Driven Brands Holdings Inc. (DRVN) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to the Driven Brands Third 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 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. 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. Information about any non-GAAP financial measures referenced including a reconciliation of those measures to GAAP measures can also be found in the company SEC filings and the earnings release available on the Investor Relations website. Today’s prepared remarks will be followed by a question-and-answer session. We ask that you limit yourself to one question and one follow-up. I’ll now turn the call over to Jonathan. Please go ahead.
Jonathan Fitzpatrick: Thank you, and good morning. We had another great quarter across the board our third as a public company, and are excited to the share results over the course of today’s call. Driven Brands is the largest automotive services company in North America And our diversified portfolio of services gives us many levers to grow same store sales and units which ultimately drive profit growth. We've consistently taken share for the past decade, and yet we are less than 5% of this massive and growing fragmented market. We will continue to take share and win in this industry because of our core competitive advantages, our sheer scale, our ability to collect and then use our customer data to drive higher frequency and deeper penetration. Our ability to open new units, either franchise or company. Now, over the long term, Driven has and will consistently deliver organic double digit revenue growth and double digit adjusted EBITDA growth. And because of our asset light business model, we generate a ton of cash. We then use that cash to further accelerate our growth by layering on acquisitions, which, as we have proven, has massive incremental upside to our model. Said simply Driven is growth and cash. And we're pleased with our Q3 results that we released this morning, and all credit goes to our team and our amazing franchisees. Compared to Q3 of 2020, consolidated same store sales were positive 13%. Revenue increased 39% to $371 million. Adjusted EBITDA increased 42% to $98 million and adjusted EPS increased 30% to $0.26 a share. Another top to bottom beat, and we are very proud of these results and remain optimistic about the remainder of this year and more importantly, about 2022 and beyond. Now in Q3 we gained market share across all segments, we continued to lead into our competitive advantages, our data, marketing, operations, store growth and supply chain, which led to more cars, more sales, and more profits for our franchises and for Driven. We drove same store sales through a healthy balance of new customers, increased repeat rates, better mix and our ability to take price. All of this combined led to 13% same store sales. We continue to see strength in our consumers and their driving behavior in 2021, vehicle miles traveled continues to be a tailwind. The summer started strong, June and July were the first months that VMT was flat to 2019. And then in August, VMT softened slightly lightly around concern for the Delta variant. September rebounded nicely to a similar pattern experienced in June and July, and that trend is continuing into Q4. 2022 is set up to be a very strong year for driven brands. Our consumer outlook for 2022 is positive, which should return VMT to pre-pandemic levels. First party data is getting more and more valuable as we continue to shift from mass marketing to personal one to one engagement and a call to action. Now we see tremendous opportunity from the customer data we're continuously capturing. While we've always done a great job of collecting customer data, I'd say we've only done a good job of digesting and commercializing it. And to that end, I'm excited to welcome Matt Myer to the Driven Brands team as Chief Data and Digital Officer. Matt joined us from Whirlpool, where he expanded their offerings to include industry leading IoT connected appliance experiences, expanded their direct to consumer digital platforms and led their global data and advanced analytics competency. Matt will be working with Suzanne Smith, our Senior Vice President of Marketing, Analytics & Intelligence, to unlock even more customer frequency and penetration opportunities across Driven. We currently have 20 million unique customers in our Data Lake, and we're adding about 900,000 each quarter. This customer data will continue to be foundational to our market share gains over the next decade. We've been leveraging data to drive higher customer frequency and increased penetration. Now we're starting to test cross-marketing and driving more customers to our digital platforms. But this is just the tip of the iceberg. This will allow us to lower acquisition costs of new customers and increase the wallet share of existing customers by continuing to cross-market and provide complementary products and services. As we look across Driven segments, the opportunity for incremental sales from targeting and cross-marketing is huge. And we're just starting to unlock this. And all of this with minimal costs, thanks to the data infrastructure we have already built and the plug and play model that can be applied across customers. And none of this is built into our long term guidance. But the opportunity is significant. And moving to unit growth, in the third quarter, we added 53 net new units. This was a balance of franchised and company store openings and tuck-in acquisitions. And I'll break down these complementary leverage for you. But to us, they're interchangeable. Our goal is to own the best street corners in the best market. In the best, fastest and highest return on investment we can. Our goal is to own the best street corners in the best market. In the best, fastest and highest return in investment you can. Organic new unit pipeline continued to grow into Q3. Our total organic new unit pipeline now sits at over 1,000 units. That's up by 10% versus the prior quarter through a combination of both company and franchised locations. Now let's break that down a bit. Our company store pipeline is strong with over 220 locations, also up 10% since Q2 and continues to build. This provides very strong visibility into 2022 and 2023 openings. The franchise pipeline is also growing every quarter. Today we have more than 800 commitments to open franchise sites. Looking back at our first public call this franchise pipeline was 600 sites which gives you a sense of just how quickly this growing and these 800 commitments provide visibility into unit growth over the next four years and we have locations identified for nearly 300 of these already. Based on the well-developed pipeline we are confident in opening at least 250 locations in 2022 and those are all organic openings. That is before we include any sites in the M&A pipeline which will obviously add to the overall visibility for unit growth. Now supplementing our strong organic pipeline is our equally robust M&A pipeline. Scale matters in our industry and M&A is one of the highest and best uses of our cash flow which will compound over time, driving higher returns for all stakeholders. M&A is a core strength that driven and all transactions to date have been accretive to earnings. We make the businesses we acquire better and they make us better. The fragmentation in this industry allows for highly accretive acquisitions for many years to come. 2021 has been a busy year, particularly for car wash acquisitions. So far this year, we have acquired 70 car wash units for a total of 87 units since adding the car wash business to the Driven Brands’ portfolio in August 2020. This brings our total car wash unit count to 288 units in the United States. This is a 44% increase in store count in only 14 months. And these acquired stores will continue to benefit from our scale and data, marketing operations, supply chain and purchasing. And they'll have a full year impact in 2022 and beyond. This is M&A augmenting our compounding organic growth algorithm. Now let me give you a few details about our car wash acquisitions to date. The average transaction includes 2.6 locations, 60% are proprietary deals being generated by our internal business development team. The AUV and acquisition is $1.3 million. Purchasing synergies are significant with a 40% average reduction in chemical costs. Our pipeline is strong and we feel very good about this growth lever for years to come. And remember, that is before we layer on greenfield car wash growth, which we expect to be about 50 units in 2022. If you look at the average of the trailing three years, Driven has acquired more than $50 million of free synergy EBITDA annually. Every acquisition is integrated, and in all cases, the business has improved under Driven ownership. Synergies typically translates into a two to three turn reduction in purchase multiple post acquisition and these synergies come from better use of data that are marketing, better operations and better purchasing. We won't provide annual guidance for M&A, however, adding $250 million of incremental free synergy EBITDA over the next five years to Driven’s organic long-term growth algorithm would be a very reasonable assumption for your models. We’ve now leading the car wash business for a little over one year. And looking back to when we acquired the business in August of 2020, there were fewer than 200 locations in the United States. We now have 288 as our teams applying the driven growth playbook through both Greenfield openings and acquisitions. The car wash business has been highly accretive to both our top and bottom lines, and we have made significant changes to improve its foundation, which has resulted in higher subscription rates and healthy same store sales, and we are opening and acquiring new units. But there is still a long way to go. And I’m even more optimistic about this business when we bought it a year ago. But we will continue to optimize it. And I'm delighted to announce that John Teddy has joined Driven Brands to run our US car wash business. John spent the bulk of his career driving transformation and growth in multi-unit retail and consumer services businesses. Most recently, he was Head of Strategy and corporate development at Lowe's. Previously, John also worked at the Home Depot, and John is no stranger to Driven. He was a key member of the Take Five team where he helped grow our business significantly from 2017 to 2020. We are thrilled to welcome John back to the Driven team. I've been asked about our long-term strategy and competitive mode for car wash. When I think about the long-term potential for this business, it's simple, we are going to be the biggest car wash company in the industry. Now, while we intend to have the most stores, we are equally committed to having the best stores. We want stores that have great real estate and then we commit to offer customers the best experience when they come to one of our locations. This is core to everything we do at Driven. We want the customer to trust that our brands will always offer a great experience with first class customer service. That's our long term vision for the car wash business, and we're only 14 months into that journey. We recently started testing rebranding our car washes to the Take 5 brand name. And it is still very early innings, but I wanted to give you an update. Now the hypothesis is straightforward. Having one national brand allows for efficiencies across marketing, real estate, operations, people and subscription member benefits. So why the Take 5 name? Well our Take 5 brand name stands for fast, friendly, quality and simple, and that is what customers want in a car wash experience. Take 5 has industry leading NPS scores of over 80% and repeat rates of over 70%. Our customers trust that Take 5 name. It also accelerates the growth of our Take 5 brand recognition across the country while enabling cross promotional synergies between our two most frequented brands. There are also many markets where our car wash and Quick Lube businesses overlap and future development will in many cases be in the same markets and even on shared real estate, driving further brand connection and efficiencies. We started with five Take 5 branded car washes and have since expanded to 2025 and we'll keep you posted as our test progresses. Well, let me share my thoughts about the rest of the year and beyond. It's very positive. We remain bullish on 2021 and feel very good about achieving our updated guidance for adjusted EBITDA of $350 million for 2021. This is up 23% from the original $285 million estimate ahead of our IPO less than 12 months ago. More importantly we feel really good about the momentum in our business heading into 2022. We've added 145 stores so far this year. They will ramp and have a full year impact in 2022 and all of our store pipelines continue to grow. Unit count growth should accelerate in 2022 and 250 new units feels very achievable and M&A will continue to be an additional accelerator to our results. Tiffany will give full 2022 guidance on our Q4 earnings call in February 2022. As a private company, when I joined Driven in 2012 we generated less than $40 million in EBITDA. In 2015 we announced our first five year plan with a goal of $200 million in EBITDA, we achieved that early and increased our target to $300 million which we have also achieved ahead of schedule. Our new Dream Big Plan is now targeting adjusted EBITDA of at least $850 million by the end of 2026. That means continuing to deliver on our long term organic low double digit revenue growth and low double digit adjusted EBITDA growth plus the $250 million of Preece Energy Acquisition EBITDA, which we know will expand and compound and we're believers in this plan because we are a compound grower, and our growth is low risk because of our current market share, and we are asset light and generate a lot of cash, which we reinvest back into growth. And our benefits we generate with scale are continuing to grow, and our business model works well in all economic cycles. And finally, we execute and do what we say we're going to do. You can see this very clearly in our 2021 results and our momentum heading into 2022 Driven is growth and cash. I'll now turn it over to Tiffany for a deeper dive into the Q3 financials and 2021 guidance. Tiffany?
Tiffany Mason: Thanks, Jonathan, and good morning, everyone. We've now delivered three consecutive quarters of strong performance since our IPO in January. We are proud of our entire team from franchisees to store level employees, brand support teams and corporate office personnel. Everyone has shown tremendous flexibility and a relentless focus on operational excellence, which has produced great results year-to-date, and we expect to end fiscal 2021 strong. For the third quarter, system wide sales of $1.2 billion from which we generated revenue of $371 million, adjusted EBITDA was $98 million. And as a percentage of revenue, adjusted EBITDA margin was 26%. Adjusted EPS was $0.26 for the third quarter, exceeding our expectation as a result of strong sales volume which allowed us to leverage our expense days driving significant flow through. This is the power of the Driven Brands platform a scaled, growing, highly franchised business with a diverse, needs based service offerings that delivers very attractive margin. Now, let me break things down a bit more. 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 account in its $300-plus-billion, highly fragmented industry. And as Jonathan discussed, our franchise company, Greenfield and M&A pipelines are all robust and we are aggressively growing our footprint. In the quarter, we added 53 net new stores. Same-store sales growth was 13% for the quarter, with consistent performance across the three months. Now that we have celebrated the anniversary of the ICWG acquisition in early August, Car Wash was included in our consolidated same-store sales calculation on a pro-rated basis for the third quarter. We once again outpaced the industry across all business segments, continuing to gain market share, and our same-store sales were comprised of positive store count and average ticket. Store count was driven by our best-in-class marketing and customer experience and average ticket continued to benefit from the increasing complexity of vehicles. Now, remember, we are over 80% franchised. So not all segments contribute to revenue proportionally. For example, PC&G was roughly half of system-wide sales this quarter, but less than 15% of revenue because it's effectively all franchised with lower average royalty rates. Maintenance and Car Wash are a mix of franchised and company operated, contributing approximately 40% and 35% of revenue, respectively. As always, this is provided on our infographic, which is posted on our Investor Relations website. When you put unit sales and same-store sales growth in the blender and account for our franchise mix, our reported revenue in the quarter was $371 million, an increase of 39% versus the prior year. From an expense perspective we continue to carefully manage state level expenses across the portfolio. In fact, prudent expense management together with a strong sales volume drive for low margin of 39% at company operated stores. And above shop SG&A as a percentage of revenue was 20% in the quarter, over 200 basis points of improvement versus last year. This resulted in adjusted EBITDA of $98 million for the quarter, an increase of 42% versus the prior year, and a $5 million beat to our internal forecast. Depreciation and amortization expense was $28 million versus $16 million in the prior year. This increase was primarily attributable to the growth in company operated stores. Interest expense was nearly $18 million in the quarter, and we recorded income tax expense of nearly $12 million, which was an effective tax rate of approximately 26%. For the third quarter, we delivered adjusted net income of $44 million and adjusted EPS of $0.26. 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 17%, once again the strongest in the portfolio. Maintenance continues to benefit from more targeted digital marketing, which led to an increase in car count from both new and repeat customers in the quarter. And from a profitability perspective, strong top line performance resulted in higher flow through on incremental sales. While the national labor shortage continued into the third quarter the situation has improved since Q2 in many of the markets that we serve. And they estimate that the margin benefit from running slightly later on labor than intended was 11 basis points in the third quarter, down from 50 basis points in Q2. The car wash segment posted positive same store sales growth of 6%. As Jonathan discussed, we made a lot of progress since the acquisition. One of the highlights is the improvement in wash club subscription under our ownership. Subscriptions increased to over 49% of sales, and the number of wash club members grew by an additional 43,000 in the third quarter. This is up 700 basis point or 170 acquisition a year ago and this is a great recurring revenue stream that provides a level of predictability to this business. Non-wash club revenue per wash continues to increase as well. The results of a simplified menu board and the focus that our teams have placed on improved selling techniques. Non-wash club revenue for wash is up more than 14% versus last year. From a profitability perspective, we renegotiated our acquisition achieving a significant cost reduction while increasing the service level and associated growth incentive. Similar to our oil program, the more volume we do, the greater the benefit. But as Jonathan also said, there is still a long way to go to fully optimize this business. We'll continue to drive results with the items I just mentioned while supercharging our marketing and branding effort to drive even stronger revenue and profitability going forward. The Paint, Collision & Glass segment posted positive same store sales in the quarter of 11%. This is the second consecutive quarter of positive same store sales for this segment since the start of the pandemic and improving DMT trends is an important tailwind for this business. And although 30% of collisions occur during rush hour and that congestion hasn't fully returned, we have added an additional 570 direct repair programs with insurance customers so far this year, resulting in performance that continues to outpace the industry. And finally, the platform services segment posted positive same store sales growth in Q3 of 16%. Platform services is the segment most exposed to supply chain pressures. And as you know, every aspect of the supply chain is challenged right now, from manufacturing to the port to trucking. We have leveraged our scale and leadership in the industry to turn this into a strength and differentiator for driven. The contract with multiple suppliers, while most of our competitors, 80% of the industry that is independent operators rely on one primary supplier. We leverage the strength of our balance sheet to place orders earlier, and we have the team dedicated to relationship management and ensuring they keep close watch on every step of the supply chain. This is translated into more inventory in stock at one 1800 radiator and many of our competitors and customers have been willing to pay a premium driving continued record sales levels within the quarter. We were pleased with our strong operating results in the quarter, which resulted in significant cash generation that allowed us to further that cash generation, together with our revolving credit facilities, and it's important for our strategic growth plan. And as we've consistently stated, investing in our business and growing our footprint is our number one priority. With $115 million in cash and we had $152 million in undrawn capacity on our revolving credit facilities resulting in total liquidity of $268 million. Subsequent to the end of the quarter we closed on a $450 million whole business securitization issuance. The notes were priced at a fixed rate of 2.791% and has a seven year tenor, improving the weighted average fixed rate of our overall debt portfolio to 3.71%. The proceeds from the securitization issuance were used to repay the facility and the remainder will be used for general corporate purposes, including continued M&A. Pro forma for the securitization issue our net leverage ratio at the end of the third quarter was 4.15 times. You can find a reconciliation of our net leverage ratio posted on our Investor Relations website. We intend to continue using our balance sheet to capitalize on the substantial life space in a $300-plus-billion consolidating industry. Now, looking ahead, we have delivered three strong quarters in 2021, and we expect a strong fourth quarter as well. We continue to be bullish on the state of the consumer tailwinds from recovering VMT and demand for our services this holiday season. Research suggests that 25% of consumers plan to travel for the holidays, that's up 5 points from 2020, and 70% of these consumers plan to use their car with the majority planning to get a car wash or oil change before they do. In this morning's earnings release, we raised our full year guidance to account for our strong operating performance in the third quarter whilst maintaining our guidance for the fourth quarter. So the year we are on track, the net new stores across the portfolio a combination of franchise and company operator location as well as the tuck-in M&A lease completed to date. We expect positive same store sales growth across all of our segments and on a consolidated basis, we expect approximately 15% same store sales growth that will drive revenue of approximately $1.4 billion adjusted $150 million and should result in adjusted EPS of approximately $165 million weighted average shares outstanding. In closing, we expect the strength of this portfolio to continued to deliver best in class results, we are focused on our proven formula with a platform that is scaled and diversified. Our formula is simple the added stores, we grow same store sales and we deliver stable margins. This results in significant cash flow generation that we reinvest in the business. But we won't release fourth quarter results until February 2022. We hope that you’ll have a great holiday season and we look forward to connecting with you over the course of the next few months. Operator we’d now like to open the call up for questions.
Operator: Your first question comes from the line of Liz Suzuki with Bank of America. Your line is open.
Liz Suzuki: Great thanks very much. So you've added 145 stores year-to-date and the new guidances for 200 total for the year. I think previously you'd broken it out by 80 to 90 in maintenance, which you've already exceeded 20 to 30 in carwash, which you've exceeded and 60 to 70 net in PCG it looks like there's been a net reduction in PCG ;year-to-date so where there's some stores reclassified into maintenance and how should we think about that net store growth by segment now? You know, for the next quarter?
Jonathan Fitzpatrick: Hey, Liz, it’s Jonathan, good morning. You know, look, I think you've got a generally right, I'll tell you that. The good news is we have all these different levers to grow unit count. We actually took it upon ourselves to, let's say, prune some underperforming operators in our coalition business in Q3. We get the importance of our large insurance carriers and performance of our franchisees. So once in a while, we need to send a message to the system when we took out some underperforming operators. So I think that was something that happened in Q3. I think it's a onetime event. It sends a little message to the rest of the system. The other thing I would remind you Liz is, like when you think about the collision units from an economic contribution perspective, they're massively lower than, let's say, our car wash, our maintenance businesses. So I think you'll see a little bit of softness there self-composed in terms of the collision. Just because we're making sure that our franchisees understand the importance of delivering for our insurance partners.
Liz Suzuki: Okay, great, that's helpful. And then you took up the full year EBITDA estimate by the amount of the beat in 3Q versus your internal estimates. You know, in your 4Q outlook hasn't really changed. Do you think you're baking in a, you know, decent buffer of conservatism, just given all the unknowns with regard to the trajectory of miles driven, labor shortages, other headwinds that pop up?
Jonathan Fitzpatrick: Hey, Liz, I'll take this one. Sorry, let me start, and then if you want to answer, that's great. So listen Liz, we've continued to provide a measure of being a conservative approach to our guidance. As you said, we raised our fiscal 2021 guidance by the $5 million beat to our internal forecast in Q3, and we held our 4Q forecast. That brought fiscal 2021 adjusted EBITDA to 350, which frankly implies for Q4 that we'll do same store sales somewhere in the 10% range with adjusted EBITDA $73 million. Frankly we're pleased with key – with October performance and we continue to see strength across all segments. So October is off to a great start. Q4 pulled off to a great start, I should say. We expect solid demand for our services this holiday season. However, as you call out we're not yet out of the woods on inflation and supply chain disruption and now we're excited to welcome John Teddy back to driven brand to lead our US car wash business, changes inevitably disruption disruptive in the short term. For those reasons we're holding our Q4 guidance and that's consistent with our conservative approach to guidance over the course of the year. But I do want to be very clear that we did not lower our 4Q guide today. Hope that answers your question Liz.
Operator: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.
Michael Kessler: Hi guys. This is Michael Kessler on for Simeon. Thank you for taking our questions. I want to ask about the car wash segment if we looked at the – the same sort of sales on two year and geometric stack. It looks like there was a bit of a slowdown that – to that 10 point slowdown versus Q2 off a very strong Q2 and Q3. I just want to ask, what did you -- what do you see in that business to the extent that there was a slowdown driven by anything in particular when it was dealt an immediate miles driven in the quarter slow down any commentary there would be great.
Jonathan Fitzpatrick: Hey, Michael Jonathan here. Look, we posted 6% percent in Q3. There's always a bit of noise with the consumer right now whether there's, you know, funky things happening with Delta, you know, different things you know there was some sort of crazy weather stuff going on this summer, but we don't ever talk about that, but the business is in great shape, Michael. We have you know owned it for 14 months. We're even more bullish about it than we ever have before. We've got you know a bunch of new stores that we've added a bunch of stores in both our M&A and Greenfield pipeline. So there's nothing that concerns us whatsoever about the long-term potential for this business. This remains an incredible asset with incredible white space in front of it. So nothing whatsoever concerns us.
Michael Kessler: Okay. Okay, great. And my follow up on our maintenance segment, it was another I guess called out a little bit of a benefit from the understaffing, the grand scheme of things, it sounds pretty minor relative to the level of margin expansion that we've seen in that segment, especially versus a year and especially two years ago. So, I'm just wondering how we should be thinking about the margin here I would anticipate our expected could maybe continue to expand as the business shifts more franchise and that might eventually be looking at, I would say, both maintenance and the whole company's EBITDA margin is potentially replacing on this new higher level, and we're likely going to end 2021 with.
Jonathan Fitzpatrick: Yeah, Michael, great question. So on the point about the labor piece, I’ll tell you’re right, we're seeing improvement in in labor trends, right? So we call that 50 basis points of benefit in Q2 where we're seeing 11 basis points of benefit from the labor shortage in Q3. So definitely seeing improvement while we're still seeing a tight labor market, as we think about a greater mix of franchise in the maintenance space you're absolutely right we should continue to see that margin expand. And then you know if you just look at the trend, the end of 2020, with overall consolidated margins of 23%, we’re forecasting overall margins of 25% for Driven this year, based on our guide. And as we continue to increase the amount of traffic to our sites and increase the benefit of the top line flywheel, we should drop more profitability to the bottom line of the variable model, the margin should expand over time.
Michael Kessler: Okay. Thank you, guys. Good luck for Q4.
Operator: Your next question comes from the line of Chris Horvers with JPMorgan. Your line is open.
Chris Horvers: Thanks. Good morning. So, my first question just following up on the fourth quarter guide, I guess two parts to it. On the second quarter, you talked about sort of mid-single digits-ish comps in the back half with 4Q slightly better. And now you're talking about 10. So it feels like you did raise the sales outlook, but then didn't really flow that through to the EBITDA line. So is there something – is there something changing on the cost side? And there – is there something unique about 4Q EBITDA margins and seasonality?
Jonathan Fitzpatrick: Hi, Chris. Back to what I said to Lavesh a few minutes ago, nothing is fundamentally changing, other than we're taking a conservative stance because there are some moving pieces as it relates to inflation and supply chain. So we're just giving ourselves a bit of wiggle room and staying consistent with our conservative approach to guidance, but nothing to be alarmed about. And we expect Q4 to be strong.
Chris Horvers: Okay. And then on the long term, quick math suggest you – you just raised the – you know, the algorithm to the high teens from low double digits. So is that accurate? And then, as you think about what's on top of that, does that assume any EBITDA margin expansion in core business? And can you talk about typically what sort of margin synergies you could extract from that $250 million of a presynergy acquisition?
Jonathan Fitzpatrick: So first three questions so a couple of points to make there, so when we’re talking about long term at least $859 million of EBITDA by 2026, basically what we're doing there is keeping our long-term algorithm intact. So we're saying double digit revenue and adjusted EBITDA growth with $350 million EBITDA as a jumping off point coming out of 2021. We're suggesting that if you wanted to build in a layer of M&A $50 million a year that compound that that same long-term algo with the appropriate based on history. And then Jonathan's giving you a bit of insight today into the pipeline right. So that's effectively how we’ve built it. Now, if you remember back when we talked about the algorithm earlier this year heading into the IPO, that algorithm was based on pretty conservative assumptions around same-store sales, which were 2% and a very conservative assumption around EBITDA margin, which was essentially holding it flat. As we talked about before, the whole purpose of that long-term algorithm was to show the power of the drone portfolio and the fact that we could be a double digit grower with conservative assumptions. We certainly and that’s the purpose, frankly, of Jonathan's statement around at least $850 million, right ? So again, the point is with conservative assumptions, we could get at least $850 million and there's plenty of upside there. As you know, we get synergies on the acquisitions as we expand margins. And as you know, we expect things for sales to be somewhere above 2% just based on history.
Chris Horvers: And then on the synergies that you've experienced historically is that 400 basis points or 500 basis points of potential margin benefit there?
Jonathan Fitzpatrick: Yeah, we should get about two to three turns of synergy improvement on the acquisitions that we acquire Chris.
Operator: Your next question comes from the line of Peter Benedict with Baird. Your line is open.
Peter Benedict: Hi, thanks. Thanks, guys. Two questions first, just back on kind of inflation, is there any way to quantify the impact it had? You think you move across the top line and how you're thinking about that 4Q and then on the 570 DRPs you added year-to-date. How many do you have currently in total and just kind of curious where you think you can get that maybe over the next few years? Thank you.
Tiffany Mason: Jonathan, why don't I take the first part and you take the second. So on inflation, Peter, thanks for the question. So what I would say is we've experienced mid-single-digit cost inflation year-to-date between oil and wages. Those are the two big categories. We’ve successfully passed that through to date to the consumer, you know, obviously we provide needs based essential services and our average ticket, particularly in the maintenance business, which is where we're seeing most of that inflation from a company and store perspective is $78. So, we're having pretty good success year-to-date. I would say if you think about the average ticket of the maintenance division, though, and just what that means from an average ticket increase still, 80% of the average ticket is coming from mix. So prices, you know, price increases that we've been able to take as a result of our pricing power. It's still a relatively small percentage of the average, the average increase in ticket. Jonathan do you want to address DRP?
Jonathan Fitzpatrick: Yeah. Hi, Peter, good morning. Yeah, the DRP as Peter is really coming from, you know, as our large insurance partners want to do more business with, you know, fewer large scale providers. So as we bring on stores or add stores to, you know, to one of our insurance partners programs, you know, they get added to that, that DRP. So we think there's a great sort of long-term growth here for additional insurance work with our great insurance partners for our franchisees. So we'll get back here. Rachel, we’ll get back to you with the total number of DRPs that we have. Peter, I don't have it on hand, but you know, we see sort of this continual addition of DRPs to new stores that we add and existing stores that are expanding their insurance relationships.
Peter Benedict: Okay, great. Thank you.
Operator: Your next question comes from the line of Kate McShane with Goldman Sachs. Your line is open.
Kate McShane: Hi, good morning. Thanks for taking my question. I wondered if you could help us with quantifying some of the market share gains, was there a particular business where you saw more market share gains than not and any quantification around that? And then my second unrelated question was with regards to supply chain disruption that we're seeing. I know and your platform services are in a much better position than peers, but just curious what inventories look like right now and if there's anywhere you'd like to see more?
Tiffany Mason: Okay. So I'll take the first part of market share, and maybe Jonathan you can address the second part. So in terms of market share, we're actually seeing great performance across all of our segments. We're taking share across four. Obviously our higher growth segment is – higher growth segments I should say are Car Wash and Maintenance. Maintenance is performing quite well. We're seeing fantastic results there. So we're seeing outsized performance. We're doing quite well in Car Wash as well. So we're leaning into both of those segments, but again, seeing performance across all four.
Jonathan Fitzpatrick: Yeah. And just building on that, Kate. Hi, good morning. By the way, it’s Jonathan. If you look at sort of Maintenance, you know, close to that sort of 20% same-store sales, you know, you know, that we have a look at sort of maintenance you know close to that sort of 20% same store sales, you know you know that we have we have one great competitor in that space, I don't know what our numbers are, but obviously, you know, when we look at some of the smaller independents or small chains, we know they're not delivering those numbers, so we're taking share from them. Same in car wash, like 6% same store sales comp is terrific, probably ahead of the overall industry. But then if you look at the unit count growth that we're experiencing car wash, that's obviously leading to share gains through you know incremental units. In terms of supply chain, I mean, I think it's amazing. What's happening right now is that if you look sort of at the entire supply chain, it's this advantage that every level, whether it's at the production level, whether it's at the transportation level and then whether it's at sort of the last mile level. So you know that is affecting literally every aspect of people's lives, I think, all over the world. We see patches of that in various parts of our business. But again, I go back to our scale, allows us to have really great contracts and be very important to our suppliers. So we're going to get sort of put into the front of the line when there is supply shortages or distribution shortages. We've got contracts in place, multi-unit contracts that cover some of the pricing pressure that may exist in the market. And again, I go back to what Tiffany said earlier. We provide, for the most part, needs based services, so our ability to pass on price through both our company stores and our franchisees as evidenced in this sort of same store sales 13% that we delivered. So I think what I would say is that you know supply chain is definitely disadvantaged haven't seen any green shoots of improvement yet. We think it's going to last for some time. But when you're one of the biggest and most sophisticated in the market, generally, you can leverage that supply chain advantage over sort of the fragment – fragment of the industry that we operate in.
Operator: Your next question comes from the line of Sharon Zackfia with William Blair. Your line is open.
Sharon Zackfia: Hi. Good morning. Thanks for the detail on the development pipeline and your expectations for next year. I was wondering if you could talk about what your expectations are for maintenance in in 2022. I know you have talked about safety for car wash. And then just to clarify I think there's some confusion as to whether or not you're falling short of your organic growth plans for 2021. Maybe if you could clarify how that's kind of shaping up relative to your initial expectation.
Jonathan Fitzpatrick: Yeah. Hey, good morning, Sharon. Relative to 2022 I think we will give sort of a breakdown by segment, you know, in the -- they call it in February but you know I think you'll see growth, you know, for all the segments as you sort of look back to that 250 -- 250 unit that I referenced in my remarks earlier. In terms of the organic pipeline, I think I mentioned it -- I think it was to, you know, maybe Peter earlier. But you know, we definitely took the time to I would say send the message to some of our coalition franchisees with sort of pulling some underperforming stores. So that's intentional. We have the ability to do that because we've got so many levers to grow the business. So we took the time to actually get some underperforming franchisees out of that business that will obviously have a -- I suppose short term negative impact on unit growth. However the economic contribution from franchise coalition stores is a lot less than some of our other stores. In terms of the other greenfield components, I think car wash greenfield, you know, we sort of guided to 20% to 30% I think it'll be slightly less than that just because of if you like sort of the – that the labor and supply chain issues in terms of getting those stores open We feel really good about those stores that are under construction, but we're seeing a little bit of delay just in construction time frame. So that'll just bleed into Q1. So overall, two things are happening a little bit slower opening on the carwash because of permitting inspections, some equipment supply chain issues within that industry. And then secondly, proactively, you know, sending a message to some of our coalition franchisees. So those are the two things. Again, what I would say, Sharon, though, is, you know, we look at this bolt-on acquisition machine that we've built. It's really interchangeable, right? We don't at the end of the year say how many stores came from this, how many stores came from that. We're looking to grow units and we look at bolt-on M&A as simply another way to add new units to our portfolio. So I think over time, you know, that's something that we'll be talking more about is just the total unit count, including what we think of as bolt-on and, you know, traditional greenfield in that in that calculus.
Operator: Your next question comes from the line of Peter Keith with Piper Sandler. Your line is open.
Peter Keith: Hi, thanks, good morning, everyone. Jonathan, I was hoping you could provide a historic perspective on rising gas prices. They seem to be moving in that type of environment. Has that impacted demand for your services with your core middle income customer historically?
Jonathan Fitzpatrick: Hey, Peter, great question. I think look, I think we're all sort of dealing with that, pretty dramatic interest. Sort of increase in gas prices. So, you know, it definitely probably impacts people a little bit. I think it's offset by a couple of things, though, Peter. One is I think consumers have a lot more money in their pockets now than they did when there was the last massive, you know, rise in gas prices. So I think that's sort of an offset. I think the second thing that's pretty interesting in our space is if you look at what's happening with new car sales and new used car sales, right? So to make a decision before deciding to convert all the locations and maybe start a plane to rebrand new locations once you acquire them.
Tiffany Mason: Yeah, I think it's like anything, Chris, it's, you know, the implementation of the signage, the implementation of the merchandising, possibly retraining some of the crew members, right, seeing what the consumer reaction is, making sure that when these stores are rebranded, it's not just the resignage, but there's other things for the consumers. So I think it's not really questioning the validity of the hypothesis. It's making sure that we're nailing all the little things that go into a rebranding, which is not as simple as just putting a sign on a building. There's lots of sort of people process and systems that go along with that. So look, I think you can infer pretty easily that we've gone from five to 25 stores. So, you know, we like what we're seeing and really we're trying to find is there, is there a reason not to do this? And to date, we have not seen a reason why we wouldn't continue this.
Operator: Our next question comes from the line of Lavesh Hemnani with Credit Suisse. Your line is open.
Lavesh Hemnani: Hey guys, thank you for squeezing me. I had a quick follow up question on M&A, especially related to the $250 million in committed EBITDA, over the next five years. And is it safe to assume that most of it is going to be car wash related or just can you give us a sense of some of the you near term pipeline that you're seeing regarding M&A? Thank you.
Jonathan Fitzpatrick: Yeah, it's a good question. Look, we're not, we're not going to break down, because we don’t want to give guidance on where that M&A is going to come from, but I think it's a fair assumption that, you know a good portion of that could come from car wash. We certainly don't talk about other potential platforms are additional M&A targets that we may be looking at, but I think it's fair to assume that a good chunk of it could come from car wash.
Lavesh Hemnani: Got it. And just a quick follow up, especially on the labor piece, we’ve spent some time looking at the maintenance business on the call today. But if I look at the collusion side of the business, there have been some of your competitors out there talking about technician availability issues. I'm just trying to think about how is that impacting driven specifically in tese franchise locations? Thank you.
Jonathan Fitzpatrick: Yeah. I go back to what I said to – I think it was Karen asked about labor. Look, our franchisees are amazing individuals, they’re owner operators, they've had a team of people for in many cases our average franchisees tenure is 17 years. So they've had teams together for a long, long time. They take care of those employees. So look, we talked to our franchisees every day. There's no question that there's some challenges out there, but I think franchise locations are inherently very well equipped to deal with labor because of their embeddedness in the in the both the store, the community and the relationships with people. So, I would say our franchisees are dealing with it in a very positive way.
Lavesh Hemnani: Okay, thank you.
Operator: I will now turn the call back over to Mr. Fitzpatrick. End of Q&A
Jonathan Fitzpatrick: Thank you all. We appreciate it. And we’re very happy with Q3, and you know again reiterating the conservatism of our Q4 guidance. So anyway, thanks, I'll look forward to speaking to you in the future. Bye-bye.
Operator: This concludes today's conference call. You may now disconnect.
