Yet Another Value Podcast - GrizzlyRock Capital's Kyle Mowery on $DRVN's goodco / badco thesis

Episode Date: October 13, 2024

Kyle Mowery, Managing Partner and Portfolio Manager at GrizzlyRock Capital, joins the podcast for the third time to discuss his thesis on Driven Brands Holdings Inc. (NASDAQ: DRVN), an automotive services company in North America, providing a range of consumer and commercial automotive needs, including paint, collision, glass, vehicle repair, oil change, maintenance and car wash To see the full DRVN deck, see: https://www.grizzlyrockcapital.com/wp-content/uploads/2024/10/GrizzlyRock-Driven-Brands-Write-Up-October-2024.pdf Chapters: [0:00] Introduction + Episode sponsor: Tegus [2:05] What is Driven Brands Holdings and why is it so interesting? [3:38] What is Kyle seeing that the market is missing with $DRVN [7:20] $DRVN trading history and what caused this dislocation that gives the perceived opportunity here [11:59] What protects $DRVN from oversupply (oil change services) problem? [16:37] Why is the brand and scale beneficial to Driven/Take 5? [18:35] $DRVN valuation / why do they not report Take 5 numbers separately? [24:59] How does Kyle view Roark's ownership of the company [28:23] Capital allocation [34:01] EV Risk [38:03] Glass and Collision segments [46:45] Path for Car Wash [51:44] $DRVN bear case [56:50] Final thoughts Episode sponsor: Tegus If you’ve been reading my newsletters, you know how often I rely on Tegus for my research. It’s truly revolutionized how I get up to speed on new industries and companies. Tegus has the largest transcript library in the world, with over 75% of private market transcripts. Whether you’re curious about AI, biotech, or any niche market, Tegus has the insights you need. What sets Tegus apart is its all-in-one platform. It’s packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Tegus, everything is right at your fingertips. The best part? The insights you get are from the very people shaping the industries you’re interested in. You’ll find perspectives from insiders and executives that you simply can’t get anywhere else. To see Tegus in action and understand why it’s my go-to resource, visit Tegus.com/value – that’s T-E-G-U-S dot com slash value. Trust me, once you try Tegus, you’ll never look back.

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That's Tegus.com slash value. Trust me, once you've experienced Tegis, you won't go back to your old way of doing research. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean a lot if you could rate, subscribe, review wherever you're watching or listening to it. with me today. I'm happy to have one. I believe it's for the third time. It might be for the fourth time. My friend, the founder of Grizzly Rock, the head of Covest, Kyle Maui. Kyle, how's it

going? Good. Thank you for your time. Yes, third time. Third time. I wasn't sure because, yep. But look, I'm super excited to have you on today. Before we get there, I guess I'll just get started. Quick disclaimer. Same way I start every show. Nothing on this podcast is investing advice. Please consult a financial advisor, do your own work, all that type of stuff. Kyle and I are both long the stock we're going to talk about. So there's a little added disclaimer for you, added disclosure, disclaimer, whatever it is there. But, you know, please consult a financial advisor do your own work. Kyle, I'm really excited today. This story we're talking about, it's got so many different facets. You and I've been talking about it for probably about nine

months now. I kind of got turned on it after I did a podcast with the guys who won the Persian Square Challenge for Valvalene. And then, you know, of course, find a more complex, hairier way to play it. You had already done tons of work and research on it. But I'll just pause there. What is driven brands and why is it so interesting? Yeah. So it's a complex investment in terms of a lot of moving pieces. But the business is very simple. So the business is automotive aftermarket services. They have 5,000 units predominantly in the United States. And it's basic car maintenance. So it's oil changes, car wash, is collision repair glass repair so very very recurring and needed service this type of service

ties with miles driven it does not really not impacted by the economic cycle as much as many businesses it's certainly not a a political or interest rate sort of related play so it's a It's a very, very steady, eddy end market based on miles driven. And certainly the transition towards Do It For Me Services as opposed to do it yourself for things like oil change. It only continues to grow. Perfect. There's a lot of different things to talk about because, as you said, they've got a lot of

different segments, some good, some bad. I think that's one of the things that attracts us to it. But let's start high level. First question I always like to ask, market is a competitive. place. What are you seeing that the market is missing with driven that you think leads this to be, you know, a risk-adjusted alpha opportunity? Yeah. So it's actually a combination of two of the better setups, the types of setups that we look for. One is private equity and the public markets. And that is a widely overused phrase because private equity, you know, private equity has

control. They can control the outcome of the business with respect to management. Capital allocation is probably one of the biggest drivers there. But when they have control of a business, then they can actually do the things that public market investors, such as URI, you know, often are requesting better capital allocation, holding management's feet to the fire, etc. So in this scenario, you have a business that is, you know, half roughly half owned by Roark. Rourke is a highly thought of private equity firm down in the southeast. They focus on franchise and consumer. And there's a lot of franchise elements here, not only on the Take 5 oil change business, but also nearly a pure play on the collision side franchise. So highly franchise,

it fits in their wheelhouse, and they do control the capital allocation and whatnot. We think that's actually beneficial here. But public markets offer. liquidity for investors such as us, as other, everyone, basically, and the world can buy a piece of this business. It's not traded solely by private equity, from private equity to private equity, although many of the business segments have been in the past. And so with the public markets, you get both liquidity and then oftentimes discounts, discounts to private market value.

And so I personally believe, and we're certainly long. the stock that driven is wildly mispriced because of the second setup and the second best type of setup that's really attractive here is good co bad co so good co bad co is a pretty classic public market setup with respect to um you know a lot of the business roughly 90 percent of the EBITDA is doing very very well it's growing it has good returns on capital and the end markets are solid. 10% of the EBITDA here is quote and quote badco and that has what has made the price

go from let's call it $30 a share to currently 14 a share. But it's only 10% of the EBITDA, those issues which are US car wash are largely ring-fenced, I believe, and they are actually in a process of potentially divesting that segment, right? they are running a process. This is a comment that we've received not only from management,

but also industry sources that driven has been attempting to sell U.S. car wash. It's a big slug. It's a big business. So it may or may not sell, but if it sells, it's going to sell by year end. And so that's, but that's the good code, bad code. 90% of the business is doing great. 10% is struggling, yet the market's, you know, knock down the value of the stock by over 50% and we think that's irrational and we think that, you know, leads to the opportunity if we see today. That's great. So everything you talked in there is exactly what I wanted to hit in this. Let's start with a little history. You just mentioned the public markets have knocked this stock down by 50%. And what you're referring to is, you know, the IPO, I think they were

the IPO in the low 20s back in early 2021. They kind of trade there till 30 till it's July. of 2003, where the shares go for 26 to 15 on earnings, like they just complete pupe. So why don't we start? What causes the pupe? What causes this dislocation that kind of gives you the opportunity here? Yeah. So this business was perceived as a compounder at IPO because of the high returns on capital for all their businesses at the time, including U.S. car wash, extremely high returns on capital in oil change, you know, the franchise, you know, segments are doing very, very well, collision, et cetera, very steady businesses, very high free cash flow conversion, etc. So this business actually traded in the mid-to-low 20s, low-to-mid-multible next 12 months at IPO and traded there

until U.S. Car Wash essentially blew up. And what happened here was there was a large push by private equity, RORC being one, but many other private equity firms that went headlong into the U.S. car wash industry and really built that out. And what happened was, is there was too much money that came in too quickly, and prices paid by Rourke or driven, backed by Rourke, were just simply too high. So they got in and around 400 car wash units. They spent $2 billion doing so. And however, that business, you know, there was integration challenges. There were operational challenges.

There were market share challenges with new entrants. And essentially, that business, the investment thesis changed. And the stock went down 40% overnight. That was not what was interesting to us, you know, an industry going through an overinvestment cycle. is usually not a great place to look for new ideas. What got us interested was 13 months ago in September of 2023, the company held an analyst day. And in the analyst day, they laid out 2026 projections,

which was for material ebidog growth. And the material ebidogroth was from Take 5 oil change, about two thirds, if we're speaking in rough terms, and one third related to auto glass. And they said, look, we're not going to put more capital into car wash. We're actually taking capital out of car wash. So we're taking this issue and we're ring fencing it is functionally what they said. And so that got, you know, we looked at the public price and then we looked at the go forward

plan of, you know, deemphasizing car wash, certainly not putting capital into car wash. We knew the investor's sentiment was focused on car wash. But we started looking at, one, can it be ring fenced? And our analysis said yes. And then two, are there, the growth drivers of the business, specifically all change in auto glass, real. And as we did our work, it took some time because it's a very complex industry and it's something we had to get up to speed on. But it took six to nine months to really do that work to the level that we wanted to do it. And it is very real. The returns like capital are very high. And we do think the numbers are inflecting higher. And quite frankly, not only do we think

those numbers are inflecting higher. We think a lot of the growth is, quote-unquote, embedded, meaning the new units that they're ramping on the oil change side of the business are maturing, and over the course of a three-year maturation, each of those sites goes from negative EBDA to significant positive EBITDA. So we think a lot of the EBITDA growth that the company is talking about is already embedded in the platform. And so that was, you know, we saw a growing business, high free cash flow conversion, trading at a very low price. We understood why the price, that's car wash, but we thought that the public markets were overly focused on the negatives.

So that's great. I want to ask a lot of things. And I'll just encourage people, not to pitch my own product, but go listen to the Valvillian podcast. I did a few months ago. I'll try and put a link in the show notes because we really dive into the oil change segment, and that's a key competitor. I'm going to try and hit it here, but we've got five.

different segments to talk about. So go listen to that if you want. And go listen to Driven's 2023 analyst day if you're interested in that. But I guess let's start. You mentioned car like my first thing when I came in this or when I was looking at Baldwin. You mentioned car wash, right? What happens is COVID car wash is booming. People are getting their car wash. Tons of money floods into the space. And it turns out to be a lot more commoditized than people thought. One of the worries I have with Driven is oil change. You know, you mentioned in 2023 analyst day, they say, hey, we're going to take take five from just under 300 million in EBITDA to it's like 450 in 2006, right? That's great growth. They say a lot of it's

embedded as these stores ramp and everything. But I guess my question would be, I've got take five saying that. I've got Valvaline saying that. I know there are a few other chains that are growing. Everybody has recognized, do it for me. Quick oil change is a really nice business. I guess my question, why is, why are we not going to be sitting here two years from now and saying, Oh, there was oversupply coming in oil change, too. Everybody was rushing to grab market too much oversupply, and this was a commodity business. Like, what protects take five from that? Yeah, so just a level set on oil change industry, only 20% of oil changes are currently done at Quicklub,

and that number is growing rapidly. So the bulk of where the market share gains are coming for for the industry come from general automotive repair. and dealership, okay? And so you've got a lot of businesses. An oil change is, let's call it a hundred bucks, right? It is, it is functionally a loss leader for dealerships and general automotive repair. They're going to make a lot more money on other more complicated, higher ticket car repairs. And so $100 oil change is only so interesting. Now, why does the model for valbulin and take five and grease monkey and all these guys work well the answer is the cost of labor is extremely low okay this is uh somewhat like roofing in um you know the building

industry it is a a way for uh you know newer technicians to come in and and and perform needed services without significant um licensure or you know training there is certainly training required and these companies all do it well but it's not something that you thing where you need a certified auto mechanic to change oil, right? There is a very standard process for doing that and Valvalin, Take Five, Jiffy Loop, et cetera, do a good job with that. And so they can provide this service at high margins to themselves and keep costs low for customers. The second is convenience. The convenience of no appointment, drive-in, or Take-5 model, you stay in your car, right? You don't even, you know, you're just scrolling on your phone, basically, and it's being done. It's being

done well, and it's simple, friendly, and fast. And so that is a very appealing to consumers. So the 20% market share for Quicklube is growing rapidly. And Valvaline says this, Driven says this. There's a lot of, there's a lot of data that back that up. So we believe that this is a growing market and will continue to grow. Second, in terms of the type of car that's being serviced, these are older cars, right? Newer car is probably going to go to the dealership for obvious reasons. But this is, there's a very, very large install base, ice car park in the United States. And those consumers require their cars for daily living in a way that you and I is living in a city, maybe don't. But that's the majority of America requires their car to, you know, get their kids to

school or whatnot. And so this is the most efficient, lowest cost way to do it in an outsource basis. So one of the interesting things since Valvlin, since I got interested in driven, all my friends now, I ask when I go visit them, you know, the friends around the city, hey, you've got a car, how do you get your oil change? And they're always like, why are you asking? But inevitably, if their car is three-ish years or younger, they have the, they say, oh, I go to the auto dealership. And you say, oh, because it's free, because it's under the auto dealership warranty, because the auto dealership. But after three years when it's up, inevitably, if they've got that car, they're saying, I go to a quick loop spot. And once I was, I text to you, I was driving with my

brother-in-law, and he pointed to a take five, and I was like, we thank you for your service. But inevitably, you ask, and you say, well, and they say, look, it's on my way to work. It's really fast. I think it's a little bit more than the auto shop. I'm not really sure, but it's fast. If I go to the auto shop, it's half a day. I do it here. It's 30 minutes. I know what I'm getting. So they do that. Let me ask the second piece of this question. So you laid out why the economics are great in all this. It's taking share from auto dealerships. It's taking share for do it yourself.

The second layer is Driven, Valvlin. They have a franchise and Driven has a company-owned and franchise model, but it's really franchises that are driving a lot of the unicroath. You've got these big private equity firms that are opening 20, 40 shops. Why is a private equity firm choosing to work with Tate 5 in this case? Instead of saying, hey, we're going to open 50 shops in a little region. Why don't we just do it ourselves and cut out? the 10% of sales that we would be paying take five right i guess the second way i'm asking is

why isn't this just like lots of little local players why is the brand and the scale really beneficial to driven slash take five yeah i think it's i think it's mine share i mean this business largely started in the south southeast uh new orleans uh florida these are these are very uh ice heavy um markets you know they're not in markets as e v or forward, such as California, Hawaii, Washington, etc. These are sort of traditional ice type markets, and I think the brand does matter. I don't know that the customer is really making a differentiation between Jiffy, Lou Valvillian, and Take Five, because the service is largely a commodity, but it's a convenience factor, right? So if it's convenient, the price is in and around

the same, but if it's more convenient, they just pop in, pop out. they're on their way. So I think it's brand recognition and convenience that being on the right street corner absolutely matters here. Yeah, I think a lot of the location, the model, but I do also think some of it is, hey, your main operating cost is oil and just having the standardized model, getting the bulk scale of everyone buying the oil and stuff. I think that does make a big, big difference because you've got to justify being able to charge that 5% or 10%. Let's go to, we mentioned take five is the good code. I think both you and I think it's a crown jewel. We mentioned 2003 analyst day. They're going from 280 million to 450 million in five years or three years.

The two things I want to ask here. First, go pull up Valvaline stock is financial statements everything. You can look at it. Valvaline trades for 15 times EBDA. You know, take five trailing EBIT up over 300 million dollars as you and I speak. The EV of this company is just under $5 billion. Why, I understand we're both on the stocks, so I'm leaving the witness. But if I'm a bull here, why would I not believe, hey, take 5, 15x plus multiple is worth about the whole EV if I slap the valve and lean multiple on it? Well, I think it probably is worth more than $5 billion if you roll the calendar forward a year

or two. But I think in terms of market structure. sure what you have with take five or driven is a lot of complexity, a lot of noise, a lot of hand-wringing, and you have a lot of debt. And so if for an investor, you know, think of a larger shop, long-only kind of shop that's got to go to investment committee, you've got to explain all the sort of details on car wash and the capital allocation there and there's an international business and there's all this leverage. And in every investment committee I've ever been, in there's always somebody that hates leverage there's somebody that hates complexity right and pitching

valvilline which is a very very clean story it's a growth story there's low leverage it's simple to tell that's a very it's a much easier story to tell and you had the valvaline pod was very good and and that team won the pushing challenge for a reason right that's a very clean story to tell now the way i look at the world um what you have here is an ability for both the numbers to go up, the EBIDA and free cash flow to increase, but also the perception. So we don't need the perception, i.e. the multiple, to increase to make money here because the numbers are going to increase. But some of the bigger winners we've had historically, we've had both numbers up and perception, i.e. multiple up. And I do think that's where

you can underwrite, you know, 100% return over two years and driven in a way that it's more challenging to underwrite that for Valvalade. This episode is brought to you by TIGIS, The Future of Investment Research. Look, if you've been reading my newsletters, you know how often I rely on Tegas for my research. I probably read one or two expert calls a day, you know, probably average seven a week off of Tegis. They've got the largest transcript library in the world with over 75% of the private market transcripts.

Whether you're curious about AI, biotech, or any niche market, TIGIS has the insights you need. What sets TIGUS apart is its all in one pack platform. It's packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Teegis, everything is right at your fingertips. The best part? The insights you get are from the very people-shaping the industries you're interested in.

You'll find perspective from insiders and executives that you can't get anywhere else. To see Teegis in action and understand why it's one of my go-to resources, visit tegis.com slash value. That's teag-g-g-us.com slash value. Trust me, once you try Teague's, you'll never look back. Let me ask you. So my pushback, and this was the main pushback I had, I think, when I started learning this, hey, if take five is so good, if it's such a crown jewel, people can go pull up their Q2 earnings report, right?

They do not even report take five numbers separately, right? Take five is rolled into maintenance with minor key. So it is their biggest segment, but I think one pushback I would have, and this is why the 2023 investor was so important. But one pushback, I think that's natural, hey, guys, you've spent the first half of this podcast 30 minutes talking about take five talking about what a jewel it is talking about how it might be worth the entire enterprise value of the company the company doesn't even disclose the take five numbers in their financials so does the company

not get it or are they trying to pull the wool over our eyes right like they're never putting it in the SEC reported numbers so are they giving you a little crumbs but they're they're hiding a lot of KPIs or something like it does kind of make you worry about it so i guess i just toss all that to you. Yet. Yet is the issue. And I think what the company has said is that they are going to be resegmenting the business starting in 2025. So, you know, January, February, when they, you know, kind of lay out what they see for the year. They are going to break out take five. They've actually been working on that internally for over six months. That predated the new CFO, but, you know, on the road shows and whatnot since the new CFO has come in. He has reiterated that. So,

I think those numbers are coming. Plus, the beauty of a franchise businesses, the franchise disclosure documents are publicly available information and contain a plethora of data. So in our deck, which, you know, you're going to post along with this pod in the show notes, and I'll post on our website as well. You should have mentioned at the start. Absolutely. Yep.

Yeah. So we were able to glean and decipher a lot of data. And yes, we had to make a lot of assumptions on corporate cost allocation, et cetera. but directionally the numbers are accurate, you know, based on a franchise disclosure document and what the company publicly discloses. Now, I do think, and I don't mean to poke at Roar, but I do think, you know, public markets investors want all the data that they're going to be given, and private equity folks tend to not want to give data. And there's just a rub in that. And I think they have it all. They are the majority owner of the business and are making the decisions for the best interest of all shareholders, including themselves.

But there's certainly a dichotomy when private equity is running a publicly listed company. There's a dichotomy mentality from disclosure. But I do think, I mean, look, they have to mark this to market. It's a big position for them. And they are not happy with the, you know, stock price. They're not happy with what they have to report to their investors. And so they are aligned in terms of improving the disclosure. And I expect that we'll see that in a few months.

I'm glad you mentioned Rourke, because I did want to talk about them at some point. Rourke controls the company, about 62%. And I think that's interesting in a lot of ways. I think private equity controlled companies are very interesting in public markets, because if private equity controls a lot, some people are skeptical. If you think they're aligned, they probably do better than your average co. If you think they're not, they probably take more than your average co. They are more illiquid because private equity controls them, which might fewer eyeballs,

which might lead to more opportunity. But I just want to ask about Rourke, how do you view it? their ownership here, and I'll throw my part B, work controls inspire brands, which owns a bunch of consumer-facing stuff. That's been rumored that it's going to IPO inside of the next year, $20 billion IPO. And I have heard a lot of people say, hey, work might need to take care of their driven problem before they can IPO inspire. You know, you don't want something that's doing poorly in the public markets when you're doing this thing. So I threw a lot out there, but I'd love to just hear how you think about work and everything I listed. Yeah, I think that the type of

of buyer, institutional long only buyer that they're looking for on the IPO is going to be a very similar set to that went into driven and probably got bagged to a certain extent here. So yeah, I do think they want to rectify it. I think they know that and that's why they're running the strategic process for car wash. Like, I think this, I think this investment works over a couple of years. If they do not sell car wash, they just grow, de-lever, and then kind of get the leverage where the public markets wants it. I think the stock does really well. I think the stock does much better in the near term if they sell part or all of car wash. But that's, I don't want to get too far down the road. In terms of RORC, you know, the first thing that I think

about when I see private equity as a large holder is, look, private equity is an owner of businesses for five to 10 years and it's inherent in the model that they must monetize. So is private equity overhang, going to keep a lid on this stock, I look at the two transactions that they enacted were in and around $30 a share. And so for me, the way I look at the world is they're unlikely to sell, you know, significant amounts below 30. You know, they did not sell at, I think the IPO was in around $22 per share. They did not sell the IPO. They got, you know, the business was working. The growth compounder nature of the platform was executing. and they were able to divest manageable chunks into public markets.

But that's at 30 a share. And, you know, we're sitting here at 14. So I don't worry about the overhang here. That was the first, you know, thing we looked at with respect to Rourke. And the second thing we looked at with respect to Rourke is something we look at at every company, and that's capital allocation, right? Are they going to put more capital into car wash? The answer is no.

And then you go to, okay, there's other verticals, tires being, obvious one where they're not currently in a platform. We had a long conversation with the management team, not Rourke, but the management team about tires. And they looked at tires and ultimately passed in terms of a platform and adding more complexity. I think Rourke understands that the market needs simplicity. And so I think we're going towards simplicity, not only with the resegmentation, but also the possible divestiture of car wash. Let's stick on that simplicity in capital allocation. At some point, we'll probably talk about glass, which is a very interesting business and segment, but you mentioned tires. I guess just on the overall,

right now you've got Mineke, you've got take five, you've got car wash, you've got paint, you've got platform, which has some various businesses rolled in there. One question would be, hey, you know, Valvillin's over there trading it 15 times EBDA. They're doing great. I think if you actually looked at the same sort numbers, I think Driven is doing just as well or maybe even better than it. So it's not impacting the corbus, but do these businesses belong to that? Clearly, they've thought about tires. They decided to go with a glass and said, but should you have 15

different consumer facing brands that all touch driven automotive, but should you have them together or shouldn't take five be its own and then you can sell car washer turnaround and glass can be its own standalone segment? Does it make sense to even have these all together? I think it's a fair question.

I think if you pulled a number of investors, you'd probably get opinions both ways. There are a lot of, you know, stand-alone you know, Monroe is, you know, automotive repair, Boyd is collision and glass, right? There are a lot of these standalone, and they are, Mr. Car Wash is standalone car wash, right?

And these businesses all all trade higher multiples than driven. And I think, when I think about that, I think about management, mental capacity, and ability to execute on a business. That's what happened to Car Wash. Yes, the car washes were purchased at too high prices, but then management was focused on take five and glass and they kind of let car wash languish and try and run itself and it didn't work right and so the comps turned nasty and the financial

performance was even worse and so it's a management capacity question so I think I think the question is does management have the capacity to run each of these segments as efficiently as if they were stand-alone and I think that's an open question right and I think that's one of the reasons they're considering car wash. You know, one of the things that I vehemently disagreed with in the original business plan as laid out in the IPO was the subscription of both car wash and oil change. I view one as recurring and one is on an as needed basis. I never really thought that would work.

They have de-emphasized that. There's still some smattering of discussion of it. I don't think it's a reasonable strategy. but I don't think you're paying for it. I don't think management is going to be leaning into that hard. They might try it here and there. There's a lot of co-located, take five, well-changed, take-five car wash. And they do offer that in certain geographies, but it's not going to be a needle mover, in my opinion.

I just want to ask capital allocation one more real quick. You know, I look at this company, and one of the things that frustrated me a little bit was you go back, the stock price crashes late last year, and they buy back, I think it was 50. million dollars worth of shares, which as a percentage of float is kind of meaningful. They buy back in the 13s to 14s. But this is, even at the depressed share price today, this is a $2.2 billion equity market cap company. So 50 million isn't really that much. They buy back a little bit. The stock keeps coming down. They don't buy back and they say, we're going to de-leverage the company, right? We're going to go from five times EBITDA leverage five times plus to three and a half times

by in the next two years. I guess my question to you is, look, work controls this. They're private equity. And I kind of look at it and say, hey, I get, I hate that. Everybody says, we're in the public markets. We can't be levered. I hate that. But I get it. But I look at this. You know, they bought the car wash business. They're doing, I think glass would be success, but they put a lot of capital into glass. The returns are TBD. Probably would have been better just focusing it on take five. They're not really buying back stock. They're focused into leverage. And I look at that and say, hey, can I really trust these guys to maximize value with capital allocation? Or is there something else going on here?

So I think what's instructive is to think about, like, why they went headlong into car wash. And it's two things. One, the returns at the time were good and too much money came in and oversupplied the market. Driven bought a lot of existing car washes. There was a lot of also new building, Greenfields. But also, they were preparing for an IPO. And private equity does a great job. of, you know, getting companies, you know, dressed up and ready to go.

And at the time, there was a big focus on EV, right? And EV, ICE was a big topic among investors. And what Car Wash did, if you look at the numbers, Carwash brought the EBITDA to roughly split between ice exposed and ice neutral or EV, you know, kind of 50-50 ice EV in terms of. of like just at a headline number so if the public markets and at the time the public markets this was 2021 we're very focused on energy transition ebs were all the rage we were all going to be driving an eb by 2030 clearly that's not the public perception in october of 24 today but that was a big issue

and that was one of the reasons they went into that and i think a lot of that and i i have never spoken to Roar about this. But my perception and my sense of why they did that was to get the company to IPO and that EV, quote unquote, risk they were trying to mitigate. That's great. Just while we're on EV, again, I talked about it on the Valvillian podcast, but it is worth mentioning. The main business here is Take Five. It's an oil change business. You can get kind of comfortable by saying, hey, they're growing unit counts and they're doing a franchise. And, you know, it's franchisees who are private equity firms who are investing. and they're saying, we see at least 20 years run rate for these boxes that we're putting in

the ground to make this investment. But we should quickly talk about EV because I will tell you, my worry, you and I recently looked at another company that touches convenience stores that sell gas, gas stations, right? And my worry is right now, everybody is building gas stations, right? All these big operators, they're saying there's a land rush, there's new places, we can take a lot of share for mom and pops. I worry if I fast forward at four years, all these guys who are like heavy-hand, trying to build new stations there you say, hey, we love our gas stations, but we're not building

anymore. And if you were supplying stuff to build gas stations, that's gone. And I worry, we buy this at a 15 times multiple. It sounds great. And we fast forward five years and say, hey, our existing store base is great, but there's no unit growth anymore. Right. Nobody wants to build new, nobody wants to build new oil change facilities because the ice park is starting to come down as the EVs grow. And people say, our store counts great, don't need to grow anymore. And then this is in a 15 times you know a business, then it's a seven times you put up business. So I threw a lot out there. I'd love to hear your thoughts on all that.

Yeah. And I think that is a certain amount of risk for sure. But we're not buying take five at 15 times. Great point. We're buying take five at eight. Eight on next year's street consensus numbers eight times. And there's a high free cash flow conversion. And take five, yes, you and I probably believe it's worth the whole enterprise value

today but there's a lot of those other businesses which are EV neutral right there's a giant collision business and the collision business is basically uh franchised and so what's the multiple on any franchise business it's not a and the reason is the free cash flow conversion is very high the reason collision works really well as a franchise model is the complexity requires uh there to be significant owner operators in the space so there's a lot of owner operators that own one or two collision centers that they like to put them under a brand, a national brand. There's a lot of marketing and affiliate, you know, lead generation that way. I mean, I think a lot of the reason is working with the insurance companies, right? You need a little bit of scale at the national level

to get the insurance contracts. And, you know, the insurance contracts is probably not going to work with one individual store, but if they can get 100 stores and then the franchise, tell me if I'm wrong on any of that. No, no. And that's part and parcel of what it is. And I think going back to the catalyst path and the resegmentation, the way that the company driven has said they're going to lay it out is it's basically going to be take five auto glass, which I do want to hit, and then franchise and then other. And the franchise multiple right now, you know, if we could argue about multiples, I would probably put a 13 on that. Many would have a higher multiple. But the point is that that's not an eight. Take five is not an eight. The eight is only being

applied because of the issues in car wash and that's fine put an aid on car wash right i mean mr car wash which is better operated than driven's car washes trade denied so let's let's not quibble here about whether car wash is worth x y or z let's just say hey look the growth drivers are are trading at a depressed multiple vis-a-vis every relevant public comp every relevant private transaction and that has to do with public perception of the car wash rather than and focus on where the business is going, out the windshield, pun intended. Out the windshield, I just want to mention some of the franchises,

but it's like Minichy. I've mentioned them a few times. They'll be in franchise. I mean, it's not like these are small businesses. I guess most people have heard of Mineke because they advertise on football Sundays a lot. Let's talk about glass, though. You said Out the Windshield, great transition of glass. I think it is a absolutely fascinating story.

I think the risk reward of glass at today's prices and everything is really interesting. But I'd love to talk about the glass segment, what is it, what they're trying to do, and also some of the really interesting drivers behind the glass business. Yeah, and this is where I actually probably wear a more bullish hat than most, even driven longs. So the glass business, everybody knows safe flight, right? Safe flight is a wonderful. Safe flight repair, safe flight is replaced. Yeah, they have 50% market share in the United States. Zero. So pretty darn strong, right? This is a great business. It's the number one. It's a global business. And it trades at extremely high multiples because of the quality of the business, the market share, the industry, etc. But Autoblass is actually a wildly growing industry. And you say, well, why is that? The answer is increased car technology, specifically, you know, what are called ADAS systems.

These are basically driver technology systems that help, you know, do adaptive cruise control, stay in your lane, all of these, you know, driver, eye driver monitoring driver's eyes, etc. All this technology that's going into the cabin to help in a driver safety requires cameras. And what the cameras require is calibration. and so this is this is a nascent trend which will only get larger and larger roughly 90% of the cars rolling off the lines new cars right now have a technology which requires calibration i'm surprised it's not a hundred to be honest with you i can't believe there's a company making cars that don't yeah right but that's not true of the car park the installed car park is 11-and-a-half 12 years old and most of an 11-year-old car probably doesn't have that maybe some of the german the germans and Japanese started mandating it the middle of last decade. So there is certainly, there is some in the install base, but it's only growing. And what that does is take windshield replacement from, let's say, $400, which is something that's usually out of pocket from a customer, right?

If you get a rock kick up on the highway, you cracks windshield, you got to get it replaced for safety, obviously. You know, what used to be something that was done out of pocket, it's now, instead of $400, It's now $1,200, $1,500, and that is for the average American insurance claim. And so the business is going insurance, and it's growing significantly because of the calibration technology required, which is simply a big fancy machine and 45 minutes of time by a trained tech. And so it's going, it's going institutional with insurance, and it's going higher dollar, which is industry growth. And so Autoblast, as an industry, is a dramatic grower vis-a-be-what you might think, right? So what the market was before 2022 was SafeLight and everybody else.

And what Rourke's thesis was, or driven thesis, was that there was an opportunity for a national number two, a number two to come in and be able to offer services to commercial fleets, to regional insurers. And so that's what they did. So they assembled 12 disparate in geography, auto glass businesses, and they centralized that under the Autoglass Now brand. And they just got in Q1 of this year, 24,

they just got them all on the same operating platform. And so the thesis, which I believe is very real, is to grow in regional insurance, commercial fleet, and retail. It's about a third, third, in terms of revenue on the Outer Glass side from those businesses. And then once you're national, grow and grow in regional insurance. So there's 3,000 regional insurers in the U.S. You or I might not know, and we might be with the biggies, but there's a lot of folks who aren't.

And SafeLy, because of its market share, has been able to charge those companies quite high prices because they don't need the volume. So if you want to come to Safe Flight, great, we are who we are, we're the number one, we're the gold standard, and we're going to charge you for it. Well, you know, Autoblasts now, Driven, believes that there is a price that makes the numbers work where they can really be a preferred supplier to regional insurance. And you just started to see in the spring of this year, and it's been accelerating, regional insurance wins. So we absolutely think that the auto

glass is a growing business. It took them, yeah, four or five quarters more than they anticipated to kind of get going, but they're nascent. You know, that business is in around 50 million dollars of EBITDA. We think that 50 can double in two, three years. And we think once it gets going, we think it continues going and grows thereafter. So we really have a high view of that business execution challenges are known and they're in the rearview mirror in my opinion so that's kind of the framing on glass look i completely agree if you don't mind if i add on i think one of the

interesting things is you and i've both done expert calls right expert calls on this and you hear especially regional insurers but even the big insurers they would love someone to come around to challenge safe light and i think we even heard hey if you came and you had a credible number two they might even pay a premium just to try and prop you up because they know if you've got only safe light with pretty much all the market share and all the insurance, you know, you never like to have a monopoly supplier. So I think that piece of the thesis is so awesome. And then the one piece I wanted to yes, Angie on was we talked when we were talking about collision, hey, you can't be a one man mom and pop anymore. You really need a brand so you can deal with

the insurance. And you mentioned that here. I think the other interesting thing is you could be a one man mom and pop with glass insurance where it was literally, you go to the car, it's got a crack in the windshield, you take the glass out, you put the glass in. Today, as you were mentioning with the ADIS, it's a lot more complicated of install. You need expensive equipment. There's a lot more working capital and you need a lot of training. And I think you get the added tailwind of a lot of a lot of these mom and pops that were only doing glass or auto shop. All of that goes to specialized players because you need to be specialized because it takes a lot more time, a lot more attention, a lot more equipment. So I just love those dual tailwinds of glass. I think it's very

much where the puck is going and it's something that's not going to i guess it could get eliminated by autonomous driving but even there autonomous driving they're not going to be able to dodge rocks that get kicked off so glass repair is going to be here as long i guess in a real autonomous driving world maybe you don't need windows anymore would be a thought but it seems to me like this is just like completely future proof i i just love the thesis here anything you want to add on that No, I think, you know, in terms of, you know, having the collision side, and, you know, there's certainly some like Gerber is integrated collision and glass, but historically glass and collision have been different. So having the large collision piece does do a certain amount for lead gen, but also being national, right? Being national allows you to go to commercial fleets, rental fleets, et cetera, you know, the Amazon's, Walmart's. All these giant fleets need collision and repair. And in terms of collision, just to hit on that, yes, we looked into, well, there are driver assistance, autonomous driving, you know, shouldn't collision rates be coming down. And unfortunately, from a societal and personal perspective, the answer is no, those have been very steady.

And the reason is distracted driving. So you have distracted driving, offsetting the improvements in technology, which is very unfortunate from a society. which is very unfortunate from a societal and personal perspective, but from an investment perspective gives me a sense that the collision in glass is going to be flat and now growing in glass because of the technology improvements that we discussed over the next, you know, 35 years. Let's quickly talk. So we mentioned up front the thing that attracted us is good co-backo.

We talked the real good co, take five. We talked what I think can be a very good co-blast. Let's quickly talk about the path or car rush. We mentioned how they got here, industry got oversupplied. I think the execution here was, even with oversupply, the execution here was subpar versus peers. Great. All that's behind.

Carwash does over $100 million per year in EBDA, and this is a $5 billion business. So it is still a meaningful piece of the value. So let's just quickly talk the path for Car Wash. They're not going to put more capital in it, but what do you think the next steps with Car Wash are? Yeah, so driven kicked off a strategic process. which is attempting to sell all or part of the U.S. business.

It's a really big bite. The only player who could function, you know, a new private equity firm, large, you know, Bulls bracket private equity firm could take it down, national footprint. But the only other really national player is Mr. Car Wash. They have 500 units and Driven has, you know, about 375. So that's a pretty big bite for Mr. Car Wash. I think what is more likely to happen than selling the whole thing, although I'd do a backflip if they did,

is selling a certain geography, one or more geographies, to work down the leverage. But just in terms of capital, just to put some round numbers in place, they driven spent about $2 billion, putting the Car Wash business together. And if we put a reasonable multiple, 8 to 9 multiple on the current EBITDA, that's in and around $1 billion just to make the math easy. So billion dollars of value has been destroyed, is what it is.

That's a no-known. But what that billion dollars does is it would de-lever the business in and around a turn and a half. So one and a half turned debt reduction from five to instantly three and a half. and reducing quickly thereafter. If they sell less, obviously it would be less leverage reduction, et cetera. But it also just de-emphasizes the perception of it. Secondly, there is an international business, which is, they call it independently operated.

It's more of a, it's basically a franchise business that's UK, Europe, and some other geographies. And like, why the heck is that business tagged on? well, that's another sort of a RORC specialty, if you will. RORC owned that business, and that business had passed from private equity firm to private equity firm a number of times, and they kind of stapled it into the driven IPO as a way respectfully to exit that business. Yep. So that business, now what the CEO said in September at the Goldman Conference was he

confirmed that the U.S. car wash business was undergoing a strategic process, which everyone kind of knew. I mean, industry sources were telling us. We had a sense that it was going on, but the language driven what was using was vague until that conference. And they said, yes, not only is it undergoing, but they are quote unquote, very confident that they will have it wrapped up by the end of this calendar year. So in the next three months, they're either going to go or no go on U.S. Carwos divestiture. And then the follow-up question, which was well played, was what are you going to do with international and they basically said we'll let you know that after we decided what to do with us so if they sell u.s they're going to sell international heck they should sell international to

another private equity firm either way there's just no integration with the business even on the platform side of the business which we haven't talked about much uh which i think is valuable but it's it pales in comparison to value created by take five oil change and and auto glass now in terms of growth but it absolutely will grow a platform but the platform doesn't even affect international so like why the heck do they have international they should sell international either way now whether they choose to do that or not international is fine there's no issues there the comps are fine the free cash flow is fine the issues really are u.s car wash the international is a business that really should be it is a non-growth cash flow cow it really should be in a private equity

firm's hand who is just taking leverage to the max running the leverage for the cash shield running it for cash and then passing it on to the next guy because this is one of things they're going for five and three and a half times leverage. You don't want this cash cow with the growth just like sell it. We've talked about a lot here. Oh, you mentioned the Goldman Conference. There was one other thing that they said at the Goldman Conference. They have a new CFO and the CEO was joking that he got in at the right time and the stock

was going to triple and the CFO was going to make unreal amounts of money from all of the RSUs and options he got granted when he's hired. So, you know, take that for what it's worth. That's not financial advice. Go to him for financial advice if you want to follow. of that, but I thought it was worth mentioning. Yep. We have talked about a lot.

Let me ask one last question before I kind of turn it over to you because there is a lot of other stuff we could talk about that we haven't hit. I love this question, the framing, a friend of both of ours put it to us. I think I might make this the standard final question I asked, but we've talked bullishly about a lot of stuff. We've talked about the valuation, everything. We've talked about the growth trends. You and I are sitting here.

We're hopefully doing the podcast together. it's your 14th appearance, you know, it's 2027, 2008. When we say driven didn't work. Why do you think it didn't work if we're sitting here at that time and kind of looking back and saying something went wrong? Yeah, it's a very good question. I do

think that I think technology would be the answer. An increase in technology of say if EBs were to proliferate significantly. I mean, if silicon can be used in batteries that could dramatically increase the range of EVs, range anxiety is a large issue for most buyers. I recently purchased second vehicle because I had a third kid, and I chose to buy an ice, and the large reason was range anxiety on EV. But if Silicon can transform that,

then EVs and the cost of battery materials can come down. That's a whole separate series of podcasts. But, you know, if EVs really do jump to over half of the, you know, new car sales, you do have a declining business and what is a declining business worth? It may or may not even be worth eight times. Now, in terms of the regions that Driven is focusing on, it's the Rust Belt and the Southeast, those are culturally late adopters. And given the installed base there,

terms of the next three to five years, there's barely going to be a reduction in ice vehicles in aggregate. So I don't believe that is a risk. We've done extensive modeling on a state-by-state basis to kind of work that up. And it's in the deck in terms of ice vehicles and that recurring service. But yes, if EVs went in that direction, the cost of annually maintaining an EV is about half what an ice is. And it's largely things like tires and battery replacement. And And Draven doesn't do that. So I would think it would be a re-emergence of EVs and that would take down the perception of, say, take five, even though it would be cash cow, you know, that I think that could be an issue or another toe stub, you know, in glass, all of what happened in car wash. So do I think the probability of that is high? No, but I think in that state of the world where this does not work over five years, I would think that would be a key component. Then I think I agree. I mean, I think it'd have to be more than a tow sub and glass to be really poor over the next five years.

But the nice thing I like about it is you mentioned the EV risk, and we mentioned earlier, because of the multiple we're paying here, you know, if EV acceleration really, if EV adoption really accelerates, because of the multiple we're paying here, I think you're pretty protected by the cash flow. And this is not a supply and demand thing like oil, EV accelerates, the demand goes down. oil prices are going down quite a bit because it's set at the margin. You know, the car park, as you said, it's 11 years old. It takes a long time for it to recycle out. So, yeah, you don't make screaming home runs, but I think the multiple in that combo really protects you on the downside there. The other thing I'd point out is there's the work ownership. You mentioned they staple the international side here.

Maybe something really wild happens with the work ownership. And they say, hey, we're going to bail ourselves out, but the minority shareholders not so much. I don't think that's going to happen, but that's the other risk. came to mine. Kyle, we have talked so much. There's so much more we could have talked about. We could have talked about the driven central sourcing thing that they're sourcing that apparently is going to be a pretty

profitable. Could have talked about a few other brands, but hour long podcast. This episode is brought to you by Tegas, the future of investment research. Look, if you've been reading my newsletters, you know how often I rely on Tegas for my research. I probably read one or two expert calls a day, you know, probably average seven a week

off of Tegis. They've got the largest transcript library in the world with over 75% of the private market transcripts. Whether you're curious about AI, biotech, or any niche market, Teegas has the insights you need. What sets Teegas apart is its all-in-one-pack platform. It's packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Teegas, everything is right at your fingertips. The best part? The insights you get are from the very people-shaping the industries you're interested in. You'll find perspective from insiders and

executives that you can't get anywhere else. To see Teegas in action and understand why it's one of my go-to resources, visit tegis.com slash value. That's T-E-G-U-S dot com slash value. Trust me, once you try Tegas, you'll never look back. Just want to ask you, anything you think we should have hit that we didn't hit on or anything you think we kind of brushed over, we should have hit a little harder. Yeah, this is in terms of just putting a couple numbers out there in terms of, you know,

we talk a lot about, you know, Ibada, our Ibidah, is actually kind of, I find it humorous that our numbers for 26 are basically in line with the street. The streets at $740 million of EBITDA. The company's guidance is 825, functionally when you do a lease adjustment on the 850 from Analyst Day. And that, you know, that's 40-43-ish percent EBITDA growth. That's significant. That's a 13 percent three-year EBITDA Kager. You know, next year you're buying a business at an 8% free cash flow yield, free growth capbacks, which is a high ROIC, and then it goes to 13% the next year. So this business is generating significant amounts of cash, which is being reinvested in the business, and it's growing. Lastly,

you know, you know me and I understand how you think to a certain extent as well. Neither one of us are Buffett Acolytes, but there's a reason Buffett is Buffett. And I think, you know, there's been a lot of discussion around his quote-unquote Buffett test of, you know, is the business trading below 15 times earnings? Driven checks that box. It's trading it 14 times gap earnings for next year. So you're not paying a huge multiple on earnings, gap earnings. And then does the business have a 90% confidence interval of growth over five years and does it have a 50% confidence interval of 7% earnings growth over five years. So 90% plus chance of growing an aggregate and 50% plus chance of growing 7% a year for five years. In my opinion, driven checks each of those

boxes so um you know it's just one mental model but i think it's it's an interesting mental model for a business that has such steady in markets and embedded growth uh you know on the quick quick loop side taking taking share that 20% is only going higher valbulin's growing units uh take five's growing units etc really filling that that that void and then on auto glass too so in my opinion it checks each of those three boxes and I just you know kind of as one mental model and a toolkit I think it is at least interesting to consider the growth could be faster if they sold the car wash brands right so they'll be starting they'll be more of the growth all the earnings will be coming from the faster growing brands and you know I would just encourage people go look

at the driven investor day go look at Valvene it Kyle's throwing out big growth numbers look at what they've done historically, but look at how all of the units that they've just built. Look at how they ramp over three years. A lot of this growth is very baked in unless you think the world is dramatically changing in the next couple years. Kyle, this has been great. We're past 11 a.m. Eastern, which means that that one press release we thought might come while we were filming live did not come. But look, this has been so great. I appreciate you coming on for the third time and looking forward to the fourth, fifth, sixth time. Coves is publishing a deck with Kyle full driven thoughts. I'm going to include that in the show notes.

People should go check that out. Go check out co-covost. But, Cal, thanks so much. Looking forward to chatting soon. Appreciate your time. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Thanks.