Driven Brands Holdings Inc. (DRVN) Earnings Call Transcript & Summary

Yes. So conversely, the Meineke key business is doing quite well, right? So that's one of the really neat things that I think is undervalued about driven is that you do have a portfolio of businesses, right? And like any portfolio, there's a bit of diversification that happens there. So we've got that amazing Take 5 growth, [indiscernible], which is great, but within Franchise Brands, sure, Mako is seeing some softness. But this year, we've seen strength out of Meineke. To your point, Meineke is nondiscretionary in nature. So typical services for a Meineke really talking brakes shocks, struts, exhaust, general repair work and the nature of that type of work, look, if you're driving your car and your brakes or squealing, it's not the kind of thing that you're going to defer, you're going to get that work done. And so not only are we benefiting from the fact that it's a little bit more nondiscretionary in nature. It's another business that's a 100% franchise, and we've got owner-operators on the ground. That's also a business that you need certified ASC technicians that are also in short supply. So again, having that owner operator on the ground makes a huge difference. And it's important to call out that both of those businesses, ultimately, the role that they play in driven brands, it's all about the cash side of that equation, right? So we talk about growth and cash. These are great EBITDA margin businesses for us.

Right. And I guess with the typical Meineke heat customer, is there anything to note there from a demographic or income perspective for that customer base?

I'd say the Meineke customer is very Middle America. So one of the other really neat things about driven in general is that our customer demographic base doesn't skew too far one way or the other. I mean, we generally serve Middle America across most of our businesses.

Perfect. And I think you touched on this a second ago, but the Franchise Brands segment as a whole, it's a very cash-generative platform. EBITDA margins in the low to mid-60s, very limited CapEx requirements. Of course, there's some CapEx you need to then you invest in, you have the system to support your franchisees. But as we look forward, how should we think about the platform's contribution of the broader business? Is it best to look at it, I think, as maybe a stable source of cash that can be deployed elsewhere for higher priority uses?

I think that's right. I mean, I think you've hit the highlights, which is EBITDA margins in and around 60% same-store sales growth in the low single digits and then very minimal CapEx. So it's a really strong cash flow provider. As we talked earlier about the power of the [indiscernible] between growing Take 5 and returning capital to shareholders. One of the reasons we can is because of the strength of the Franchise Brands segment.

Excellent. And then shifting to your last segment, Auto Glass Now. still relatively small compared to the broader business, but it's got a great market position, very compelling, I think, long-term growth opportunity. Can you talk about where the platform currently is in the U.S. glass market and what your growth aspirations are?

Yes, happy to. I think to talk about where it is, we almost have to talk about where it was or kind of what the road map has been, right? So I think it's important. If we were having this conversation 5 years ago, we wouldn't even be in the industry, right? So we went from no position in glass to fairly quickly building up a #2 position. So sitting here today, we're the second biggest operator in North America, which is fantastic. I would say the reason we got into the space, nothing has really changed. We see heavy amounts of fragmentation. Certainly, when you get outside of the #1 player who's the incumbent who has been in the space for a long time, a lot of fragmentation, great unit level economics a relatively simple business from an operating perspective and none of those things have changed. We continue to say that, that business is an incubation. We see growth, and we have been growing that business, but growth is not expected to be linear right now. For us, this is really about the long term. And the long term is, ultimately, we want to get into the national insurer carrier business. So if you look at the top 10 national insurers in the country, they're all sitting with the incumbent. We would love to earn our fair share of that business. And when we do, you're going to see a nice unit step change in the business, both from an EBITDA dollars perspective and also from a margin perspective.

When we think about the different customers you serve in that channel, obviously, there's difference between ticket and margin between commercial insurance and retail. Can you talk about what drives the difference there? And I think a lot of it has to do with the scanning and calibration attachment.

That's right. I mean -- so generally speaking, on the insurance and commercial side, they tend to be higher tickets. There's a certain part of that is just there's more calibration that happens on that side. If you're coming out of a pocket, a consumer can choose to not do calibration work if they choose not to. We don't recommend it, but they can make that choice. And ultimately, the real benefit to getting into the national insurer carrier business is more about the stickiness, right? So at the end of the day, it's just a completely different experience. And it's a different stickiness and retention to the customer base.

So when we think about the platform, you've built the position, you have the assets in place, now you're working on winning the business. And longer term, how should we think about growth? Is it expanding into new markets, expanding in new units? Or is it adding more vans because this is a very mobile-heavy fleet?

It is. I think -- I mean, pragmatically when it comes to distribution, generally speaking, what you should expect from us is when we're new into a piece of geography, if we're new to a market, you tend to lead with vans. It's the fastest way to get distribution on the ground and to scale up the business. Ultimately, you'd like to graduate, so to speak to brick-and-mortar, and we've got about 200 brick-and-mortar locations today. But the brick-and-mortar doesn't make sense until you scale it. And so this business is somewhat unlike take 5, and there's been historically, we've gotten a lot of questions where if you look at Take 5, I would call that a build it and they will come kind of a model, right? We know exactly what types of markets we want to be in, what street corners we want. We can predict all that and model all that out. And Mike and I sit on Capital Committee, and we approve every single site through Take 5. We can look at a business and go, okay, that business over 3 years is going to do this much top line, this many cars, et cetera, et cetera. On the AGM side of the business, it doesn't quite work that way. Ultimately, you want to drive supply, so to speak, from getting carrier business or commercial business, you want to drive the scale. And once you have the scale, the brick-and-mortar makes a ton of sense.

Excellent. And as we think about difference between having the brick-and-mortar versus in the van fleet, is there any difference in capabilities between what you can do in the van versus the physical location?

No. There's some really niche cases where there's some -- but generally speaking, no. I mean, the services that we can provide brick-and-mortar, we can do remotely as well.

And as we think about very longer term for the platform, how should we think about what you'd like your ideal business mix to be?

It's a great question. I'm sure I don't want to get into percentages here today. Again, for me, the long term is if I look at the top 10 national insurance carriers, I want my fair share of that business. Along the way, there's really 3 channels in that business. You've got insurance, you've got commercial, you've got retail. We've been growing all of those. Commercial is a great part of the business. It's great to hit your fixed cost, and it's just a great way to have a steady source of business retail is a great business and as much as, again, if the other parts of the business are soft, you can drive demand there. You can do advertising and there are certain kind of levers that you can pull. But the big picture there and the thing that gets Mike and I excited is breaking into the to the top 10 national insurance carriers.

Excellent. And I think we've gone through all the different segments we have here in recent years, the company has gone through some portfolio optimization. And I think now it's at a point where you feel pretty comfortable about the businesses you have. And if you look at the Take 5, that's certainly a growth engine. If you look at the Franchise Brand segment, that's a great source of cash. It's very stable as we talked about. And I think maybe this is just how I think about it. But Auto Glass Now is sort of a long-term option on growth and your expansion within the market. Is that a fair way to think about it? And then, how do you feel about the current portfolio? Do you see room to optimize it? Or are you fairly confident and feel good where it is now?

Yes. I mean I think that's a great way to describe it. I couldn't have said it better myself. I think look, Danny and I have demonstrated over our last couple of years, we will continue to evaluate the portfolio. We've gotten out of the carwash business. We sold a glass distributor, PH Vitra in late 2024. That said, the pieces of this business right now work well together. And so -- we'll never say never, we feel good with the portfolio where it stands, the growth to take 5, the cash of the Franchise Brands business and then the ability to see outsized benefit from AGM as it goes from an incubation period now, and we start to make progress there.

Excellent. And historically, the platform has been built up by a lot of M&A. And I know it's not part of your capital framework now. But as we think about it, could there be a potential for -- I guess, there's bolt-on M&A potential for sure. But do you see any potential to expand across the auto services platform? Or is that even something you look at M&A has been on hold for a while now.

I would say -- I mean, I think you've characterized it well, right? So M&A has been a tool in the tool belt for a long time. In the short term, what you should expect from us is M&A as it relates to bolt-on to the Take 5 business, makes a ton of sense. It's a great way to deploy capital and that's a business that we understand, and it's the growth business for Driven Brands. In the short term, what you should not expect from us is large M&A, certainly like new vertical entries or anything like that, that is not in our short-term plans.

Excellent. And I think it's important to note for Take 5, you have opportunities to densify existing markets to go into new white space because you have geographies that are untapped from that perspective. How do you approach that from whether it's going to be a greenfield brownfield development or going to be a bolt-on M&A or acquire a location in converted?

I think to answer that, you first have to take a step back on how we think about market mapping, right? So we look at all of the country and figure out where we think in general, we want Take 5. And so that's not necessarily down to Main and Main, but it says, look, within this trade area, let's call it, there should be a Take 5. As opportunities come up from a real estate perspective, or from an M&A perspective, we then decide is that the right location. And that can be as simple as, boy, there's a piece of real estate here, but we really think we need to be half a mile further north because that's where the retail is. In a couple of instances, we've actually started down the process of a greenfield location and then we've had a conversion opportunity come up. And so as Danny says, every site comes back. And so we will then go back to Capital Committee and say, hey, Danny and Mike, you approved this location last month, but there's now a conversion opportunity that oftentimes has quicker turnaround time and lower CapEx because it's already being built with a stable customer base. But the short answer is we are prepared to go in from a greenfield perspective. We can do sale leaseback if we want to buy the dirt. We can do ground lease. And when there's conversions, we can do that as well. And so for us, it is agnostic. The best thing to do is get the right location with the right long-term growth potential. And our job is to deploy the capital in a specific site that has the right customer demographics, the right growth potential and the right economic profile. And the beauty of a business that has 4-wall EBITDA at steady state of 40% is you really can find a lot of different vehicles to get that way.

I think when you densify your existing company market, you, of course, benefit from opening up because you don't have to leverage the same marketing expense, you have to aid a brand awareness. So of course, that makes the decision a little bit easier when you want to deploy capital within your existing markets.

Yes, that's true. I mean look, I think the strength of the business, to be clear, has been the ability to go from one single market in New Orleans and expand to 1,400. So we definitely have an ability to take it to, we think, any market in the U.S. that we want -- that said, it's always nice when you're opening the 20th or 30th location because there is that awareness. But going into new areas doesn't scare us because we know what a great model it is and what strong economics they are. And it's what gives us confidence that we can get from the 1,400-ish we are today to the 2,500 goal that we've stated.

The other really neat thing about the Take Five business is that when you compare franchise and company ops. I mean, Mike and I, I won't speak for Mike. I've certainly worked in businesses where company operations was nowhere near as good as franchise operations, and it's actually fairly hard to find franchisors that know how to run company ops. But if you compare our company ops and our franchise ops side by side, whether it's financial or operational KPIs, they're fairly similar, right? So it's a very -- it is a box that operates the same way across the country, and that lets us replicate things pretty readily.

Excellent. Well, definitely tremendous growth on right ahead for Take Five. Looking forward to that. We have a few minutes left here, and I'll let a little bit more time than usual to go through these 4 questions that we're asking each company because you have a very I would say, very different customer bases for each one of your businesses. And so I think we'll start off. The first one is around the health of the consumer in the second half environment. So, what are your expectations for the environment for the second half of the year relative to recent results? Do you expect them to be the same, better or worse? And feel free to opine in each business or you keep it high level if you prefer.

Well, I'll start by saying, in general, we're just speaking to where we saw in Q2 results, and we're not going to break any new ground here in terms of an inter-quarter update. I think Danny talked about this. You talked about it in Q1. We talked about it again in Q2. We continue to see softness, moderation with the lower income consumer. I haven't seen anything in the popular press that would suggest that's going to stop, right? I think borrowing costs are going to go up for the average consumer starting tomorrow. And so I think in general, whether it is more discretionary or not that consumer is going to be under pressure. I think the benefit of most of our portfolio is we are nondiscretionary. And so while the lower income consumer may be under pressure, I think outside of maybe Mako, which tends to be more discretionary, we benefit from being nondiscretionary. And people need their cars to work. They need to get to work in this environment. And therefore, they will continue to need our services, whether it's oil change, collision, glass repair or any of those things.

Excellent. Yes, certainly, the strength of the nondiscretionary auto service that's highlighted here helps. And similarly, when we think about '27 versus '26, it might be very early to think about that. But if you have any thoughts on how you think about the strength of the consumer there.

I mean, I think to your point, it's tough to tell. It's a very dynamic environment. So similar to what I just said, I think our job is to make sure we continue to execute as well as we can. And react to whatever environment we are and thank goodness, we're in a nondiscretionary space.

Excellent. And for pricing, I think we may know the answer for Take 5, but of course, you have other businesses as well. So when you think about, I guess, your blended pricing environment for the second half of this year, do you expect to be higher or lower than the first half?

I think generally speaking, you can trace what's happening in the overall market, and then you can assume that we're going to follow suit. I mean one of the benefits of being nondiscretionary nature is that we feel like we can pass through a certain amount of pricing. We're going to continue to be smart about how we do it. We want to ultimately protect profitability, but we also want to deliver value to the consumer. And so we're constantly trying to figure out what's the right balance there.

The next one is kind of interesting. We've had some good answers on this. And I'm always surprised how companies are leveraging AI. Do you leverage AI and to the extent that you do, do you expect a significant increase in efficiency as a result of '27 versus '26?

Yes. I mean we do have a few AI pilots in place right now. I'm not going to get into a lot of detail for competitive presence. But we look at AI investment, like we look at any other investment. It starts with driven is all about growth in cash. And so either, number one, needs to accelerate growth to Take 5 or it needs to make the rest of the business more efficient. We've got a couple of pilots right now that are aimed at both sides of that equation. The early results are promising. Whether it's going to be game changing next year. I'd say it's too early for us to tell. Is it ultimately game-changing technology? Yes.

Excellent. Yes. And I know you don't want to get it I'm sure some absolutely with pricing, sourcing, all those sorts of things are very interesting avenues I expect we'll probably hear from in the coming years. And I think we touched on this a little bit. But again, as we think about the margins, right, do you see more margin headwinds or tailwinds when we think about '27 or '26. And again, you might be too early to talk about '27. I think a lot of companies are preferring not to answer that, so feel free.

Well, I think -- look, we've talked about the uncertainty as it relates to, in general, supply, particularly as it relates to oil. I will use this as an opportunity just to remind people, we feel very good with our supply. Clearly, there are price and cost impacts we need to think about. We have committed to trying to maintain that margin dollar, not margin percent as we go forward. We think the beauty of our category is so far to date across the industry, across our category, across history. We've been able to pass that along while maintaining those margin dollars. The commitment is we'll continue to monitor the macro environment and adjust accordingly. Again, I'll come back to, thank goodness for in a nondiscretionary category for an asset people's cars that they need, even when the economy is uncertain. And so we'll continue to monitor carefully. We feel really good with our supply, and we feel pretty well positioned with where we are.

And I think it's also to note the diversification of the businesses you have. They have very different customer base is very distant industry trends. So I think that helps, of course, from people looking at the business to understand that live and die by any one business, you have a lot of other businesses that can facilitate and they all have excellent, I think, different to Take 5 being the growth driver. Again, I think you have an excellent source of cash in the franchise brand business, very stable iconic automotive brands. And glass is just something that I'm looking forward to seeing over the coming decade unfold as you continue to move up in your market position there and expand. So Danny and Mike, this has been very wonderful. I appreciate your time today. It's a great pleasure.

Thank you, Mark. It's a pleasure.

Thank you.