Valvoline Q1 2025 Earnings Report

Valvoline EPS Results

• Actual EPS: $0.32
• Consensus EPS: $0.31
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: N/A

Valvoline Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $398.80 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Valvoline Announcement Details

• Quarter: Q1 2025
• Date: 2/6/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, February 6, 2025
• Conference Call Time: 9:00AM ET

Valvoline (NYSE:VVV) engages in the operation and franchising of vehicle service centers and retail stores in the United States and Canada. The company, through its service centers, provides fluid exchange for motor oil, transmission and differential fluid, and coolant; parts replacement for batteries, filters, wiper blades, and belts; and safety services, such as tire inflation and rotation, bulbs, and safety checks. It offers its services for passenger cars, hybrid and battery electric vehicles, and light and medium duty vehicles. The company was founded in 1866 and is headquartered in Lexington, Kentucky.

Valvoline Q1 2025 Earnings Call Transcript

Key Takeaways

• In Q1 the company posted system-wide store sales up 14% to $820 M, net sales up 11% to $414 M and adjusted EBITDA up 14% to $103 M, while adding 35 net new stores.
• Closed refranchising of 39 stores in Central and West Texas plus three deals since Q4, driving faster market development and enhancing franchise partner momentum.
• Strategic focus on maximizing existing business, accelerating network growth and expanding services was reinforced through BOOMTown customer experience training and enhanced employee engagement, lifting non-oil change revenue.
• The balance sheet remains healthy with $1 B net debt (3.3× leverage), $41 M in operating cash flow, negative $12 M free cash flow and $39 M of share repurchases in Q1 (plus $20 M post-quarter).
• Reaffirmed full-year targets of 5–7% same-store sales comp, 160–185 net store additions and $450–470 M adjusted EBITDA, with 40–45% of EBITDA in H1 and 55–60% in H2 due to seasonality.

Presentation

[Operator]

Hello, everyone, and thank you for joining the Valvoline's First Quarter twenty twenty five Earnings Conference Call and Webcast. My name is Marie, and I will be coordinating your call today. I will now hand over to your host, Elizabeth Clevenger of Investor Relations to begin. Please go ahead.

[Elizabeth Clevinger, Investor Relations at Valvoline]

Thank you. Good morning, and welcome to Valvoline's first quarter fiscal twenty twenty five conference call and webcast. This morning, Vablink released results for the first quarter ended 12/31/2024. This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our Investor Relations website at investors.vablink.com. Please note that these results are preliminary until we file our Form 10 Q with the Securities and Exchange Commission.

[Elizabeth Clevinger, Investor Relations at Valvoline]

On this morning's call is Laurie Fleeth, our President and CEO and Mary Weichlsberger, our CFO. As shown on Slide two, any of our remarks today that are not statements of historical facts or forward looking statements. These forward looking statements are based on current assumptions as of the date of this presentation and are subject to certain risks and uncertainties that may cause actual results to differ materially from such statements. Badlands assumes no obligation to update any forward looking statements unless required by law. In this presentation and in our remarks, we will be discussing our results on an adjusted non GAAP basis unless otherwise noted.

[Elizabeth Clevinger, Investor Relations at Valvoline]

Non GAAP results are adjusted for key items, which are unusual, non operational or restructuring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our GAAP to adjusted non GAAP results in a discussion of management's use of non GAAP and key business measures is included in the presentation appendix. The information provided is used by our management and may not be comparable to similar measures used by other companies. With that, I will turn it over to Lori.

[Lori Flees, CEO, President & Director at Valvoline]

Thanks, Elizabeth. And thank you all for joining us today. Let's start with a look at our first quarter highlights on Slide three. We delivered financial results substantially in line with our expectations for the quarter. Our system wide store sales grew 14% to $820,000,000 and our same store sales growth for the quarter was 8%.

[Lori Flees, CEO, President & Director at Valvoline]

Net sales increased 11 to $414,000,000 and adjusted EBITDA increased 14% to $103,000,000 We had a good quarter of new store additions, delivering 35 net new stores across the network. In addition, we closed our recently announced refranchising effort in Central And West Texas, transferring 39 stores to a new franchise partner. This refranchising transaction along with the two we completed in Q4 give us great momentum to develop these markets significantly faster than we otherwise would have while delivering long term value to shareholders. Now, let's turn to an update on our strategic priorities. We remain focused on three priorities, driving full potential in the existing business, accelerating network growth, and targeting customer and service expansion.

[Lori Flees, CEO, President & Director at Valvoline]

Actions across these three areas will enable us to deliver strong financial growth and best in class returns. The highlight of this past quarter was our two annual meetings where we brought together our company operations team and our franchise partners. These events are a time for us to celebrate the progress we've made, align our focus for the coming year and provide training that can be taken back to the stores. The theme for both meetings this year was elevate as we look to elevate our performance in all aspects of the business. At our company meeting, which we call our family reunion, we hosted our service center managers from across The United States and Canada with our field operations management and key support team members.

[Lori Flees, CEO, President & Director at Valvoline]

We recognize team members who have twenty or more years with the company. We celebrated our first company store to surpass $5,000,000 in annual sales. And we recognize the stores and markets with the highest customer satisfaction scores and the highest employee retention. The most impactful training sessions were focused on customer experience and employee engagement, key drivers of successful business performance and growth. On customer experience, we continue to focus on how to educate our guests on the services their vehicles require without making a heavy sales push.

[Lori Flees, CEO, President & Director at Valvoline]

Our session called BoomTown was focused on behaviors, opportunities, ownership and mindset or BOOM to grow the ticket in the right way. The training needs to be memorable and fun so the information can make its way back into our stores. Our investment in this training has a huge payback as seen by the increase in our non oil change services growth. In Q1, non oil change revenue was again a significant contributor to ticket growth And we see a continued runway as our teams focus on improving the presentation of these services to educate guests. On employee engagement, we provided our store managers the tools to attract, train and develop their teams and ultimately retain them.

[Lori Flees, CEO, President & Director at Valvoline]

We have seen our retention rates improve significantly post COVID, with the trailing twelve month retention once again decreasing as we close the first quarter. Our effective training, which starts with a two seventy hour program for all technicians, helps employees feel confident in delivering our services to guests. And we also see stronger performance in vehicles served per day and non oil change revenue service penetration in the stores with longer tenured employees. At our annual franchise workshop, we were joined by partners representing over 90% of our franchise stores, including all of the partners who've recently joined our network. The engagement of our franchise community has never been higher.

[Lori Flees, CEO, President & Director at Valvoline]

A significant focus of our time with franchisees was around development as we work towards our target of a 3,500 plus store network. With the development commitments that all of our large franchisees have made, we were focused on how to continue to build a robust pipeline. We spent time on our real estate analytics tools and how they could be further leveraged to assess new build locations. And we discussed how to convert the pipeline of acquisition targets. Our business development team has been successful engaging with nearly 4,000 independent quick move operators to identify attractive acquisition targets.

[Lori Flees, CEO, President & Director at Valvoline]

Those targets span both company and franchise geographies. So, our focus was on how to transfer and convert the opportunities within the franchise territories. But before we move on to look at our financials, I'd like to congratulate our franchise team on the recent recognitions our brand received from both Entrepreneur and Franchise Times. We were recognized as the leading automotive services retailer and number 24 overall on the Entrepreneur Franchise 500 list for 2025. This recognition is a testament to the quality of our operating model and our franchise partners.

[Lori Flees, CEO, President & Director at Valvoline]

Getting to spend time with our teams was a great way to kick off fiscal twenty twenty five. I'd like to thank our team members and franchise partners for their work to start this fiscal year strong. The talents and capabilities of both our franchisees and team members truly differentiates our brand and provides a meaningful competitive advantage for Valvoline. Now, I'll turn it over to Mary to look at our financial results.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Thanks, Laurie. On Slide five, let's take a look at the top line performance for Q1. For the first quarter, net sales grew to $414,000,000 an 11% increase over the prior year. System wide same store sales grew 815.2% on a two year stack, with company stores up 8.2% and franchise stores up 7.8%. As a reminder, we have updated our approach to determining same store sales beginning in fiscal twenty twenty five.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

The amount shown on the slide represent the updated approach for both the current quarter and the prior year's comparison. We are pleased to see a return to a more balanced contribution from ticket and transaction this quarter, with transaction growth contributing nearly 50% of the comp. We saw a modest benefit in the quarter from weather that impacted the September in the Southeast, pushing some volume into early Q1. Non oil change revenue service penetration continued to be the largest contributor to the ticket component of same store sales. Next quarter, we will lap the start of non oil change revenue initiatives and some pricing actions.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

As a result, we expect to see some deceleration in the Q2 same store sales comp that will remain for the balance of the year. In addition, in the second quarter, we will be comping up against the benefit we saw from LEAP Day in the prior year. Turning to the next slide, we'll take a look at the financial drivers for the quarter. Gross margin rate increased 80 basis points year over year to 36.9%, driven by labor efficiency as well as modestly lower product costs. Increased depreciation expense, primarily from new stores, offset these benefits by about 30 basis points.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

SG and A as a percentage of sales increased 40 basis points to 19.6% year over year. As we mentioned in Q4, we are continuing to invest in technology, which is the main driver of the deleverage in SG and A for the quarter. The timing of the annual meetings and the typical seasonality of sales drove the sequential change. Our adjusted EBITDA margin of 24.8% is a 60 basis point improvement over prior year. On Slide seven, we'll take a look at overall profitability.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

During the quarter, adjusted net income increased 9% to $42,000,000 driven by adjusted operating income growth of 14%. This was partially offset by higher net interest expense of $4,000,000 As you may recall, the remaining proceeds from the global product sale that were used to retire the 2,030 bonds were invested through the end of the second quarter of last fiscal year. On a GAAP basis, net income for the quarter is $94,000,000 and includes a $71,000,000 pretax gain related to the refranchising transactions. Adjusted EBITDA increased 14% to 103,000,000 largely from top line growth and improvements in gross profit, partially offset by additional SG and A over the prior year. We saw modest impacts from the three refranchising transactions in the first quarter and we expect a larger impact from refranchising in the remainder of the year given the early December closing of the most recent transaction.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Adjusted EPS increased 10% to $0.32 per share, primarily from the growth in earnings, partially offset by the increase in net interest expense. Turning to Slide eight, we'll look at the balance sheet and cash position. We ended the quarter with just over $1,000,000,000 of net debt and with a leverage ratio of 3.3 times on a rating agency adjusted basis. Cash flows from operating activities were $41,000,000 an increase of $20,000,000 over the prior year. Free cash flow was negative $12,000,000 an improvement of $8,000,000 over the prior year, driven by improvement in cash from operations.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Share repurchase totaled $39,000,000 for the quarter. As we look at the remainder of the year, we remain confident in our guidance with full year same store sales comp of 5% to 7%, net store additions of $160,000,000 to 185 units and adjusted EBITDA of $450,000,000 to $470,000,000 Consistent with prior years, we expect to see 40% to 45% of adjusted EBITDA in the front half of the year with 55% to 60% coming in the back half due to the seasonality of the business. I will now turn it back to Lori for some closing remarks.

[Lori Flees, CEO, President & Director at Valvoline]

Thanks, Mary. I'm pleased with our results for the first quarter. The fundamentals of our business remain strong, allowing us to consistently deliver compelling growth as we demonstrate the attractiveness of our customer value proposition and the robustness of our business model. Accelerating network growth enables us to drive market share gains and capture the benefits of scale. Completing the three refranchising transactions and seeing the momentum that our new franchise partners are adding, we are confident that we're on track to achieve our new store growth goals.

[Lori Flees, CEO, President & Director at Valvoline]

We're well positioned to deliver strong and durable growth in fiscal year twenty twenty five. And I'm happy with our start of the year. With that, I'll turn it back over to Elizabeth.

[Elizabeth Clevinger, Investor Relations at Valvoline]

Thanks, Laurie. Before we start the Q and A, I want to remind everyone to limit your question to one and a follow-up, so that we can get to everyone on the line. With that, can the operator please open the line?

[Operator]

We have a question from Steve Shemesh of RBC Capital Markets. Please go ahead.

[Steven Shemesh, Director - Equity Research at RBC Capital Markets]

Good morning and thanks for taking the question. Wanted to start off on same store sales. So, you guys have made clear that your compares on pricing and on oil change revenue are going to be a little bit tougher as we move into 2Q. Just any initial thoughts on what you're seeing quarter to date and how you expect the quarter to play out?

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Yes, Steve. Thanks for the question. We've continued to see good momentum, at the beginning of the quarter, although it's been a little choppy because some of the weather that we've seen, but consistent with our history when we see difficult weather in one week, we typically get that volume back in the following week and, the month of January with some of the choppiness and weather, especially down in the South. We've seen good recovery, subsequent to the weather and, encouragingly, we're continuing to see strong transaction growth consistent with what we saw in the first quarter as well as we're moving into the quarter. You're right, we are lapping some key initiatives, pricing and non oil change initiatives that we started in the second quarter of last year.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

So we expect to see some deceleration there. And then the other key thing I would call out for Q2 is the impact of leap day. We expect the impact of leap day to have a negative 120 basis point impact on our comp for the quarter. So it's a pretty big impact for the quarter for LEAP Day. The year less so, the full year impact is, you know, more like 30 basis points.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

But, you know, we are running up against that LEAP Day headwind as well for the second quarter.

[Lori Flees, CEO, President & Director at Valvoline]

And Steve, I'll just comment on NOCR. While we're lapping a bunch of initiatives, we redoubled down in our family reunion, to talk about process. Our value proposition is about quick, easy trusted, and we've got the technology to pull all of the information on a customer's vehicle when they pull up to the bay. And that allows us our team members to know what added services are required on the vehicle. And so, as you think about since we started talking about NOCR, we did a lot of work focused on making sure we had machines in working order to do the services and supplies, particularly on the visuals for any vehicle that will come into our store.

[Lori Flees, CEO, President & Director at Valvoline]

And we shifted to focus on training and process excellence. And I just say that while we're lapping sort of an oversized contribution in the comp, we still expect to have positive contribution from NOCR service penetration for some time to come. And we look at that by saying, what is the cars or customers that are coming into our store on average? What do we think their mileage gains will be and what services will be required versus the services we deliver? And there's a very good opportunity there for us to continue to manage.

[Lori Flees, CEO, President & Director at Valvoline]

And it comes down to process execution and training. And so again, I think various comments are right. It'll lessen in the comp, but it still will be a positive contribution as we've been talking about for the last couple of years.

[Steven Shemesh, Director - Equity Research at RBC Capital Markets]

Okay. That's great. Thank you. And maybe just a quick follow-up here on gross margin, Mary. You guys have previously talked about gross margin being in the ballpark of flat for the year, obviously, a really strong start to 1Q, up 80 basis points.

[Steven Shemesh, Director - Equity Research at RBC Capital Markets]

Again, know that pricing and non oil change revenue contribution should be less, which should come out of that. But just any changes to how you're thinking about gross margin flowing through the full year?

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

We're encouraged by the first quarter results, but Laurie mentioned in her remarks, it is pretty consistent with our expectations. So, we saw a good margin performance, but we do expect to see some deleverage impact from the refranchising transactions that we announced last year. And, we certainly are continuing to work, benefits from both scale and efficiency. But overall, our guidance for the year is unchanged.

[Steven Shemesh, Director - Equity Research at RBC Capital Markets]

Okay. That's great. Thank you.

[Operator]

We have a question from Simeon Gutman of Morgan Stanley. Please go ahead.

[Simeon Gutman, Analyst at Morgan Stanley]

Hello. Good morning. I'm going to ask my one and follow-up on just in a noisy spot first. It was a good quarter. I wanted to ask the word substantially in line was used in the transcript and in the press release.

[Simeon Gutman, Analyst at Morgan Stanley]

Curious what was substantial, what either missed or what was better? And then the follow-up is on the prior question around the guidance range for the rest of the year. Were you always expecting we knew it would be above the range or at the high end? Are you saying the business is still running strong and we're not flowing upside through because it performed consistent with our expectations? Are you being more conservative, especially given that trends are continuing in the second quarter so far?

[Simeon Gutman, Analyst at Morgan Stanley]

Just thinking about upside to it like underlying run rate versus conservatism?

[Simeon Gutman, Analyst at Morgan Stanley]

Thanks.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

So on your first question, Simeon, in terms of substantially in line, I mean, I think it was substantially in line. It's not no performance is ever perfect in terms of meeting expectations. There as you said, there's things that are, you know, slightly above and slightly below. But overall, we were we were very substantially in line with our expectations for the quarter. In terms of your second comment on the guide range for the balance of the year, we still have a lot of the year to go.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

We are cautiously optimistic based on the good performance we saw in Q1. We're really pleased that we've seen transaction growth tick up to a more balanced level and continue here into the early parts of Q2. And I would tell you that I certainly think that we have some upside opportunity toward the top end of our range, guidance range, and we're going to continue to focus on managing the business to be able to deliver really great outcomes for the year. But, as of as we sit right now, we're still very comfortable with the guidance range that we provided, last quarter.

[Lori Flees, CEO, President & Director at Valvoline]

I think some of, Simeon, some of the difference maybe between could be around the transaction and the timing of the transaction for the last re franchising. I'm not sure. Overall, the assumptions made in for Q1 may have been consistent with what we were expecting. So I think that maybe drove some of the consensus being lower than where we were expecting. But other than that, I think Mary's comments are spot on around.

[Lori Flees, CEO, President & Director at Valvoline]

We're substantially in line and there's always going to be pluses and minuses, but we're really pleased with where we started.

[Simeon Gutman, Analyst at Morgan Stanley]

Thanks, Laurie.

[Operator]

We have a question from Chris O'Cull from Stifel. Please go ahead.

[Chris O'cull, Managing Director at Stifel Financial Corp]

Good morning, everyone. Thanks for taking the questions. Laurie, I know the company has been working on ways to reduce the investment outlay for new units. Can you provide an update on the amount of cost you expect to take out of the build out? Or what you're targeting for the investment outlay?

[Chris O'cull, Managing Director at Stifel Financial Corp]

And then I had a follow-up.

[Lori Flees, CEO, President & Director at Valvoline]

Sure. It's a great question and one that we spend a lot of time on. In fact, just spent some time with our board last week. We have always talked. We started this process a year ago, give or take.

[Lori Flees, CEO, President & Director at Valvoline]

And we went through a process to redesign our prototype, which hadn't been done in quite some time. We looked at the size of the building, we looked at the structural elements that add cost and make us different than other competitors who have touted lower capital costs and really value engineered the building. We also value engineered every piece of equipment. Some of the equipment changes were already flowing through some of the bills that will happen this week. That's actually, you know, those are hundreds of thousands of savings with every change, but it could be $510,000 by element and those add up to really attractive savings.

[Lori Flees, CEO, President & Director at Valvoline]

And they don't take away from the, team member experience and efficiency and they certainly don't take away from the customer experience. They're just re contracting with suppliers to get the best rates on the equipment that we need to serve our guests. On the prototype builds, we are just getting the bids back from contractors. We have some franchisees who've already gotten bids back and very encouraged, obviously. You know, we haven't gone we're going to construction.

[Lori Flees, CEO, President & Director at Valvoline]

So I don't want to overstate what the savings will be until we actually see final build costs at the end because there is plus or minuses with our contractors as they start to build. But we've always said we think 10% to 20% is certainly reasonable. And I think the other thing we're looking at, we've been very open about is really looking at right sizing the number of bays to the market and going through an exercise of do we need to build a three bay or will two two bays serve the market better drive more share and higher return. So we've gone to more of a we're moving to more of a modular design. It won't impact a lot of what we have in place to open this year.

[Lori Flees, CEO, President & Director at Valvoline]

But I think in future years, you'll see the mix shifts between three bay and two bay will also bring our average new unit build cost down. Now, the way that we've done it is we keep flexibility to add a bay, both in the way we design all of the electrical and plumbing as well as the pit design and everything. So, we can actually add a third base should we need it and not spend the capital today, but spend it when we need it, which actually does drive our capital costs down. And we factor in future build into the overall NPV calculations that we're expecting and so feel really good about our new store returns.

[Chris O'cull, Managing Director at Stifel Financial Corp]

A follow-up is, are there opportunities to reduce the time it takes for a new store to reach maturity? I believe it's now three to five years. But can you shorten that in order to improve the return as well?

[Lori Flees, CEO, President & Director at Valvoline]

Yes. It definitely is something we've spent some time on in the last couple of years as we've opened up new builds, at a higher rate. I think part of what we're doing is it depends by the market. So if a market is already got a good presence with the Valvoline brand, we tend to see the first year ramp be a little higher and the ramp to maturity a little shorter. But as we try to extend our footprint into markets that we have less presence, which by the way there's fantastic returns in those markets, we have to balance the right marketing spend, pre opening and then in opening to build the car count more quickly.

[Lori Flees, CEO, President & Director at Valvoline]

So that's always when we look at every location, we look at marketing spend for the area and marketing spend for the new unit and we try to adjust to try to bring those maturities, the maturity faster. I think if you look over time, the maturity has shortened, but we still, it still varies by location and that's why we talk about it from a three to five year perspective.

[Chris O'cull, Managing Director at Stifel Financial Corp]

Okay. Thanks guys.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Thanks Chris.

[Operator]

We have a question from Stephen Zaccone from Citi. Please go ahead.

[Steven Zaccone, Director, Equity Research, Hardlines Retail at Citi]

Great. Good morning. Thanks very much for taking my question. I was hoping, Laurie, you could talk a bit more about that improved transaction performance. What do you think is driving that?

[Steven Zaccone, Director, Equity Research, Hardlines Retail at Citi]

Are you seeing some changes in the competitive landscape? Just anything to chime in there. And then and a follow-up on Simeon's question just in the context of same store sales. You had some prior commentary on the last call that you could potentially have a quarter below the comp range given the strength that you've seen here in the first quarter and that's carried into 2Q. Is it fair to say that's kind of off the table that you should pretty much be in the range for the remainder of the year?

[Lori Flees, CEO, President & Director at Valvoline]

Sure. I'll cover the first one. I'll let Mary, cover the same store sales range for the rest of the year. I think when we look at performance in Q1, we were pretty clear on last quarter's guide or discussion that we knew we would have some increased transaction flow from the push out given the two hurricanes that happened and hit most of the Southeast Region. More outsized on the franchise, but still hitting some of our company stores.

[Lori Flees, CEO, President & Director at Valvoline]

So we knew that transactions would be quite strong in October. We also had, as you may recall, a year ago, we talked about softness and the starting last financial year, just given some marketing agency changes. So we knew going in to October that we'd have a really strong transaction growth in October. When we look at the rest of the quarter, we still had very good transaction growth. And really the most of that comes from the compounding effect of growing our customer base.

[Lori Flees, CEO, President & Director at Valvoline]

So as we acquire new customers into our location, when we serve them well and we, you know, our customer satisfaction scores are 200 basis points higher year over year than they have been. And when that happens, our retention rates stay strong and we are building on the base. So the biggest, you know, the biggest contributor to transaction growth is our active custom customer base growing year over year. Obviously, we know, how much new stores contribute, as well. But I would say there's nothing competitive wise that is creating an outsized impact.

[Lori Flees, CEO, President & Director at Valvoline]

These are just the core fundamentals of our business. In fact, I'd just say that there's not really been any change in what we're seeing from a competitive standpoint, apart from the typical pullback that starts after the busy drive season. So we feel really good about our performance, really good about our ability to acquire new customers and retain the customers we've served.

[Lori Flees, CEO, President & Director at Valvoline]

Mary, do

[Lori Flees, CEO, President & Director at Valvoline]

you wanna comment on the Sure.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

On, your question on same store sales and, range, you know, there there's always the risk of a significant weather event happening at the end of a quarter that can shift volume, between quarters. You know, in January, we actually saw the significant weather events happen, early in the second week of the month, and that shifted a lot of volume into the third week of the month. But those types of timing things can happen, during the quarter. Do I do I think that it's a probability or or a likelihood? No.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

I don't. But I think there's there's always a remote possibility that those those, those types of events could happen. We feel good about our guidance for the full year. We had a strong start to the first quarter and we continue to see good momentum in the early part of the second quarter. I did mention that we're lapping some pricing and non oil change initiatives that we started in the second quarter of last year, that will cause some deceleration.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

And then again, leap day will have a significant year over year impact on Q2, well in excess of 100 basis points. So those are really kind of the highlights in terms of same store sales.

[Steven Zaccone, Director, Equity Research, Hardlines Retail at Citi]

Okay. Thanks for all that detail. The brief follow-up I had was just on gross margin. I know someone asked earlier, but on the last call, you had talked about some risk with some of your, I guess, you'd say people you're selling waste oil to adjusting their pricing. Has anything changed in that scenario?

[Steven Zaccone, Director, Equity Research, Hardlines Retail at Citi]

It sounds like your gross margin expectations are the same, but just help us understand if anything's coming in a little bit better or worse than expected.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Yeah. Nothing has really changed. We've worked hard to be able to minimize the impact, from the waste oil collection, challenges. But typical with what we've seen historically when the revenue from waste oil collection goes down, it typically is correlated with the underlying product costs declining as well. And you might have noticed in my comments, I said we saw some modest benefits in margin for the Q1 from lower product cost.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

And so, we did not see and did not expect to see the lower waste oil recovery in q one. We expect, that, more of that in q two. But again, I I do believe that we'll see, correlation with some modestly lower product cost as well. And, I don't expect it to have a significant impact on us for the year.

[Steven Zaccone, Director, Equity Research, Hardlines Retail at Citi]

Okay. Thanks for that detail.

[Operator]

We have a question from Justin Cleaver from Baird. Please go ahead. Justin, your line is now open. Please go ahead.

[Justin Kleber, Senior Research Analyst at Baird]

Hey, good morning, everyone. Sorry about that. Thanks for taking the question. So first one just on guidance, 14% EBITDA growth here in 1Q. The midpoint of the full year guide implies sub-two percent over the balance of the year.

[Justin Kleber, Senior Research Analyst at Baird]

It seems like a fairly big change even if we take into account the greater headwind from refranchising. So can you maybe unpack what's changing? It doesn't sound like waste oil dynamics are a major headwind here. So is the pacing of your investment spend weighted to the back half of the year? Or are you just maintaining a conservative approach to guidance?

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

So, Justin, thanks for the question. In I don't think you can discount the impacts that refranchising will have for the balance of the year. So, you know, they're the from a Q1 perspective, we saw some modest impacts from refranchising, but we didn't close on the largest of the three transactions until early December, of the quarter. And so we had the benefit of those 39 stores in our quarterly results for most of the quarter. If I were to take out, and show the quarter on a pro form a basis, for refranchising, I would have removed an additional 12,000,000 of revenue and an additional $3,000,000 of EBITDA for the quarter.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

And, I'd have to do a similar kind of pro form a adjustment for last year's first quarter, taking out the refranchised stores, I would have reduced revenue by about $24,000,000 and EBITDA by about $5,000,000 for the first quarter of last year. And so, I think when you look at the balance of the year on a pro form a basis for refranchising, you would expect to see sales and EBITDA growth numbers that are very consistent with our trend, longer term. But I think that the year over year compare with those stores in last year and out of the current year is going to cause, that EBITDA growth to be, you know, substantially lower on a reported basis. We'll make sure that we call it out, for you all to, we did say last quarter that the full year impact, last year was about 100,000,000 in sales and about 25,000,000 in earnings. So I think if you put that kind of $25,000,000 in earnings back in, you'd get back to a more normalized EBITDA growth level and that's the primary driver of the deceleration in the growth rate.

[Justin Kleber, Senior Research Analyst at Baird]

Okay. That's very helpful. And Mary, thanks for framing the refranchising impacts. And my follow ups just related to the tailwind from premiumization. If I looked at your latest FDD, it shows your premium oil mix is about 80%.

[Justin Kleber, Senior Research Analyst at Baird]

Curious how much higher you think that penetration can realistically go? And then also, just if you could share any insights on maybe how that 80% breaks down between fully synthetic versus some sort of synthetic blend?

[Lori Flees, CEO, President & Director at Valvoline]

Yes. I think the point is, when we reported in the FTD, we include both MaxLife, which is our synthetic blend and our full synthetic. And so, as we're seeing and we've been looking at consumer behavior, we're seeing continued trade up to, from conventional to both the max life product as well as the full synthetic and we see a trade up from max life into full synthetic. And that continues to be a very positive tailwind for us that will continue. Some of that is driven, there's really two key drivers.

[Lori Flees, CEO, President & Director at Valvoline]

The biggest one is that the car park as it evolves, there are more vehicles coming into that four to six year window when we start to see an oversized percentage of the car park, that are that are requiring or recommending full synthetic. And so that that's an easy education for the customers. But the other the other factor that's contributing is the age of the vehicle, which I think has clicked over twelve years now. And when we get to older vehicles with high mileage, high mileage being over 100,000 miles, we tend to educate the customers around how to take care of their vehicle so that it can stay on the road for even longer. And that creates a trade up environment even for customers that we have seen for years.

[Lori Flees, CEO, President & Director at Valvoline]

So both of those things, we've always talked about it being, 100 to 150 basis points of comp tailwind for many years to come. And I think that still remains to be true.

[Justin Kleber, Senior Research Analyst at Baird]

All right. Thanks so much for the insights and best of luck.

[Lori Flees, CEO, President & Director at Valvoline]

Thank you. We have

[Operator]

a question from David Ballinger of Mizuho. Please go ahead.

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

Hey, thank you all and

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

good morning. I might as

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

well go back to your Q2 comments just on the detail again. Maybe if we take a bigger step back here, right? It seems like the Q2 comp is mainly impacted by the ticket comparison, the leap days shift. So if you X out all that, it still seems like the transaction piece of the business is running pretty strong quarter to date. Is that all correct?

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

And then second part of this is, you mentioned some of the transaction flow being pushed out from the hurricane, some of the other weather. So is that all in the system now and we should look at potentially post Q2 back FV or getting to somewhat of a more normalized transaction growth level?

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

So on the first part of your question, David, in terms of, the Q2 comp, if I understand your question correctly, from a from a comp deceleration perspective, we certainly expect to see continued transaction growth. We certainly will see offset to that transaction growth from leap day and lapping leap day. So it won't be, you know, we'll once we get here through the February, we're gonna see some offset, of the transactions because we had the extra day in the quarter last year, and that'll affect, you know, transactions more significantly than it will affect ticket. Because ticket, you know, we would expect to see some relative consistency over over the quarter time frame. So, I'm not sure if that answers the first part of your question in terms of the deceleration of the comp and the impact of that deceleration on transactions.

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

No, that's fair enough. But it's not like you've seen that change on the transaction growth side as you entered Q2 being absent these other pieces of the business is these one time like shifts. The underlying growth rate on the transaction side is not changing materially.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

No. We continue to see strong see good performance in terms of the transaction contribution to the overall comp.

[Lori Flees, CEO, President & Director at Valvoline]

And I think also still balanced. So again, while we're going to lap some of the ticket items, we're still having growth on the ticket side. So I think what I think your your question is is right in that one, we're seeing continued good transaction growth as we're getting as we're into Q2. And we're continuing to see good ticket growth, although slightly slower than what we would have seen in the past twelve months because of some of the lapping activity on NOCR improvement as well as some pricing actions.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

And then your second part of your question on the transaction, go ahead. Go ahead, David.

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

No. Go ahead. Sorry. Sorry for cutting you off. Go ahead.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

I was just gonna say on the second part of your your question in terms of transaction growth for the balance of the year. You know, we are comping up against weaker transaction growth in the back half of last year. So when we get to the back half of the year, my expectation would be we'll continue to see some good balanced, balance between transactions and ticket in the back half, especially given that we're going to be comping up against some, some weaker numbers from fiscal twenty four.

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

Yes, understood. That's very helpful. And then just to shift over, changing gears onto the buybacks, you've repurchased almost $40,000,000 this quarter alone. That's really towards the low end of your full year guide. So How should we think about buybacks over the balance of the year?

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

And what would allow you to potentially go to the high end of the range or even above? Is there anything you need to see in the marketplace? Or just how are you thinking about that change over the balance of the year?

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Sure. So you'll see, that, when we issue our 10 Q that subsequent to the end of the quarter, we did some additional buyback, as well. We did about $20,000,000 of additional buyback, since the end of Q1. So, you know, the fiscal year to date, we're more in the 60,000,000 in terms of total buybacks. And, you know, we've looked opportunistically.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

We saw weakness in the share price after our last quarter call and we were taking advantage of that. We think that there's significant undervaluation of the business in the marketplace and we thought it was made a lot of good sense for us to accelerate some of that buyback to take advantage of

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

that.

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

Perfect. Thank you.

[Operator]

We have a question from Peter Keith of Piper Sandler. Please go ahead.

[Alexia Morgan, Equity Research Associate at Piper Sandler Companies]

Hi. This is Alexia Morgan on for Peter Keith. Thanks for taking your question. My first question would be on the promotional environment. We've heard from our Czechs that it's or the promotions have come down a bit or promotions have moderated recently.

[Alexia Morgan, Equity Research Associate at Piper Sandler Companies]

Can you talk about what you saw there in Q1, just as it related to prior quarters? And then how you're thinking about promotions in Q2?

[Lori Flees, CEO, President & Director at Valvoline]

Sure. I think we're not seeing any significant change on the competitive standpoint from a promotion standpoint. We feel really good about our performance. I think in the last couple of quarters, we talked about some episodic activity from competitors outside of our quick lube segment. And it's been pretty transitory in nature, and not had a material impact on our business.

[Lori Flees, CEO, President & Director at Valvoline]

Now, that's whether we think about discounting in the category or discounting by folks in our category. And I think as we step back and reflect, we have a very high quality brand and that really attracts customers for trial. And then we have a best in class customer experience once they're there, which enables us to continue to capture share of the do it for me market and outperform the market overall. So again, we're not seeing any outside competitor actions, promotional or marketing that's having a significant impact on us. And we're really pleased on how our marketing team is driving really good return on ad spend.

[Alexia Morgan, Equity Research Associate at Piper Sandler Companies]

Great. Thank you. And then my follow-up, is just more on unit growth, specifically on the franchise side. Are you still on track to, for your longer term target 150 franchise opens a year by 2027? Or how you're thinking about the bridge to that?

[Lori Flees, CEO, President & Director at Valvoline]

Yes. As I've mentioned in my remarks, we have really strong engagement from our franchise partners in The US. We have about 40 partners. And at our workshop, we had the most engagement and focus on development. All of our large franchisees and many of the smaller ones have committed to upsize development agreements and our pipeline for new units is very strong.

[Lori Flees, CEO, President & Director at Valvoline]

So the momentum of both the existing partners that we've been working with as well as the new partners we've welcomed to the network, it really has increased our confidence in our new unit growth goals. Overall, we stated we wanted to get to two fifty new units by fiscal twenty seven, with 100 give or take 100 coming from company and 150 coming from franchise. And I think the momentum that our franchisees have as well as some of the things we're doing to support them, give us a lot of confidence we're on track to hit those goals. Thank you.

[Operator]

We have a question from Thomas Wendler of Stephens. Please go ahead.

[Thomas Wendler, Analyst at Stephens Inc.]

Hey, good morning, everyone. I just wanted to touch on the waste oil one more time. It sounds like that didn't really flow through or become any issue to the margins this quarter, but I think there was a mention of maybe impacting 2Q. So maybe if you could touch on that. And then just maybe your thoughts on how the company could be impacted if we see increasing oil prices?

[Thomas Wendler, Analyst at Stephens Inc.]

Thank you.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Yeah, good questions. In terms of waste oil, for Q2 and beyond, our expectation is that, there'll be a very, very little impact because we think that any reduction in the waste oil recoveries will be offset by lower product costs. And so, we're in so we're really expecting it to have negligible impact in the balance of the year. As it relates to rise rising oil prices, it typically would take a while for any kind of increases in crude oil to pass through into the base oil markets, and those base oil markets then impacting the cost of our lubricant products. That also has an impact by the inventory that's in the system that has to flow through as well.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

So, rising crude prices, at this point in the year would likely not have a really significant impact to us until the back half of the year. And we would, of course, be looking at opportunities for us to, offset any increases through any efficiencies. And then, we always would have the opportunity to potentially look at our pricing and pass through pricing as well. Our expectation is that, any increases would impact competitors in the same way that it would impact us. And the market's always behaved pretty rationally when it comes to passing through cost increases, from a pricing perspective.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

So I wouldn't expect it to have a significant impact on our results for the year if we did see some increases.

[Thomas Wendler, Analyst at Stephens Inc.]

Alright. I appreciate the color. Thank you.

[Operator]

We have a question from Brett Jordan of Jefferies. Please go ahead.

[Bret Jordan, Managing Director at Jefferies LLC]

Hey, good morning guys. Could you talk about the

[Bret Jordan, Managing Director at Jefferies LLC]

seasonality of the non oil change business? Obviously, you think batteries and wipers would benefit from the winter weather we've been having, but could you sort of talk about the mix there and what the weather impact has been?

[Lori Flees, CEO, President & Director at Valvoline]

Yes. And that's a great question. When you look at our services, there are very there are a few things that are highly seasonal. Wipers, obviously, we have an outsized demand for those as we get into wet weather seasons in the spring and also in the fall. Battery definitely impacts in the winter.

[Lori Flees, CEO, President & Director at Valvoline]

And we've seen a significant uptake in battery, and our battery penetration, which we would expect in the summer. Our air conditioning recharge services, obviously, is when that starts to become into play. But most of the services that we have, it's really driven by the miles driven of the vehicle. So tire rotations every 5,000 miles. When we look at air filters and cabin air filters and the things that drive most of the non oil change revenue because they're highly recurring, most of those have limited seasonality.

[Bret Jordan, Managing Director at Jefferies LLC]

Okay. And then you talked about the independent quick lube operators as sort of a potential, I guess, acquisition upon it. What are the evaluation trends there? Are they sort of looking at this business as seeing a lot of franchise quick lube additions in the market making them inclined to sell? Or how do you what's the average multiple for those independents?

[Lori Flees, CEO, President & Director at Valvoline]

Well, the multiple definitely varies, based on the quality of the asset in the real estate location. But what we're not seeing I think post COVID when employment and the turnover of people was really high and supply chain was more challenging. We had a lot of independent operators just, you know, putting their hands up saying, okay, this is too difficult. I don't have all the support in place. And so we went through a period of time when there may have been more interest.

[Lori Flees, CEO, President & Director at Valvoline]

But I don't I think we're gone back to a normal course and people just getting to an age and or a point in their career where they are not transitioning, the business down to the next generation and they're looking to exit. So I don't think there's any significant changes that are driving more or less of the independent operators in terms of them wanting to transition. I do think that when we come into a market and we start to build some of the independence that impacts them and then they express more interest because they see us slowly taking business away from them and adding business from dealers. And that sometimes will precipitate a raising of the hand. And if the location is additive, then we're very interested.

[Lori Flees, CEO, President & Director at Valvoline]

But I don't think there's any significant changes in that dynamic other than it's still incredibly fragmented. They're still 4,000 independent quick lube operators out there. Not all of them do we want to own. But if it's in the right real estate location that's complimentary to our network, you know, we we have a playbook, we know how to do that, whether it's a onesie twosie owner or something of more scale. It is it is a great return on invested capital.

[Lori Flees, CEO, President & Director at Valvoline]

It has a faster path to maturity because you're buying a business that's already existing and you're building upon it. So, you know, we love those. Obviously, we're selective when we buy them.

[Bret Jordan, Managing Director at Jefferies LLC]

Great. Thank you.

[Operator]

We have a question from David Lance of Wells Fargo. Please go ahead.

[David Lance Hays, Senior Due Diligence Consultant & Senior Assistant Vice President at Wells Fargo]

Hey, good morning and thanks for taking my questions. So SG and A per store per company operated store grew high single digits in Q1, but considering the franchising activity and the recently closed acquisition, curious how you're thinking about these trends throughout the balance of the year?

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Yes. So we talked last quarter, David, about, there we expected to see some deleverage in SG and A, partially due to refranchising, but really driven by some of the investments that we are making in technology. So, we really, since we sold the products business, are focusing on systems that are retail focused that can help us to support the continued growth and scaling of the business over time. So we've replaced our ERP system. We're in the process of replacing our HRIS system, both with systems that are really have the ability to help us from a pure play retail perspective to drive growth in the business.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

So, I do expect to see some modest deleverage in SG and A over time excuse me, over the remainder of the year, and it's primarily being driven by our technology investments. The only other thing I did want to add for some clarity in terms of some of the questions we've had about the cadence of earnings and what our expectations are for the balance of the years. In my comments, I did say that we expect the first half of this fiscal year to be produced 40% to 45% of our overall earnings. And because of the refranchising impact, I do expect that to be the, towards the top of that range in the front half relative to the 55% to 60% in the back half. So, I just wanted to provide some clarity in terms of the cadence of earnings as well.

[David Lance Hays, Senior Due Diligence Consultant & Senior Assistant Vice President at Wells Fargo]

Got it. That's really helpful.

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

Did you

[Mary Meixelsperger, Chief Financial Officer at Valvoline]

have another question, David?

[David Lance Hays, Senior Due Diligence Consultant & Senior Assistant Vice President at Wells Fargo]

Can you just yes, just one more. Can you talk about fleet performance in the quarter and any additional color you can provide around account wins as well?

[Lori Flees, CEO, President & Director at Valvoline]

Yes. Fleet continues to be a great business. Our investments in both team and capabilities, that our fleet managers, look for is really paying off as the growth continues to outpace our consumer transaction growth. The business, our service proposition is very attractive to fleets and we've had some success growing the account base, but continue to focus on increasing penetration and ensuring as we grow our network of stores, the fleet customers that we're already serving know that we can handle more of their portfolio as their geographies, as their geographies span ours. I think, we have a significant market opportunity to continue to drive same store sales coming from fleet.

[Lori Flees, CEO, President & Director at Valvoline]

That's some of the transactional growth that we've been driving and expect to continue to drive. And at our franchise workshop, we did have some discussion with franchisees around how we could partner and support them. We're actually helping all of our large franchisees as it relates to administrative support in terms of billing with the franchisees, but also some regional sales support. Just taking the tools and programs that have been very successful in company markets and ensuring that our franchisees get the benefit of those.

[Bret Jordan, Managing Director at Jefferies LLC]

Got it. Thanks so much.

[Operator]

We currently have no further questions. So I will hand back to Elizabeth Clevenger for closing remarks.

[Elizabeth Clevinger, Investor Relations at Valvoline]

Thank you all for joining us today. This concludes our call.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your lines.

Participants

Executives

• Elizabeth Clevinger, Investor Relations
• Lori Flees, CEO, President & Director
• Mary Meixelsperger, Chief Financial Officer

Analysts

• Steven Shemesh, Director - Equity Research at RBC Capital Markets
• Simeon Gutman, Analyst at Morgan Stanley
• Chris O'cull, Managing Director at Stifel Financial Corp
• Steven Zaccone, Director, Equity Research, Hardlines Retail at Citi
• Justin Kleber, Senior Research Analyst at Baird
• David Bellinger, Director & Senior Analyst at Mizuho Financial Group
• Alexia Morgan, Equity Research Associate at Piper Sandler Companies
• Thomas Wendler, Analyst at Stephens Inc.
• Bret Jordan, Managing Director at Jefferies LLC
• David Lance Hays, Senior Due Diligence Consultant & Senior Assistant Vice President at Wells Fargo