Q4 2022 Driven Brands Holdings Inc Earnings Call
Speaker 1: The.
Speaker 2: Good morning and welcome to Drummer Brands, fourth quarter and fiscal 2022 Ernie's conference call. My name is Rob and I will be your operator today. As a reminder, this call is being recorded. I would now like to turn the conference over to Christy Moser, Vice President of Investor Relations.
Speaker 3: Thanks very much and welcome everybody to Driven Brand's fourth quarter in fiscal 2022 earnings conference call. In addition to the earnings release, there is a leveraged ratio reconciliation and infographic available for download at our website at investorrelations. Drivenbrands.com.
Speaker 3: summarizing our fourth quarter results. On the call with me today, our Jonathan Fitzpatrick, President and Chief Executive Officer, and Tiffany Mason, Executive Vice President and Chief Financial Officer.
Speaker 3: In the moment, Jonathan and Tiffany will walk you through our financial and operating performance for the quarter and year. 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 recommendations to the most directly comparable gaps in the financial measures. Thank you.
Speaker 3: and the company's investor relations website, and it's filed with the Securities and Exchange Commission.
Speaker 3: Please advise 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 can cause actual results and events to differ materially from the results and events contemplated.
Speaker 3: by these forward-looking statements. These risks and uncertainties include those that 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 year-of and accepted required by law.
Speaker 3: We undertake no obligation to update or revise any of them, whether it is a result of new information, future events, or otherwise.
Speaker 3: Today's career remarks will be followed by a question and answer session. We kindly ask that you limit yourself to one question and one follow-up. With that, I'll now turn the call over to Jonathan.
Speaker 2: Thank you and good morning. 2022 was a year of record performance and significant strategic progress for Driven Browns. We deepened our competitive mode by expanding our network benefits and our differentiated offerings resonated with our customers.
Speaker 2: We are redefining the industry by embracing simplicity and a customer-first mindset, making car care faster, friendlier, and more convenient.
Speaker 2: We continue to gain significant share in this large, growing, and highly fragmented 350 billion automotive aftermarket category, leveraging our proven playbook to drive long-term sustainable growth.
Speaker 2: Since 2019, we've tripled our revenue and quadrupled our adjusted EBITDA, while significantly expanding our footprint.
Speaker 2: In 2022, we delivered results ahead of our guidance with 39% revenue growth supported by 14% same-store sales growth and 9% new store growth, which translated to 42% adjusted EBITDA growth.
Speaker 4: We continue to navigate a challenging macro environment.
Speaker 4: demonstrating our consistent execution and the resilience of our needs-based service offerings.
Speaker 4: That generated strong cash flow, which we used to reinvest in the business and gain further market share.
Speaker 4: Now all credit goes for our 11,000 driven brands team members, our amazing franchisees, and our loyal long-term customers.
Speaker 4: Our business remains resilient. Our team is executing and we continue to deliver strong growth on both the top and bottom line in the fourth quarter.
Speaker 4: including the seventh consecutive quarter of double digit same-store sales group.
Speaker 4: We entered the first quarter of 2023 with momentum and excellent visibility into our expense base.
Speaker 4: Our 2023 guidance released this morning reflects that momentum and our continued confidence in our diversified platform, the resilience of the automotive services category, and a strong track record of execution.
Speaker 4: We remain highly task flow generative.
Speaker 4: We remain highly cash flowed generative, creating capacity to reinvest in growth.
Speaker 4: Our pipeline of future openings continues to expand, giving line of sight into multi-year growth.
Speaker 4: And we have multiple levers to deliver that unit growth. Franchise, build or buy.
Speaker 4: The power bringing these businesses together on the driven platform is tangible.
Speaker 4: The diversification and the breadth of our offering provides significant benefits of scale, as well as a natural balance and additional resilience to our business.
Speaker 4: This diversification is complemented by the significant network benefits that our brands collectively create through scale and they carefully curated offering.
Speaker 4: The network benefits include driving more value for and sales for our commercial customers.
Speaker 4: Delivering revenue growth and cost savings from procurement.
Speaker 4: And unlocking the share of wallet benefits from the largest database in the category with 30 million unique customers.
Speaker 4: These network benefits continue to compound as we grow our diversified platform.
Speaker 4: And we look forward to sharing more on that at our upcoming analyst day in May.
Speaker 4: Our continued execution combined with the strength of our business model gives us confidence that we are on track to meet or exceed our Dream Big Plan of 850 million of adjusted EBITDA by the end of 2026.
Speaker 4: As our consolidated business drove strong performance and cash flow, we continue to make significant progress across our key growth categories. Quick-glue, car wash, and glass.
Speaker 4: leveraging our proven paper for growth.
Speaker 4: And from a customer perspective, our solutions oriented approach to simplifying and enhancing the experience is resonating across our growth segments.
Speaker 4: supporting our market share gains and strong unit level economics.
Speaker 4: Now starting with QuickLoop, take 5-oil change are differentiated 10-minute Stain-Your-Car QuickLoop model, continues to drive customer acquisition and besting category same-store sales.
Speaker 4: which further accelerated in the fourth quarter to over 25% driven by both ticket and traffic continuing to outpace the competition.
Speaker 4: As our unit count has grown, so has our unated brand awareness.
Speaker 4: Take 5 is now the second most recognized quick-loop brand in the US. Just 6 years after driven brands entered the category.
Speaker 4: As consumers become more aware, there is a faster, friendlier, and simpler alternative for their oil change. At a more cost-effective price than dealerships, we continue to gain market share.
Speaker 4: In addition to our strong same-store sales performance, we grew our footprint 20% year over year to 850 North American locations, including close to 250 franchise locations.
Speaker 4: Our pipeline has continued to expand to 950 units.
Speaker 4: Primarily made up of franchise locations.
Speaker 4: giving us a long runway for sustainable and predictable growth.
Speaker 4: And we're on track to grow our footprint by an additional 20% in 2023.
Speaker 4: Shifting to car wash, we are the largest provider of car wash services globally, with over 1,000 locations comprised of a single branded, more established international business.
Speaker 4: and what has quickly become the largest express car wash provider in the US with a growing footprint of almost 400 locations.
Speaker 4: The long-term opportunity within the car wash business remains compelling with strong profitability and cash-on-cash returns.
Speaker 4: As we cautioned last quarter, we continued to experience some headwinds in the fourth quarter related to foreign exchange and softer retail volume as a result of the macroeconomic environment that Tiffany will discuss shortly.
Speaker 4: Our scale and experience will remain a significant competitive advantage as the current environment is beginning to rationalize the competitive intensity of new entrants.
Speaker 4: Additionally, as we look to path cycles, the industry remained resilient relative to the broader retail industry.
Speaker 4: Our Greenfield pipeline for openings in the U.S. remains robust at over 250 locations.
Speaker 4: with roughly 65 expected to open in 2023, enabling us to be more selective with Tuckian M&A following our proven playbook for growth.
Speaker 4: As we migrate our footprint under the take 5 brand, which was approximately 50% complete as of year end, we are elevating our brand awareness, standardizing our market positioning, operations, system, and customer experience.
Speaker 4: This in turn allows us to integrate our tape 5 unlimited program and enhance our data capture capabilities.
Speaker 4: In fact, we drew our total wash club members to 675,000 subscriptions.
Speaker 4: By the end of the quarter, in aggregate, locations where rebranding was complete, delivered positive seamstor sales and mined single digit higher adjusted EBITDA margin than the locations yet to be rebranded.
Speaker 4: If you combine our 850 quick-loop locations with our nearly 400 car wash locations that will soon operate entirely under the T5 brand and include growth plan for 2023, we will have over 1400 T5 branded locations.
Speaker 4: We remain bullish around the long-term synergies of leveraging one brand across two great businesses.
Speaker 4: Now wrapping up with glass.
Speaker 4: In the fourth quarter, we continue to enhance our position as the second largest player in the highly fragmented $5 billion US Auto Glass servicing category.
Speaker 4: Ending the year with over 188 locations and over 800 mobile units in the United States.
Speaker 4: And we're following the same growth playbook that we used in QuickLoop and Car Wash.
Speaker 4: We are now shifting towards smaller tuck-in acquisitions and green-vealed mobile and store openings.
Speaker 4: which have the best cash-on-cash returns in our portfolio, given the compelling unit level economics. In addition to strong unit growth, store volumes continue to increase as we begin to see the early benefits from our implementation of calibration services and expanding our commercial relationships. And as we migrate our footprint under AutoGlass now,
Speaker 4: That not only strengthens our brand recognition with consumers, it also upgrades our systems and standardizes our operating procedures that enables us to further capture commercial
Speaker 4: We expect to continue to grow commercial volume at our location through the year with the addition of fleet and regional insurers in the short term and large national insurers in late 2023 and 2024.
Speaker 4: The benefits of scale from further growth and the increasing commercial business as we mature our footprint over the next year will provide a tailwind to the already compelling economics.
Speaker 4: And with a current footprint that covers approximately 20% of US consumers today, there remains significant white space for continued expansion over the next several years.
Speaker 4: We couldn't be more excited about the long-term potential of the glass business. Now looking across driven brands, our robust development pipeline has continued to grow to over 1,600 locations, which are approximately 35% site secured or better, giving a strong visibility interface.
Speaker 4: sustainable, predictable, unit growth over the next few years. Within this large and highly-priced into category, there remains significant white space, creating a long runway for unit growth, same-store sales growth, and market expansion in the future.
Speaker 4: And we believe there is no one better position to capitalize on that opportunity than driven brands.
Speaker 4: Beyond the breadth and strength of our brands, our scale and our shared service capabilities create significant network benefits.
Speaker 4: that deepen our competitive mode and differentiate our business.
Speaker 4: Further enabling unit growth in incremental store profits, same store sales growth and cost savings.
Speaker 4: We continue to leverage data, technology and scale.
Speaker 4: Over time, these network benefits will include simplifying car care and rewarding our customers.
Speaker 4: so they can focus on the road ahead.
Speaker 4: So let's talk about some of these network benefits.
Speaker 4: Beginning with commercial business, our B2B sales continue to represent approximately half of our system-wide sales, including the top 20 insurance carriers, regional and local insurance carriers, and a large and growing fleet business.
Speaker 4: Creating an additional layer of resilience to our business.
Speaker 4: Within our collision business, our B2B volume for the top 10 carriers was up 38% in Q4, and our estimates are up high single digits from the start of the year.
Speaker 4: Our expanding relationship with our insurance partners continue to give us confidence in glass.
Speaker 4: Continuing to expand our offering with P2B partners, including fleet and insurance, will remain a major focus for Driven Brands in 2023 across all of our segments.
Speaker 4: a tailwind to same-store sales. Now shifting to procurement.
Speaker 4: We continue to generate network benefits from our centralized procurement function.
Speaker 4: This helps to optimize input costs and keeps our stores in stock, which will continue to be a differentiator for driven brands even if the market begins to stabilize.
Speaker 4: In 2022, procurement contributed approximately 45 million of adjusted EBITDA, up 43% year over year.
Speaker 4: And we recently launched the pilot of our new marketplace.
Speaker 4: branded driven advantage.
Speaker 4: which will begin to roll out over the course of 2023.
Speaker 4: It's still early days, but the 65 location test is performing in line with our expectations.
Speaker 4: In addition to being a great growth driver for driven brands, we continue to believe it will provide significant value to our franchisees. Giving franchisees buying through driven brands the opportunity to save tens of thousands of dollars annually per location.
Speaker 4: By expanding our offering from 10,000 SKUs to over 160,000 SKUs, value to our vendor partners by driving volume through a one-stop shop, and value to driven brands providing cost savings and revenue generation without a material impact to working capital.
Speaker 4: We will continue to learn and validate our assumptions as we complete our test over the first quarter.
Speaker 4: We continue to be excited by the potential for it to generate meaningful revenue and even their growth for driven over time. And now, turning to share of wallet. Another component of leveraging our network benefits is to unlock the power of our data ecosystem.
Speaker 4: that is generated from all our brands to grow wallet share. This is a strategic priority for our business.
Speaker 4: Underpin by one of the most robust databases in the category with more than 30 million unique customers which has grown by 25% year-over-year. We are driving tangible results today through direct-to-consumer marketing which contributed to over 80 million in revenue.
Speaker 4: which equates to 4% of total revenue or 8% of consumer revenue in 2022. We're integrating our differentiated quick-loop and car wash services under the T5 brand.
Speaker 4: Bringing brand awareness to our carwash business and serving as a low-cost customer acquisition point for quick-loop.
Speaker 4: We're only beginning to scratch the surface of the long-term potential to drive customer acquisition, retention, and share of wallet across our platform, which will be a focus for us in 2023.
Speaker 4: Now bringing all that together, the power of our growing scale and network benefits will enable continued future growth and market share gains in this highly fragmented needs-based industry.
Speaker 4: And we are still in the early innings of these capabilities with a long-run way of incremental value, volume, and profitability benefits to the business, giving us further confidence in our ability to deliver on our short, medium, and long-term goals.
Speaker 4: On the back of a strong 2022, momentum has continued in the first quarter.
Speaker 4: We are growing, taking share and generating cash, which we are reinvesting into the flywheel of growth.
Speaker 4: Our scale gives us a competitive and compounding advantage.
Speaker 4: We have a proven playbook and multi-year visibility into unique growth that gives us confidence in the significant opportunities ahead of us.
Speaker 4: Our green-big plan of at least $850 million of adjusted EBITDA by the end of 2026 remains very much on track and we're confident in our ability to beat it.
Speaker 4: Now with that, let me turn it over to Tiffany for a deeper dive into the Q4 full year 2022 financials and 2023 guidance. Tiffany.
Speaker 3: Thanks Jonathan and good morning everyone. Driven Brandt has delivered another strong print in 2022. In fact, we ended the year 10% ahead of our original adjusted EBITDA guidance.
Speaker 3: Our team executed well, delivering best-in-class needs-based services to both consumer and commercial customers.
Speaker 3: We continue to build on our strong track record of organic and inorganic growth. As Jonathan mentioned earlier, since 2019, we have tripled revenue growing at a 50% Kager and quadrupled adjusted EBITDA growing at a 63% Kager.
Speaker 3: Our business continues to be incredibly resilient, and the fourth quarter unfolded much like we anticipated.
Speaker 3: We have entered 2023 with strength, delivering same-store sales and unit growth in this resilient category as we execute on behalf of our customers. Let me begin with the highlights of the full year.
Speaker 3: Systemwide sales will $5.6 billion, up 24% versus prior year.
Speaker 3: The growth was driven by both the addition of 393 met new stores and 14% same-store sales growth.
Speaker 3: We continue to benefit from market share gains, the increasing complexity of vehicles.
Speaker 3: and retail pricing actions to offset the cost of inflation. When you account for our franchise mix, a reported revenue for the year was $2 billion, an increase of 39%.
Speaker 3: From an expense perspective, we continue to carefully manage right mobile expenses across the portfolio. In fact, prudent expense management, together with the strong sales volume, drove 4-Wall margin of 39% at company operated stores.
Speaker 3: And above shop, SGMA is a percentage of revenue with 20% for the year, improving 129 basis points largely driven by leverage on our growth.
Speaker 3: This resulted in an adjusted EBITDA of $514 million per year and increased the 42%.
Speaker 3: Adjusted even to margin with 25%.
Speaker 3: adjusted E.D.R. margin was 25 percent. 62 basis points ahead of the prior year.
Speaker 3: Pulling that together, we delivered adjusted met income of $208 million and adjusted EPS of $1.22, which were up 41% and 39% year-to-year respectively.
Speaker 3: The 53rd week in fiscal 2022 contributed $25 million of revenue, $6 million of adjusted EBITDA, and two cents of adjusted EPS to their results.
Speaker 3: You can find the reconciliation of adjusted net income, adjusted EPS, and adjusted EBITDA in today's release. Our strong performance during the year resulted in significant cash generation that allowed us to continue to invest in the business.
Speaker 3: In 2022, we delivered $197 million of cash flow from operation.
Speaker 3: While cash flow generation remains strong on an absolute basis, it decreased approximately 87 million dollars from the prior year, primarily due to the one-time 56 million dollar success fee related to the AGM acquisition paid in the first quarter and higher interest expense year-over-year.
Speaker 3: That cash generation, together with our revolving credit facilities and our real estate portfolio, provide us more than enough capital to fuel our strategic grotesque plans in 2023.
Speaker 3: Our number one priority continues to be investing in the business, given the strong return profile, and this highly fragmented $350 billion category.
Speaker 3: In fact, we ended the year with $618 million of liquidity comprised of $227 million in cash and cash of the blunt and $391 million of undrone capacity on our revolving credit facilities. This does not include the additional $135 million of variable funding that is issued in the fiscal explorer.
Speaker 3: which can be exercised at the company's discretion, assuming certain conditions continue to be met. At the end of the year, a net leverage ratio was 4.5 times.
Speaker 3: You can find a reconciliation of our net leverage ratio, post them on our investor relations website.
Speaker 3: Now, double-clicking on our fourth quarter results. SystemLide sales for $1.5 billion, up 24% versus prior year.
Speaker 3: from which we generated $540 million of revenue up 38% versus prior year. Systemwide sales growth in the quarter was driven by the addition of 98 net news stores.
Speaker 3: and 11% same store sales growth. From an expense perspective, we drove four-wall margin of 37% at company operated stores. And above shop, S-GNA as a percentage of revenue was 21% for the quarter, increasing 172 basis points from the prior year driven by two items.
Speaker 3: First, a $15 million trip related to the tax receivable agreement that we entered into at the IPO as a result of filing our 2021 tax returns.
Speaker 3: Second, $7 million of incremental equity-based compensation expense based on outperformance on the earlier grant and layering in another annual grant.
Speaker 3: These items, both of which are adjustments to EBITDA, will partially offset by leverage on our growth. Adjust the EBITDA with $130 million for the quarter, and increase the 50th new percent from the prior year.
Speaker 3: adjusted EBITDA margin was 24 percent up to 150 basis points from the sports quarter of 2021.
Speaker 3: Depreciation and an amortization expense with $40 million.
Speaker 3: This $5 million increase versus the prior year was attributable to the growth in company operated stores.
Speaker 3: Interest expense was $35 million. This $12 million increase versus the prior year was primarily attributable to increased debt levels as we lean into opportunities across our quickly car wash and glass business.
Speaker 3: And the adjustment in mid-December of our floating rate term loan debt from an initial 12 month labor of 50 basis points plus a 300 basis point spread.
Speaker 3: to a three-month live war of 474 basis points plus a 300 basis point spread.
Speaker 3: Our 38% effective tax rate in the quarter was elevated as the result of a change in our tax strategy.
Speaker 3: The change allows us to optimize the NOLs that we can recognize in the US, providing cash tax savings going forward, despite the one-time rate impact in the quarter.
Speaker 3: For the fourth quarter, we delivered adjusted net income of $42 million and adjusted EPS of 25 cents, which were up 35% and 39% year-over-year respectively.
Speaker 3: Now, a bit more color on our fourth quarter results by segment. The maintenance segment posted positive things to our sales of 16%.
Speaker 3: Take 5th quick move continues to benefit from enhancements to targeted digital marketing driving increased car count. And we've successfully passed along retail price increases.
Speaker 3: while maintaining our premium oil mix year-over-year driving an increase in average ticket. The attachment rate of ancillary products such as engine air filters, wiper blades, cabin air filters, and corn exchange remains strong at nearly 40 percent, also contributing to a higher average ticket.
Speaker 3: Despite retail price increases over the past 24 months, our net promoters will remain stable, while repeat rates have increased 5% year-to-year.
Speaker 3: The expansion and segment adjusted EVETA margin year-over-year is primarily the result of lapping higher alternative supply costs incurred in 2021 to mitigate oil supply shortages.
Speaker 3: The car wash segment posted negative things were sales of 10%. Foreign exchange rate movement continued to have an outside negative impact versus the prior year of roughly 400 basis points. In the U.S., we are evolving to a single brand and operating standards. We had approximately 50% of our car wash business operating under the take 5 banner.
Speaker 3: as of the end of the year, which are outpouristling the footprint yet to be rebranded as Jonathan mentioned earlier.
Speaker 3: We are on track to rebrand the rest of the estate at the end of fiscal 2023.
Speaker 3: So retail volume was soft again this quarter. We continue to drive mixed shifts to higher dollar washes and grow our subscription program.
Speaker 3: We now have over 675,000 take five unlimited subscriptions in total, and the retention rate has remained steady. 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 brands.
Speaker 3: The compounding effect of a five-time tire LTV from take five unlimited members versus retail customers is compelling. Software retail traffic is the primary driver of the segment adjusted ebic and margin decline year over year.
Speaker 3: The paid collision and glass segment posted positive things to our sales of 14%. We are excited about the significant expansion of our glass offering in the US after entering the market just 14 months ago. Glass repair complexity is increasing due to the need for calibration of the windshield camera associated with the advanced driver assistance systems that govern a vehicle safety features.
Speaker 3: As these features grow as the proportion of the car park and as our mix of commercial customers increase, we expect to see a tailwind to those ticket and margin.
Speaker 3: Also, the recovery in the collision business continues. In fact, estimate counts for the industry continue to grow, and our shops have consistently outpaced the industry.
Speaker 3: We added 229 direct-to-a-paraprograms with insurance carriers in the fourth quarter.
Speaker 3: Our expanding commercial partnerships are a testament to our strength and scale. And the ease of working with one large national provider is a clear difference year for driven grants. The decline in setting adjusted margin year over year is the result of the build-up of our new U.S. class business. This business has scaled rapidly and we're investing to support future growth.
Speaker 3: While that pressures margins today, we expect to expand glass margins as we increase the mix of commercial customers and the penetration of calibration services. And finally, the platform service segment posted positive things or sales of 4%.
Speaker 3: We have leveraged our scale and leadership in the industry to ensure our franchisees are consistently in stock despite supply chain disruption.
Speaker 3: creating long-term customer loyalty for the 1-800-gradier brand.
Speaker 3: While we continue to benefit from the customers we acquired as a result of the supply chain disruption, average fell in prices year over year have begun to normalize. Looking ahead at fiscal 2023, we remain well positioned.
Speaker 3: Our team is executing well, and the category is proving its resilience versus other categories in retail.
Speaker 3: Vehicle miles traveled were up approximately 1% in 2022, and the forecast for 2023 is for a VMT to grow 3-4%.
Speaker 3: We serve those consumer and commercial customers and our services are diverse and needs-based.
Speaker 3: This allows us to better withstand any volatility that comes with changes in the economic environment.
Speaker 3: Our scale and sophistication provide us a competitive advantage as we continue to navigate the environment.
Speaker 3: And finally, our proven Facebook's progress is delivering across our key growth areas. As a result of our continued strong performance in 2022 and the momentum with which we have entered 2023, in our earnings release this morning we proudly issued our fiscal 2023 guide.
Speaker 3: In 2023, we expect to deliver revenue of approximately $2.35 billion.
Speaker 3: driven by 5 to 7% fainter sales growth and net store growth of approximately 365 units. This is organic growth. We have not included future M&A in our guidance. We expected just at EBITDA of approximately $590 million. Adjust at EBITDA margin is expected to remain stable at approximately 25%.
Speaker 3: And we expect adjusted EPS to the approximately $1.21 based on 167 million weighted average shares outstanding.
Speaker 3: As you update your model, it will be helpful to have a few other data points. First, equity-based compensation expense is expected to be approximately $26 million as you layer on the third annual grant post-IPO.
Speaker 3: Second, we anticipate depreciation and amortization expense of approximately $180 million as a result of Newstore growth.
Speaker 3: Third, interest expense is expected to be approximately $150 million as a result of our recent capital raised and the rate adjustment of our floating rate term owned it.
Speaker 3: The term loan is our only loading rate debt instrument outside of our resolve and credit facilities. And finally, our effective tax rate is expected to be approximately 30%.
Speaker 3: We expect to deliver approximately $300 million of cash flows from operation.
Speaker 3: A 64% kegge since 2019. Gross capital expenditures are expected to be approximately $470 million, as we follow our playbooks for growth in glass and car wash, shifting our focus to more organic growth, complemented by selective and opportunistic token MLA. That type of x is expected to be partially offset by approximately $270 million.
Speaker 3: adjusted even though we expect to naturally do leverage.
Speaker 3: With regards to how we expect the year to unfold, we anticipate a fairly tight range of same-door failed performance across the quarters, with only about a two-point range between the high and the low. We expect a just-of-eat-a-gun margin range to be the lowest in the first quarter.
Speaker 3: likely 300 basis points lower than the rate for the full year, as a result of the timing of our car wash rebranding activity as well as the integration of recent acquisitions in our US class business. In closing, delivering $590 million with just the EBITDA offers fiscal 2023 will be an increase of 15% over fiscal 2022.
Speaker 3: a great milestone on the path to at least $850 million by the end of 2026. We expect this differentiated portfolio to continue to deliver strong results outperforming the market. We are focused on our proven formula, with the platform that is scaled and diversified. Our formula is simple. We add new stores, we grow same-store sales, and we deliver stable margins.
Speaker 2: This results in significant cash flow generation that we reinvest in the business. 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.
Speaker 2: We ask you please limit yourself to one question and one follow up. Your first question comes from a line of Simeon Goutman from Morgan Stanley . Your line is open. Good morning everyone. My first question is on Car Wash. Can you talk about the Compar the Forecast for 23 and if you share anything on US first is abroad.
Speaker 2: And just thinking about it, why should it get any better than the current run rate other than the compares, and then if you could talk about any of the take five branded, it looks like you have critical mass, curious why it doesn't look like what. They probably are driving improvement, but why haven't they been enough to reshape the comp? D art and experience.
Speaker 3: Okay, so I mean, thanks for the question and good morning. Let me start and then I'll have Jonathan add on some color around the rebrand. So, you know, obviously we don't guide the specific segments. So there's no specific segment guidance in the outlook this morning for 2023. With regard to car wash, though, I'll give you some qualitative commentary. First, I'd say.
Speaker 3: But in the second half, we start to lap some pretty significant effects headwind. And we also will have completed our car wash rebranding exercise, which was the second part of your question. And we continue to see those rebranded stores outpaced those that have not been rebranded.
Speaker 4: Jonathan, anything additional you want to add there? Yeah, good morning, Simian. Look, over the long run, this is a fantastic business and the return profile continues to be incredibly compelling. We are positioning this business with a value proposition of fast, friendly and convenient, which has resonated very, very well with our take-five quick-loop business.
Speaker 4: We're growing our target customers in subscription, which has a 5X higher LTV. And while there's some short-term pressures in the macro environment, that doesn't change our any of our long-term expectations for returns. So look, the other thing I'd add, Simeon, is one of the great things about driven brands is our diversified portfolio across a needs-based industry, and that enables us to possibly not have all businesses firing at all cylinders.
Speaker 3: but still deliver phenomenal consolidated results at the driven level. Okay, and then one last point there. You asked about the rebrand. The other thing I'd share there is while we have 50% of our fleet rebranded at the end of the year, there was a significant portion of that activity that happened in late 2, 3, and into Q4. So we're at 50% when we snapped the line at the end of the year.
Speaker 2: the use car, I don't know what you would call it, the wave that occurred over the last couple of years. Any insight into that cycle? Is it abating? Is it at the top? Is it in, you know, what ending could that be in? And how much, you know, how much could that drive the maintenance business over the next 12 to 18 months? Yeah, look, we think sort of the new and used car environment is a natural tailwind for credit for that question, really. You too. You get connected with your conduct, with your
Speaker 4: is holding on to their vehicles and those older vehicles longer, which naturally sort of drives them into incremental repair and maintenance and more premium products such as high mileage oil. So we see this as a net tailwind for the foreseeable future.
Speaker 2: Thanks, good luck, take care. Your next question comes from a line of to a segment from Barclays. Your line is open.
Speaker 5: Hey everybody nice to talk to you guys and congrats on the quarter. So I just wanted to touch on the Comp Outlook first. So you're guiding 5 to 7% comps which is still above the long term targets that you've had. Can you just discuss some of the assumptions across business lines and then maybe comment specifically on the cadence that last comment around the range being tight.
Speaker 5: It seems to imply every quarter around five to seven, but I think there's also comments that momentum into Q1 was very strong. He just did an 11% comp, so just trying to reconcile that a little bit too.
Speaker 3: Hey, thanks for the question, and I appreciate your sentiment this morning. So let me first just start with the macro backdrop with which we've planned 2023. A couple of qualitative points there. We'll continue to see inflation, though we think inflation will be more modest. We'll moderate over the course of 2023.
Speaker 3: growth and 15% adjusted EBITDA growth. So obviously we believe we're going to continue to execute well in what is the needs-based industry. To the point about Cadence, so the comments in my script this morning fairly tight range around same-store sales performance across the quarters, and you're right, only about a 2% range between the high and the low. So it's tight over the course of the year for all the reasons I just mentioned in the macro backdrop.
Speaker 5: around the EBITDA margin guidance or what's embedded in the guidance around 25%, which is pretty consistent with where you've been historically, but on that stronger 5% to 7% comp, I'm just curious, is there anything specific that holds the flow through back? Is that just a business mix dynamic or their cost pressure? How should we be thinking about that?
Speaker 3: Yeah, that's great. So let me first put it into perspective. Our margin is already very strong at 25%. And our 2023 guidance reflects, again, about a 15% increase in EBITDA dollars at that same stable margin of 25%. Now we've expanded margin each year since we went public, even with significant macro challenges like supply, chain disruption, and inflation. I'd also suggest you remember that we lack the anniversary of our AGM acquisition and our glass.
Speaker 3: that continues to perform really, really well.
Speaker 6: Okay, great. Thank you for all that.
Speaker 4: Your next question comes from a line of Christopher Horvers from J.P. Morgan. Your line is open.
Speaker 7: Thanks and good morning. So my first question is, and they help us think about how much Iveda was acquired in the fourth quarter, and then in 2023 and totality, how much of the Iveda does, it simply carry over from M&A during 2022. Sure, Chris, good morning.
Speaker 3: So I'm going to speak to 2022 in total. So we recognize about $34 million of acquired ebbs off from the acquisitions that we did over the course of the year. That's inclusive of both the AGM transaction as well as the rest of the glass tuck-in and it's net of SLB. If you, so one I think really important point to to.
Speaker 7: account in our guidance. Understood. And then you are stepping up the unit growth pretty much across every segment, including the car wash business. Jonathan, you mentioned things coming down on the car wash side. But I guess more broadly, can you talk about?
Speaker 7: What opportunities you're seeing out there are these all new store opens into what extent is it sort of brownfield type locations and then longer term. How does this affect your longer view of how many stores and units that you could add over.
Speaker 4: across all segments. Yeah, good morning, Chris. Thanks. Look, on the Greenfield pipeline, there's a really core set of skills and competencies required to develop the pipeline that we have today across both our company and franchise businesses.
Speaker 4: Our pipeline is over 1,600 units and we mentioned over 250 for car wash with a site-secure to better at about 35%. So we see this greenfield, both company and franchise continuing to grow and deliver amazing new stores for the next decade. So we've got...
Speaker 4: really high degree of optimism around those stores coming online. And these are truly greenfield stores where our teams are finding real estate and then we're building the stores and opening up those new units. And the reason that expands is because the underlying unit level economics are so attractive. Number two in terms of overall white space, we've talked about the ability for driven over time to get to 12,000 units. Chris.
Speaker 4: No, look again, you know, we can't deliver this without an incredible team who built this pipeline. So as the pipeline continues to build, we would expect that sort of this rate of unit growth would minimally be sort of the new standard and hopefully expand over time.
Speaker 5: Excellent. Thanks so much. Your next question comes from a line of care and short from Credit Suisse. Your line is open.
Speaker 3: Hi, thanks very much. I'm wondering a couple things. Can you just clarify exactly what you think the interest or the inflation rate will be for 23 and then what exactly it was in 4Q? All right, Karen, good morning. So in terms of what we've seen in
Speaker 3: in 2023, but something in the single-digit range. Okay. And then maybe just a little color in terms of your appetite for M&A. Obviously, you don't guide to anything, including M&A, but maybe talk about your outlook and prospects on the M&A front, but also just triangulating that in the context of leverage because obviously, you know, the scenario has changed a little bit in terms of...
Speaker 4: appetite for higher-leathered companies. So, wondering if you could just maybe talk a little bit about that. Sure. Hi, Karen. Jonathan here. Look, the M&A environment is one of our levers to grow our businesses. And as we've outlined with our quick-loop, our car wash, and our glass business, we use M&A at the start to build platforms.
Speaker 4: and then ultimately migrate to sort of more greenfield growth. We've done that with Quick Loop. We're now doing it with Car Wash. Let me expect to continue to do that with Glass. That being said, M&A has been an important part of driven story for the last decade. And we have a phenomenal M&A team. And we'll continue to look at all the M&A opportunities that cross our desks here at Driven. In terms of specifically what's happening in the markets, we're definitely seeing some moderation in the...
Speaker 4: we did a phenomenal job in 2022 building out that platform from zero to becoming the second largest player in the United States. And then, you know, as mentioned in my scripted remarks, we'll continue to do some small tuck-in acquisitions in glass, but again, moving towards our proven growth playbook of Greenfield Growth and Quick Loop really has been both a...
Speaker 4: Greenfield company and franchise growth story for the last number of years. So that's how we think about M&A.
Speaker 3: and just appetite on leverage update. Yeah, Karen, I'm happy to take that one. So, Jonathan, I laid out the plan, sort of vertical by vertical as you think about our playbook for growth and shifting from M&A, predominantly M&A into greenfield. So obviously we remain committed to our long-term growth strategy and the capital that we're deploying we're deploying into assets that are generating in excess of 40% return.
Speaker 3: And of course, as you know, our business generates really healthy cash flow, and we've guided just $300 million of operating cash flow in fiscal 23 with a net cap-expectation of 220. So we have more than enough capital to fund our growth plans in 2023. We don't expect to go back to the debt capital markets for incremental financing.
Speaker 3: We ended the year at 4.5 times levered and with our growth in EBITDA that we're projecting for 2023, we expect to naturally deliver it below that point.
Speaker 4: Great, thanks very much. Your next question comes from the line of Liz Suzuki from Bank of America. Your line is open. Thank you very much.
Speaker 3: Great, thank you. You talked about the network benefits and unlocking share of wallet. Do you have any stats just about the percentage of your customers that visit more than one of your brands in a given year? Do car wash customers also go to my Nikki for service? What do those early learnings of the take five co-branding tell you about the opportunity to convert car wash customers into multi-channel customers? Hey Liz, Jonathan here. Thanks for the question and look what we're seeing.
Speaker 4: services that we operate or offer to our customers. So that's number one. It's really making sure that anyone who does business with us understands there's a suite of automotive aftermarket services that are provided under the driven brands umbrella. The second is to lean into loyalty and rewards at a driven level. And we're excited about what that could look like.
Speaker 4: and in 2023 and beyond. So we think there is a massive incremental opportunity for any customer that comes through any of our brands to sort of understand and take advantage of the rest of our services in the network. So that is something we're super excited about and we'll talk about in a lot more detail at our analyst day in May. Great, yeah, look forward to hearing that. Just a quick follow-up kind of thinking about the evolution of your.
Speaker 4: to potentially expand into to increase your touch points. There's great question, big question. And what I would say is that we're always thinking about how we can add more value to our customers, whether that's incremental services with our existing businesses or potentially new service categories. So if you look at the last two and a half years of driven brands, we enter the car wash space, which is a phenomenal business.
Speaker 4: last year we entered the glass space. So, you know, we will continue to look at, is there obvious large addressable markets within automotive aftermarket that were not in, and think about whether that's the right fit for driven going forward. But I think the last two and a half years have proven that we think about that strategically, both in terms of customers.
Speaker 7: and the sort of the changing landscape within the automotive aftermarket service. Great, thank you. Your next question comes from a line of Crystal call from Steeple. Your line is open. Great, good morning. Thanks, guys. This is Patrick on for Chris. Jonathan, I know you originally indicated in your $850 million EBIT dot target that at least $250 million would come from M&A, but...
Speaker 7: You know, this is a follow up to that earlier question. Can you frame up where you are today relative to that target, maybe on a full year run rate basis based on what you've acquired so far, where you believe you are? And then is that 250 million still the right number or has the mixed change given the strength and the underlying organic growth and, you know, based on where the opportunities that you see today as you look forward? Yeah, thanks Patrick, good morning. What I would tell you is our model that we shared in November of 2021.
Speaker 4: showed that over five years you should model $250 million of acquired EBITDA. On any individual year that we acquire EBITDA, it'll then sort of roll into the sort of the legacy or the organic growing business and then convert at sort of a 10% growth rate after you're one of acquisition. So that $250 million cumulative number is still a good number to use in your models. As of end of 2022.
Speaker 4: We're about a little over $100 million of M&A, which has already included in the driven story. And I think that it's safe to assume that there could be another 100 plus million of acquired EBITDA in the plan over the next three, four years as we build towards the 850. Very importantly, Patrick, like we've always said, we are extremely confident in our ability to beat, minimally to meet, but typically to beat that 850 target by the end of 2026.
Speaker 7: Great, that's helpful. And then I know you guys have mentioned the pasture testing several co-located sites between take 5, quickly and take 5 car wash. And just with a little bit of aging on those tests, I mean, I'm presuming that the thesis is that higher car counts and more frequent car counts in the car wash side would help the ramp up of new, quickly units that were located next to them. But just curious if you could provide an update there and...
Speaker 4: if you've seen that pan out and if it's what you're seeing as you actually ramp up some of these locations. Yeah, good question Patrick and I think we've opened you know about 10 to 15 of these stores you know primarily in 2023 so we're very happy with sort of the you know meeting the underwriting thesis both in terms of efficient use of real estate synergies with construction and then obviously ultimately.
Speaker 4: you know, getting those customers to trade between those two assets on that one location. That is part of a broader strategy Patrick, which you'll see with the take five, you know, branding, which is to have, as I mentioned at the end of this year, about 1400 locations in North America, which will operate under the take five brand name. And that, along with the co-developed locations, will enable us to cross brand, cross promote and capitalize on those.
Speaker 4: those two great businesses and make sure that we're moving and shifting customers from one of those businesses to the other. So I would say we're very pleased with this sort of 10 to 15 stores that have opened, but it really is part of this bigger take 5 branding strategy.
Speaker 5: Great, thanks, guys. Your next question comes from a line of Sharon Zaxia from William Blair. Your line is open. Thank you.
Speaker 3: Hi, good morning. My cell did cut out, so I apologize to someone asked this, but I was really curious about the commercial opportunity in glass. How material do you think that could be over time? And then secondarily, just any color on...
Speaker 3: within this segment. To be how you expect, I know you said two points of bandwidth for overall comps, but are there any segment thought possibilities that we should think about for comps, particularly as inflation might roll off as some of the segments?
Speaker 4: Good morning, Sharon. I'll take the first part which is sort of the commercial opportunity in glass. And I think it's important to understand this. There's multiple levers in the glass business which we see as really nice opportunities. The first is the calibration services that Tiffany talked about today. That need for calibration in glass replacement and repair is going to grow.
Speaker 4: and we're seeing that growth within our portfolio today. When we add calibration to a ticket, we will typically see margin expansion within that ticket. So that feels really good on the calibration side. In terms of the customer opportunity, really there's sort of free layers of customers here, Sharon. One is...
Speaker 4: what I would call regular B to C customers or retail customers which is an anchor point for us. The second is our commercial so if you think about fleet customers or local insurance customers, we're starting to lean into that as well right now. And then as we've sort of said by the end of 2023, rolling into 2024, we believe we'll be in a position to capture some of those large national insurance relationships that we've had such great partnerships with in our collision space. So really it's sort of a calibration will flow through all customers.
Speaker 4: We've heavily focused on B to C right now, you know, local insurance and fleet, and then long-term into that sort of national insurance space. So, you know, incredibly excited about what's going to happen with glass over the next couple of years. And Sharon, this is Tiffany. With regard to your same-source sales question, both cadence as well as segment expectations. So just to reiterate, my scripted remarks, again, we fairly tight range is what we expect around same-source sales performance across the quarters.
Speaker 3: with only about a two-point range between the high and the low. So if you've guided the five to seven, you can expect every quarter to be in that range. I also suggested in an earlier question that we, well, we don't guide the specific segments from a car wash perspective qualitatively, we're thinking about retail softness that continues in the first half.
Speaker 3: And then as we get into the second half, we start to lack significant effects pressure in that business as well as getting further into our rebranding and be fully rebranded by the end of the year. So we think car wash picks up theme as we go through the year. And then your last point I think in that question was around inflation. Again, we were dealing with double-digit inflation, low double-digit inflation the last 18 to 24 months. We think that starts to moderate. Obviously it's as it starts to moderate, it less of a tailwind to ticket.
Speaker 3: particularly in the maintenance segment as we think about navigating that moderate inflation rate instead of high inflation. And so that's the other qualitative factor I give you as you think about the quarters. Your next question comes from a line of Peter Keith from Piper Sandler. Your line is open.
Speaker 7: Hey, thanks. Good morning, congrats on wrapping up a nice year. Fiviting to 2023, and maybe this is a bit of a preview on the analyst state for Jonathan. It's really run the data ecosystem and the rebranding of a car wash to take five. The maintenance segment seen nice complex celebration as you've kind of turned on that marketing engine.
Speaker 7: Should we think of 2023 as the year when the marketing engine gets turned on with Car Wash and potentially seeing some of this same store sales benefit? Peter, I look at the answer is it's a continuous focus for us but I think we will be coming to market with commercialization in that space in 2023.
Speaker 4: And like I talked about, that's sort of a multi-layered approach. One is to make sure that all customers that do business with any of our brands understand the overall service offering within the Driven Brands portfolio. So that's number one. And then it makes sure that we are cross-promoting, cross-branding those services to those customers.
Speaker 4: And then layer on top of that, you know, what a long-term sustainable rewards and loyalty program looks like at the driven level. So I think we're pretty excited about those things. So look, it'll be a multi-year journey, Peter, but I think 2023 will mark the year where, you know, we're talking about commercialization of these activities. Okay. Great. Maybe I'll stick on car wash. You know, one piece of feedback or push that we get is on the European car wash segment.
Speaker 4: over in Europe and has done a magnificent job since we've owned that business for about two and a half years. If you take out the FX Peter, I think we're very pleased with the trajectory of that business. We've deployed some capital in there, so we've done extensive remodels and rebrandings in the European business. Tracy and her team have expanded the digital...
Speaker 4: the digital footprint over there. And we have one brand across 13 countries in Europe . So I think the other thing that you have to factor in is that the European macro environment over the last year has been challenging both from a sort of inflationary perspective not to mention the horrible war that's going on there. So we remain incredibly
Speaker 4: pleased with how our business has performed and pretty excited about the long-term prospects for that business under Tracy and her team. Thank you very much. Your next question comes from a line of John Lawrence from Benchmark. Your line is open. Good morning. Thanks for the questions.
Speaker 8: Could you speak to a little bit? You talked about the procurement business. I was interested in moving the skew base from 10,000 to 160,000 is quite a jump. Could you talk a little bit about that expansion and how often do you have to say no today, not having that product and talk about the categories of this expansion, please?
Speaker 4: Yeah, John , thanks for the question. Procurement is an unsung hero within the Driven Brands platform. Ultimately, we're trying to achieve a couple of things, John . One is make our franchisees more profitable and make it easy for them to buy the products and services that they need to run their businesses effectively.
Speaker 4: And then thirdly is to make sure that we have continued great vendor relationships and that we're working with all of our vendors on a weekly basis to make sure they're giving us the best terms and conditions and service levels to both our company and franchise stores. So this marketplace that we've invested in over the last sort of year and a half
Speaker 4: new 160,000 SKUs is partly enabled by the new technology investments that we've made. So again, we feel really good about creating incremental profitability for our franchise stores, for driven for our vendors and ultimately capturing the opportunity with procurement as we look ahead the next of the three to five years. Yeah, just quickly on that what?
Speaker 8: What type of products would be at the end of that tail on that when you get north of 120,000? What kind of products are we talking about that you haven't had before?
Speaker 4: Yeah, I think look we've got obviously the sort of core items if you think about our business whether that's oil or filters or Paint or ancillary products within any of our business You then move into you know sort of I'll call it the if you like some of the office supplies and sundries that are franchisees Use and then over time I think we'll have the ability to add potential service
Speaker 4: services that our franchisees use as well. But I'd say with the 160,000 skew count we have today we're probably capturing 85 to 90% of what the franchisees and company stores need to run their businesses effectively. Great, thanks, good luck. And your last question comes from a line of Justin Clever from Baird. Your line is open.
Speaker 5: Thank you. Good morning, everyone. Thanks for taking the question. Wanted to ask about what's driving the uplift in the rebranded car wash locations. Is it more about an increase in car counts as you leverage to take five brand equity or?
Speaker 5: Is it more a function of ticket as I assume you're optimizing the menu board and sound like you're having success trading customers up to higher dollar washers?
Speaker 4: Yeah, Justin, I think it's important to understand that this is not just a rebranding of the stores and putting new signage on it, but we also included any deferred maintenance caps that the stores had. We've got equipment upgrades, we've got better merchandising, we've got new team uniforms, we've got...
Speaker 4: incremental technology that we've included, whether it's point of sale systems or camera technology and all those stores. So when a customer goes to one of these rebranded stores, it really feels like a big remodel to that store. So that's number one. Number two is the team is doing a terrific job at converting what we call retail customers into washclubs subscription members as evidenced by that.
Speaker 4: you know, the growth now to over 675,000, you know, take 5 unlimited car wash members. I think the other thing that we're continuing to work on is pricing and menu board construct at those stores, so making sure that we've got the right sort of good, better, best.
Speaker 4: offering to our customers at the right price point. So I think it's a combination of both traffic and check and really a whole new experience for our customers who may have gone to the store pre and post in terms of the rebranding. So I think it's a combination of both traffic and check and really a whole new experience for our customers at the right price point.
Speaker 4: Got it. That's helpful color. And then just to follow up, Jonathan, you mentioned in your remarks that current environment within car wash, beginning to rationalize new entrances into the space. And was that just a comment related to the M&A environment? I guess I'd also be curious if you're seeing any pullback in the pace of greenfield development from some of your larger peers.
Speaker 4: Yeah, Justin, I think it's both. One is sort of the very lofty multiples that were being, that were in effect in 2021 and 2022 have definitely moderated. And we're seeing some processes that are just not getting completed. So that's sort of on the M&A front. And then when you think about this market over the last two to three years, you had a lot of people building and then flipping stores.
Speaker 4: And because there's no buyers for those stores, I think we're seeing moderation in the pace of Greenfield activities. So I think we're seeing a double hit. One is multiples are rationalizing. And secondly, we're seeing some moderation in the amount of new stores being built. Again, when you think about some of the multiples that were paid for these businesses and the leverage levels on some of these new entrants, that is sort of handicapping their ability.
Speaker 4: final closing remarks. Thank you and thank you all for joining us and for your time today. Druen Brand continues to deliver strong growth and profitability with momentum entering the year in a resilient category powered by a diverse of platform and tangible competitive advantages. Our team is executing, we're delivering record performance and share gains in a dynamic environment leveraging our proven playbooks for growth. We remain confident in our ability to deliver long-term profitable growth.
Speaker 4: and enhance shareholder value. And as always, investor relations with Christie will be available after the call if anyone has any further questions.
Speaker 4: and as always, investor relations with Christie will be available after the call if anyone has any further questions. Thank you.
Speaker 9: This concludes today's conference call. Thank you for your participation. You may now disconnect.