Driven Brands Holdings Inc (DRVN) 2022 Q3 法說會逐字稿

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. (Operator Instructions)

Kristine 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 in infographic available for download on our website at investors.drivenbrands.com, 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 in regards to 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, whether as a result of new information, future events or otherwise.

Today's prepared remarks will be followed by a question-and-answer session. We kindly ask that you limit yourself to 1 question and 1 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 price [inelasticity] in our business. And 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 offering not only provides 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 multiyear growth. And 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. And 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 2 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.

And 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 2 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% 4-wall EBITDA margins. We couldn't be more excited about the long-term potential of the Glass business. And 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 systemwide sales are generated from commercial customers including insurance and fleet. Now that 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 means more locations to serve commercial customers. The addition of Glass and Car Wash creates additional revenue opportunities. For example, 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 to mitigate rising input costs and keep our stores in stock when others are not. And 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. And 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. And 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. And our scale gives us a competitive and compounding advantage. We have a proven playbook and multiyear 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. And 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. Tiffany?

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 Brand. Our team executed well, delivering best-in-class needs-based services to both consumer and commercial customers. And we continue to gain share in the category with a focus on the 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 $570 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 actions 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.

Now remember, over 75% of our locations are franchised, so not all segments contribute to revenue proportionately. For example, PC&G was over half of system-wide sales this quarter, but only about 20% of revenue because it's predominantly franchised with lower average royalty rate. 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, which is 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 $570 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 volume drove 4-wall margins of 39% at company-operated stores. And a [buzz] shop, SG&A as a percentage of revenue, was 17% in the quarter, improving 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 Lubes, 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. And we've successfully passed along a series of retail price increases while maintaining our premium oil mix of nearly 90%, driving an increase in average ticket. The attachment rate of ancillary products such as engine air filters, wiper blades, cabin air filters and cooling exchange, remained strong at nearly 40%, also contributing to a higher average ticket. Despite a series of retail pricing in over the past 18 months, our Net Promoter Scores remained 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 shift despite a challenging operating environment. In the U.S., we are evolving to a single brand and operating standards. 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 continue to grow our wash club program. We are nearing 600,000 wash club subscriptions in total and the retention rate has 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. And as a result, we are the largest express car wash operator in the U.S.

The Paint, Collision & 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 strength and scale and the ease of working with 1 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 3 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, the [governor] vehicles advanced safety features like brake assist and lane departure warning. As these features grow as a proportion of the car (inaudible) and is our mix of commercial customers increase, which generally require calibration, we expect to see a tailwind to both ticket and margin.

And 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, a real estate portfolio that can be monetized and access to the debt capital markets, fuel our strategic growth plan, which remains our #1 priority given the strong returns on investment.

We ended the third quarter $190 million in cash and cash equivalents, and we had $97 million of undrawn capacity on our revolving credit facility, 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 5-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 3 growth businesses remain 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 rate of our debt portfolio is now 4.2% with a 5-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 4.7x. You can find a reconciliation of our net leverage ratio posted on our Investor Relations website. In addition to the ability to raise capital to 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 the 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 need-based. This allows us to better withstand any volatility that comes with a weakening economic environment. Our scale and sophistication provide us a competitive advantage as we continue to navigate the inflationary environment and supply chain challenges.

And 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, and 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. And our performance to date in the fourth quarter is trending in line with our expectations.

In closing, we expect the strength of this portfolio to continue to deliver strong results. We are focused on our proven formula with a 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.

(Operator Instructions) Our first question comes from Simeon Gutman with Morgan Stanley.

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 4? Is that the right way to think of it? Or it could be volatile and snap back on a whim? Are we in a steady environment now that we should model what happened in the third quarter?

Simeon, thanks for the question. So here's what I would tell you about Car Wash segment adjusted EBITDA performance. It contracted in total -- 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 rate as we move forward. And we're, I think, appropriately guiding there. And then certainly, as the Take 5 Quick Lube -- excuse me, Take 5 Car Wash brand is prevalent across the entire state. We expect that to drive incremental volume over time. So I think it's going to be -- I think it 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, 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 2 things. One is we acquired in September of last year, 10 Seattle location 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% 4-wall EBITDA margin, 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. And so I think this is a good run rate for you for the PC&G segment over time.

Our next question is from Liz Suzuki with Bank of America.

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?

Liz, yes, thanks for the question. So in terms of inflation, the team has done just an absolutely excellent job managing inflationary impacts. And we've had really good 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 4 price increases in the past 18 months. But as I said in my prepared remarks, NPS scores have remained strong and repeat rates have improved 5% year-over-year. So importantly here, we're operating in a need space and a very resilient category.

Liz, it's Jonathan. Good to hear from you. I'll talk about the -- your deflation question. So a couple of thoughts. One is, 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 2 years. I think we've been very thoughtful on not maximizing that price, but making sure we're taking enough price to offset sort of 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. So I think if costs do come down over time, that we think it would be likely a very slow process, and then sort of the flip side of that, if we have some deflation, obviously, that could lead to a decline in interest rates, which lowers the cost of capital. So that's how we're thinking about deflation.

Great. And 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. And was that 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 sort of the 2 big factors, right? There's FX certainly in the international business. But in the U.S. business, I think there's a couple of things. Look, one, we're incredibly pleased with almost doubling the size of the portfolio over the last 2 years. Secondly, we've got a massive greenfield pipeline now of about over 200 locations. We have undertaken the rebranding strategy and are now almost 40% -- 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, you'll see that 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 5:1 versus retail customers. So I think we're very pleased with it.

We also have a broad-based customer demographic where we've got sort of the 3 tiers there, sort of the lower, the middle and the higher and I'd say that we still see that there's going to be some noise in the retail space, as Tiffany mentioned, in Q4. But overall, we're incredibly pleased with the operations of the Car Wash business.

The next question is from Sharon Zackfia with William Blair.

I guess first question for Tiffany. There seems to be, maybe, some confusion on the context for about $2 billion. So if you could kind of 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. So maybe any insight into what we should expect in the fourth quarter even by a 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 urgency to open?

Sharon, I'll take the first question, and then Jonathan will answer the second one. Here's 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. And that's using a [9/30] spot rate for Q4. So if I double click on that for just a minute, we started the year with adjusted EBITDA guidance of about $465 million, and the benefit of year-to-date M&A, net of any SLB transactions is $24 million. So that means we expect to be our organic guidance for the year by $14 million. So we're really proud of the team, particularly given an operating environment that's different from where we started the year.

And the last thing I'll tell you relative to the confusion you note on the revenue guidance, all of this is approximately, right? So I think keep in mind that we're rounding and giving you approximate numbers as we guide at a high level.

Sharon, this is Jonathan, I'll talk about the franchise pipeline and your question around discernible impact. The answer is categorically, no. I think the results and resiliency of our category continue to become even more attractive for prospective franchisees. And certainly, if you look at our pipeline, it continues to grow. So 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 0 discernible impact to our franchise pipeline or franchise energy around opening locations.

The next question is from Chris O'Cull with Stifel.

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 then do you have a target for this year as well? And has the higher rate environment made generating positive free cash flow, a higher priority for the company?

Chris, thanks for the question. So quickly on our CapEx guidance. Total CapEx for the full year is expected to be $400 million. And you can split that between gross CapEx of $360 million and maintenance CapEx of $40 million. And that growth CapEx of $360 million includes the Car Wash rebranding. So we'll be at half of the estate by the end of this year. And it also includes some, what I would call, corporate projects such as this idea of unlocking the digital potential. So that's how you think about guidance for the year.

As we think about free cash flow, I think it's important to take a look at a couple of things. One is, if you took cash from operations and subtracted CapEx, so sort of a traditional definition of free cash flow, you would see contraction year-over-year. But I think when you think about us being an aggressive growth company and the tremendous opportunity in a growing and consolidating environment, subtracting out growth CapEx and then importantly, thinking about that $56 million success fee that we paid in the first quarter when we acquired AGN, you get to a, what I would call an adjusted normalized free cash flow level, but it's actually growing quite nicely. So the business -- the punchline here is the business is incredibly strong. It's incredibly resilient, and we continue to be pleased with our performance.

The next question is from Peter Keith with Piper Sandler.

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 double the TAM. But you're talking about that not until late 2023, early 2024. I guess what's the delay on lining up the insurance contracts. And on the calibration opportunity, does that kind of come hand-in-hand with insurance or can calibration start to ramp earlier?

Peter, Jonathan. Look, we love this glass business, right? And in the space of less than 12 months, we've become the second largest provider in the industry with multiple hundred locations, multiple hundred mobile capabilities. The Glass business is worth understanding is that there's -- from our view, there's at least 3 types of customers. There's what I would call retail noninsurance customers, there's commercial customers and then there's actually insurance customers. So those are 3 categories. And then there's 2 methods of delivery, they're sort of in-shop and mobile. So sitting here today, we're very much focused on the commercial customer and the retail customer. And as we build scale in our business, that will allow us to leverage the amazing insurance partnerships that we have today through our Collision business. So I think we are being appropriately prudent in sort of the timing of unlocking that insurance opportunity. So I think that's just us being, again, appropriately prudent.

In terms of the calibration opportunity, Peter, we are making sure that all of our stores have the calibration equipment and the training and the capabilities to offer calibration. Calibration really doesn't matter what type of customer it is as more and more vehicles require calibration, we'll be capturing that opportunity. So I think those things are separate in terms of the insurance opportunity. We'll continue to grow our calibration opportunity in the meantime.

Okay. That's great. I also wanted to pivot over to labor. So we're just hearing about constant labor constraints in the industry. And 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 and perhaps maybe your scale and ability to offer benefits? Is it offering you any advantages here?

Yes, Peter, I mean, I think it's a really interesting question. First of all, if you think about our large-scale company assets within Quick Lube, Car Wash and Glass, we don't require specialized labor, right? So we don't need ASE-certified technicians or mechanics. We have labor that can be trained in-house to operate in those stores. So that's number one. Number 2 is all those 3 models I talked about are highly labor-efficient. We're talking about running these locations with 3, 4, 5 people. So we're not talking about 10, 12, 15 people. So that's the second thing.

As we've talked about in the past, we do have people that want to work in automotive, so it can be an attractive space versus some of the alternatives at the same sort of wage levels. We obviously offer, I think, very competitive benefits to our employees. And then I think what's really important is that we are in all 3 entities in our company, Glass, Car Wash, and Quick Lube, we are growing and because we're growing so much, we offer great promotion and advancement opportunities for those employees that join Driven Brands. So I think when you put all that together, we've got a really nice sort of set of advantages in the labor model, not denying that things are still tough, but I think we've got some structural advantages that are allowing us to continue to win.

The next question comes from Kate McShane with Goldman Sachs.

Just back to the commercial and insured opportunity. I know you mentioned the commercial opportunity when we spoke with you last fall. But we were wondering if there's been a change in how big you are thinking this opportunity can be versus maybe what you originally incorporated in your 2026 outlook?

Kate, look, I think it's just highlighting how big that opportunity is. We're not going to sort of frame exactly is it what part percentage, but it continues to grow and has grown very nicely over the last sort of 5 to 7 years. And commercial customers are amazing, right? So they have big books of business. They can be harder to win, but typically, they are stickier customers because the [friction] cost of them changing is quite high. And you're seeing now the benefit of this deep commercial customer expertise within Driven. We've talked about the massive partnership we have in the insurance space with our Collision business, which we're now able to parlay that over into our Glass business. So this just remains a very important part of Driven both today and in the future. But I wouldn't sort of size it, I would just say that our optimism around this space is the same as when we talked about it before.

Okay. And then our follow-up question was just about the marketplace test that you mentioned. Is there any more detail that you can provide us about how the mechanics work and what you might be providing the franchisees that you didn't provide before?

Yes. I think it's the ultimate sort of transaction flow is the same. Our franchisees will ultimately buy products or services through Driven Brands. really what we're doing is providing a sort of a better, more efficient, more holistic platform for them to do that. So you could think about Amazon, which is probably the world's greatest marketplace on the planet, not suggesting that we're becoming Amazon. But it's that technology, it's that central place. It's the ability to provide multiple options, which are best for the franchisees. It's a great place for vendors to be consolidated. So this is something that we've been working on for quite a while.

As Tiffany mentioned, were -- or I mentioned, we're going to be in test this November. And we're pretty excited about this is only going to accelerate, deepen and widen sort of the procurement offering for our franchisees and ultimately drive incremental profitability for both them and for Driven. So pretty excited about it, and we'll certainly keep you updated next year as we get through the test and move into hopefully, commercialization.

Next question is from Justin Kleber with Baird.

Just a clarification on the guide. You mentioned leaving 4Q unchanged a few times. Obviously, you've done M&A during 3Q. So 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. So any M&A that we've done through the third quarter and when we take that M&A, we take it net of SLB because they go hand in hand. Any year-to-date M&A is in the guide. So the way that, that breaks down is about $11 million of benefit expected in Q4. So again, if you look at our guidance, said, we started the year at $465 million. Obviously, we beat the last 3 quarters. We've rolled in that M&A year-to-date. And we've taken the offset from FX because, of course, FX is different now than it was at the end of the second quarter. And all of that would suggest that for the full year, we expect to beat our organic guidance by $14 million.

Okay. That's helpful clarification. And then just a follow-up to what unrelated on the Car Wash business. You mentioned in response to Simeon's question, promotions in the U.S. Can you elaborate a bit more on that? Are you discounting the membership program? Or what type of promotions were you alluding to?

Yes. Thanks, Justin. Look, promotions are something that we do across all of Driven Brands, right? So I don't want people to start thinking that, "Oh, my god, they're all of a sudden promoting because there's a little bit of softness." This is part of day-to-day consumer-facing brand stewardship, marketing and customer acquisition. So this is something that we do across all of our businesses. We expect to continue to do it across all of our businesses. This is not a reaction to -- a short-term reaction. This is about customer acquisition, building long-term incremental customer counts and ultimately building more folks moving into our Car Wash membership program, which is now 600,000. And again, we talked about the lifetime value being 5:1. So this is very, very normal practice for us across Driven Brands, something that we've been doing very well for more than a decade. So I want you to think about it more about lifetime value customer acquisition versus sort of a short-term reaction to something that people may be reading into?

Our final question is from Christopher Horvers with JPMorgan.

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

Chris, de minimis impact in terms of the rebranding. I mean, sort of so small that we didn't even sort of split it out, but definitely, I would say de minimis. And then in terms of within Q3 trajectory, no, we didn't -- let's just say we didn't see a worsening of the comp profile within Car Wash. So again, I'd just reiterate Car Wash is an unbelievable business model with great unit level economics. We've doubled the size of the U.S. business in 2 years since we've owned it. And we've got a greenfield pipeline now of 250 stores, which is exactly the strategy that we laid out when we first talked about Car Wash, M&A to start to build scale, a balance of M&A and greenfield in 2022 and a migration to probably more greenfield and less M&A in 2023. So I think we've been very consistent in terms of talking about the strategy and now executing that strategy.

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

Yes. I mean, Chris, I think the question is probably more related to Car Wash. So I'll sort of break down Car Wash and Glass a little bit for you. So in Car Wash, this has sort of been a hot space, Chris, you've written about it multiple times. There are probably 20 institutional capital investors in this space right now, and they're all chasing M&A because very few of them have greenfield capabilities like we do. So we're not yet seeing multiple moderation or multiples coming down in the Car Wash space. So I do expect we will see that as you see the rising cost of debt, but we're not seeing that yet, which is again why we're heavily focused on the greenfield side.

In the Glass business, where we've obviously sort of running our playbook to build scale in the first year, we've done a handful of nice acquisitions there. I think the multiples are certainly more moderated than the Car Wash space simply because we don't have sort of the volume of institutional capital in the Glass space.

And quite frankly, when you look at the size of the opportunity there, you have to get into smaller deals very quickly, which is, again, sort of a core competency that Driven Brands has executed against for like the last decade. So that's sort of my commentary on M&A.

And then I just had one quick follow-up. The recent -- the recent Glass deal was that a franchise acquisition and how do you think about the balance of greenfield versus acquisition in Glass over the coming, let's say, 2023?

Sure. Yes. No, it wasn't franchise, Chris, I don't know how that got out there. But no, it wasn't franchise. Again, going back to the growth playbook, right? Sort of the first year is building scale, and we do that through platform M&A and then bolt-on M&A. And as we look at 2023 and beyond, I think you'll see a migration towards greenfield growth within our Glass space. I'm not saying we'll get rid of M&A. Obviously, we'll remain active in that space, but you'll see the shift to greenfield, which I think will come through in 2023 and 2024.

I'll now turn the call back over to Mr. Fitzpatrick for any closing remarks.

Yes. And look, 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 continued 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 offering, 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.