Good morning and welcome to the Driven Brands Second Quarter 2021 Earnings Conference Call. My name is Tamiya 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 reconciliation to the most directly comparable GAAP financial measures on the company’s Investor Relations website and in its filings with the Securities and Exchange Commission. Please be advised that during the course of this call, management may also make forward-looking statements that reflect expectations for the future. These statements are based on current information and actual results may differ materially from these expectations. Factors that may cause actual results to differ materially from expectations are detailed in the company’s SEC filings including the Form 8-K filed today containing the company’s earnings release.

Thank you, and good morning. We had another great quarter across the board and are excited to share the results. Before we jump in, let me reiterate the power of Driven Brands. Driven Brands is the largest automotive services company in North America, and yet we have less than 5% market share in this highly fragmented and consolidating industry. Our scale means that we have many competitive advantages, like our marketing dollars, data, purchasing power, unit growth to name just a few. We have consistently taken share in this industry for the past decade, and we will continue for the next decade. Our four operating segments provide diversification to our business model. Diversity across our brands, geographies, and needs-based service categories. These multiple segments provide many levers to organically grow same-store sales and units. And because of our asset-light business model, we generated a ton of cash which we reinvest back into the growth engine. Over the long term, Driven has and will consistently deliver double-digit revenue growth and double-digit adjusted EBITDA growth, and this is before we layer on acquisitions which is incremental upside to our model. This is the compounding power of Driven Brands. We're pleased with our Q2 results that we released this morning, and all credit goes to our team and our amazing franchisees who consistently deliver. Compared to Q2 of 2020, consolidated same-store sales were significantly ahead of expectations at positive 39%. On a two-year basis, same-store sales were up 19%, accelerating from Q1 into Q2. Revenue more than doubled to $375 million. Adjusted EBITDA more than doubled to $101 million, and adjusted EPS was $0.25 beating expectations hence beating expectations another part to bottom beat. We are very proud of these results and remain optimistic for the remainder of the year. Our same-store sales performance was high quality built on a foundation of marketing and operational execution. We drove more new and repeat customers to our shops. Our teams are executing across all segments, resulting in both one and two year same-store sales growth across all segments and increased market share across all segments in Q2. We continue to benefit from our competitive advantages, marketing, operations, scale, inventory which led to more and more sales and more profits for our franchisees and for Driven.

Thanks, Jonathan, and good morning, everyone. We delivered another strong quarter, thanks to the hard work of the entire Driven Brands team. We continue to capitalize on an important industry tailwind with a relentless focus on operational excellence. Our proven playbook enables these results. Systemwide sales records reached $1.2 billion in the quarter, mostly generated revenue of $375 million, more than double that of the prior year. Adjusted EBITDA is $100 million, and as a percentage of revenue adjusted EBITDA margin was nearly 27%. Finally, adjusted EPS was $0.25 for the second quarter exceeding our expectations as a result of strong sales volume which allowed us to leverage our expense base driving significant flow through. This is the power of the Driven Brands platform. A scaled growing highly franchised business with a diverse need-based service offering that delivered very attractive margins. Now, let me break things down a bit more. Systemwide sales in the quarter were driven by same-store sales growth as well as the addition of new stores, both company and franchise store growth, and tuck-in acquisitions. We have tremendous whitespace to continue growing our store count in this roughly $300 billion highly fragmented industry. Our franchise, company Greenfield, and M&A pipeline are all robust, and we are aggressively growing our footprint.

Your first question comes from the line of Chris Horvers with JPMorgan. Your line is open.

Thanks. Good morning, everybody. I know you're not guiding by quarter, but can you give us some flavor on how you're thinking about the cadence of sales and EBITDA on the back half? How are you thinking about it on a two-year basis in sales? Are you raising more for Q3 versus later in the year, and if so is that just prudent? And then any comments on margins overall would be really helpful.

Hey, Chris, good morning. Thanks for the question. So if I can, I'm going to take a few minutes just to give you some more color even than you asked for. I think this could be helpful and probably answer the key questions that are on the line. So let me give you a little bit of color on monthly comps in the second quarter. I'll tell you how we're feeling about July and then I'll answer your direct question because I think all of that provides a really good picture for you. So qualitatively on the second quarter itself, on both a one- and two-year basis, monthly comps were just as you would have expected. April was our strongest as we lapped the strictest shelter in place orders from a year ago. And then same-store sales turned down each month in the quarter as we lapped tougher compares. So well same-store sales trended down throughout the quarter, comps in June on a one— obviously as we got further into the year we had some challenges in Q4 so the payers a little busier than Q3, but qualitatively I give you that little bit of color. We expect positive comps across all of our segments. VMT is expected to be flat in the back half of the year. So that's a little bit of color commentary for you in that regard. And I'll stop there. Any follow-up questions for me as you think about that.

Yeah, so just maybe on top line just to clarify. So you were saying that June on a one- and two-year basis you were low double digits across all segments?

One and two different. So, on a two-year basis low double digit, yes.

Got it. The commentary around July indicates that it is more of a travel month, and all regions in the country had schools, so July is showing better trends compared to June.

So, I have not completed yet. So, we are off to a great start. We're pleased with this momentum and I will leave it there.

Understood. Can you clarify whether the acquisitions you've made this year and the updated guidance include just those, or do they also exclude potential future acquisitions?

Yes, great question, Chris. Our guidance includes the acquisitions we've completed so far, but it does not account for acquisitions that are under consideration or planned for the latter half of the year.

Got it. Thanks very much. I opened up first and maybe somebody else.

Your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

Good morning. Hi, Jonathan. Hi, Tiffany. My first question is a two-prong on the Car Wash segment. The first part of it is the penetration. Tiffany, I think you said 47, I think we had 45 on the Wash Club last quarter. Can you talk about seasonally is there normally an uptick from Q1 to Q2. I don't know if we have the numbers but how that compares to a year ago. And then bigger picture, can you talk about any updated thoughts on franchising Car Wash or rebranding to a single banner.

Hi, Simeon. It's Jonathan. I'll start and Tiffany can certainly jump in. Regarding Wash Club seasonality, this year is somewhat unusual since people are getting out and driving more. There is a natural seasonality to the business, but given the current circumstances, it's hard to provide a detailed analysis on Wash Club subscriptions. We're executing our plan, which focuses on strong operations, a simplified menu, and improved selling techniques in our stores, and we are seeing positive results from those efforts. Therefore, it's difficult to assess seasonality for Wash Club subscriptions. As for rebranding, I previously mentioned that we are testing rebranding some of our stores to the Take 5 Car Wash name. It's still in the early stages, but we believe that having a unified brand could enhance brand equity and consumer perception over time. We'll provide updates in future quarters as the test progresses.

And Simeon, I think the only thing I'd add is we're making great progress on Wash Club penetration, subscription penetration right. So you've seen that of course that penetration percentage pick up just about every quarter. And more importantly even in the penetration because that bounces around based on the mix of Wash Club and non-Wash Club is that we're adding members every month, right. 50,000 this quarter, I think it was 50,000 last quarter. So the team is making great progress.

And is there seasonality in general? Not saying what the numbers are, but is there a seasonality to Wash Club penetration or shouldn't it work that way, given that it's a loyalty program and it should build cumulatively over time?

Yeah, though the latter said they build cumulatively over time.

Okay. That's fair. And then my follow up question is thinking about the incremental margins or the flow through for the remainder of the year. Tiffany you mentioned that you're not fully staffed in some places and in some businesses. How should we think about it even on maintenance this quarter? Our model we flow through was I think a little bit better last quarter and yeah, the company is even stronger. And so we're trying to think about. We get the guidance and it's better in the back half, but how do you think about flow through and some of the considerations you mentioned around labor?

Yeah. So listen, I want to be really clear here. I don’t want to overplay this card, right. We are certainly not immune to the labor challenges, the nationwide labor challenges. We’re facing the same challenges as everyone else. It’s important to note that in the maintenance segment in particular while we are facing those challenges and it did give us a little bit of incremental flow through. If I just give you an order of magnitude here, the company operated store four-wall margins for 40% in the quarter. That’s a combination of car wash and maintenance. If you look at maintenance, maintenance was about 43%. The impact of the labor shortage was about 50 basis points. So with $700,000, it’s 50 basis points. It’s not a large number, right. So it gives a benefit. But the bigger benefit of those incremental margins is just sheer car count, right, and the fact that consumers are driving more and are pushing more cars through the boxes, and those incremental cars are driving incremental margin. So, I don’t want to overplay that point though we are facing some labor shortages.

Okay. Thanks. It’s helpful. Take care.

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

Great. Thank you. Are you starting to see any pause in the recovery in areas that we are starting to see spikes in COVID cases from the Delta variant, or does it seem like that recovery in driving activities really still chasing you along?

Hey, Liz. This is Jonathan. I’d say that we’re not seeing any detrimental moves in traffic or demand in those areas. But look, this is a moving target. But so far, we are not seeing that.

Okay. How is the breakup in performance in areas that have really reopened? I think in the US versus Canada that's still pretty tightly locked down?

Yeah. I think I mentioned it and Tiffany mentioned it in our prepared remarks, Canada is hard to say exactly, but two to three quarters maybe behind the US in terms of opening. They really started opening up in early July. So still a bit of softness there. And then, obviously we mentioned some of our European markets, I don't want to go through all 13 countries, but you've got various degrees of sort of normality in Europe. So we definitely think the US is ahead in terms of consumer behavior, consumer spending was sort of a lag, certainly in Canada and then parts of Europe. That's how we think about it.

Okay. Great. Thank you.

Your next question comes from the line of Kate McShane with Goldman Sachs. Your line is open.

Hi. Good morning. Thanks for taking our questions. You had mentioned in the prepared remarks that being in stock when others weren't was a driver of market share during the quarter. I wondered how big of a driver this was and how it looks as the year goes on just give us some of the challenges we're seeing within the supply chain?

Hey, Kate. It's Jonathan. I'll start and Tiffany can certainly jump in but then I think I mentioned we were very proactive on this sort of area really back in Q1 late Q2 of 2020. We feel very good about our supply chain and inventory availability and access to inventory for the balance of this year and beyond. There are certainly pressures there in terms of actual availability in some of the shipping costs we’re certainly seeing that. As I mentioned we've successfully passed that on to our customers. And we're seeing sort of active customers at an all-time high. So I don't know exactly when this thing sort of relieves itself. I think we're probably looking at another maybe two to three quarters of this sort of being an impact. But we feel very good about where we are today.

Thank you. Your next question comes from the line of Peter Benedict with Baird. Your line is open.

Hey guys good morning. Thanks for taking the question. I guess, my first is around car wash. I was just curious any comments qualitative or what are around that competitive environment. Just within the carwash segment around M&A multiples where they may be landing and related to that just your thoughts, you talked about the rebranding. Is that something that could be a precursor to franchising within that segment monitoring, just curious your thoughts on that.

Sure, thanks Peter. Good questions. In terms of multiples I think, we've talked before that tuck-in M&A acquisitions are sort of in that mid-to-high single digit and no change in that guidance. In terms of rebranding, it's something that was part of our underwriting thesis when we first looked at this business back in August 2020. We do think there's power in having potentially one brand for our car wash business. I think I've also mentioned on previous calls that like we did with the quick lube business we owned that business, company stores for about a year. We sort of worked on the model made some tweaks to it and then obviously we started franchising it. No commitment to franchising the car wash business but I think it wouldn't be unfair to look at that playbook. What we've done in the past and say that we would do it again. So more to come on that.

Okay great that's helpful. And my thoughts would be just around the cross-segment engagement by your customers you mentioned kind of still I think less than 5% maybe crossover. Just can you maybe build a little bit on how you plan to grow this timeline? Is this something that can see meaningful traction in the next 12, 24 months or is it just a longer term I guess? Thank you.

Yeah. I think we mentioned less than sort of 5% on average or sort of visiting one service to it. It's part of our digital journey. It's part of our data journey. We're very early into it. Obviously, that overlap matters in terms of proximity from one store to another. So we think this is a multi-year journey. We're super excited about it. And I think we would hope to obviously grow that less than 5% to way more than 5% over a multi-year basis. So just an important opportunity for us that we're sort of leading into now.

Okay. Fair enough. Thanks so much.

Your next question comes from the line of Sharon Zackfia with William Blair. Your line is open.

Hi. Good morning. I guess I wanted to delve a little bit deeper on the implied second half guidance. I guess there is some conservatism it appears in the comp guidance. I know you said July was off to a strong start. I'm wondering if July is ahead of that included kind of 4.5% comp for the second half? And then, also on the margin, I think there's a bit of a step down in the implied EBITDA margin. Is that just seasonality in the business or are you expecting any kind of incremental pressure and margin in the second half?

Hi, Sharon. Thank you for your question. The guidance suggests about a 4.5% increase in same-store sales for the second half. We're pleased with how July is performing. We'll keep it qualitative for now, without sharing any specific numbers. We remain cautious as we are not completely past the pandemic yet, and there is still some uncertainty in the market. However, we are confident in our execution. As mentioned in our earlier comments, we took proactive steps last year while others were more reserved, which positions us well as the reopening progresses. We have observed positive trends in the first and second quarters, but we are aware of the delta variant and have factored that into our planning for the second half. Despite these challenges, we are enthusiastic about 2021 and will continue to perform at our best. We hope to bring you good news as we move into the latter part of the year.

Really helpful. Can I ask a follow-up question on the staffing levels, are you fully staffed now, and did it impact any of the top line results from the second quarter?

Hi, Sharon. We are prepared to achieve the results that we achieved in Q2. There are ongoing staffing challenges, but we are hopeful that these will improve as the employment stimulus begins to diminish in the latter half of the year. It's important to note that our company-operated stores for both Car Wash and Quick Lube utilize efficient labor models, meaning we don't employ a large number of people in those locations. We rely on effective operational procedures and technology to minimize our labor needs. While we do face staffing pressures, it's essential to have strong staffing levels in our stores to deliver the results we saw in Q2.

Thank you.

Your next question comes from the line of Chris O'Cull with Stifel. Your line is open.

Thank you. Good morning, guys. Jonathan, my question relates to the company’s M&A strategy for the Car Wash segment, and Is the company trying to get into a dominant position that it acquire stores or operate locations, and is the focus on acquiring change with an express format? Maybe talk a little bit about that? And then I had a follow-up.

Sure. Thanks, Chris. Yeah. Good to have you on the team. We buy stores in quick lube or car wash because there are accretive transactions. We have a machine that's been built since 2016 in order to execute against that. We acquire at accretive multiples, we integrate to make the businesses better. So the last thing I'd say in terms of your dominant position, sure we want to have a dominant position in every single segment that we operate in. And I think scale really matters in this industry. So getting to a scale position in our segments is important to us. So there are some things to think about from an M&A perspective. And the other thing I would point you to is, our quick lube business really provided an amazing playbook in terms of car wash. So we're sort of repeating to some extent that the playbook we've done in our quick lube business. In terms of the type of assets that we're acquiring, we are very focused on the express tunnel car wash business. So that's our core focus in terms of acquisitions and greenfield stores.

Yeah. I know you mentioned there were no changes to your valuation assumptions and that acquisitions are still highly accretive. But are you concerned at all that if the number of players increase in PE backed players, I guess, that it could impede your acquisition plans?

It's a good question. We have a M&A muscle and experience over the last 10 plus years that second to none in the industry. We have a reputation because we are a known buyer in the industry. And I would say that we continue to do highly accretive transactions. We're not worried about whether there are some smaller type PE groups. We have a mission and we're going to continue on that. And I think it's validated by 50 units having been acquired so far in 2021 and 67 total units since we acquired the business in August of 2020. So we feel very good about our M&A strategy both in terms of what we've delivered so far and in the future.

Your next question comes from the line of Lavesh Hemnani with Credit Suisse. Your line is open.

Hi everyone. Congrats on the strong quarter and thanks for taking my questions. So I had a follow up question on the strategy behind rebranding the car wash at five locations. I'm trying to understand if this is just a strategy because the market wouldn't allow for two separate locations. Or is this just being viewed from the customer angle where it might drive more marketing synergies over time.

Thanks, Lavesh. I think I said in my prepared remarks we're testing it. So I think we've got a thesis around the benefits for it, but we will come back to you in future quarters. But from a big picture perspective having a single brand which we present to the customers is probably long term a positive for our business so that's what we're testing. And we'll come back to you with more results. But again, early in the test and we're excited about what we're seeing so far.

Got it. What about the Take 5 labor model, is it at the same tank rate?

So, the labor model was Q2, sorry, the Take 5 labor model was Q2 of 2020. So, we just lapsed that the anniversary of those changes.

Your next question comes from the line of Karen Short with Barclays. Your line is open.

Hi. Thanks for taking my question. I had a couple of questions just in terms of the crossover shopper, what do you actually think the potential is relative to just under 5% that you cited. And then what is the actual physical overlap in the store base within the appropriate trade area, and then just trying to gauge what the opportunity is on that crossover.

Sure. Thanks, Karen. Less than 5% today. So, a bigger number than that in the future. So, let's say that's a starting point for potential. We've got 4,000 locations. There is significant overlap within the businesses but we've got businesses that have different intervals with customers. Some of our customers come multiple times a month with Car Wash, multiple times a year with quick lube and so on and so forth. So, I would say that we have the data because we capture data across all of our businesses, so we know the habits of the customer. We also understand the lifetime value of a customer in the automotive aftermarket spend. So understanding where we have the opportunity to capture more of that wallet share is important to us. But in terms of potential, I would say we're less than 5% today. We believe that it will be much bigger than 5% in the future.

Okay. Can you provide some insight on the current state of inflation and whether there is a level at which you might start to see pushback from customers?

I believe that's a valid question. We've discussed this before. If we examine our various businesses, our Car Wash has an average check of about $10 or $11, while our quick lube business has a significantly higher average check of around $80. This wider range indicates our ability to adjust prices in response to commodity or labor pressures is quite feasible. Over the past year, we've successfully implemented price increases across all segments without negatively impacting consumer traffic or demand, nor have we seen any decline in customer satisfaction as indicated by NPS scores. Our advantageous position allows us to effectively pass on any inflationary pressures we've faced. In summary, I see inflation as a net positive for Driven Brands. Additionally, our franchisees excel at passing along price increases, and we benefit from royalties based on their top-line revenue, reinforcing the idea that inflation is generally beneficial for Driven Brands.

Okay. Last question, your longer-term algorithm was obviously for low-double digit revenue growth and low-double digit EBITDA growth, but you're obviously a much wider gap on EBITDA growth versus the top line. Any thoughts on that algorithm longer term in terms of whether EBITDA growth actually can be higher?

Well, we're certainly not going to change our long-term growth algorithm two quarters into being a public company. So we're certainly sticking with the long-term growth algorithm. Obviously we want to be prudent in terms of how we manage expectations, but we're very pleased with what our long-term growth algorithm is. And remember that's organic that's before we think about any M, A which is definitely upside to the model.

Our last question comes from the line of Peter Keith with Piper Sandler. Your line is open.

Hi, thanks guys, nice results. Jonathan two quarters into being a public company, I'm curious what the conversations are like with potential franchisees. Now that your results are public and we can see the attractive for a while EBITDA margins, are you tracked potentially more institutional money or more well capitalized franchisees that perhaps want to own portfolio of the Driven brands?

Hey Peter, great question. It's a really good one. I would say that you know look at our franchise pipeline, I think it's up to 750 units. It grew by about 100 units from Q1 to Q2. Demand for our brands is strong. I don't think the public entry of Driven brands is really affecting that demand. I think the demand is different because these are great businesses, needs-based essential services with really strong and unit level economics. So I don't think the average franchisee really cares whether Driven brands is public or not or potential franchisees. And in terms of larger institutional type franchisees, how we think about our franchisees is we want equity that is highly correlated with the term of the franchise agreements. So I don't necessarily want private equity. I want patient equity or typical franchisees in 15 years. And I want people that are investing in our business to marry towards that franchise agreement. So that's how we think about that.

Okay, fair enough. And then I didn't want to flesh out a little bit more around that cross marketing. Maybe a basic question but you've pointed out that the premium oil customers kind of mirror customers. Maybe that high level provide some characteristics and what those overlaps are. And then as you're starting to get into this cross-marketing are you finding it easier to drive to oil change or to drive the Car Wash or is it pretty comparable?

Good question. When we mentioned that the oil change customers and the car wash subscription customers are similar, we were referring to their demographics, including higher income levels, proximity to the store, and the type of car they drive. These factors align well, and it's not surprising that customers purchasing premium oil may have more disposable income and are more likely to subscribe to the car wash service. We know this because we gather data from both aspects of the business, allowing us to analyze which customers are using both services. If we identify premium oil customers who live nearby but are not buying car wash subscriptions, that presents a clear opportunity for us to encourage them to try the car wash. Our strategy is driven by data from our Data Lake, as we've discussed previously. This represents a significant opportunity for us, and while Karen pressed me on how the percentage might change in the future, we believe it will exceed 5%, although it will take some time to develop.

And that goes mostly taking those oil customers to Car Wash not vice versa.

Oh. I think this is an absolute and it's not a sort of one-way traffic. So I think it works across all of our businesses. So when you think about our collision businesses, our quick lube businesses, our Meineke businesses, other businesses, all those customers are spending money and sort of the lifetime - what we think about sort of the lifetime value of their spend in the automotive aftermarket. So there's opportunities not just with quick lube or Car Wash but across the entire Driven Brands ecosystem.

I will now turn the call back over to Mr. Patrick.

Thanks, Tamiya. And I think we're out of questions, but I just wanted to say thank you to the Driven team and especially to our franchisees for just having a phenomenal first half of 2021. And just to reiterate, how optimistic and excited we are for the back half of the year. Thank you, Tamiya.

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