Good morning, and welcome to Driven Brands Holdings Fourth Quarter 2020 Earnings Conference Call. My name is Denise and I will be your operator today. As a reminder this call is being recorded. Joining the call this morning are Jonathan Fitzpatrick, President and Chief Executive Officer; Tiffany Mason, Executive Vice President and Chief Financial Officer; and Rachel Webb, Vice President of Investor Relations. During today's call, management will refer to certain non-GAAP financial measures. You can find the reconciliations to the most directly comparable GAAP financial measures on the company's Investor Relations website and in its filings with the Securities and Exchange Commission.

Thank you, Denise and good morning, everyone. I'm thrilled to be joining you on our first earnings call following our IPO in mid-January. The focus of myself, Tiffany, and our entire team has always been to consistently deliver great results, and that focus has only been further amplified now that we are public. We remain incredibly excited about capitalizing on the whitespace in front of us and ensuring we drive value for all our stakeholders. 2020 was quite a year. We carefully managed through the pandemic and drove strong results, acquired and fully integrated International Car Wash Group, the largest acquisition in Driven's history. We completed two debt offerings and launched our IPO. I want to thank our franchisees and our employees for their unwavering dedication and commitment to delivering exceptional service to our customers. Our industry is strong, and we are optimistic about the rebound in trends as consumers more fully reengage in their daily activities and drive more. The strength of our results is a testament to our business diversification and amazing franchisees. You saw our results for Q4 and fiscal 2020 release this morning. While same store sales declined 5.6% for the year, our performance outpaced the industry as we continue to gain market share, largely from independents and small chains. We added a total of 1,121 locations across our portfolio in 2020, representing net store growth of 36%. I'm proud to report that we hit the top end of our expected range for fiscal 2020 with revenue of over 904 million, adjusted EBITDA up $205 million, and acquisition adjusted EBITDA up $269 million. Tiffany will get into more detail regarding those results in addition to our guidance for fiscal 2021. But I'm pleased to share that so far into our first quarter, we're on plan.

Thanks, Jonathan, and good morning, everyone. I'll begin with our performance in the fourth quarter, then share highlights from fiscal 2020 before providing some context to accompany our guidance for fiscal 2021. Looking in the rearview mirror at the fourth quarter, system-wide sales were $935 million, from which we generated revenue of $289 million, an increase of 58% versus the prior year. Adjusted EBITDA was $66 million, more than double that of 4Q 2019. As a percentage of revenue, adjusted EBITDA margin was 23%. Revenue growth in the quarter was driven by the addition of new stores. As Jonathan mentioned, we acquired Fix Auto in the second quarter of 2020, which added more than 150 collision shops to the portfolio. We acquired ICWG in the third quarter of 2020, which extended our service offering to a fourth segment, adding over 900 Car Wash locations in the US and Europe.

So outside of the M&A that Driven Brands has undertaken, there’s been relatively less industry consolidation than we might've expected in such a destructive year. Some industry participants have talked about PPP loans kind of keeping these smaller businesses afloat. So my question is whether you think government support actually limited your M&A opportunities and that if in the next year or two, you could see more opportunities for tuck-ins?

I think we were pretty active from an M&A perspective in 2020, right? We did six auto in April and we did the Car Wash deal in August. I think we were pretty active. I do think on some of the smaller chains and independents, there is a little bit of residual PPP funding or stability impact there. But our pipeline from an M&A perspective feels really good. I would say that we're not concerned about the opportunities going forward.

And then another one on kind of organic store growth. Which segments of automotive service do you think the US market in particular is under stored, or if it isn't under stored but is kind of just stored incorrectly? How do you see that as an opportunity for Driven Brands?

So just to further Jonathan's point, the places we would expect to lean in, we see tremendous opportunity in the maintenance segment, specifically in the quick lube space. We will continue our greenfield expansion as well as the franchising of that business. That franchise pipeline is tremendous and we're really pleased with the way that business is unfolding. Secondly, Car Wash is obviously a brand new opportunity for us, and we are super excited about the whitespace in that business as well. We took advantage of a significant amount of tuck-in activity in the fourth quarter as we fold that business into our portfolio and we'll continue to execute M&A transactions as well as build new greenfield sites in the Car Wash space. And then of course, in the paint, collision, and glass segment, that's a fully franchising model and there's great runway there to continue to convert independent collision shops to our Driven Collision brands.

It was mentioned in '21 guidance, positive same store sales, realized that's somewhat open-ended. Is there any more specificity you can provide, what where that range could be that underlies the 30% EBITDA margin guidance that you also gave for the year?

Like I said in my scripted remarks, consumers are in great shape financially. They've been saving more, spending less, vaccines are starting to roll out, that's going to improve mobility. We think this business continues to recover over the course of the year. As I said at the end of my remarks, we're really bullish on 2021. Q1 is going to be the low point as we lap the last quarter. It didn't have a COVID impact last year. Q2 we all expect to be gangbusters just because we're lapping some pretty tough comps last year. Then we'll return to store averages somewhere around the 4% mark in the third and fourth quarter. So definitely positive for the year. We expect positive comps across all of our segments. As we get further into this recovery, furthering the vaccine distribution, the business just continues to get healthier.

Can you just parse out the businesses that are more reopening than those that did steady? And you said you expect to get these healthier run rates by the end of the year. Are all signs pointing to being on track to getting there and are you seeing even in early places where vaccine distribution is stepping up or miles driven improving?

Let me take the first part of that question, and I'll let Jonathan talk about the subscription model for Car Wash. As we think about segment performance, if you look across the business by quarter, obviously, Q2 was tough, we all know. Q3, we started to see great rebound. We posted positive comps in Q3 in the maintenance segment, as well as in the platform services segment. Paint, collision, and glass were lagging in recovery because of collision miles and lower congestion miles. So lower congestion miles mean less collision risk. From Q3 to Q4, we saw continued positive performance out of maintenance and platform services. Importantly, with PC&G while it's still negative on a two-year stack basis, we saw great sequential improvement. So we're seeing recovery across all of the businesses in which we operate. Our businesses will continue to perform very, very well.

I'll just sort of answer the question on the subscription revenue and Car Wash. Yes, we saw about 400 basis point improvement in Q4. That was something we're continuing to see in Q1. We did that through variable compensation as a huge element for us. We made sure that all levels of the organization and Car Wash had the right variable compensation plans in place. Secondly, we retrained people in terms of selling techniques. Lastly, Suzanne and the data analytics team leveraged data to understand how to best execute against this incremental subscription model. We feel very good about those trends as we look forward.

Can you talk a little bit about some of the segment comps here in the fourth quarter, the maintenance segment to the plus one, we're modeling a bigger number of plus seven. On the other hand, platform services clearly outperformed. Did something surprise you in December in terms of what happened in maintenance because of COVID spikes or weather?

Let me start with maintenance, posted a 1.2% positive comp in Q4, very strong comp. We continue to benefit from the new marketing campaign that Jonathan discussed in his prepared remarks. We are getting great customer response from both existing and new customers. However, the second wave of COVID was a pressure point. The beauty of the Driven Brands portfolio is our diversification. The 1.2 positive in maintenance makes us bullish about that business for 2021. Platform services had a 9.5% comp. As I mentioned, we launched a new product line with exhaust this year, which has done tremendously. Platform services are primarily distribution businesses where we have high inventory levels throughout the COVID pandemic, and that has been beneficial for us.

Has your expectations changed in terms of how the performance might be relative to the Analyst Day? And how did stimulus affect your business?

Our expectations for 2021 are largely in line with what we thought back in December when we had our Analyst Day. So no dramatic shifts. As we think about Q4 and rolling into Q1, stimulus is indeed in the mix, that’s a good tailwind for us. As vaccines roll out, that’s an additional tailwind.

Your next question comes from Peter Benedict with Baird.

Going back to the Car Wash segment, can you talk about the competitive environment there? A lot of people are going after that segment. What do you see there regarding competition and the multiples that are being paid?

What we've done with the Take 5 business over the last five years has been important. We started with 60 stores, perfected the model, grew company stores, and added franchising. We're really successful with our specialized M&A team here. We like competition because we generally beat it. We feel really good about the Car Wash business, both in terms of what we've done since acquiring it and the future of that business.

Can you provide broader comments around your franchise renewal rates, how they've been trending?

Our franchisees did amazing in 2020. We're so proud of them. 95% of our stores stayed open for the entire year. Franchisees managed demand changes and we helped them in every way possible. We did not lose one franchisee as a result of COVID in 2020. Our renewal rates are very good and have not changed. Our franchise pipeline is bigger than ever, showing renewed interest in the automotive space.

How much of an increase in miles driven or congestion do you think you need to see a positive comp, and will any positive comp translate into margin improvement in that business?

Vehicle miles traveled being down is a factor for that business. Congestion miles are critical to the collision business. As vaccine distribution picks up, we think congestion miles will recover by September of this year. We're optimistic about recovery across all segments. PC&G is lagging but shows solid momentum.

Being public has not impacted our M&A interest. We've executed over 40 transactions. We are well positioned to take advantage of the pipeline for M&A. The last 18 to 24 months has seen an increased understanding of the benefits that we bring to franchisees in the automotive aftermarket space.

I know that data analytics is a big initiative and differentiator for you. Is there anything new to discuss there or ways to leverage existing data to help drive 2021 comps?

We're driving a 400 basis point improvement in Q4 through our data analytics capability. It's part of our DNA and culture. As we continue this journey, it's only going to get more powerful.

Can you discuss organic market share gains in 2021 versus 2020?

Nothing in our outlook has changed since the Analyst Day in December. We feel good about our competitive positioning as we enter 2021. We expect positive same-store sales across all segments, which indicates recovery by the end of 2021.

We are fully committed to consistent organic same store sales growth in the low single digits for many years to come.

You mentioned your sales and adjusted EBITDA were at the high end of your expected range. What caused the net income miss?

Operating performance was strong, but there were non-operating factors causing the delta in net income expectations. Higher tax expense from nondeductible expenses and a larger depreciation and amortization impacted net income.

With stimulus checks coming out, do you see any sales bumps from it? Any historical observations would be helpful.

We feel very bullish about the rest of this year. The return to mobility and increased driving trends, along with the stimulus targeting our core customers, put us in a good position. We're optimistic about 2021.

Could you give some color on the cadence of comps during the quarter and comp in the quarter-to-date?

We're very pleased with Q4 comps across the organization. We're on plan for Q1 and look forward to good performance for Q2 and beyond in 2021.

Could you discuss the impact January had relative to the next stimulus? If you'd prefer not to answer that, can you talk about leverage levels given M&A opportunities?

We're really optimistic about 2021. The vaccinations are increasing, and consumer optimism is growing. As mobility increases, we feel good about returning to normal. I'm not going to specifically tell you what the stimulus could do, but we are optimistic.

We are very comfortable at 5 times leverage, which aligns us with or better than our highly franchised peers. Most of our tuck-in acquisitions can be funded through cash from operations. So 5 times leverage feels right for us.

I wanted to follow up on the EBITDA margin guidance for the year. Can you remind us of some of the puts and takes to think about?

Think about the business mix. Maintenance has a mix of company-owned and franchised stores, with company-owned margins in the mid-30%. Car Wash and PC&G are primarily franchised, so positive comp growth drives incremental EBITDA and ultimately margin improvements.

Are there no major cost concerns, or do you have levers to offset any cost pressures?

Given that we're a franchisor, we have insulation from cost pressures. We have flexibility in passing along any cost inflation. So no major concerns from a cost perspective.

Can you provide more color on how immediate of an impact you see when miles driven improves?

There are a lot of moving parts in 2021. Increased mobility and driving trends will boost demand. Our core customers are still driving. We feel bullish about 2021. Thanks, Denise. And thank you all for your time this morning. We're incredibly proud of our team, our franchisees, and our results in 2020, and we look forward to a really great 2021. We'll talk to you all soon. Thank you all.

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