Driven Brands Holdings Inc. Q3 FY2022 Earnings Call

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Driven Brands' Q3 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Kristy Moser, Vice President of Investor Relations, you may begin.

Thanks very much and welcome everybody to Driven Brands' third quarter earnings conference call. In addition to the earnings release, there is a leverage ratio reconciliation infographic available for download on our website, summarizing our third 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 on this 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 regarding our current plans, beliefs, and expectations. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties and other factors that could cause actual results and events to differ materially from the results and events contemplated by these forward-looking statements. These risks and uncertainties include those set forth in our earnings release and our filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof, and except as required by law, we undertake no obligation to update or revise any of them. 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 the call over to Jonathan.

Thank you, and good morning. Our team delivered another quarter of strong performance in Q3. Another top-to-bottom beat with 39% revenue growth, inclusive of 12% same-store sales growth, translating to 32% adjusted EBITDA growth. Tiffany will share more on the results in just a few minutes. Those results, together with our asset-light business model, generated strong cash flow, which we used to reinvest in the business and gain market share. All credit goes to our incredible team, our amazing franchisees, and our loyal long-term customers. The $350 billion automotive aftermarket industry continues to grow, Driven Brands continues to grow, and our customer database of 29 million unique customers continues to grow. Despite the current economic environment, the category is once again proving its resiliency given that it is highly needs-based. Our business remains stable and resilient and our team is executing. This quarter, our team did an excellent job of managing inflationary impacts, operating through continued supply chain disruption, and navigating the evolving consumer landscape. We've had success passing through input cost increases given the pricing elasticity in our business. We're leveraging our scale and supply chain capabilities as a competitive advantage on behalf of ourselves and our franchisees. The diversification and the breadth of our offerings not only provide significant benefits of scale but also provide a natural balance and additional resilience to our business. This is the power of the Driven platform, multiple levers to grow both organically and through acquisitions. We entered the fourth quarter with momentum and excellent visibility into our expense base. We remain very confident in our strategy and growth outlook as our business continues to be highly cash flow generative, creating capacity to reinvest in growth. Our pipeline of future openings continues to expand, giving us visibility into multi-year growth. We have multiple levers to deliver that unit growth: franchise, build, or buy. Our continued execution combined with the strength of our business model gives us confidence that we are on track to meet or exceed our Dream Big plan of $850 million of adjusted EBITDA by the end of 2026. As our consolidated business drove strong performance and cash flow, we continue to make significant progress across our key growth levers: quick lube, car wash, and glass, leveraging our proven playbook. These businesses share several characteristics: simple operating models, very strong unit-level economics, significant cash flow generation, highly fragmented competition, and significant white space for unit growth. From a customer perspective, our solutions-oriented approach to simplifying and enhancing the experience is resonating with customers, supporting our market share gains, significant customer growth, and strong unit-level economics. So let's start with quick lube. We established our playbook for growth in our Take 5 Oil Change business. We used platform M&A to acquire the assets, technology, and capabilities to rapidly scale. We immediately began building a greenfield pipeline and migrated to a combination of tuck-in M&A and greenfield openings to densify quickly in key target markets. Beyond that, we standardized the operating model, tools, and technology to launch a franchise model and then began scaling that franchise pipeline. That playbook has built the quick lube business to over 800 North American locations, including roughly 200 franchise locations. Consistently strong unit growth coupled with double-digit same-store sales growth resulted in strong double-digit revenue growth in Q3. Given the compelling business model and unit-level economics, our pipeline has continued to expand and is now roughly 950 units, giving us a long runway for sustainable and predictable growth, and we're on track for our unit openings for the year. Now shifting to car wash, we are the largest provider of car wash services globally, with almost 1,100 locations comprised of an impressive international business and a growing U.S. presence that has almost doubled over the past two years, with 369 company-owned express locations. We continue to find the long-term opportunity and strong returns within the car wash business compelling. Our single branded international business continues to deliver strong results on a constant currency basis despite a challenging operating environment, proving the strength of the model. In the U.S., we are leveraging our standard playbook for growth, focused on building density in key geographies. We now have a presence in the majority of our target geographies and are focused on further densification. We did experience some headwinds in the third quarter related to FX and softening retail volume as the result of the macro environment that Tiffany will discuss in more detail shortly. Now those headwinds were partially offset by strong execution from the team, implementing price increases, shifting mix towards premium offerings and converting customers to stickier recurring revenue with our Wash Club program. Nearly 40% of our U.S. locations are now branded Take 5 Car Wash and we're on track to have a single U.S. brand by the end of 2023. Through the rebranding, we are standardizing our market positioning, operations, systems, and customer experience, which in turn allows us to integrate our Wash Club program and enhance our data capture capabilities. Our greenfield pipeline for openings in the U.S. remains robust and has expanded to over 250 locations in just two years since we entered the car wash business, enabling us to be more selective with M&A. Let's talk about glass. Since entering the highly fragmented $5 billion U.S. auto glass servicing category at the beginning of the year, we have quickly become the second largest player as of the end of the quarter following that same growth playbook we've used in quick lube and car wash. Adding our growing U.S. footprint to our existing Canadian business, we now have nearly 400 locations and over 700 mobile units across North America. In addition to strong unit growth, store volume continues to increase as we begin to see early benefits from the implementation of calibration services and expanding our commercial relationships. We expect to continue to grow commercial volume at our locations through the addition of fleet in the short term and large national insurers in late 2023 and 2024. The benefits of scale from M&A and the increase in commercial business will provide a tailwind to the already compelling mid-30% four-wall EBITDA margins. We couldn't be more excited about the long-term potential of the glass business. Again, we're repeating our proven growth playbook and getting better each time we do it. Beyond the breadth and strength of our brands, the benefits of our scale and our shared service capabilities deepen our competitive moat and differentiate our business, further enabling unit growth, same-store sales growth, and cost savings. In addition to the unique advantages that we have discussed previously on data and marketing, a few additional capabilities include our commercial, or B2B, business, procurement, and development. Beginning with commercial, we're uniquely positioned with a breadth of offerings that no other player in the category can offer. About 50% of our system-wide sales are generated from commercial customers, including insurance and fleet. This drives significant incremental volume to our locations, a tailwind to same-store sales, and an additional layer of resilience to our business. We have dedicated teams that work with these partners across our portfolio, streamlining operations, and ensuring a consistent customer experience. While it's a meaningful contribution today, we have significant opportunity to continue to grow this part of the business, and it's a key priority for us. More units mean more locations to serve commercial customers. The addition of glass and car wash creates additional revenue opportunities. Our glass business today is 80% B2C with limited insurance volume. As we build a national footprint and connect existing insurance customers to this new service offering, we will drive significant additional volume to our locations, and delivering commercial volume to acquired locations makes M&A even more accretive to Driven. As we discussed last quarter, we leverage our significant scale across our company-operated and franchise network through a centralized procurement function. This helps mitigate rising input costs and keep our stores in stock when others are not. We're still in the early days of the opportunity in front of us. In November, we are launching the pilot of our new marketplace, which we expect to fully roll out over the course of 2023. We believe this new marketplace will provide significant value to our franchisees and vendor partners by creating a one-stop shop for franchisees, expanding our offerings and improving the experience. We will learn more in the coming months through this test, but we're excited by the potential to provide meaningful revenue and EBITDA growth for Driven over time. In addition to our M&A capabilities, one of our core competitive advantages is our greenfield development competency. We've got a team of experts working across all of our businesses that specialize in market planning, site selection, engineering, and construction, supporting both our company-operated and franchise pipeline. This is a very important internal capability that provides us with the flexibility to maintain our growth trajectory and to be very selective on acquisitions when others don't have that luxury. Over the last year alone, our development team has secured, purchased, leased, converted, or opened almost 1,200 locations. For our company-operated stores, that includes construction in almost 300 locations and about 120 rebrandings. Also, of our robust development pipeline of over 1,500 locations, roughly 40% of those units are site secured or better, giving us strong visibility into sustainable, predictable growth over the next few years. Within this large and highly fragmented category, there remains significant white space, creating a long runway for unit growth and market expansion in the future. We believe there is no one better positioned to capitalize on that opportunity than Driven Brands. As you can see, the power of our growing scale and sophistication in these shared service capabilities enable growth and market share gains in this highly fragmented needs-based industry. We are still in the early innings of maturing these capabilities with a long runway of incremental value, volume, and profitability benefits to the business, giving us even further confidence in our ability to deliver on our short, medium, and long-term goals. So when you pull all that together, we continue to have momentum entering the fourth quarter, building on our strong performance year-to-date. Although the operating environment may be different than we anticipated as we entered the year, we’re pleased with how we’re navigating the market and remain very confident in the significant opportunities ahead of us. We are growing, taking share, and generating cash. Our scale gives us a competitive and compounding advantage. We have a proven playbook and multi-year visibility into unit growth. Our Dream Big plan of at least $850 million of adjusted EBITDA by the end of 2026 is very much on track. We’re confident in our ability to beat it because our team is in place and executing against a proven growth plan. Our industry is needs-based and highly fragmented. We are generating cash, which we reinvest into the growth flywheel. So with that, let me turn it over to Tiffany for a deeper dive into the Q3 financials.

Thanks, Jonathan, and good morning, everyone. Building on our performance in the first half of 2022, we exceeded expectations again in the third quarter with another strong print from Driven Brands. Our team executed well, delivering best-in-class needs-based services to both consumer and commercial customers. We continue to gain share in the category with a focus on key growth areas that Jonathan just outlined. In the fourth quarter, we will remain both nimble and resolute in our efforts to capitalize on consumer demand in this resilient category, drive strong growth, continue to gain market share, and deliver on behalf of our customers. Now diving into the specifics of our third quarter results. System-wide sales were $1.5 billion, from which we generated $517 million of revenue. Adjusted EBITDA was $129 million, and adjusted EPS was $0.32, another top-to-bottom beat. System-wide sales growth in the quarter was driven by same-store sales growth as well as the addition of new stores. We have tremendous white space to continue growing our store count in this $350 billion highly fragmented and growing industry. Our franchise company greenfield and M&A pipelines are all robust and we are aggressively growing our footprint. In the third quarter, we added 101 net new stores. Same-store sales growth was 12% for the quarter. We continue to benefit from the increasing complexity of vehicles as well as retail pricing action to offset the cost of inflation. Importantly, performance across the months of the quarter was relatively consistent on a consolidated basis, and we once again outpaced the industry across our business segments. Remember, over 75% of our locations are franchise, so not all segments contribute to revenue proportionally. For example, PCMG was over half of systemwide sales this quarter, but only about 20% of revenue because it’s predominantly franchised with lower average royalty rates. Maintenance and car wash are a mix of franchise and company-operated, contributing almost 40% and 30% of revenue, respectively. As always, this is provided on our infographic posted on our Investor Relations website. When you put unit growth and same-store sales growth in the blender and account for our franchise mix, our reported revenue in the quarter was $517 million, an increase of 39% versus the prior year. From an expense perspective, we continue to carefully manage site-level expenses across the portfolio. In fact, prudent expense management, together with the strong sales volumes, drove four-wall margins of 39% at company-operated stores. Above shop, SG&A as a percentage of revenue was 17% in the quarter, and improved over 350 basis points from the prior year, primarily due to leverage on our growth. This resulted in adjusted EBITDA of $129 million for the quarter, an increase of 32% versus the prior year. Adjusted EBITDA margin was 25%. Depreciation and amortization expense was $37 million. This $8 million increase versus the prior year was primarily attributable to the growth in company-operated stores, and interest expense was $27 million. This nearly $10 million increase versus the prior year was primarily attributable to increased debt levels as we lean into opportunities across our quick lube, car wash, and glass businesses. For the third quarter, we delivered adjusted net income of $55 million and adjusted EPS of $0.32. You can find a reconciliation of adjusted net income, adjusted EPS, and adjusted EBITDA in today’s release. Now a bit more color on our third quarter results by segment. The Maintenance segment posted positive same-store sales of 14%. Take 5 quick lube continues to benefit from enhancements to targeted digital marketing, driving increased car counts. We’ve successfully passed along a series of retail pricing increases while maintaining our premium oil mix of nearly 90%, driving an increase in average tickets. The attachment rate of ancillary products such as engine air filters, wiper blades, cabin air filters, and cooling exchange remains strong at nearly 40% also contributing to a higher average ticket. Despite a series of retail price increases over the past 18 months, our net promoter scores remain strong and repeat rates have increased 5% year-over-year. The Car Wash segment posted negative same-store sales of 9%. Foreign exchange rate movement continued to have an outsized negative impact this quarter of roughly 560 basis points. Our more mature single branded international business delivered strong results on a constant currency basis driven by strategic pricing, digital marketing, and premium mix shifts, despite a challenging operating environment. In the U.S., we are evolving to a single brand and operating standard. We have nearly 40% of our Car Wash business operating under the Take 5 banner today, and we’ll have completed nearly half of the estate by the end of this year with the expectation that all stores will be rebranded by the end of 2023. While we experienced softer retail volume this quarter in the U.S., we drove mix shifts to higher dollar washes and continued to grow our Wash Club programs. We are nearing 600,000 Wash Club subscriptions in total, and the retention rates have remained steady. This is not only a great recurring revenue stream that provides a level of predictability to this business, but it is also proving to be a sticky customer and an important focus for Driven Brands. Since the acquisition of ICWG in August of 2020, we have added 170 net new stores in the U.S. through acquisitions and greenfield development. As a result, we are the largest express car wash operator in the U.S. The Paint, Collision, and Glass segment posted positive same-store sales of 16%. We added 206 direct repair programs with insurance carriers in the third quarter. Our expanding commercial partnerships are a testament to our strengths and scale, and the ease of working with one large national provider is a clear differentiator for Driven Brands. The recovery in the Collision business continues. In fact, estimate counts for the industry continue to grow, and our shops have consistently outpaced the industry. We are also excited about the continued expansion of our glass offering in the U.S., including three acquisitions in the third quarter alone. Glass repair complexity is increasing due to the need for calibration of the windshield camera associated with advanced driver assistance systems that govern a vehicle’s advanced safety features like brake assist and lane departure warning. As these features grow as a proportion of the car parc and it’s our mix of commercial customers increase, which generally require calibration, we expect to see a tailwind to both ticket and margin. Finally, the Platform Services segment posted positive same-store sales of 9%. We have leveraged our scale and leadership in the industry to ensure our franchisees are consistently in stock despite supply chain disruptions, creating long-term customer loyalty for the 1-800-Radiator brand. We were pleased with our strong operating performance in the quarter, which resulted in significant cash generation that allowed us to continue to invest in the business. That cash generation, together with our revolving credit facilities, our real estate portfolio that can be monetized, and access to the debt capital markets fuel our strategic growth plans, which remains our number one priority given the strong returns on investments. We ended the third quarter with $190 million in cash and cash equivalents, and we had $97 million of undrawn capacity on our revolving credit facilities, resulting in total liquidity of $288 million. Subsequent to the end of the third quarter, we closed on a $365 million whole business securitization transaction. The notes were priced at a fixed rate of 7.4% and have a five-year tenure. We hedged the interest rate on this transaction resulting in an effective interest rate of 6.8%. Although the cost of capital is higher than it was a year ago, the return on investment of our three growth businesses remains highly compelling given their attractive unit-level economics. The proceeds from the securitization transaction were used to repay the outstanding balance on our revolving credit facility, and the remainder will be used for general corporate purposes, including continued greenfield openings and M&A. The pro forma weighted average interest rate of our debt portfolio is now 4.2% with a five-year weighted average maturity, and our debt portfolio is approximately 80% fixed rate. At the end of the third quarter, our net leverage ratio was 4.7 times. You can find a reconciliation of our net leverage ratio posted on our investor relations website. In addition to the ability to raise capital through the debt markets, we have a real estate portfolio that can be sold and leased back providing roughly $500 million of incremental financing. This is an important additional lever in a rising rate environment. We intend to continue using our balance sheet to capitalize on a substantial white space in a $350 plus billion consolidating industry. Looking ahead, we remain optimistic about the balance of the year. Vehicle miles traveled were up approximately 1% year-to-date compared to the prior year, and the forecast for the fourth quarter is positive. We serve both consumer and commercial customers, and our services are diverse and needs-based. This allows us to better withstand any volatility that comes with a weakening economic environment. Our scale and sophistication provide us the competitive advantage as we continue to navigate the inflationary environment and supply chain challenges. Finally, our proven playbook for growth is delivering across our key growth areas. As a result in our earnings release this morning, we raised our fiscal 2022 guidance reflecting our outperformance in the third quarter while keeping our expectations for the fourth quarter unchanged, even as we absorb FX headwinds. We now expect to deliver revenue of approximately $2 billion, driven by low double-digit same-store sales growth and net store growth of approximately 370 units across the portfolio inclusive of organic growth and M&A through Q3. We expect adjusted EBITDA of approximately $503 million and adjusted EPS of approximately $1.21 based on 167 million weighted average shares outstanding. As you update your models, it will be helpful to have a few other data points. First, we continue to anticipate depreciation and amortization expense of approximately $145 million. Second, interest expense is now expected to be approximately $115 million as a result of the recent debt raise. Our effective tax rate is now expected to be approximately 30%. Delivering $503 million of adjusted EBITDA for fiscal 2022 will be an increase of 39% over fiscal 2021 with stable adjusted EBITDA margin year-over-year, a great milestone on the path to at least 850 million by the end of 2026. Our performance to date in the fourth quarter is trending in line with our expectations. In closing, we expect the strengths of this portfolio to continue to deliver strong results. We are focused on our proven formula with the platform that is scaled and diversified. Our formula is simple. We add new stores, we grow same-store sales, and we deliver stable margins. 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.

Thank you. Our first question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Hi. Good morning everyone. My first question is on car wash. The EBITDA deleverage that occurred in the quarter. Can you speak if that's directly tied to the comp underperformance? I assume there's some FX in there, is there any other thing related to that deleverage? And then should – is it appropriate to run rate this quarter's EBITDA for the next four? Is that the right way to think of it? Or it could be volatile and snap back on a whim? Or are we in a steady environment now that we should model what happened in the third quarter? Thank you.

Hi. Simeon thanks for the question. So here is what I would tell you about car wash segment adjusted EBITDA performance. It contracted in total, so this is total car wash now, it contracted about 280 basis points year-over-year due to a couple of things. One is certainly the outsized impact of FX in the quarter and then it's also softer retail volumes as well as some promotional activity in the U.S. So obviously, we've got to watch FX rates as we move forward. I think we could bounce around. I wouldn't necessarily take this quarter's margin and forecast it out, but just keep those couple of points in mind.

Perfect. Maybe the follow-up on the PC&G business. Can you say where the EBITDA would have been or the proper run rate if we had the full quarter of the acquisition? And then thinking about incremental margins, I guess I'll leave it open-ended. We wanted to ask how we should think of incremental margins in that business going forward with these new acquisitions and I guess some changing mix of business.

Sure, Simeon. So with the PC&G business, if you look at the contraction year-over-year, it's driven by two things. One is we acquired in September of last year, 10 Seattle locations that obviously as we think about a company-owned business versus the franchise business dragged down the performance of the collision segment. However, we have resold those company-owned stores, and so that's no longer a part of the future run rate. From a glass perspective, glass is a fantastic business, it's generating 35% four-wall EBITDA margins, but when you mix that glass business in with the remainder of the PC&G segment, you are seeing some dilutive effect. The glass is a fantastic business, great cash-on-cash return. I think this is a good run rate for you for the PC&G segment over time.

Perfect. Okay. Thank you. Good luck.

Thanks, Simeon.

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

Great, thank you. I think you may have mentioned this and I might have missed it, but just how much did inflation impact your comps and/or margins across your various categories? And then on the other side of that, do you have any expectations for how deflation or disinflation might impact your business if we start to see some of those input prices falling?

Hi, Liz. Yes, thanks for the question. In terms of inflation, the team has done just an absolutely excellent job managing inflationary impacts. We've had success passing through input cost increases given the pricing elasticity in our business. If you take our Take 5 quick lube business as an example, we've experienced a double-digit rate of inflation, and we've taken four price increases in the past 18 months. Importantly, NPS scores have remained strong and repeat rates have improved 5% year-over-year, showing that we operate in a need space and a very resilient category.

Hi, Liz. It's Jonathan. Good to hear from you. I'll talk about the deflation question. A couple of thoughts. First, obviously, we only control pricing for our company-owned stores. Our franchisees control their own pricing. However, they are incredibly nimble and agile in terms of managing price effectively. As Tiffany said, look, we've been very active in both price and revenue mix management over the last two years. I think we've been very thoughtful on not maximizing that price, but making sure we're taking enough price to offset the input costs that we've been facing. In this category, I would say historically, price increases have been very sticky following periods of inflation. If costs do come down over time, we think it would likely be a very slow process. There's potential for deflation to lead to a decline in interest rates, which would lower the cost of capital.

Great. If I might ask one more question just on car wash in the U.S. was the decline there? Because, I mean, I guess there was the impact from FX, but you would still be seeing the U.S. business down year-over-year. Was this the effect of more of those retail customers choosing not to come in? Did you find some of that discretionary demand starting to pull back?

Yes. Look, again, Tiffany mentioned the two big factors, right? There's FX certainly in the international business. But in the U.S. business, there are a couple of things. We’re incredibly pleased with almost doubling the size of the portfolio over the last two years. Secondly, we've got a massive greenfield pipeline now of over 200 locations. We have undertaken the rebranding strategy and are now almost 40% changed over to Take 5 Car Wash with a view that will be finished at the end of 2023. I think when you look at the actual business, we've made great progress in migrating people into our Wash Club program, over 600,000 folks in that program right now with an LTV, lifetime value of 5 to 1 versus retail customers. We expect some noise in the retail space, as Tiffany mentioned, in Q4, but overall, we're very pleased with the operations of the car wash business.

Okay, thank you.

The next question is from Sharon Zackfia with William Blair. Your line is open.

Hi. Good morning. I guess first question for Tiffany. There seems to be maybe some confusion on the context for about $2 billion. If you could clarify that, and specifically for the fourth quarter, I think you can get to double-digit full-year comps on any positive comp in the fourth quarter, but it sounded like you've got some pretty strong momentum. Any insight into what we should expect in the fourth quarter even by segment basis, if there's any variation to think about? And then secondarily, just curious on the franchise pipeline, is there any discernible impact from rising rates there and maybe a franchisee or urgency to open? Thank you.

Hi, Sharon, I'll take the first question and then Jonathan will answer the second one. Here is how you think about our guidance. We raised our guidance for the beat in Q3, right? So we raised our full-year expectation by that beat. We kept our expectations for Q4 unchanged, and it's important to know that we've absorbed about $4 million of FX headwinds in the second half, which is using a 9/30 spot rate for Q4. If you started the year with adjusted EBITDA guidance of about $465 million, the benefit of year-to-date M&A, net of any SLB transactions is $24 million. This means we expect to beat our organic guidance for the year by $14 million. We're particularly proud of the team, especially given an operating environment that's different from where we started the year. The confusion on the revenue guide is that all of this is approximate. Keep in mind that we're rounding and giving you approximate numbers as we guide at a high level.

Hi, Sharon, Jonathan, I'll talk about the franchise pipeline and your question around discernible impact. The answer is categorically no. The results and resiliency of our category continue to become even more attractive for prospective franchisees. Our pipeline continues to grow. The biggest headache we have right now is just making sure that we can open based on some of the resource issues in terms of local permitting and jurisdictions, making sure that all the supply chain pieces are moving, but there is zero discernible impact to our franchise pipeline or franchise energy around opening locations.

Thank you.

The next question is from Chris O’Cull with Stifel. Your line is open.

Thanks. Good morning guys. I was hoping you could provide some details around CapEx spending this year outside of acquisition spending and maybe just bucket the CapEx around unit development, maintenance, and tech or corporate? And do you have a target for this year as well? Has the higher rate environment made generating positive free cash flow, a higher priority for the company?

Hi, Chris. Thanks for the question. So quickly on our CapEx guidance. Total CapEx for the full year is expected to be $400 million. You can split that between gross CapEx of $360 million and maintenance CapEx of $40 million. That gross CapEx of $360 million includes the car wash rebranding, so we'll be at half of the estate by the end of this year. It also includes some corporate projects such as unlocking our digital potential. When we think about free cash flow, it's important to take a look at a couple of things. If you took cash from operations and subtracted CapEx, you would see contraction year-over-year. However, considering us being an aggressive growth company with tremendous opportunities in a growing and consolidating environment, subtracting out gross CapEx and factoring in the $56 million success fee we paid in the first quarter for acquiring AGN, we have a normalized free cash flow level that's actually grown quite nicely. The business is incredibly strong and resilient, and we continue to be pleased with our performance.

Okay, great. Thank you.

The next question is from Peter Keith with Piper Sandler. Your line is open.

Hi, good morning everyone. Nice results. I want to dig in a little bit on the glass comments. I think a lot of investors are eager for you to open up that insurance opportunity, probably doubling the TAM, but you're talking about that not until late 2023, early 2024. What's the delay on lining up the insurance contracts? And on the calibration opportunity, does that come hand-in-hand with insurance, or can calibration start to ramp earlier?

Hi, Peter, Jonathan. We love this glass business. In less than 12 months, we've become the second largest provider in the industry. From our view, there are at least two types of customers: retail non-insurance customers, commercial customers, and insurance customers. We are very much focused on the commercial customer and the retail customer. As we build scale, we will leverage the amazing insurance partnerships that we have through our Collision business. We are being prudently cautious about the timing of unlocking that insurance opportunity. Calibration equipment and training are critical and we're ensuring that all of our stores have what they need to provide calibration services. Calibration matters regardless of customer type as more vehicles require calibration.

Okay, that's great. Thank you. I also wanted to pivot over to labor. We’re hearing about constant labor constraints in the industry. It seems like it’s a bit of a structural problem as younger people just aren’t getting the proper training on auto service and repair. Are your sites seeing any challenges with hiring? Is your scale and ability to offer benefits providing any advantages here?

Yes, Peter, it's an interesting question. If you think about our large scale company assets in quick lube, car wash, and glass, we don’t require specialized labor. We have labor that can be trained in-house to operate those stores. That’s number one. Secondly, the three models are highly labor efficient, running locations with just a few people. We offer very competitive benefits to our employees. We have people wanting to work in automotive, making it an attractive space versus other alternatives at similar wage levels. Additionally, we’re growing, which offers great promotion and advancement opportunities for our employees.

Okay, that’s very helpful. Thank you. Good luck.

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

Hi, good morning. Thanks for taking our question. Just back to the commercial and insured opportunity. Is there any change in how big you think this opportunity can be versus what you originally incorporated in your 2026 outlook?

Hi, Kate. I think it’s just highlighting how big that opportunity is. We won't frame exactly what percentage, but it continues to grow very nicely over the last five to seven years. Commercial customers can be harder to win but are sticky due to high switching costs. Our commercial customer expertise combined with the partnerships in insurance strengthens our position in this space, which is central to Driven's future.

Okay, thank you. Our follow-up question was just about the marketplace test. Can you provide more details about the mechanics of it and what you might be providing the franchisees that you didn’t provide before?

Yes, the ultimate transaction flow is the same. Our franchisees will ultimately buy products or services through Driven Brands. What we’re doing is providing a more efficient and holistic platform for them to do that. Think of it like Amazon, creating a centralized location that allows vendors to consolidate while offering multiple options for franchisees. We're excited about this and will keep you updated as we move through the test and hopefully enter commercialization soon.

Thank you.

The next question is from Justin Kleber with Baird. Your line is open.

Yes. Good morning, everyone. Thanks for taking the question. Tiffany, just to clarify on the guide, you mentioned leaving 4Q unchanged a few times. Obviously, you’ve done M&A during 3Q. If you’re leaving your 4Q guide unchanged, doesn’t that imply your organic assumptions have come down or is the M&A that you completed during 3Q not in the full-year guide?

Yes, Justin, thanks for the opportunity to clarify. Any M&A that we’ve completed in Q3 is included in that guidance. So what that breaks down to is about $11 million of benefit expected in Q4. We started the year at 465. We’ve rolled in the M&A year-to-date. We’ve also taken the offset from FX because it’s different than at the end of Q2. That all points to our expectation of beating organic guidance by $14 million.

Okay, that’s helpful clarification, thank you. And then just a follow-up on the Car Wash business. You mentioned promotions in the U.S. Can you elaborate on what that entails? Are you discounting the membership program or what type of promotions were you alluding to?

Yes. Thanks, Justin. Promotions are something we do across all of Driven Brands. I don't want people to think we're promoting because of a little softness; these are part of our customer acquisition strategy and marketing efforts. We expect to continue this practice to build long-term customer accounts and move more customers into our car wash membership program, which currently has over 600,000. It's all about enhancing lifetime value for customers and not a reaction to short-term conditions.

Got it. Makes sense. Thank you both.

Our final question is from Christopher Horvers with JPMorgan. Your line is open.

Excellent, thank you. A couple follow-ups. First on the Car Wash business, was there any disruption to comps and EBITDA from the remodeling in the U.S. and volumes slowdown from a macro standpoint? Did that get worse over the quarter and into the fourth quarter?

Hey, Chris. De minimis impact in terms of the rebranding, so small that we didn’t even separate it out. We didn’t see a worsening of the comp profile within Car Wash. Car Wash has a solid business model with great unit-level economics. We’ve doubled the size of the U.S. business in two years since acquisition and have a robust greenfield pipeline of 250 stores, which aligns with our initial strategy of using M&A and greenfield to build scale. We have been consistent in our strategy and its execution.

Got it. And then a follow-up on the M&A side, you mentioned that the deal pipeline remains robust. Can you talk about how returns are changing given the intersection of multiples and funding costs?

Yes, Chris. The question is probably more related to Car Wash. In that space, there are about 20 institutional capital investors right now, all chasing M&A opportunities because only a few have the greenfield capabilities that we do. Currently, we aren't seeing moderation in multiples, but I do expect that to change as rising debt costs affect the market. In Glass, we've completed nice acquisitions and multiples are more moderated compared to Car Wash because there isn't as much institutional capital. The opportunity in Glass involves smaller deals, something we've been doing for over a decade.

The recent Glass deal was that a franchise acquisition and how do you think about the balance of greenfield versus acquisition and Glass over the coming let’s say 2023?

No, it wasn’t a franchise, Chris. The focus this year has been on building scale through platform M&A and then bolt-on M&A. In 2023 and beyond, you'll see a shift to more greenfield growth in Glass, though we will remain active in M&A.

Great. Thanks so much.

Yes, and thank you all for joining today and for your time. We appreciate it. On the back of a strong third quarter, we continue to have conviction around the strength of our business model and the continuing momentum of our business. Our team is executing and we’re successfully navigating the evolving market dynamics. The benefits of our scale and breadth of our offerings deepen our competitive moat and differentiate our business, which is driving unit expansion, same-store sales growth, and cost savings. Our results are a testament to the resiliency of this needs-based service offering and our ability to drive sustainable growth and cash flow leveraging a proven playbook. As always, investor relations with Kristy Moser will be available after the call if anyone has any further questions. But again, thank you for your time this morning.

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