Driven Brands Holdings Inc. (NASDAQ:DRVN) Q4 2023 Earnings Call Transcript

Driven Brands Holdings Inc. (NASDAQ:DRVN) Q4 2023 Earnings Call Transcript February 22, 2024

Driven Brands Holdings Inc. beats earnings expectations. Reported EPS is $0.19, expectations were $0.18. DRVN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Ludy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Driven Brands Q4 and Fiscal 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Joel Arnao, Senior Vice President of Finance. Joel, you may begin your conference.

Joel Arnao: Good morning, and welcome to Driven Brands fourth quarter 2023 earnings conference call. The earnings release and the leverage ratio reconciliation are available for download on our website at investors.drivenbrands.com. On the call today with me are Jonathan Fitzpatrick, President and Chief Executive Officer; Danny Rivera, Executive Vice President and Chief Operating Officer, and Gary Ferrera, Executive Vice President and Chief Financial Officer. In a moment, Jonathan, Danny and Gary will walk you through our financial and operating performance for the quarter and fiscal year 2023. Before we begin our remarks, I’d like to remind you that management will refer to certain non-GAAP financial measures. You can find these reconciliations to the most directly comparable GAAP financial measures on the company’s Investor Relations website and in its filings with the Securities and Exchange Commission.

During the course of this call, we may also make forward-looking statements in regards to our current plans, beliefs and expectations. These statements are not guarantees for 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 by these forward-looking statements. Please see our earnings release and our filings with the Securities and Exchange Commission for more information. Today’s prepared remarks will be followed by a question-and-answer session. We ask you to limit yourself to one question and one follow-up. Now, I’ll turn it over to my partner, Jonathan

Jonathan Fitzpatrick: Good morning. We appreciate everyone joining us to discuss Driven Brands fourth quarter and full year 2023 financial results. I want to acknowledge the hard work and strong execution by our more than 10,000 Driven Brands, team members and our amazing franchisees for how they continue to navigate an extremely dynamic macroeconomic environment. Now, it’s been several months since we last communicated, and I’m pleased to report that we delivered on our latest guidance for Q4 and fiscal year 2023. Let me review some of our fiscal year 2023 highlights before turning it over to Danny, who will discuss our operating segments and Gary who will detail our fourth quarter financial results and full year 2024 outlook.

For fiscal year 2023. We delivered 13% revenue growth versus prior year supported by 7% same store sales growth and 4% net store growth, achieving adjusted diluted EPS of $0.93. We continue to be pleased by the performance of our Take 5 Oil Change and franchise businesses, all being key contributors to fiscal year 2023 growth. I want to take a few moments to speak about one of the key drivers of our performance Take 5 Oil Change. We have grown this business from less than 60 solely company operated locations in 2016 to over 1000 locations today comprised of approximately 65% company stores and approximately 35% franchise stores. Looking back on some 2023 milestones for Take 5 Oil Change, we celebrated our 1000 store opening our 300 franchise store opening and we exceeded $1 billion in annual system wide sales, all while maintaining an industry leading Net Promoter Score of approximately 77%.

Take 5 Oil Change system wide sales grew by 26% year-over-year, driven by 14% same store sales and 18% unit growth. We opened 98 franchise locations and 59 company locations in fiscal year 2023. Now looking ahead between company and franchise stores, we have a pipeline of over 1000 stores expected to open in the coming years, approximately 75% of which will be franchised. Some additional highlights for Driven in 2023 include building out our US Glass platform and strong performance from our asset light high margin franchise businesses. Additionally, our fleet team delivered our best every year with approximately $470 million of system wide sales. Now our total commercial business represents approximately 50% of total system wide sales when you include sales from our insurance partners in glass collision and paint.

Commercial sales are incredibly important to Driven because our franchisees liked the business and the sales are predictable and sticky. This is a great balance to our retail sales. Now turning to 2024. January was a challenging month with sales been impacted by multiple storms, flooding and freezing temperatures across many of our markets. And we estimate this could negatively impact performance in Q1. However, we don’t see this having a material impact on the full year. We have made and continue to make progress to improve the underperformance in our US Car Wash and US Glass businesses. Now let me give you an update on our full Car Wash segment. The headline is that we improved margins from approximately 17% in Q3 to over 23% in Q4. This approximate 600 basis point improvement was primarily from our US operations.

This is the result of great work from Danny, who has been focusing on the U.S. and continued performance from Tracy and our International team. As mentioned on our previous earnings call, we have stopped all growth capital, and will not open new US Car Wash stores until we determine the base business is performing up to our expectations. Additionally, the team is making good progress on divesting any pipeline properties we owned when we made this decision. And we expect that during fiscal year 2024, we will likely see a meaningful return of capital from selling these pipeline sites. Now switching to US Glass, as of today, the integration of all the acquisitions is behind us. The team is now focused on improving performance and positioning for future growth.

And Danny will provide further color in his remarks. My focus for 2024 is delivering our guidance, reducing debt, and finally, active portfolio management, which means making sure that driven has the right assets to execute on our short, medium and longer term goals. In conclusion, we have a platform that generates high steady state returns with a long runway for reinvestment at exceptional returns. And we’re incredibly motivated to see our valuation mirror our results over time. Now, let me hand it over to Danny, our Chief Operating Officer to discuss our key business segments.

Danny Rivera: Thanks, Jonathan. During the fourth quarter, our team really rolled up their sleeves and got to work on the commitments we made to finish 2023 strong and set the foundation for growth in 2024. I’d like to thank our team members and franchisees for all their hard work and for a strong fourth quarter, as Jonathan has said, Driven his growth and cash when it comes to running the businesses, I think and manage them accordingly. Businesses like Take 5 Oil Change, Auto Glass Now and platforms like Driven Advantage are managed to deliver accelerated growth in terms of revenue, adjusted EBITDA, and new units. Cash businesses, like Meineke, Maaco, CARSTAR and 1-800-Radiator managed to deliver strong margins and cash flow.

With that background. Let’s dive into Take 5 Oil Change, Home of the Stay In Your Car 10 Minute Oil Change. This quarter on a year-over-year basis, Take 5 delivered over 9% revenue growth, same store sales growth of about 7% adjusted EBITDA growth of almost 14%. And we expanded adjusted EBITDA margins by about 150 basis points. Moreover, Take 5 opens an additional 54 stores in the fourth quarter 28 company locations and 26 franchise locations. Once again, Take 5 Oil Change has met or outpaced our competition. Take 5 Oil Change has delivered positive same store sales growth for 14 quarters in a row by delivering fast, friendly and simple oil changes with a net promoter score in the upper 70s. We also remain poised to continue to grow Take 5 Oil Change by over 150 units per year for the foreseeable future, with a majority of those sites being asset light franchise locations.

Special congratulations to Mo Khalid, President of Take 5 Oil Change and our Take 5 team members and franchisees on opening their 1000th location and 300 franchise locations in 2023. Within our PC&G segment, I want to provide more color on our Auto Glass Now business. I’m happy to say that as of today, the integration is behind us. Auto Glass Now is operating as one brand with one operating playbook. We have implemented our core systems and processes including one point of sale system, one phone and lead management system, one payroll system and comp plan. And we’ve centralized purchasing I’d like to thank Michael Macaluso EVP of our PC&G segment and the entire business and shared services team for working diligently to position Auto Glass Now for improved performance in 2024.

Moving on to our Platform Services segment, which is comprised of our distribution and procurement businesses. We delivered a strong year with double-digit growth in both revenue and adjusted EBITDA while simultaneously increasing margins. Launched in 2023 Driven Advantage is an Amazon like marketplace where managers or owners of automotive businesses can purchase everything they need to run their shop. This includes everyday items like pens and computer paper to industry specific products like oil and paints. Driven Advantage truly is a win-win-win. Franchisees win by leveraging Driven scale and buying power to lower their costs and increase their profits. Vendors win by generating revenue more efficiently across a captive audience. And Driven wins by capturing margin on sales up flow through the platform without holding any inventory.

Kyle Marshall, EVP of Platform Services, and his team have done a great job in a short period of time. As of December 30, 2023, over 2300 locations, including over half of eligible US Driven locations have generated over $240 million in transactions. I will wrap up my overview with our Car Wash segment. Our main focus in Q4 was to improve the variable cost structure of the US business. Thanks to a lot of focus and diligence by our field teams. We successfully grew our segment adjusted EBITDA margins by over 600 basis points sequentially, with most of the improvement coming from our US business, mostly due to our continued focus on detergent costs and labor. Although we continue to see softer retail volumes in the US, particularly in January due to the winter storms and freezing temperatures across the country.

We feel good about the improvements we’ve made to the variable cost structure of our US Car Wash business. Our International Car Wash business under the leadership of Tracy Gehlan continues to deliver quarter-after-quarter of solid business performance with the fourth quarter being no exception. Historically, we haven’t discussed our legacy franchise businesses too often. These businesses are an important part of Driven DNA. Businesses like Meineke, Maaco and CARSTAR are amazing businesses run by amazing franchisees. These are efficient, cash generating businesses that performed expectations quarter-after-quarter. In 2023 each of these businesses delivered positive revenue and double-digit adjusted EBITDA growth. Also, because these are capital light franchise businesses, they produced adjusted EBITDA margins in excess of 50%.

Lastly, I’m thrilled to say that we’ve recently made some strategic hires within the businesses. Within the next 60 days, you’ll see press releases from us announcing a new president of our US Car Wash business on SVP of operations for Take 5 Oil Change, and the new Chief Revenue Officer for Auto Glass Now, I’m thrilled with these hires and believe each of these individuals will be instrumental in growing these important businesses. I will now turn it over to my partner and CFO Gary.

Gary Ferrera: Thanks, Danny and welcome everyone. Before diving into our results, I would like to start out by discussing two administrative points. First, we are making a change to how we report our non-GAAP financial measures. Starting with the filing of our 10-K we will no longer add back straight line rent to arrive at adjusted EBITDA. Adjusted income and adjusted EPS. As a reminder, this adjustment consisted of the non-cash portion of rent expense. This adjustment in FY 2023 was $18.2 million. And the approximate quarterly breakout is as follows. Q1 $4.4 million, Q2 $4.6 million, Q3 $5.2 million. And in Q4 $4 million, we estimate that in FY 2024 for the adjustment would approximate $15 million. We’re using this earnings release as an opportunity to smoothly transition to our revised reporting.

You will see it reported both ways in our earnings release for both total company and segment adjusted EBITDA. To minimize confusion. I will primarily use the previous methodology in my remarks until I start discussing the full year 2024 outlook. Second, we will no longer be providing the same store sales growth metric for the Platform Services segment as an only applied to 1-800-Radiator, a small portion or approximately 15% of the segment’s revenue for the fourth quarter and therefore is not a representative indicator of the segment’s performance. However, system wide sales for 1-800-Radiator are still available in our filings. Now I will discuss our results. I joined Driven Brands just over nine months ago, and we’ve been laser focused on delivering the outlook we provided in early August, while also stabilizing parts of the business in order to set ourselves up to deliver a strong 2024.

I am pleased to say that we met or exceeded all the financial metrics that we provided in an updated 2023 outlook. We got into revenue of approximately $2.3 billion and we generated slightly more. We said we would deliver approximately $535 million and adjusted EBITDA and we delivered $535.1 million adjusted diluted EPS came in at $0.93, which is just above the outlook of $0.92 per share that we provided. I want to thank all our team members for their efforts in getting us across the finish line this year. I will now dive a little deeper into our full year results. System wide sales for the year were $6.3 billion up 12.1% versus prior year. This growth was driven by both the addition of 183 net new stores and 7.4% same store sales growth. Our reported revenue for the year was $2.3 billion, an increase of 13.3%.

We delivered adjusted EBITDA of $535.1 million for the year an increase of 4.2%. Adjusted EBITDA margin was 23.2% approximately 200 basis points below the prior year, primarily driven by US Car Wash store growth and increased rent from sale leaseback related to that store growth, as well as the impact of working through the integration of multiple US Glass acquisitions. Margin was also impacted by the increase in company owned stores versus franchise stores. Now I will focus on some key components below adjusted EBITDA, depreciation and amortization expense totaled $175 million for the full year, reflecting a $28 million increase from the prior year, mainly due to company owned store growth. Additionally, interest expense with $164 million a $50 million increase from 2022.

Driven by the full year impact of the 2022 notes, the higher interest rates on our variable rate debt and increased utilization of the revolver. Our effective tax rate for the year was approximately 12%. This is significantly lower than FY22, primarily due to the impact of the goodwill impairment recorded in Q3 of FY23. We delivered adjusted net income of $155.9 million and adjusted diluted EPS of $0.93, which were down 25% and 23.8% year-over-year respectively. The change year-over-year is driven primarily by the increased depreciation and interest expense. You can find a reconciliation of adjusted net income adjusted EPS and adjusted EBITDA and today’s earnings released for clarity our results under our revised reporting which will no longer add back straight line rent expenses are as follows.

Adjusted EBITDA of $516.9 million, adjusted net income of $142.5 million and adjusted diluted EPS of $0.85. In 2023. We delivered $235 million in cash flow from operating activities an increase of 19.3% or up $38 million versus 2022. This is after spending approximately $20 million towards the development of a new ERP system during the year. Capital expenditures for the year were $596 million offset by $195 million of proceeds from sale leaseback activity. Net leverage at year end was 4.96 times. Now moving on to the fourth quarter. As a reminder, FY23 was a 52 week year, but FY22 was a 53 week year. Therefore, in Q4 2023, we are comparing against the prior year quarter that had one additional week on a consolidated basis versus Q4 2022. Our system wide sales were $1.5 billion representing a 3% increase from the prior year period, driven by a 3.9% increase in same store sales.

Q4 represented our 12th straight quarter of same store sales growth. This translated into reported revenue for the quarter of $554 million an increase of 2.6%. This growth was primarily led by our maintenance and PC&G segments. Adjusted EBITDA was $129 million down slightly versus $130 million in the same quarter last year. But in line with expectations provided on our last earnings call. Fourth quarter adjusted EBITDA margin was 23.3%. Down 87 basis points versus last year primarily due to our US Car Wash and US Glass businesses. Adjusted net income was $31 million for the quarter, resulting in adjusted diluted EPS for the quarter of $0.19, versus $0.25 in the prior year period. I’ll now focus on our Q4 performance by segment. We are pleased with the same store sales growth of 4.7% and maintenance our largest segment, revenue from this segment grew 8.9% over the prior year period.

This was primarily driven by our Take 5 Oil Change business which continues to perform strongly across both our franchise and company owned locations. Maintenance segment adjusted EBITDA margin increased by over 140 basis points versus Q4 2022 due to flow through from strong top line performance as well as continued focus on operational efficiency. This drove an increase in segment adjusted EBITDA of 13.3% or $10.3 million to $87.5 million. In our Car Wash segment, we experienced the same store sales decline of 3.3% versus the prior year period. This decline was driven by our US Car Wash operations, total segment revenue decreased 1%. The Car Wash segment adjusted EBITDA margin decreased to 23.2% in the quarter from 26.9% in Q4 2022, resulting in segment adjusted EBITDA of $30.8 million.

And our Paint, Collision & Glass segment, we achieve positive same store sales of 6.4% representing 11 straight quarters of same store sales growth. Segment adjusted EBITDA margin was 27% versus 28.2% in Q4 2022, resulting in a $2.9 million decline in adjusted EBITDA. This decline is directly attributable to our US Glass business where we were working through the operational challenges that Danny previously mentioned. In our Platform Services segment revenue increased 5.6% over the prior year period. Platform Services segment adjusted EBITDA was $18.6 million margin decreased to 36.7% from 37.6% in Q4 2022, due to a positive one time item in the prior year period. I will now turn to our fiscal 2024 full year financial outlook. As a reminder, our 2024 outlook no longer includes the straight line rent add back to adjusted EBITDA adjusted net income and adjusted EPS that I mentioned earlier.

Historically, the company has provided point outlook but going forward, we will use ranges. For the full year we expect revenue to be between $2.35 and $2.4 5 billion, a growth rate of approximately 2% to 6% over 2023. Adjusted EBITDA will be between $535 and $565 million, a growth rate of approximately 4% to 9% over 2023. And adjusted diluted EPS is expected to be between $0.88 to $1 a growth rate of approximately 4% to 18%. At the bottom end of our outlook reflects potential impacts from macro economic uncertainty and weather. As Jonathan previously mentioned, we’ve seen significant storm activity across the nation so far this year. The range also reflects various rates of improvement in our US Car Wash and US Glass operations throughout the year.

The top end of our outlook is consistent with what we shared at our Investor Day. The slight difference in revenue outlook versus what we shared that day is driven primarily by refranchising and closures of company owned stores and other asset disposition since September 2023. However, we have held adjusted EBITDA as we continue to focus on cost efficiencies. We expect same store sales growth of 3% to 5% for 2024, which primarily reflects continued growth in our maintenance segment, as well as improvement in both our Car Wash and PC&G segments. We expect net store growth of approximately 205 to 220 stores during the year. Maintenance should be approximately 165 to 195 net new stores, of which approximately 65% will be franchised. In our PC&G segment, we expect net store growth of 25 to 35 stores with 85% franchise.

And finally, and our Car Wash segment, we currently anticipate net store growth of five to 10 stores, all in the international portion of the business. We expect depreciation and amortization expense of approximately $175 million, we expect interest expense of approximately $170 million. Our effective tax rate is expected to be approximately 35% in 2024, which is in line with our FY 2022 effective tax rate. Gross capital investments are expected to be approximately $260 million, which is less than half of the amount spent in 2023. CapEx spend is expected to be partially offset by approximately $40 million of sale leaseback of our own real estate, primarily in our maintenance segment. This results in net CapEx of approximately $220 million, which is in line with what we shared at our Investor Day in September.

As I mentioned at our Investor Day in September, we have embarked on an enterprise resource planning or ERP project. We are early in the process of replacing multiple legacy ERP systems with Oracle fusion. This is very similar to a successful implementation that we executed at previous company where I was CFO about five years ago. While this is a significant investment in the future of our business, US GAAP does not consider investments in cloud computing to be a capital investment. Therefore, the ERP investment flows through cash flows from operating activities, instead of cash use and investing activities. We will spend approximately $30 million dollars in 2024 on upgrading our ERP system. Let me wrap up our discussion of our 2024 outlook by talking about the distribution of adjusted EBITDA throughout the year.

While we don’t provide specific quarterly outlook, we thought it best to offer some direction as we expect significant variability in growth by quarter. As I mentioned on previous calls, we expect to see most of our adjusted EBITDA growth to come in the second half of the year, as we’ll have weaker comparable and see continued improvement in our US Car Wash and US Glass businesses. We currently anticipate that approximately 80% of our total year-over-year dollar growth will fall in the second half. Similar to 2023. We expect adjusted EBITDA to peak in Q2 and then decline sequentially throughout the remainder of the year. Additionally, as Jonathan mentioned earlier, we had major storms impacting large swaths of the country in January. Therefore, I am anticipating that even with maintaining strong cost controls over the next few weeks, we expect Q1 adjusted EBITDA to be in line with our Q4 2023 results and only slightly above our Q1 2023 results.

In FY 2024, we will be laser focused on generating free cash flow and reducing debt as we move throughout the year. Therefore, we currently estimate driving leverage down to below 4.5 times by year end, with most of the reduction occurring in the second half of the year. With that, I’ll now turn it back over to the operator.

See also 12 Worst Cities in the Southwest for Retirees and 15 Worst States for Homeowners Insurance in the US.

Q&A Session

Operator: Thank you. And, ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] Your first question comes from the line of Peter Benedict from Baird. Your line is open.

Peter Benedict: Hey, guys, good morning. Thanks for taking the question. First, maybe Gary, just as you think about the ‘24 EBITDA guidance, growth in the range of $20 to $50 million roughly. Maybe talk about the buckets driving that. I assume the majority of that is coming from maintenance, but just maybe if you can break that down a little bit more. And as you think about Car Wash, do you think that EBITDA is down year-over-year or can that be flat? Just any color around? That would be would be helpful. Thank you.

Gary Ferrera: Yep, you got it. Yeah. So, we don’t guide specifically to segment EBITDA, we haven’t in the past. We don’t plan on going forward. But when — based on themes we’ve talked about so far, obviously, a lot of our growth is coming from Take 5 Oil, right? So maintenance, you’d expect obviously to be a little bit higher. And in Car Wash, the US Car Wash, and US collapse, as I mentioned are probably going to come along stronger as the year progresses. So I don’t — Danny, you have anything you want to add there. But I think that’s as far as I want to get with the segment projections.

Danny Rivera: Nothing to add there.

Peter Benedict: Okay, now that’s fine. And then the second question would be really around the capital you guys expect from monetizing the Car Wash pipeline? I don’t know if he can speak to the timing of that or magnitude just an update on that process. And when you think we’d have that kind of wrapped up. Thank you.

Jonathan Fitzpatrick: Pete, it’s Jonathan. Yeah, we kicked that off into the queue, late Q3, early, early Q4 last year. We’ve divested the first of those pipeline sites in early this year. I think it’ll happen throughout the course of the year and meaningful, for me, it’s north of $100 million of capital. That should come back over the course of the year, but it’ll be fairly spread out throughout the course of the year.

Peter Benedict: Okay, thanks, Jonathan. Good luck, guys.

Jonathan Fitzpatrick: Thank you.

Operator: Your next question comes from the line of Seth Sigman from Barclays. Your line is open.

Seth Sigman: Hey, good morning, everyone. I wanted to focus on the maintenance segment and the profitability, the margins there have been impressive. They’ve generally exceeded I think, expectations that you laid out from the very start. Can you just elaborate on the drivers and remind us how you think about the opportunity from here?

Danny Rivera: Yeah. Hey, Seth, this is Danny. Thanks for the question. So look, yeah, we’re super happy with the Take 5 business, as Jonathan mentioned in his opening remarks, Mo Khalid and the team has done an amazing job, not just driving revenue, but also to your point, kind of managing the lower P&L. So look, most of the major drivers there, we continue to manage labor quite effectively, that’s been a practice that’s been going on for probably year and a half now. And Mo and the team have done a really nice job managing labor. Also managing our commodity costs in the middle, the P&L is something that the team has been focused on. And we’ve been using price quite effectively for the course of the last 18 months. So really happy with that business, really happy with the work that that Mo has been doing, and also really happy with the shift that we’ve been seeing in PEMEX [ph], right.

So we’ve been seeing customers kind of buying the upper end of our offerings there. And that trend has continued for some time now. So just really happy with the work that the team has been doing.

Seth Sigman: Okay, very helpful. So then I’ll give Peters question, another shot here. As we think about the guidance, right? I realize you don’t want to break down the segments, but it would seem like based on the performance of maintenance, and based on the trajectory that it pretty much drives all of the EBITDA growth. So if that’s right, can you just help us frame some of the offsets? Thank you,

Jonathan Fitzpatrick: Seth, Jonathan, I’ll try and take this one. Really, if you look at the EBITDA growth for 2024 it’s very much in line with sort of the three year outlook that we gave at Investor Day, where the majority of the growth was coming from maintenance, supported by US Glass and then supported by our procurement efforts and driven advantage. So those are the three areas that are consistent with the Investor Day as we think about growth in 2024, which obviously supports the thesis on the three year outlook as well.

Seth Sigman: Okay, thanks, guys.

Operator: Thank you. And your next question comes from the line of Chris O’Cull from Stifel. Your line is open.

Chris O’Cull: Yes, thanks, Danny, mentioned Take 5 comps were up 7%. I’m just curious how much of that is coming from car count growth versus check growth? And how do you expect the comp will break down over the course of this year for that business? And then also, is there going to be any new services offered in ‘24? To kind of help grow the check?

Danny Rivera: Hey, Chris, thank you for the question. So look, as far as comp growth is concerned, we don’t get into the details of exactly which part how much of it is traffic versus check. But suffice it to say the team has been growing both sides of that equation pretty healthily here for a long period of time. So we feel really good about the fact that number one, we’re growing comps, and number two, that we have the healthy balance in that growth via both car count and check size. From a new services perspective, we continue to really focus in on PEMIX, I would say and then Big Five attachment. So PEMIX for us, think in terms of the types of oil that folks are buying. So, whether it’s kind of the lower end of the spectrum or the upper end of the spectrum.