Driven Brands Holdings Inc. (NASDAQ:DRVN) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning, and welcome to Driven Brands First Quarter 2023 Earnings Conference Call. My name is Sylvie, and I will be your conference operator today. As a reminder, this call is being recorded. I would now like to turn the conference over to Kristy Moser, Vice President of Investor Relations.

Kristine Moser: Thanks very much, and welcome, everybody, to Driven Brands first quarter 2023 earnings conference call. In addition to the earnings release, there’s a leverage ratio reconciliation and infographic available for download on our website at investorrelations.drivenbrands.com, summarizing our first quarter results. On the call with me today are Jonathan Fitzpatrick, President and Chief Executive Officer; and Tiffany Mason, Executive Vice President and Chief Financial Officer. In a moment, Jonathan and Tiffany will walk you through our financial and operating performance for the quarter. Before we begin our remarks, I’d like to remind you that management will refer to certain non-GAAP financial measures. You can find reconciliations of 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, management may also make forward-looking statements in regards to our current plans, beliefs and expectations. These statements are not guarantees of our future performance and are subject to a number of risks and uncertainties and other factors that could cause actual results and events to differ materially from the results and events contemplated by these forward-looking statements. 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 kindly ask that you limit yourself to one question and one follow-up. With that, I’ll now turn it over to Jonathan.

Jonathan Fitzpatrick: Thank you, and good morning. In the first quarter, Driven Brands continued to deliver strong results. We gained significant share leveraging our proven playbook to drive long-term sustainable growth and tailwinds from our network benefits that provide a significant and compounding advantage across our business. With continued resilience in the needs-based automotive services category, the quarter unfolded much like we anticipated. We delivered 20% revenue growth supported by 9% same-store sales growth and 7% new-store growth. And all that is thanks to the hard work and strong execution by our 12,000 Driven Brands’ team members and our amazing franchisees who serve our loyal long-term customers. I couldn’t be more proud of how our nimble and innovative team has continued to deliver on behalf of both our customers and shareholders.

Consistent execution by our team combined with our differentiated business model has delivered a strong record of performance across a variety of economic environments. In the first quarter, we generated strong cash flow even as we integrated our glass businesses, and continued the rebranding of U.S. car wash, and we used that cash flow to reinvest in the business and gain further market share. Momentum has continued into the second quarter, powered by the resilience of the category, our diversified platform and our strong track record of execution. Our pipeline of future openings has continued to expand to 1,700 units 35% of which are site secured or better, providing a line of sight into significant multiyear growth. Now underpinning that momentum, our carefully curated portfolio of automotive services drove strong performance and cash flow, and we use that cash flow generation to invest into the flywheel of growth into our three growth priorities: Take 5 Oil Change, Take 5 Car Wash and Auto Glass Now.

We continue to make significant progress across these growth categories, simplifying and enhancing the customer experience, integrating to a standard operating playbook and moving to a single technology platform, supporting our market share gains and strong unit level economics. Starting with Quick Lube, our most mature growth focus. Take 5 Oil Change continue to drive customer acquisition and best-in-category same-store sales of 20%, continuing to outpace the competition as our differentiated 10-minute stay-in-your-car Quick Lube model builds brand recognition with top quartile NPS scores and increasing repeat rates. We continue to gain market share as customers become aware of Take 5s faster, friendlier and simpler alternative for their oil change at a more effective price point than dealerships.

In addition to our strong same-store sales performance, we grew our footprint over 20% year-over-year and our pipeline remains robust at 950 units, primarily made up of franchise locations, giving us a long runway for sustainable, profitable multiyear growth. And we expect to grow our footprint by an additional 20% in 2023, largely driven by franchise store growth. Now shifting to Car Wash. We continue to experience softer retail volume as a result of the macro environment. We had modestly less pressure from foreign exchange rate movement, and we will begin to lap that FX rate pressure in Q2 ’23. The long-term opportunity within the Car Wash business remains compelling with strong profitability, cash on cash returns and cash flow generation over time.

Our scale and experience will remain a significant competitive advantage as the current environment is beginning to rationalize the competitive intensity of new entrants. Additionally, as we look to past economic cycles, the Car Wash category remained resilient relative to the broader retail industry. As we migrate our footprint under the Take 5 Brand, which was largely 2/3 complete as of the end of Q1, we are elevating our brand awareness, standardizing our market positioning, our operations, systems and customer experience. This, in turn, allows us to integrate our Take 5 Unlimited program and enhance our data capture capabilities. In fact, we continue to grow our total Take 5 Unlimited program to over 700,000 subscription members. For the quarter, in aggregate, locations where rebranding was complete, delivered higher adjusted EBITDA margin and same-store sales than the locations yet to be rebranded.

And our greenfield pipeline for openings in the U.S. remains robust at over 300 locations with roughly 65 expected to open in 2023, enabling us to be more selective with tuck-in M&A, which is following our proven playbook for growth. Now wrapping up with glass. In the first quarter, we made significant progress integrating our 10 acquisitions to create a U.S. glass platform. This platform is the culmination of years of careful planning, studying and phenomenal execution. Beyond building national scale, our U.S. glass platform includes expertise in calibration, mobile, insurance and fleet servicing. We’ve combined the best processes, procedures and technology to inform our standard operating model that is being rolled out across the entire footprint.

Simultaneously, we have begun scaling our organic growth strategy, building on our position as the second largest player in the U.S. Auto Glass servicing category. We ended the quarter with over 200 locations and approximately 800 mobile units in the United States. In addition to strong expected unit growth of almost 100 net new stores in fiscal 2023, store volumes continued to increase as we see the early benefits from integration under the Auto Glass Now brand, including calibration attachment rates and expanding commercial relationships. The benefits of scale from further growth and the increase in commercial business, as we mature our footprint over the next year, will provide a tailwind to the already compelling economics. We couldn’t be more excited about the long-term potential of our U.S. glass business as we leverage the network benefits of the broader Driven Brands platform.

The power of bringing these businesses together on the Driven platform is compelling. The diversification and breadth of our offering provide a natural balance and additional resilience to our business. This diversification is complemented by significant network benefits that include driving more value for and sales from our commercial customers, which already comprise approximately half of our system sales, delivering revenue growth and cost savings from the benefits of scale and expertise in procurement, which we believe will be further enhanced by our Driven Advantage marketplace, which has great long-term potential. Our Driven Advantage test has performed ahead of our expectations, and we’re expanding that test across our full suite of businesses, leveraging our development and M&A capabilities to deliver best-in-category store growth in our key growth categories and unlocking the power of our data ecosystem with over 32 million unique customers that is generated from all our brands to help grow same-store sales and our share of wallet benefits.

We’re only beginning to scratch the surface of the long-term opportunity to drive customer acquisition, retention and share of wallet across our platform, which is a focus for us in 2023. The unmatched scale and sophistication of our shared service capabilities generate these significant network benefits that deepen our competitive moat and differentiate our business. These network benefits continue to compound as we grow our diversified platform, driving further unit growth, same-store sales growth and incremental profits. Now we’re pleased with the strong start to 2023 and the continued momentum into early Q2. We are growing, taking share and generating cash, which we are reinvesting into the flywheel of growth. Our scale gives us a competitive and compounding advantage.

We have a proven playbook and multiyear visibility into unit growth. Our momentum, combined with the strength of our business model and playbook for growth, gives us further confidence in our ability to deliver on our short-, medium- and long-term goals. With that, let me turn it over to Tiffany for a deeper dive into the first quarter financial results.

Tiffany Mason: Thanks, Jonathan, and good morning, everyone. Fiscal 2023 is off to a good start, and we delivered another solid in the first quarter, slightly beating expectations. Our business continues to be incredibly resilient. And as Jonathan mentioned earlier, the first quarter unfolded much like we anticipated. Our team remains nimble and executed our playbook in an evolving macroeconomic landscape, delivering best-in-class, need-based services to a growing suite of both consumer and commercial customers. We continued to build on our strong track record of unit growth and delivered market share gains across each of our categories. Diving into our first quarter results. System-wide sales were $1.5 billion, up 19% versus prior year.

The growth was driven by the addition of 59 net new stores in the quarter and 9% same-store sales growth. When you account for our franchise mix, our reported revenue for the quarter was $562 million, an increase of 20%. From an expense perspective, we continue to carefully manage site-level expenses across the portfolio, resulting in 4-wall margin of 35% for company-operated stores. Above shop, SG&A as a percentage of revenue was 21%, in line with the prior year. This resulted in adjusted EBITDA of $128 million for the quarter, an increase of 8%. And adjusted EBITDA margin was 23%, about 260 basis points below the prior year, yet in line with our guidance due to the timing of our U.S. Car Wash rebranding activity as well as the integration of recent acquisitions in our U.S. glass business.

Depreciation and amortization expense was $38 million. This $5 million increase versus the prior year was primarily attributable to the growth in company-operated stores. And interest expense was $38 million. This $13 million increase versus the prior year was attributable to increased debt levels as we lean into opportunities across our Quick Lubes, Car Wash and Glass businesses as well as higher interest rates on our floating rate debt. For the first quarter, we delivered adjusted net income of $42 million and adjusted EPS of $0.25. You can find a reconciliation of adjusted net income, adjusted EPS and adjusted EBITDA in today’s release. Our solid operating performance in the quarter resulted in strong cash generation that allowed us to continue to invest in the business.

Our cash generation, together with our revolving credit facilities and real estate portfolio, provide us more than enough capital to fuel our strategic growth in 2023. We ended the quarter with $466 million of liquidity comprised of $191 million in cash and cash equivalents and $275 million of undrawn capacity on our revolving credit facilities. This does not include the additional $135 million of variable funding notes issued in the fourth quarter of 2022, which can be exercised at the company’s discretion, assuming certain conditions continue to be met. Our net leverage ratio was 4.7x at the end of the first quarter. We don’t expect to add any incremental long-term debt in fiscal 2023. In fact, a tick up in short-term borrowings on our credit facilities in the quarter was simply timing.

With the projected growth in adjusted EBITDA this year, we expect to naturally delever to the low 4s. You can find a reconciliation of our net leverage ratio posted on our Investor Relations website. Now a bit more color on our first quarter results by segment. The Maintenance segment posted positive same-store sales of 13%. Take 5 Quick Lube continued to drive strong car count and last year’s price increases together with higher premium oil mix driven increase in average ticket. Likewise, the attachment rate of ancillary products such as engine air filters, wiper blades, cabin air filters and corn exchange increased 340 basis points year-over-year to approximately 40%, also contributing to a higher average ticket. The expansion of segment adjusted EBITDA margin year-over-year is primarily the result of operating leverage from same-store sales as well as lapping higher alternative supply costs incurred in Q1 last year to mitigate oil supply shortages.

The Car Wash segment posted negative same-store sales of 11%. Foreign exchange rate movement continued to have a negative impact versus the prior year of roughly 230 basis points. In the U.S., we are evolving to a single brand in operating standards. We had approximately 65% of our Car Wash business operating under the Take 5 banner by the end of the first quarter. Those locations are outperforming the footprint yet to be rebranded as Jonathan mentioned earlier, and we are on track to rebrand the rest of the estate by the end of the fiscal year. While retail volume was soft again this quarter as a result of the macroeconomic environment and core weather conditions, we continue to grow our subscription program. The growth of that program is an important focus for us because we see consumer behavior change when a customer becomes a Take 5 Unlimited member.

They visit more frequently, considering as part of the normal hygiene routine, much likely in their homes. We now have over 700,000 Take 5 Unlimited subscription and the retention rate is holding steady. The compounding effect of a 5x higher LTV from Take 5 Unlimited members versus retail customers is compelling. Softer retail traffic was the primary driver of the segment adjusted EBITDA margin decline year-over-year. The Paint, Collision & Glass segment posted positive same-store sales of 14%. Performance in Paint and Collision was strong this quarter, and estimate counts, a leading indicator for the industry, are up about 7% We added 170 direct repair programs with insurance carriers versus the prior year. 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 differentiator for Driven Brands.

We are also excited about the significant expansion of our glass offering in the U.S. after entering the market just over a year ago. We are currently integrating our series of acquisitions under the Auto Glass Now brand name and implementing our new standard operating procedures. That will provide the platform to capitalize on the long-term opportunity with commercial customers in this category. Segment adjusted EBITDA margin declined year-over-year as a result of the changing mix of this segment with the introduction of the U.S. glass business. However, we expect glass margins to expand from here as we integrate the business, bringing all units to our target level in the short term, an increase in the mix of commercial customers and the penetration of calibration services over the longer term.

And finally, the Platform Services segment posted negative same-store sales of 5%. We have leveraged our scale and leadership in the industry to ensure our franchisees are consistently in stock, creating long-term customer loyalty for the 1-800-Radiator brand. While we continue to benefit from the customers we acquired as a result of supply chain disruption, average selling prices are moderating and the volume of radiator sales was down in the quarter as a result of a cooler start to spring. On a 3-year stacked basis, Platform Services same-store sales are up about 50% in the first quarter. Looking ahead, we remain well positioned and expect our differentiated and diversified offering to continue to deliver strong results. We provided guidance for fiscal 2023 on our fourth quarter earnings call.

which, in summary, included the expectation for revenue of approximately $2.35 billion, adjusted EBITDA of approximately $590 million and adjusted EPS of approximately $1.21. Given that the first quarter unfolded much like we anticipated and the economic environment continues to be volatile, we are reiterating our previous guidance. Having said that, we are pleased with our performance to date in the second quarter and may find that for the fiscal year, revenue of $2.35 billion is driven in larger part by same-store sales and less by new-store growth as a result of temporary construction delays related to weather and permitting. We also still expect to deliver approximately $300 million of cash flow from operations for the year. The team is executing well, and we remain focused on our simple proven formula.

We add new stores, we grow same-store sales and we deliver stable margins. This results in significant cash flow generation that we reinvest in the business. Operator, we’d now like to open the call up for questions.

Q&A Session

Operator: Thank you. Your first question will be from Simeon Gutman at Morgan Stanley.

Michael Kessler: This is Michael Kessler on for Simeon. I wanted to start with Car Wash and maybe a couple of quick ones here. First, any divergences or call-outs between the U.S. and international performance in the quarter? And then secondly, on the retail side, you mentioned still macro a little bit tricky there. These, Does it feel at all like that we’re seeing a troughing as far as how the retail piece is performing or it’s still kind of trudging along the bottom as far as volumes there?

Tiffany Mason: Michael, thanks for the question. So let’s decompose Car Wash for just a minute. Your first part of the question was about international versus the U.S. And I’ll tell you, on a constant currency basis, both businesses performed essentially the same in the quarter overall. As you know, we started to see a shift in U.S. retail traffic in Q2 of last year. And we didn’t start to see that shift in the international business until Q3. So it was about a quarter behind, the U.S. Ticket was positive for both businesses until this quarter, and we started to see a bit of ticket softness in the U.S., but international continues to remain nice and strong. Consumers that are watching their cars continue to mix to higher wash packages in that market.

And so we attribute the softness over the last few quarters to both the macroeconomic environment and then this quarter, in particular, to poor weather conditions in both the U.S. and in Europe. The great news is that we continued to grow our Take 5 Unlimited subscription program. And as I said in my prepared remarks, we’re over 700,000 members now, and the churn rate is nice and steady, not elevated at all. The growth of this program is an important focus for us because, as I said, we see consumer behavior change when a customer becomes a Take 5 Unlimited member. So the important thing here is looking forward, the long-term opportunity for the Car Wash business remains just as compelling as ever. We are focused on a few things. One is our subscription program, and we think we’ve got about 15 points of opportunity for further penetration with that program.

We’re going to continue to build density in markets through our organic unit growth pipeline. And we’ll also finish the rollout of the Take 5 Brand and operating playbook to the rest of the estate this year. As Jonathan said, and I reiterated today, in Q1, the stores that had been rebranded outperformed those that had not. And our top 11 markets where we have store density today, outperformed the rebranded stores generally. So that just underscores the network benefit. So again, really excited about the long-term opportunity for this business.

Michael Kessler: Okay. And maybe actually one quick follow-up just on that, and then my actual follow-up was if you could — if there’s anything you can quantify on the uplift to margins or same-store sales, if not, that’s okay. My follow-up, just on free cash flow generation, all in, including growth CapEx, it has been negative or use of cash in the last several quarters. Can you talk about, I guess, the evolution of that over the next several quarters? Even the next several years, do you expect on an all-in basis to be free cash flow positive, including growth CapEx or any, I guess, puts and takes as far as how you see that evolving with the overall growth in the business?

Tiffany Mason: Yes. Sure, Michael. So the follow-up to your Car Wash question, I mean, certainly, as we continue to rebrand the estate, we would expect to see improved performance in both same-store sales and margin, which is what we’re seeing from those that have been rebranded so far. So that’s the follow-up there. On the free cash flow front, a couple of things. So operating cash flow in the quarter was $37 million. You should know that the majority — if you look back at history, the majority of our cash flow is generated in Q2 and Q3. So it’s not unusual for Q1 to be a little bit lighter. Q1 is seasonally lower, just given the working capital dynamics in our Platform Services segment. And then the other thing I would say is if you look at our greenfield pipeline, we’re obviously shifting more to greenfield from M&A tuck-in.

And as we do that, those stores have to be built and ramped. So there is a lag in the amount of time it takes to get to adjusted EBITDA benefit despite the capital outlay to build those stores. So that’s the pressure that you’re seeing on free cash flow, but this business is nice and healthy over the long term and certainly generating high cash returns.

Operator: Next question will be from Christopher Horvers at JPMorgan.

Christopher Horvers: So my first question is just a follow-up on the weather. Can you give us a sense on any guess you have in terms of impact? It’s been really wet, been really wet on weekends, and I know that a few weekends in a quarter can throw that business off. So do you have any guess on the weather? And is there — are there any other signs that maybe the consumer is starting to feel more pressure because we are hearing this from other retailers?

Tiffany Mason: Chris, thanks for the question. So I’m not going to put any numbers around it, but I’ll just tell you, obviously, we’ve seen macroeconomic pressure, specifically in the Car Wash business since about Q2 of last year. That’s the U.S. specifically. I would say in Q1, it’s probably equal part, continued macroeconomic pressure. And then to your point, the poor weather conditions we’ve seen, especially on the weekends, which is prime car washing time. So equal parts there. Again, I can’t stress enough the long-term compelling thesis of this business.

Christopher Horvers: Understood. And then just in terms of like the shape of the overall company EBITDA margin over the year and particularly how it plays out in Car Wash and PC&G. I know that you had the conversion expenses in Car Wash and then you have the integration expense and sort of revenue headwind and PC on the glass side. So have those, I guess, pressures peaked in those segments? And how are you — how does that translate to the EBITDA margin shape over the year?

Tiffany Mason: Yes. Chris, you’ve got it. You’ve nailed it. So keep in mind, we reaffirmed guidance this morning. So that assumes a 25% EBITDA margin for the portfolio overall by the end of fiscal 2023. As I talked about last quarter when I gave that guidance, we expected Q1 to be pressured from a margin perspective just because of the state of the maturity of glass integration as well as the Car Wash rebranding. So the further we get into the year, the more that — those two things transpire, both the integration and the rebranding, we expect those margins to improve. And reaffirming our guidance this morning should give you confidence that we’re seeing the right behavior in the business.

Operator: Next question is from the line of Kate McShane of Goldman Sachs.

Kate McShane: I believe in the prepared comments, you mentioned something to the effect that the current environment is beginning to rationalize the competitive entry of new entrants in Car Wash. I wondered if you could just expand a little bit more on what you’re seeing there. What does this mean for acquisition opportunities and the decision to eventually potentially franchise Car Wash.

Jonathan Fitzpatrick: Kate, I think a couple of things are happening. One is we’ve seen a massive slowdown in sort of the M&A landscape within Car Wash and I think we’re not seeing that change at the moment. As I’ve said in previous remarks, I think this year will be a slow year generally for M&A in the Car Wash space in the United States. In terms of the competitive intensity or entrance of competitive intensity, I think what we’re seeing is due to some macroeconomic conditions, the slowdown of M&A, cost of capital that we’re seeing a lot of the players slow down their greenfield pipeline. I think that will really show up, Kate, in 2024. I think there’s a lot of stores that will continue to open this year, but I think a lot of people are pulling back in terms of greenfield growth at the end of this year, next year.

So I think those two dynamics are still in play and will continue to sort of happen this year. In terms of the franchise Car Wash — franchising of the Car Wash business, like we’ve always said, the unit level economics of this business would support franchising, but we’re still in the middle of rebranding our business going from 40-plus brands to one brand, leveraging the great power of the Take 5 brand that we have in our Quick Lube business. So I think our focus is doing that for the balance of this year and then we’ll reassess the possibility of potentially franchising this business down the road.

Operator: Next question is from the line of Liz Suzuki of Bank of America.

Liz Suzuki: Just a question on Platform Services that comped negative for the first time, I think, in recent history. And Tiffany, I think you had mentioned that pricing is moderating. So were volumes up and pricing was really the only driver of the negative comp? And how should we think about the expected trajectory of comps going forward in Platform Services given what you’re seeing in pricing?

Tiffany Mason: Yes. Liz, it’s a great question. Keep in mind that Platform Services, one of the benefits, in particular, of that 1-800-Radiator brand, which anchors that segment, is the ability for us to leverage our supply chain capabilities, which are a core competency for us and make sure that our franchisees remain in stock. And that was true during the height of the supply chain disruption over the last couple of years, and because of those competencies, it allowed us to be opportunistic on price. What we’re seeing now is as the supply chain starts to loosen and that’s obviously an evolving situation, but average selling prices are starting to normalize. So in fact, pricing is the predominant driver of that negative comp in the quarter, normalizing ASP causes that reaction.

The only place I would tell you where volumes were softer, and I said it in my prepared remarks, are radiator sales. Obviously, if you have a cooler start to spring, there’s less demand for radiators, but we think that’s timing in nature. And as the season continues to unfold, those volumes will bounce back. The other thing as, if I can just — maybe just one other underscore. If you look at this business over a 3-year basis, and I said it in my prepared remarks, this business is up 50% same-store sales on a 3-year stack. So this business continues to just outperform expectations.

Liz Suzuki: Great. And then just one quick follow-up, which is a broader longer-term question. But just broadly, how sustainable do you think your high single-digit store count growth is? And then what do you view as the limitations on growth as you scale?

Jonathan Fitzpatrick: Liz, I think we sort of talked about this year as being a mid-single-digit same-store sales number, and I think we’re very comfortable that, that is a long-term achievable target for us. We also look at sort of the needs-based category that we’re in, the age of the car park, the complexity of the vehicles. We know that the industry historically has been growing at about a 3% CAGR. So we really think that, that mid-single digit is a good long-term target for us at Driven.

Tiffany Mason: And Liz, I think on the unit count front, I mean, we obviously have a really strong pipeline, and that pipeline has continued to strengthen over the last couple of years as we’ve attracted, in particular, new franchisee interest just given our strong economics. So our franchise pipeline — or excuse me, our total pipeline today stands at about 1,700 units, 35% of which are sites secured or better. So we have nice long-term visibility into future unit expansion.

Operator: Next question will be from Karen Short at Crédit Suisse.

Karen Short: Two questions for you. So with respect to what your implied guidance is for 2Q through 4Q in terms of EBITDA margins, can you just talk to that a little bit, because obviously, you need to be at kind of 25% or almost 26% on EBITDA margins in 2Q to 4Q to meet your guidance? And then the second question I had is just on the Car Wash segment, obviously, you have very significant increases in terms of membership. But I mean, weather aside, is there anything you could point to in terms of conversion to actual losses because it seems like there’s maybe some risk factor there in terms of actual conversion into doing car wash.

Tiffany Mason: Karen, thanks for the questions. I’ll take the first one and maybe Jonathan will follow up on the car wash question. With regard to margin, and I said it a minute ago, I mean, we certainly expected EBITDA margins to be softer in Q1. I foreshadowed that a quarter ago, and it came in actually a little bit better even than we expected. And as I said, that has to do with the timing of the glass integration as well as the Car Wash rebranding. So when you think about modeling Q2 through Q4, your endpoint is to get to an EBITDA margin that’s stable relative to 2022, so 25%. And obviously, I would build it over the course of the year, just given the fact that we’re going to continue that integration activity and that rebranding activity. So I think that you’ll continue to see steady improvement over the year to get to that 25% target by the end of the year. Jonathan, you want to go to Car Wash.

Jonathan Fitzpatrick: Yes. And Karen, thanks on the Car Wash question. This is a long-term investment for us, and we remain incredibly bullish about how we’re going to win and take share in the Car Wash segment for many years to come. We have 400 units. We’ve grown that unit count by 100% since we acquired the business a little over two years ago. We’ve grown our membership subscription. We are now standardizing operations, the technology stack. The branding is almost 2/3 complete. So we really are bullish around the long-term benefits of being in the Car Wash space. So I think there’s a little bit of noise right now with the consumer. Certainly, weather was not in our favor in Q1, but I think we’re incredibly optimistic about how big this business is going to be over the next number of years.

Operator: Next question will be from Chris O’Cull at Stifel.

Patrick Johnson: This is Patrick on for Chris. Tiffany, if I heard you correctly, it sounded like you may be expecting delays to push some of the unit growth you originally guided to for ’23, maybe out into ’24. And if that’s right, can you talk about whether you’re anticipating that to play out to a greater extent in any specific segment? And then is it possible to just frame up the potential magnitude relative to maybe that net store growth of $365 million you originally guided to? Just to kind of help frame that up.

Tiffany Mason: Yes, Patrick, absolutely. Let’s just click down a little bit there. So obviously, we reaffirmed our guidance. So we still expect $2.35 billion of revenue for the year. In my prepared remarks, I simply talked about the fact that given where same-store sales levels were in Q1, and they were quite strong, obviously, at 9% for the portfolio in total, it is possible that we see a bit more of that revenue come from same-store sales than we see from unit growth. That doesn’t mean we’re seeing weakness in our pipeline. The pipeline is as strong as ever. But between permitting delays, which are temporary and weather delays, which we’ve widely publicized ourselves as well as others that weather wasn’t conducive in Q1, there’s just some temporary delay to — not to a significant tone, but — versus what we thought originally.

So in terms of what segments it’s going to impact, I mean, obviously, it’s widespread, those two conditions, permitting and weather affect growth across the three brands that were growing in earnest today. And we’ll give this another quarter, and then we’ll give you some further updates as it relates to the back half of the year when we get to our second quarter call.

Patrick Johnson: Got it. That’s very helpful. And then, Jonathan, I’m curious, you mentioned the Driven Advantage test program and moving it on to a kind of a wider test phase. I’m curious what you saw in terms of metrics in those early tests that led you to expand the program? And also if you have anything you can share around the potential for EBITDA generation over time and how effective you think your pricing can be to capture a lot more of those procurement needs from franchisees?

Jonathan Fitzpatrick: Yes. Lots of questions on, Patrick, there. Look, we invested in this platform in 2022 and always plan that the test, we’d have some learnings, but we would be expanding that test to sort of the rest of the Driven portfolio. Ultimately, what this does is provide benefits to major stakeholders within the Driven ecosystem. So we’re able to provide our franchisees better pricing, better terms and conditions and make them more profitable. That in turn leads to happier, more profitable and stickier franchisees. We’re obviously benefiting from a corporate store base because we’re leveraging all that volume to drive margin expansion with our company stores. And then lastly, that translates into EBITDA for Driven Brands.

And we’re excited about continuing to roll this out, getting our franchisees on board using the system, creating stickiness there and ultimately capturing most of the spend that goes through the Driven system. So we’re very pleased with the progress that Kyle and his team are delivering. We’ve now got over 200,000 SKUs on that platform. And we’re getting some great feedback from sort of the test users. So more to come, but we’re very pleased with the progress so far.

Operator: Next question will be from Seth Sigman at Barclays.

Seth Sigman: Maybe just a shorter-term question thinking about how Q1 actually played out. I know you mentioned whether. Clearly, there have been other cross current for the consumer during that period. I’m curious, did you see a slowdown later in the quarter, but maybe more importantly, can you just elaborate on that Q2 momentum comment and what you’re seeing here early in Q2?

Tiffany Mason: Yes, you bet. So in terms of monthly same-store sales trends, the first thing I’ll tell you is despite a challenging macro environment, you can see that our needs-based category remains resilient. We posted 9% for the quarter overall. Across the months, I’ll tell you, same-store sales were weakest, though still positive in the month of March. However, in the second quarter, we’ve seen some rebounding, and we’re pleased with our results so far and they trend in line with our current expectations.

Seth Sigman: Okay. Great. And then I just want to dig into the maintenance business and the momentum there a little bit more, it sounds like it’s really a combination of healthy transactions also average ticket growth. How do you think about the external versus internal drivers for this segment? And just the things that you’re focused on to keep that momentum going, because we do assume that at some point, the underlying inflation will start to moderate. So just trying to think about what keeps that traffic going.

Jonathan Fitzpatrick: I’ll take this, and Tiffany may jump in, obviously. But the maintenance is predominantly our Take 5 Quick Lube business. It is a fabulous business from any angle that you look at it. From a consumer value proposition, it’s a 10-minute stay in your car, limited menu oil change with NPS scores above 70%. And obviously, high repeat rates from a pure business model, from a Driven and franchisee perspective, these businesses are generating high 30% 4-wall EBITDA margins. And then from a category tailwind perspective, we’ve got aging vehicles and a premiumization in the oil category. So we think this is a fabulous business. Mo, who runs the business now, who’s been in for a couple of months is excited. And we see this business continuing to grow in terms of same-store sales and unit count for many, many years to come.

And obviously, that generates hundreds of millions of dollars of EBITDA for Driven. So just an all-around, fabulous business and the prospects remain incredibly positive for it.

Tiffany Mason: And maybe just as a reminder, so I agree with everything Jonathan said a wholeheartedly, just remember that we are lapping pricing actions in May and October. So as you think about the cadence of the year to factor those, year-over-year comparisons into your models.

Operator: Next question will be from Sharon Zackfia at William Blair.

Sharon Zackfia: Actually following up on that. Can you kind of walk through — I know there was inflationary and price benefits in the comps last year. Can you walk through kind of the pace of where we roll those off and kind of what order of magnitude by segment? And then secondarily, the reiteration of the revenue for the year, I assume, implies a reiteration of the comp guidance as well. Are you now tracking within that 5% to 7% comp guidance? Or how should we think about current trends?

Tiffany Mason: Yes, Sharon, thank you. So to your first question about the pricing actions and what we saw in terms of inflation in retail price improvement last year, we took pricing actions in both May and October, so overall, we saw high single-digit inflation last year. And obviously, we took retail pricing action to offset that inflation in those two months, respectively. And then with regard to current performance, so far in the second quarter, we are trending back in line with our guidance of same-store sales, which was 5% to 7%, so I can confirm that.

Operator: Next question will be from Brian McNamara at Canaccord Genuity.

Brian McNamara: So with recent bank failures, I’m curious where your franchisees predominantly get their financing from and what impact, if any, the recent significant tightening of lending standards is having on your franchisees and whether that was also contributing to slower store growth this year outside of construction and permitting delays?

Jonathan Fitzpatrick: Brian, let me just categorically say no. Our franchisees use a mix of funding sources, but we’re not — they’re not tied in or heavily exposed to some of the banks that have run into trouble over the last sort of quarter. This is really evident by our pipeline continues to grow. And when we talk about the pipeline, there’s really two data points that we look at there. One is when people sign a development agreement, they actually pay significant funds upfront. So it’s not just a free development agreement. They’re actually putting their money where their mouth is. And the second part is that our pipeline now is over 35% sites secured or better, which means that people are fully engaged in the process. So there is no at the moment, and we don’t expect it to be any financial — any impact to our development as a result of the banking challenges.

Just to reiterate what Tiffany said, there’s a little bit of weather and then the permitting in the new-store growth, we think it’s de minimis, but we just wanted to let people know that there could be a little bit pressure in the year, but no material change and those stores will still open.

Operator: Next question will be from Peter Benedict at Baird.

Peter Benedict: So just a question on the glass business. Maybe can you give us an update on the efforts to improve the commercial mix? I know it’s still early, but just wanted to get a sense for where you were with that effort.

Jonathan Fitzpatrick: Peter, I think a couple of things going on. One, as Tiffany mentioned, we are sort of in the throes of standardizing that business from a brand perspective, from a technology perspective, from a customer offering perspective. So that journey is still ongoing. We acquired 10 different businesses essentially last year. So the team is busy with all that integration work. In terms of the commercial customers, like we’ve said, this business is a mix of free customers. There’s what we would call retail customers. There’s commercial customers, which are a lot of our fleet partners and then there’s insurance customers. And we’re very pleased with the progress we’re making on all three fronts. Commercial is probably a little bit ahead of insurance in terms of the national insurance, but we still do a lot of, what I would say, local or regional insurance work.

So again, the team is doing great work, 10 acquisitions are being integrated and we would stand by the guidance that we talked about last year that the big national insurance opportunity really will start to unfold in late ’23, early ’24.

Peter Benedict: Okay. That’s helpful. And then just on the wallet share with your customers. I mean, obviously, multiple touch points opportunities throughout the year across your platform. Just maybe an update on kind of how you’re measuring that, where you stand on that, maybe some goals or targets that you’re hoping to achieve in terms of expanding wallet share with all those customers you’ve gotten to Data Lake.

Jonathan Fitzpatrick: Yes, Peter, I’m going to sort of do a little teaser here for our Investor Day, which is coming up on May 23, and we’re going to spend quite a bit of time talking about the wallet share opportunity and the data that we have. So I’ll tease May 23, and we’ll answer that more holistically then.

Operator: Our last question will be from Peter Keith at Piper Sandler.

Peter Keith: So a lot of my questions have already been asked, but I’m going to just dig into Car Wash a little bit. So nit-picking, but you have previously stated that the Car Wash rebranding and relaunch efforts have been driving a 10% list. You didn’t — I don’t know if it was purposeful, but you’re not giving that number today. So I want to confirm if you’re still seeing that 10% lift. And then on the Car Wash unit openings, so 65 is a lot of Car Wash units, and you historically don’t have a track record of opening greenfield car wash. These are kind of big, complex expensive units. So just give us some comfort on the execution of getting these open and seeing good returns.

Tiffany Mason: Yes. Awesome, Peter. All right. So let me take your first one and Jonathan will handle the greenfield question. Regarding the lift, so we are still pleased with what we’re seeing in our rebranded locations. I think it’s really important to hear 10% lift being — from the point where they’re starting and not 10% same-store sales, right? So there was a little bit of confusion around that, I think, by the community largely last quarter. But yes, we’re still continuing to see the performance we expect from these rebranded stores.

Jonathan Fitzpatrick: And Peter, on the opening stuff, a couple of things. One is it’s not our first rodeo, so to speak, Peter, here. We have been opening greenfield locations for many years. We’ve opened 300, 400 plus Quick Lube locations. Last year, we opened — I can’t remember the exact number, but quite a lot of greenfield car washes. We have the people, process and systems in place to comply open the guided number of 65 units this year. We’ve got deep expertise in-house. So this is not a new thing for us. Sure, the actual site work and construction is a little bit more complicated, but feel very comfortable that we’ve got the people, process and systems in place to effectively do that and ramp those new stores when they do open.

Peter Keith: Okay. And Tiffany, I just want to understand your answer. The 10% lift from where they were starting versus where they are today, I’m not really sure what the difference is. Can you help me understand that better?

Tiffany Mason: Yes. So Peter, what I was alluding to was it’s 10% off a standing start, right? So wherever the store had been performing not rebranded under Take 5 and not with that standard operating playbook, we’re seeing a 10% lift from that standing start on those stores. But that’s consistent with our business case that we shared a couple of quarters ago.

Operator: Thank you. That concludes the Q&A section of the earnings call. I will now turn the call back over to Mr. Fitzpatrick for closing remarks.

Jonathan Fitzpatrick: Thank you. Thanks, everyone, for your time today. We do appreciate it. Driven continues to deliver strong growth and profitability. We feel we have great momentum entering the year in a resilient category, powered by a diversified platform and tangible network benefits that provide a significant competitive advantage. Our team has a track record of execution, delivering results ahead of expectations and driving share gains in this dynamic environment. Our proven playbook for growth is working. And pulling all that together, we remain confident in our ability to deliver long-term profitable growth and enhance shareholder value. And we look forward to seeing you in Charlotte on May 23 for our Investor Day. And as always, Investor Relations with Kristy will be available after the call if anyone has any follow-up questions. Thank you.

Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.