximately 370 units across the portfolio inclusive of organic growth and M&A through Q3.

Right milestone on the path to at least $850 million by the end of 2026.

We expect adjusted EBITDA of approximately $503 million.

And our performance to date in the fourth quarter is trending in line with our expectations.

And adjusted EPS of approximately $1 21.

Based on 167 million weighted average shares outstanding.

In closing, we expect the strength of this portfolio to continue to deliver strong results.

As you update your models it will be helpful to have a few other data points.

We are focused on our proven formula with a platform that has scaled and diversified our formula is simple we add new stores, we grow same store sales when we deliver stable margins.

First we continue to anticipate depreciation and amortization expense of approximately $145 million.

Second interest expense is now expected to be approximately $115 million as a result of the recent debt raise and.

This result in significant cash flow generation that we reinvest in the business.

Operator, we'd now like to open the call up for questions.

Our effective tax rate is now expected to be approximately 30%.

Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.

Delivering $503 million of adjusted EBITDA for fiscal 2022 will be an increase of 39% over fiscal 2021 with stable adjusted EBITDA margin year over year.

Our first question comes from Simeon Gutman with Morgan Stanley . Your line is open.

Hey, Good morning, everyone. My first question is on Carwash.

<unk> milestone on the path to at least $850 million by the end of 2026.

The EBITDA deleverage that occurred in the quarter can you speak if that's directly tied to the compounded performance assume theres. Some FX in there is there any other thing related to that deleverage and then should should is it appropriate to run rate. This quarter's EBITDA for the next four is that the right way to think of.

And our performance to date in the fourth quarter is trending in line with our expectations.

In closing, we expect the strength of this portfolio to continue to deliver strong results.

We are focused on our proven formula with a platform that has scaled and diversified our formula is simple.

It or it could be volatile in snapback on a whim or are we in.

In a steady environment now that we should model what happened in the third quarter. Thank you.

Our new stores, we grow same store sales and we deliver stable margins.

This result in significant cash flow generation that we reinvest in the business.

Hey, Simeon Thanks for the question so here's what I would tell you that our watch segment adjusted EBITDA performance.

Operator, we'd now like to open the call up for questions.

It contracted in total as a total car wash now contracted about 280 basis points year over year.

Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.

A couple of things one is certainly the outsized impact of ex FX in the quarter.

Our first question comes from Simeon Gutman with Morgan Stanley . Your line is open.

And it's been it's also stopped our retail volume.

As well as some promotional activity in the U S. So obviously, we've got to watch FX rates as we move forward.

Hey, Good morning, everyone. My first question is on Carwash.

The EBITDA deleverage that occurred in the quarter can you speak if that's directly tied to the comp under performance I assume there is some FX in there is there any other thing related to that deleverage and then should should is it appropriate to run rate. This quarter's EBITDA for the next four is that the right way to think of.

I think appropriately guiding them, there and then certainly as the.

Take five quickly excuse me take by Carwash brand.

Is prevalent across the entire estate and we expect that to drive incremental volume.

Overtime. So I think it's going to be I think it could bounce around I wouldn't necessarily take this quarters margin and forecast it out so just keep those couple of points in mind.

Or it could be volatile and snap back on a whim or are we in.

Steady environment now that we Shouldnt model what happened in the third quarter. Thank you.

Perfect.

Maybe the follow up on the <unk> business.

Hey, Simeon Thanks for the question so here's what I would tell you about Carwash segment adjusted EBITDA performance.

Can you say, where the EBITDA would have been or the proper run rate. If we had the full quarter of the acquisition.

It contracted in total the total car wash now it contracted about 280 basis points year over year.

And then thinking about incremental margins.

I guess I'll leave it open ended I wanted to ask how we should think of incremental margins in that business going forward with these new acquisitions, I guess, some changing mix of business.

Couple of things one is certainly the outsized impact of ex FX in the quarter.

And then it's also software retail volume as well as some promotional activity in the U S.

Okay.

Obviously, we've got to watch FX rates as we move forward and were I think appropriately guiding them.

Sure.

With the P&G business, if you look at the contraction year over year, it's driven by two things. One is we acquired in September of last year Ken.

There and then certainly as the take five quickly excuse me to take the Carwash brand is prevalent across the entire estate and we expect that to drive incremental volume.

Out of locations that obviously.

Think about a company owned business versus the franchise business dragged down the performance of the the collision segment. However, we have resold those company owned stores and so that's no longer part of the future run rate.

Overtime. So I think it is going to be I think it could bounce around I wouldn't necessarily take this quarters margin and forecast it out, but just keep those couple of points in mind.

From a glass perspective glasses, a fantastic business, it's generating 35% four wall EBITDA margin, but when you mix that glass business and with the remainder of the <unk> segment. You are seeing some some dilutive effect. The glasses are fantastic business, great cash on cash return and so I think this is a good run rate for you for the <unk> segment.

Perfect.

The follow up on the <unk> business.

Can you say, where the EBITDA would have been or the proper run rate. If we had the full quarter of the acquisition.

And then thinking about incremental margins.

Over time.

I guess I'll leave it open ended I wanted to ask how we should think of incremental margins in that business going forward with these new acquisitions, and I guess I'm changing mix of business.

Perfect. Okay. Thank you good luck.

Okay.

Thank you. The next question is from Liz Suzuki with Bank of America. Your line is open.

Great. Thank you I think you may have mentioned this and I may have missed it but just how much inflation impact your comps and margins across your various categories and then on the other side of that do you have any expectations for how deflation or disinflation might impact your business, if we'd start to see some of those input prices falling.

Okay.

Sure Simeon.

The P&G business, if you look at the contraction year over year, it's driven by two things. One is we acquired in September of last year Ken.

At a location that.

As you think about our company and business versus the franchise business dragged down the performance of the collision segment. However, we have resold those company owned stores and so that's no longer part of the future run rate.

Hey, guys. Yeah. Thanks for the question. So in terms of inflation. The team has done just an absolutely excellent job managing inflationary impact and we've had really good success passenger input cost increases given the pricing elasticity in our business.

From a glass perspective glasses, a fantastic business, it's generating 35% four wall EBITDA margin, but when you mix that glass business and with the remainder of the <unk> segment. You are seeing some some dilutive effect, but glass is a fantastic business great cash on cash return and so I think this is a good run rate for you for the <unk> segment.

You take our take five quickly business as an example, we've experienced a double digit rate of inflation and we've taken four price increases in the past 18 months.

But as I said in my prepared remarks, NPS scores have remained strong and repeat rates have improved 5% year over year. So importantly here, we're operating in a needs based and very resilient category.

Every time.

Perfect. Okay. Thank you good luck.

Okay.

The next question is from Liz Suzuki with Bank of America. Your line is open.

Hey, Liz this is Jonathan good to hear from you all talk about the your deflation question. So a couple of thoughts one is first obviously, we only control pricing for our company owned stores, our franchisees control overall on pricing. However, they are incredibly nimble and agile in terms of managing price.

Great. Thank you I think you may have mentioned this and I may have missed it but it is how much did inflation impact your comps <unk> margins across your various categories and then on the other side of that do you have any expectations for how deflation or disinflation might impact your business, if we'd start to see some of those input prices falling.

<unk> Ah.

Stephanie said look we've been very active in both price and revenue mix management over the last two years I think.

We've been very thoughtful and not maximizing that price, but making sure we're taking enough price to offset sort of the input costs that we've been facing.

In this category I would say historically price increases have been very sticky following periods of inflation.

So I think if if if costs do come down over time that we think it would be likely a very slow process and then sort of the flip side of that if we have some deflation obviously that could lead to a decline in interest rates, which lowers the cost of capital. So that's that's how we're thinking about deflation.

And we've taken four price increases in the past 18 months.

Great and if I may ask one more question just on car wash in the U S.

It was the.

The decline in there because I mean, I guess there was the impact from FX.

Its still be seen in the U S business down year over year and was that the effect of more of those retail customers choosing not to come in did you find them.

Actively are Stephanie said look we've been very active in both price and revenue mix management over the last two years I think we've been very thoughtful and not maximizing that price, but making sure we're taking enough price to offset sort of the input costs that we've been facing.

Some of that discretionary demand starting to pull back.

Yes look I again, Tiffany mentioned sort of the two big factors right there's FX.

Certainly in the <unk>.

In this category I would say historically price increases have been very sticky following periods of inflation.

International business, but in the in the U S business I think there's a couple of things look one we're incredibly pleased with almost doubling the size of the portfolio over the last two years Secondly, we've got a massive greenfield pipeline now of about over 200 locations. We have undertaken the rebranding strategy and are now on.

Most 40%.

40% changed over to take five car wash with a view that will be finished at the end of 2023.

Great and if I may ask one more question just on car wash in the U S.

I think when you look at the actual business, you'll see that we've made great progress in migrating people into our wash club program.

Was the.

The decline there because I mean, I guess there was the impact from FX.

Over 600000 folks in that program right now with an LTV lifetime value of $5 to one versus retail customers. So I think we're very pleased with it. We also have a broad base customer demographic, where we've got sort of.

Still be seen in the U S business down year over year and was that the effect of more of those retail customers choosing not to come in did you find some.

Some of that discretionary demand starting to pull back.

The three tiers, they're sort of the lower the Midland the higher.

Yes look again, Tiffany mentioned sort of the two big factors right. There's FX certainly in the <unk>.

And I'd say that we still see that there's going to be some some noise in the in the retail space as Stephanie mentioned in Q4, but overall, we're incredibly pleased with the operations of the car wash business.

International business, but in the in the in the U S business I think there's a couple of things look one we're incredibly pleased with almost doubling the size of the portfolio over the last two years Secondly, we've got a massive greenfield pipeline now of about over 200 locations. We have undertaken the rebranding strategy and are now on.

Okay. Thank you.

The next question is from Sharon Zackfia with William Blair. Your line is open.

Hi, Good morning, I guess first question for Tiffany there seems to be maybe some confusion on the context for about $2 billion. So if you could kind of clarify that in.

Most 40%.

40% changed over to take five car wash with a view that will be finished at the end of 2023.

Specifically for the fourth quarter I think you can get to double digit full year comps on any positive comp in the fourth quarter, but it sounded like you got some pretty strong momentum so maybe any insight into you know.

When you look at the actual business, you'll see that we've made great progress in migrating people into our wash club program.

Over 600000 folks in that program right now with an LTV lifetime value of $5 to one versus retail customers. So.

Well, what we should expect in the fourth quarter, even even by a segment basis. If there is any variation to think about and then secondarily just curious on the franchise pipeline is there any discernible impact from rising rates, there and maybe a franchisee urgency to open. Thank you.

I think we're very pleased with it we also have a broad base customer demographic, where we've got sort of.

The three tiers, they're sort of the lower the Midland the higher.

Okay.

Hey, Sharon I'll take the first question and then Jonathan I'll answer the second one.

We're starting to think about our guidance, we raised our guidance for the beat in Q3 right. So we raised our full year expectation by that Pete.

Okay. Thank you.

The next question is from Sharon Zackfia with William Blair. Your line is open.

We kept our expectations for Q4 unchanged and it is important to know we've absorbed about two $4 million of FX headwind in the second half and that's using a 930 spot rate for Q4. So.

Hi, Good morning, I guess first question for Tiffany there seems to be maybe some confusion on the context for about $2 billion. So if you could kind of clarify that.

So if I double click on that for just a minute. We started the year with adjusted EBITDA guidance of about 480 $465 million on the benefit year to date M&A net of any <unk> transaction is $24 million.

Specifically for the fourth quarter I think you can get to double digit full year comps on a positive comp in the fourth quarter, but it sounded like you got some pretty strong momentum so maybe any insight into.

<unk>.

What we should expect in the fourth quarter, even if even by segment basis. If there is any variation to think about and then secondarily just curious on the franchise pipeline is there any discernible impact from rising rates there.

So that means we expect to be our organic guidance for the year by $14 million.

We're really proud of the team, particularly given the operating environment, that's different from where we started the year.

The last thing I'll tell you relative to the confusion on the revenue guide is all of this is approximately right. So I think keep in mind that we're rounding and giving your approximate numbers as we guide at a high level.

Maybe a franchisee urgency to open thank you.

Okay.

Hey, Sharon I'll take the first question and then Jonathan I'll answer the second one.

You say you think about our guidance, we raised our guidance for the beat in Q3 right. So we've raised our full year expectation by that beat.

Hey, Sharon Jonathan I'll talk about the franchise pipeline and your question around discernible impact. The answer is categorically no I think the results and resiliency of our category continued to be become even more attractive for prospective franchisees and certainly if you look at our pipeline it continues to grow.

We kept our expectations for Q4 unchanged and it's important to note we've absorbed about two $4 million of FX headwind in the second half and half.

Using a 930 spot rate for Q4 so.

So if I double click on that for just a minute. We started the year with adjusted EBITDA guidance of about 480, and $465 million and the benefit year to date M&A net of any <unk> transaction is $24 million.

The biggest headache, we have right now is just making sure that we can open based on some of the resource issues in terms of local permitting and jurisdictions, making.

Making sure that all of the supply chain pieces are moving but there is zero discernible impact to our franchise pipeline our franchise energy around opening locations.

So that means we expect to be our organic guidance for the year by $14 million. So we're really proud of the team, particularly given the operating environment, that's different from where we started the year.

Thank you.

The next question is from Chris <unk> with Stifel. Your line is open.

The last thing I'll tell you relative to the confusion you note on the revenue guidance. All of this is approximately right. So I think keep in mind that we're rounding and giving your approximate numbers as we guide at a high level.

Thanks, Good morning, guys.

I was hoping you could provide some details around capex spending this year outside of acquisition spending and maybe just bucket the capex around unit development maintenance and peg or corporate and then do you have a target for this year as well and has the higher rate environment made generating positive free cash flow.

Hey, Sharon Jonathan I'll talk about the franchise pipeline and your question around discernible impact the answer is categorically no.

Think the results and resiliency of our category continue to be become even more attractive for prospective franchisees and certainly if you look at our pipeline. It continues to grow so the biggest headache. We have right now is just making sure that we can open based on some of the resource issues in terms of local permitting and.

Our priority for the company.

Hey, Chris Thanks for the question so quickly on our Capex guidance total capex for the full year is expected to be $400 million and you can split that between growth capex of $3 60, and maintenance capex of $40 million and that gross capex of three 360.

<unk>.

Making sure that all of the supply chain pieces are moving but there is zero discernible impact to our franchise pipeline our franchise energy around opening locations.

These include the Carwash rebranding that will be at half of the estate by the end of the year and it also includes some what I would call corporate projects such as this idea of unlocking the digital potential. So that's that's how you think about guidance for the year as we think about free cash flow.

Thank you.

The next question is from Chris <unk> with Stifel. Your line is open.

Thanks, Good morning, guys.

It's important to take a look at a couple of things one is it.

If you took cash from operation and protracted capex, there's sort of a traditional definition of free cash flow.

You would see contraction year over year, but I think when you think about us being an aggressive growth company and a tremendous opportunity.

Yeah.

And consolidated environment.

Our priority for the company.

Tracking out growth Capex, and then importantly, thinking about that $56 million success fee that we paid in the first quarter. When we acquired AGM you get to a what I would call an adjusted or normalized free cash flow level, but it's actually growing quite nicely. So the business. The punch line here is the business is incredibly strong it is incredibly resilient and we continue to be pleased.

Our performance.

<unk> include the Carwash rebranding so it will be at half of the estate by the end of this year and it also includes some what I would call corporate projects such as this.

Okay, great. Thank you.

Okay.

The next question is from Peter Keith with Piper Sandler Your line is open.

Unlocking the <unk>.

<unk> potential. So that's that's how you think about guidance for the year as we think about free cash flow.

Hey, good morning, everyone Nice results I wanted to dig in a little bit on the glass comments I.

I think a lot of investors are eager for you to open up that insurance opportunity.

I think it's important to take a look at a couple of things one is.

If you took cash from operation and subtract the Capex, there's sort of a traditional definition of free cash flow.

Probably double the Tam, but youre talking about Thats not until late 2023 early 2020 for I guess, what's the delay on on lining up the insurance contracts and on the calibration opportunity does that kind of come hand in hand, with insurance or calibration start to ramp earlier.

You would see contraction year over year, but I think when you think about us being an aggressive growth company and the tremendous opportunity in a in a.

Our growing and consolidating environment, attracting out growth capex and that importantly, thinking about that $56 million success fee that we paid in the first quarter. When we acquired AGM you get to a what I would call an adjusted or normalized free cash flow level, that's actually growing quite nicely. So the business. The punch line here is the business is incredibly strong.

Hey, Peter Jonathan.

Look we love this glass business right and then the space of less than 12 months, we have become the.

The second largest provider in the industry.

With multiple 100 locations multiple hundred mobile capabilities.

One is incredibly resilient and we continue to be pleased with our performance.

<unk> business is worth understanding is that there is.

Okay, great. Thank you.

From our view, there's at least three types of customers, there's what I would call retail non insurance customers commercial customers and then theres actually insurance customers. So those three categories and then theres two methods of delivery, they're sort of in shop in mobile so sitting here today, we're very much focused on the commercial customer.

Okay.

The next question is from Peter Keith with Piper Sandler Your line is open.

Hey, good morning, everyone Nice results I wanted to dig in a little bit on the glass comments I.

I think a lot of investors are eager for you to open up that insurance opportunity.

Probably double the Tam.

And the retail customer and as we build scale in our business.

But youre talking about Thats not until late 2023 early 2020 for I guess, what's the delay on lining up the insurance contracts and on the calibration opportunity does that kind of come hand in hand, with insurance or calibration start to ramp earlier.

That will allow us to leverage the amazing insurance partnerships that we have today through our collision business. So I think we are being.

Appropriately prudent in sort of the timing of unlocking that insurance opportunity. So I think that's just us being again appropriately prudent in terms of the calibration opportunity Peter.

Hey, Peter Jonathan.

Look we love this glass business right and then the space of less than 12 months, we have become the.

The second largest provider in the industry.

We are making sure that all of our stores have the calibration equipment in the training and the capabilities to offer calibration calibration really doesn't matter what type of customer it is.

With multiple 100 locations multiple hundred mobile capabilities.

<unk> business is worth understanding is that there is.

More and more vehicles vehicles require calibration will be capturing that opportunity. So I think those things are.

From our view, there's at least three types of customers there as well that would call retail non insurance customers or commercial customers and then there is actually insurance customers. So those are three categories and then theres two methods of delivery, they're sort of in shop on mobile so sitting here today, we're very much focused on the commercial customer.

Our separate in terms of the insurance opportunity, we will continue to grow our calibration opportunity in the meantime.

Okay. That's great. Thank you.

I also wanted to pivot over to labor. So we're just hearing about constant the labor constraints in the industry.

And the retail customer and as we build scale in our business.

And it seems like it's a bit of a structural problem as younger people just arent getting the proper training on an auto service repair.

That will allow us to leverage the amazing insurance partnerships that we have today through our collision business. So I think we are being.

Are your sight seeing any challenges with hiring and perhaps maybe your scale and ability to offer benefits is it offering you any advantages here.

Appropriately prudent in sort of the timing of unlocking that insurance opportunity. So I think that's just us being again appropriately prudent in terms of the calibration opportunity Peter.

Yes, Peter I mean, I think it's it's a it's a really interesting question first of all if you think about our large scale company assets within quick lube Carwash and glass, we don't require specialized labor right. So we don't need ASC certified technicians are mechanics, we have labor that can be trained in house.

We are making sure that all of our stores have the calibration equipment in the training and the capability to offer calibration calibration really doesn't matter what type of customer it is.

More and more vehicles vehicles require calibration will be capturing that opportunity. So I think those things are are are separate in terms of the insurance opportunity. We will continue to grow our calibration opportunity in the meantime.

To operate in those stores. So that's number one number two is on all of those three models I talked about our highly labor efficient we're talking about running these locations with 345 people. So we're not talking about 10 12 15 people. So that's the second thing as we've talked about in the past we do have people that want to work in automotive so it can be an attractive.

Okay. That's great. Thank you.

So I wanted to pivot over to labor. So we're just hearing about constant labor constraints in the industry.

Space versus some of the alternatives at the same sort of wage levels. We obviously offer offer I think very competitive benefits to our employees.

And it seems like it's a bit of a structural problem as younger people just arent getting the proper training on an auto service and repair.

Are your sight seeing any challenges with hiring and perhaps maybe your scale and ability to offer benefits is it offering you any advantages here.

And then I think what's really important is that we are in all three entities in our company glass Carwash and quickly we are growing and because were growing so much we offer great promotion and advancement opportunities for those employees that joined driven brands. So I think when you put all that together, we've got a really nice.

Yes, Peter I mean, I think it's it's a it's a really interesting question first of all if you think about our large scale company assets within quick Lubes car, Washington Glass, we don't require a specialized labor right. So we don't need ASC certified technicians are mechanics, we have labor that can be trained in house.

Sort of set of advantages in the in the labor model not denying that things are still tough, but I think we've got some structural advantages that are allowing us to continue to win.

To operate in those stores. So that's number one number two is on all of those three models I talked about our highly labor efficient we're talking about running these locations with 345 people. So we're not talking about 10 to 12 15 people. So that's the second thing as we've talked about in the past we do have people that want to work in automotive so it can be an attractive.

Okay. That's very helpful. Thank you and good luck.

Yeah.

The next question comes from Kate Mcshane with Goldman Sachs. Your line is open.

Hi, good morning, Thanks for taking our question.

Just back to the commercial uninsured opportunity I know.

You mentioned the commercial opportunity when we spoke with you last fall, but we were wondering if theres been a change in how big you are thinking this opportunity can be versus maybe what youre. Originally incorporated in your 2026 outlook.

Space versus some of the alternatives at the same sort of wage levels. We obviously offer offer I think very competitive benefits to our employees.

Hi, Kate.

I think its just highlighting how how big that opportunity is we're not going to set a frame exactly.

What percentage, but it continues to grow and has grown very nicely over the last sort of five to seven years and commercial customers are amazing right. So they have big books of business. They can be harder to win but but typically they are stickier customers because the friction cost of them changing.

Sort of set of advantages in the in the labor model not denying that things are still tough, but I think we've got some structural advantages that are allowing us to continue to win.

Okay. That's very helpful. Thank you and good luck.

Is quite high so and Youre seeing now the benefit of this.

Okay.

The next question comes from Kate Mcshane with Goldman Sachs. Your line is open.

Deep commercial customer expertise within driven we've talked about the massive partnership we have in the insurance space with our collision business, which we're now able to parlay that over into our glass business. So this just remains a very important part of driven both today and in the future.

Hi, good morning, Thanks for taking our question.

Just back to the commercial uninsured opportunity I know.

But I wouldn't sort of size that I would just say that our optimism.

Around this space is the same as when we talked about it before.

Hi, Kate.

Okay. Thank you and then a follow up question was just about the marketplace tests that you mentioned is there any.

Look I think it's just highlighting how how big that opportunity is we're not going to set a frame exactly as it was.

More detail that you can provide us about.

<unk> percentage, but it continues to grow and has grown very nicely over the last sort of five to seven years and commercial customers are amazing right. So they have big books of business. They can be harder to win but but typically they are stickier customers because the friction cost of them changing.

How the mechanics work and what you might be providing the franchisees that you didn't provide before.

Yes, I think it's.

The ultimate sort of transaction.

Flow is the same our franchisees will ultimately buy products or services through driven brands really what we're doing is providing a sort of a better more efficient more holistic platform for them to do that so you could think about.

Quite high so and Youre seeing now the benefit of this.

Deep commercial customer expertise within driven.

Amazon, which is probably the world's greatest marketplace on the planet not suggesting that we're becoming Amazon, but it's that technology, it's that central place. It's the ability to provide multiple options, which are best for the franchisees. It's a great place for vendors to be consolidated. So this is something that we've been working on for <unk>.

<unk> talked about the massive partnership we have in the insurance space with our collision business, which we're now able to parlay that over into our glass business. So this just remains a very important part of driven both today and in the future.

But I wouldn't sort of size it I would just say that our optimism.

Around this space is the same as when we talked about it before.

Right a while is as Stephanie mentioned, where I mentioned, we're going to be in test. This November and we're pretty excited about this is only going to accelerate deepen and widen so does the procurement offering for our franchisees and ultimately drive incremental profitability for both them and for driven so pretty excited about.

Okay. Thank you and then a follow up question was just about the marketplace test that you mentioned is there any.

More detail that you can provide us about.

How the mechanics work and what you might be providing the franchisees that you didn't provide before.

Yes, I think it's.

And we will certainly keep you updated next year as we get through the test and move into hopefully commercialization.

The ultimate sort of transaction.

Thank you.

The next question is from Justin Kleber with Baird. Your line is open.

Okay.

Hey, good morning, everyone. Thanks for taking the question.

Amazon, which is probably the world's greatest marketplace on the planet not suggesting that we're becoming Amazon, but it's that technology. It's the central place. It's the ability to provide multiple options, which are best for the franchisees. It's a great place for vendors to be consolidated. So this is something that we've been working on for quite a while.

Tiffany just a clarification on the guide you mentioned, leaving <unk> on changed a few times, obviously, you've done M&A during <unk>. So.

So if youre, leaving your <unk> guide unchanged doesn't that imply your organic assumption.

Assumptions have come down or is the M&A.

But you completed during <unk> not in the full year guide.

As Stephanie mentioned, where I mentioned, we're going to be in test. This November and we're pretty excited about this is only going to accelerate deepen and widen the procurement offering for our franchisees and ultimately drive incremental profitability for both them and for driven so pretty excited about it.

Yes.

Yeah, Justin Thanks for the opportunity to clarify so.

Any M&A that we've done through the third quarter and when we take that M&A, we take it net of <unk> because they go hand in hand.

Any year to date M&A is in the guide.

So the way that that breakdown is.

About $11 million of benefit expected in Q.

We'll certainly keep you updated next year as we get through the test and move into hopefully commercialization.

Thank you for that.

Thank you.

So again, if you look at our guidance. We said we started the year at 465, obviously, we beat the last three quarters, we've rolled in that M&A year to date.

The next question is from Justin Kleber with Baird. Your line is open.

Okay.

Yes, good morning, everyone. Thanks for taking the question.

And we've taken the offset from FX because of course FX is different now than it was at the end of the second quarter and all of that would suggest that for the full year, we expect to beat our organic guidance by $14 million.

Tiffany just a clarification on the guide you mentioned, leaving <unk> on changed a few times, obviously, you've done M&A during <unk>.

So if youre, leaving your <unk> guide unchanged doesn't that imply your organic assumptions.

Assumptions have come down or is the M&A.

Okay. That's helpful clarification. Thank you and then just a follow up somewhat unrelated on the car wash business. You mentioned in response to <unk> question promotions in the U S. Can you elaborate a bit more on that are you discounting.

You completed during <unk> not in the full year guide.

Yeah, Justin Thanks for the opportunity to clarify so.

Any M&A that we've done through the third quarter and when we take that M&A, we think it net of FB because they go hand in hand.

The membership program or what type of promotions were you alluding too. Thank you.

Yeah, Thanks, Justin look promotions or something that we do across all of driven brands right. So I don't want people to start thinking that Oh, my God, they're all of a sudden promoting because theres a little bit of softness. This is part of day to day consumer facing.

Any year to date M&A is in the guide.

So the way that that breakdown is.

About $11 million of.

Benefit expected in Q.

In Q4.

So again, if you look at our guidance. We said we started the year at 465, obviously, we beat the last three quarters, we've rolled in that M&A year to date.

Brand stewardship marketing and customer acquisition so.

This is something that we do across all of our businesses. We expect to continue to do it across all of our businesses. This is not a reaction to short term reaction. This is about customer acquisition building long term incremental customer counts and ultimately building more folks moving into our car wash membership program, which is now 600000.

And again, we talked about the lifetime value of being five to one. So this is very very normal practice for us across driven brands something that we've been doing very well for more than a decade. So I want you to think about it more about lifetime value value customer acquisition versus sort of a short term reaction to something that people may be reading into.

The membership program or what type of promotions were you alluding to you. Thank you.

Okay.

Got it makes sense. Thank you both.

Our final question is from Christopher <unk> with Jpmorgan. Your line is open.

Excellent. Thank you. So a couple of follow ups first on the Carwash business was there any disruption the comps in EBITDA for the modeling in the U S and the volume slowdown from a macro standpoint.

Brand stewardship marketing and customer acquisition. So this is something that we do across all of our businesses. We expect to continue to do it across all of our businesses. This is not a reaction to short term reaction. This is about customer acquisition building long term incremental customer counts and ultimately building more.

Get worse over the quarter and into the fourth quarter.

Hey, Chris.

De minimis impact in terms of the rebranding I mean sort of so small that we didn't even sort of split it out but definitely I would say de Minimis and then in terms of.

Folks moving into our car wash membership program, which is now 600000 and again, we've talked about the lifetime value of being 5% to one. So this is very very normal practice for us across driven brands something that we've been doing very well for more than a decade. So I want you to think about it more about lifetime value value customer acquisition.

In Q3 trajectory no we didn't see let's just say we didn't see a worsening of the comp profile within Carwash. So again I'd just reiterate carwash is an unbelievable business model with great unit level economics with double the size of the U S business and in two years since we've owned it and.

<unk> versus sort of a short term reaction to something that people may be reading into.

Okay.

Got it makes sense. Thank you both.

Our final question is from Christopher <unk> with Jpmorgan. Your line is open.

We've got a greenfield pipeline now of 250 stores, which is exactly the strategy that we laid out when we first talked about carwash M&A to start to build scale, a balance of M&A and Greenfield Greenfield in 2022, and the migrations are probably more greenfield in less M&A in 2023, So I think we've been very.

Excellent. Thank you. So a couple of follow ups first on the car wash business was there any disruption the comps an EBITDA figure of modeling in the U S and the volume slowdown from a macro standpoint did that get worse over the quarter and into the fourth quarter.

Consistent in terms of talking about the strategy and now executing that strategy.

Hey, Chris.

Got it and then a follow up on the M&A side, you mentioned, Jonathan that the deal pipeline remains robust can you talk about how returns are changing given the intercept intersection of multiple and funding costs.

De minimis impact in terms of the rebranding I mean sort of so small that we didn't even sort of split it out but definitely I would say de Minimis and then in terms of within Q3 trajectory no. We didn't see let's just say we didn't see a worsening of the comp profile within <unk>.

Yes.

Chris I think the question is probably more related to carwash. So.

But I'll sort of breakdown carwash and glass a little bit for you. So.

Car wash so again I'd just reiterate carwash is an unbelievable business model with great unit level economics, we've doubled the size of the U S business and.

In car wash this has sort of been a hot space, Chris you've written about it multiple times there are probably 20 institutional capital investors in this space right now and they're all chasing M&A because very few of them have greenfield capabilities like we do so we're not yet seeing multiple mark.

In two years since we've owned it and we've got a greenfield pipeline now of 250 stores, which is exactly the strategy that we laid out when we first talked about carwash M&A to start to build scale, a balance of M&A and Greenfield Greenfield in 2022, and the migration to probably more greenfield in less M&A in 2020.

Ration or multiple.

Multiples coming down in the car wash space.

So I do expect we will see that as you see the rising cost of debt.

Three so I think we've been very consistent in terms of talking about the strategy and now executing that strategy.

But we're not seeing that yet which is again why we're heavily focused on the greenfield side in the glass business, where we've obviously sort of running our playbook to build scale in the first year, we've done a handful of nice acquisitions. There I think the multiples are.

Certainly more moderated than the Carwash space simply because we don't have sort of the volume of institutional capital.

Yes, Chris I think the question is probably more related to carwash. So.

But I'll sort of breakdown carwash and glass a little bit for you. So.

In the glass space and quite frankly, when you look at the size of the opportunity. There you have to get into smaller deals very quickly, which is again sort of a core competency that driven brands was actually executed against for like the last decades. So that's sort of my comp.

Commentary on M&A.

And then I just had one quick follow up the recent.

So the recent glass deal with was that a franchise.

Ration or multiple multiples coming.

Coming down in the car wash space.

Acquisition, and how do you think about the balance of Greenfield versus acquisition and glass over the coming let's say 2023 sure yes, no. It wasn't franchise, Chris I don't know.

So I do expect we will see that as you see the rising cost of debt.

How about how that got out there, but no it wasn't franchise.

Again going back to the growth playbook right. So does the FERC cheer as building scale.

And we do that through a platform M&A and then bolt on M&A and as we look at 2023 and beyond I think youll see a migration towards greenfield growth within our glass space I'm, not saying, we will get rid of M&A. Obviously, we will remain active in that space, but youll see the shift to Greenfield, which I think will come through.

Certainly more moderated that the carwash space simply because we don't have sort of the volume of institutional capital.

In 2023 and 2024.

Great. Thanks, so much.

Okay.

I'll now turn the call back over to Mr. Fitzpatrick for any closing remarks.

And I would just add one quick follow up the recent.

Thank you all for joining today and for your time, we appreciate it on the back of our strong third quarter. We continue to have conviction around the strength of our business model and the continued momentum of our business. Our team is executing and we're successfully navigating the evolving market dynamics.

So the recent glass deal with was that a franchise acquisition and how do you think about the balance of Greenfield versus acquisition and glass over the coming let's say 2023.

Sure Yeah, no it wasn't franchise, Chris I don't know how.

The benefits of our scale and breadth of our offering deepen our competitive moat and differentiate our business, which is driving unit expansion same store sales growth and cost savings. Our results are a testament to the resiliency of this needs based service offering and our ability to drive sustainable growth and cash flow cash flow leveraging.

Is that how that got out there, but no it wasn't franchise.

Again going back to the growth playbook right. So to the first year is building scale.

Our proven playbook as always Investor relations with Christy Moser will be available after the call. If anyone has any further questions, but again. Thank you for your time this morning.

<unk> 2023 and 2024.

This concludes today's conference call you may now disconnect.

Great. Thanks, so much.

I'll now turn the call back over to Mr. Fitzpatrick for any closing remarks.

Yeah. Thank you all for joining today and for your time, we appreciate it on the back of our strong third quarter. We continue to have conviction around the strength of our business model and the continued momentum of our business. Our team is executing and we're successfully navigating the evolving market dynamics.

The benefits of our scale and breadth of our offerings deepen our competitive moat and differentiate our business, which is driving unit expansion same store sales growth and cost savings. Our results are a testament to the resiliency of this needs based service offering and our ability to drive sustainable growth and cash flow cash flow leveraging.

Our proven playbook as always Investor relations with Christy Moser will be available after the call. If anyone has any further questions, but again. Thank you for your time this morning.

This concludes today's conference call you may now disconnect.

[music].

Q3 2022 Driven Brands Holdings Inc Earnings Call

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