Q2 2021 Valvoline Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Valvoline and incorporate it to Q2 thousand 21 earnings conference call.
At this time all participants are in a listen only mode and the distributors presentation. There will be a question and answer session.
Ask a question during this session you and eat your press Star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to you speak today, Sean Cornett. Thank you. Please go ahead Sir.
Thanks Christy.
Morning, and welcome to Valvoline and second quarter of fiscal 2021 conference call and webcast.
Valvoline released results for the quarter ended March 31, 2021, and approximately five P. M. Eastern time yesterday April 28, and this presentation and remarks should be viewed in conjunction with that earnings release.
Copy of which is available on our Investor relations website, and investors that valvoline Dot com.
This was also preliminary until we file our form 10-Q with the Securities and Exchange Commission.
A copy of the press release has been furnished to the SEC on form 8-K.
With me on the call today are Valvoline, Chief Executive Officer, Sam Mitchell, and Mary Michael Burger Chief Financial Officer.
As shown on slide two any of our remarks today that are not statements of historical fact are 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.
Valvoline 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 basis unless otherwise noted.
Acid results exclude key items, which are unusual and non operational restructuring and nature.
We believe this approach enhances the understanding of our ongoing business.
A reconciliation of our adjusted results to amounts reported under GAAP and a discussion of management's use of non-GAAP measures is included in the presentation appendix.
The non-GAAP information provided is used by our management and may not be comparable to similar measures used by other companies.
As we turn to slide three let's review our financial results for the quarter.
For the fiscal second quarter Valvoline delivered reported operating income of 131 million net income of $68 million and EPS of <unk> 37.
Year to day cash flow from operating activities was $190 million.
The key items and the quarter were $27 million of after tax expenses related to a new debt issuance and retiring our 2025 senior notes and non service pension and <unk> income of $10 million after tax and business interruption insurance recovery of $2 million.
Excluding key items results for the quarter included adjusted EBITDA of $152 million and adjusted EPS of <unk> 46.
Year to date free cash flow was $116 million.
Now as we turn to slide Portland, and turn the call over to Sam to discuss our results and operations and more detail.
Thanks, Sean.
And Q2 were outstanding and exceeding our expectations and part of and exceptional performance and the first half of the fiscal year.
Sales grew 21% and the quarter and adjusted EBITDA increased by 38%, excluding large unfavorable changes and variable compensation and LIFO inventory accounting.
We continue to benefit from decisions that we've made to drive growth Q2 was the first quarter were quick lubes contributed more than half of our total adjusted EBITDA as our strategy of shifting to a more service driven business model takes hold and supported by strong cash generation of our products business.
We're also benefiting from and improved macro environment, including stimulus and broader economic reopening.
Our strong top and bottom line growth and outperformance. So far this year gives us the confidence to raise our 2021 guidance. We now expect adjusted EBITDA to be $590 and $610 million, representing high teens growth at the midpoint and free cash flow to be roughly $260 million.
Turning to the next slide.
The topline improved across all segments and Q2.
Quick lubes and international each of our sales growth and the mid 30% range and adjusted EBITDA growth of roughly 60% quarter.
Quarter with America had solid top line growth and had a 4% decline and adjusted EBITDA due to price cost lag, excluding our LIFO inventory accounting impact.
Let's discuss quick lubes and more detail on the next slide.
Yeah.
Quickly pad and outstanding quarter same store sales growth was more than 20% with a balanced contribution from transactions and average ticket.
Some of this growth is related to the onset of COVID-19 impacts and the second half of last March. However, our normalized same store sales grew more than 10% driven by our strong digital marketing performance and excellent in store execution of the preventative maintenance model.
Same store sales growth combined with unit growth of 9% drove a 34% increase and overall revenue.
Top line growth and improved margins generated a nearly 60% increase and adjusted EBITDA and truly impressive performance.
Throughout the pandemic our quick Lubes business has produced impressive results due to our convenient safety focus day in your car service model and exceptional performance by our team.
Let's turn to the next slide to discuss how our broader menu and preventive maintenance services drive store sales.
Key component of driving same store sales growth is ticket one aspect of ticket that we pay particular attention to its non oil change revenue or NOI.
From our wider array of service offerings.
These include OEM scheduled maintenance services and fuel system cleaning battery changes tire rotations and ancillary items like cabin air filters and wiper blades.
It is important to note that these services tend to carry exceptionally strong margin contribution.
We continue to focus on ways of growing and OCR as an example last year, we relaunched our battery change program, we moved to a different supplier and brand and the batteries as valvoline matching the branding across the product lineup of use and our stores.
This also gave us access to improved testing equipment for our store employees and better understanding of battery health for our customers, we invested and our supply chain capabilities to make sure that we have the right inventory in place at the right time.
The result has been a near doubling of battery change service penetration and the first year.
We completed the rollout the company stores and December and are in the process of expanding to our franchisees as a result, and we expect this service to be and important growth driver and OCR and 2022.
And the safety precaution, we suspended cabin air filter services and the early stages of COVID-19, we've begun reintroducing them and expect a solid contribution to ticket and the second half of the year.
Non oil change revenue continues to steadily grow over time and currently makes up nearly 25% of average ticket and.
We have a tremendous opportunity and to expand and OCR and increased penetration rates of these important services to drive ticket growth, while expanding our customer base.
Let's look at the other drivers of same store sales on the next slide.
Both transactions and average ticket drive same store sales.
We leverage our strength and digital marketing and data analytics to attract new customers and retain our current lines.
We've grown our oil changes per day measure of transactions at a healthy 3% CAGR over the last several years. This reflects the success that we've had grow and our customer traffic and gaining share.
In contrast to and upsell approach, we focus on educating our guests on what services, they're vehicles need based on the vehicle service history and OEM recommendations.
This builds trust with our customers and combined with the competitive advantage of advantages of our model allows us to have pricing power and capture the shift to synthetics through premium mix and grow non oil change revenue.
The multiple levers that we have to drive same store sales give us the confidence and the sustainability of strong long term same store sales growth.
Once you get core North America's results on the next slide.
Progress and core North America continued in Q2, we.
And we have pass through raw material cost increases to our index based accounts.
We have also successfully completed the first phase of pricings and negotiated accounts.
And while material costs have increased significantly since our Q1 earnings call.
While we will execute price increases and Q3 and Q4. We also expect short term margin pressure from the price cost lag effect.
Unfavorable price cost lag and caused a decline and segment EBITDA.
A significant component of the decrease was the impact of LIFO inventory accounting.
Excluding the LIFO impact year over year gross profit was up slightly and adjusted EBITDA was down modestly.
Overall volume was up 7% year over year, despite significant cost and pricing pass through pressure, we saw growth in both channels.
Our retail channel volume continues to outpace miles driven growth.
Growth is coming from continued progress and traditional DIY outlets and from new distribution, where we've been underpenetrated historically, we're making good progress and gaining more shelf space and farm stores C stores hardware and online.
Our focus and the DIY category is on working with our retail partners to market and merchandise our brand innovation, particularly and synthetics is a key part of that strategy. For example, we recently introduced flexible packaging for our synthetic year oil.
We have received great feedback from consumers and customers and early sales results are strong valvoline is the number one brand and transmission fluids and gear oils and flexible further strengthens our position.
And the <unk> space demand is recovering more slowly than in DIY and our focus remains on helping our installer customers drive value. Our success is demonstrated demonstrated by the fact that we have extended or renewed long term agreements with many of our key installer customers.
We also continue to win new business and our volumes continue to outpace miles driven we are well positioned to see the benefit as the market recovers.
Let's review International results on the next slide.
The international segment delivered another impressive quarter of growth across all regions and Q2.
Sales and volume were up and the mid to high 30% range led by Asia Pacific and and particularly China, which had the largest COVID-19 impact in Q2 last year.
Topline volume growth was driven by our marketing programs and new distribution, which led to market share gains we continue to add new distributors and all regions building channels and expanding market coverage.
In general, we saw improving market conditions, and some distributor restocking impacts.
We're closely monitoring the impact of COVID-19 rising COVID-19, 19 cases, and India and other parts of Asia.
Adjusted EBITDA growth of 63% was driven by strong volume growth and both affiliates and JV.
Raw material cost increases impacted Q2 and are expected to continue across all regions.
We expect margin pressure to increase and the near term as we work to pass through these increases.
On the next slide let's take a closer look at one of our marketing programs that help drive brand awareness and strong volume growth and the quarter.
Along with channel building and service platforms building our brand is a key element of our international growth model.
Key pillar of our brand building efforts as our global mechanics month program, which took place across more than 50 countries, including the U S and Canada in March.
Valvoline is probably supported mechanics, with a variety of programs, including training and professional development throughout our history.
The 2021 campaign focused on recognizing the work mechanics have done to keep our economy is growing their critical efforts kept essential service workers moving to help those and need as the world manages through COVID-19 and <unk>.
Program saw significant engagement across multiple channels as well as direct retail activations with signage and promotional materials and mechanic shops and yen.
All elements of the event were focused on recognizing mechanics and driving customer visits.
<unk> deliver a record volume month and international in March.
Now, let me turn it over to Mary to review our financials.
Thanks, Sam our adjusted results for Q2 are shown on slide 12.
Year over year growth and sales of 21% led by international and quick Lubes acquisition and favorable favorable foreign exchange added 500 basis points to sales growth.
The 60 day basis point decline in gross margin was primarily the result of Europe year over year changes and LIFO inventory accounting driven by raw material cost changes, which were declining last year and have risen. This year, primarily the result of impacts from the global pandemic.
Most comparable peers use of FIFO accounting approach, we believe excluding the noncash LIFO impact is important to better understand the underlying business performance and for better comparability.
The increase in SG&A was primarily related to changes and variable compensation as we significantly reduced carrier variable comp accruals in Q2 last year due to the pandemic.
Driving a $21 million year over year change.
The remaining increase and SG&A was driven by acquisition inflation increases and advertising and marketing and foreign exchange impacts.
In Q2 quick Lubes made up just over half of our adjusted EBITDA for the first time this.
This favorable segment mix, along with top line growth and a higher contribution from unconsolidated joint ventures.
<unk> and net 13% year over year increase and adjusted EBITDA to $152 million.
Excluding the unusual LIFO impact and variable compensation changes adjusted EBITDA grew 38% and adjusted EPS grew 49%.
Let's move to slide 13 to discuss balance sheet and cash flow.
We continue to generate strong cash flow with year to date cash flow from operating activities of 190 million capex totaled $74 million, leading to free cash flow of $116 million.
Our discretionary cash flow defined as operating cash less maintenance capex was $175 million.
80% of our year to date capital expenditures for growth related investments, which is our highest priority for allocating capital.
The cash generative nature of the business and it's capital light maintenance needs and allow us to focus on and self fund our growth while also returning cash to shareholders.
In Q2, we returned $65 million and the form of dividends and share repurchases.
Interest expense was $55 million and the quarter, including $36 million of costs related to calling our 2025 senior notes and issuing new longer term notes part of our efforts to reduce gross leverage and lower interest expense.
We had debt redemption costs and Q2 last year as well.
Net interest expense, excluding the costs associated with these bond refinancing transaction would have been $19 million and each quarter.
Let's move to the next slide to review our updated outlook.
We are raising our guidance based on our outstanding performance in Q2, we now expect same store sales growth of 18% to 20% and normalized growth of 9% to 11%.
This projected same store sales performance combined with anticipated strong store additions and ongoing strength in international is expected to generate overall sales growth and the low to mid 20% range.
Strong first half results and the flow through of higher topline growth to profitability is anticipated to generate adjusted EBITDA of $590 million to $610 million and adjusted EPS of $1 72 to $1 82, which would translate to year over year increases for both metrics.
And the mid teens to 20% range.
The increase in earnings improved cash conversion and lower than anticipated cash taxes are expected to drive free cash flow of $250 million to $270 million.
Now, let me turn things back over to Sam to wrap up.
When we first gave our outlook for fiscal 2021, we anticipated this year it could be and an inflection point for growth.
Based on our progress so far and our updated guidance, we remain convinced of that expectation.
Quick lubes should make up half or more of our adjusted EBITDA as our investments and store growth and improved operations continue to deliver benefits importantly, quick lubes high margin high growth profile continues as it becomes the biggest segment and the company.
At the same time supply chain enhancements and investments and brand building are generating growth and international and we continue to generate strong cash flow and core North America as well.
The valvoline team is working incredibly well across businesses and functions to drive growth and bring innovative solutions to our customers.
This gives us the confidence that we have the right plans and capabilities to deliver high return growth and the years ahead.
With that I'll turn it back over to Sean to open the line for Q&A.
Thanks, Sam before we go to Q&A, just like to remind everyone to limit your questions to one and maybe one or two follow up and with that Christy. Please open the line.
Your first question comes from the line of Laurence Alexander with Jefferies.
Good morning, I guess, two quick ones and then can you.
And give a sense per group.
Raw material pass throughs, and both your core business and the international JV.
Would EBITDA be.
At the current run rates from business, if you fully caught up on the on the <unk>.
Known pass throughs.
And then secondly can you talk a little bit because aluminum perspective on the longer term target for the mix and non oil change revenue protect us.
Do you see.
The CAGR slowing down after crosses a certain point towards and become more difficult to linear and additional services.
Yes, first Lawrence with regard to the cost increases and I noted there have been quite significant.
And we've had particularly base oil cost increases over each of the last four to five months and so what we see as we progress through the fiscal year is that.
And we'll be taking a series of price increases to the negotiated accounts both in the U S and international and.
So.
While we expect to recover those costs over time, we will fill the price lag impact in the business.
In particular more and the DIY retail channel, where we've got scheduled promotions throughout.
The spring and summer period, so we have to have a balance between how hard and we push on price the timing of those price increases with protecting those promotions, which are important to continuing the volume momentum that we haven't DIY right now so.
So we will feel some lag impact, but nonetheless, when we take a look at our forecasted unit margins and quarter with America International we'll see.
Certainly some pressure in Q3 and Q4, but we do expect to be and.
Pretty good shape as we start the new fiscal year as you know a lot of our volume, particularly on the installer side of the business is based on negotiated index pricing and so that pricing.
And adjust automatically every quarter. So you really get very little lag impact on that side of the business.
So.
So that's where we stand from a margin perspective, we'll feel some pressure there last year of course, we had the opposite effect, where we had a tailwind of falling raw material costs. The share we are seeing that debt.
That shift back and part of rising crude also there was the weather impacts from February has had some disruption effects and the debt base oil and added a supply chain, which has put additional pricing pressure cost pressure on us. So hopefully as we progressed towards the end of the year, we will see some of those pressures subside.
With regard to the quick lube business and non oil change revenue, calling that out because it is a really important lever for driving same store sales growth. It's one of many levers that we have to drive same store sales growth and it's one that we're very much focused on we see a lot of opportunity for growth and the years ahead and and so while we've seen some.
And nice progression and especially in the last couple of years, it's been really pleased with that theres still quite a bit of upside.
Highlighted.
The battery service, which we're paying particular attention to we made some investments there. We're seeing some really strong early results, but were really and that up for a big contribution in fiscal 'twenty two.
Not just battery service I mean, what we found is that our customers when we when we present, our services and the OEM recommendations properly.
Because of that trust and we have with our customers, we're able to capture more of those services that are truly needed on those vehicles and so this is really key to our long term strategy better penetrating.
And the service opportunities that we have with our existing customer base, leveraging the technology and leveraging the investments that we've made and understanding and vehicle vehicles maintenance history.
And with the OEM recommendations combined with effective presentations.
It's a powerful lever for driving that ticket growth overtime.
Okay, great. Thank you.
Your next question is from the line of Simeon Gutman with Morgan Stanley.
Hey, guys. This is Michael Kessler on for Simeon and thank you for taking our questions.
And my personal line and ask about and I'm wondering guys I wanted to ask about the guidance beat and raise guidance just yet.
I guess relative to our expectations, maybe the street to the increase to guidance still trail a little bit the magnitude and how much you guys outperformed in Q1 and Q2. So I just wanted to ask about that the puts and takes as far as your expectations for the back half seems that quickly.
Outperforming should probably continue to trend embedded anything extra guidance earlier in the year, but you have some profitability.
And a little bit more uncertainty on the core North America side. So just if you could talk through that and I guess.
Is that kind of right way to think about the back half is there and implications as far as to how those won't offset going forward. Thank you.
Yes.
No.
Pleased to raise guidance and.
And a lot of that is.
From the strength that we saw in the first half of the year and most importantly, it is the continued strength and the quick lube business and so we fully expect that quickly business to perform very strong and the second half of the year. So obviously the same store sales growth and we saw even on a normalized basis in Q2 being double digits.
We're seeing that momentum carry into the beginning of Q3. So that is our biggest profit driver. It's important to note, though that the international business has been delivering outsized growth over the last couple of quarters and so we're.
But we're excited about that and the fact that we're seeing growth across all of our regions.
Tells us debt some of the investments that we've been making and building our capabilities on the supply chain side building, our channels to market strengthening and our distribution and strengthening our teams.
This is.
A business that is going to deliver sustainable growth into the future. However revenue debt the debt.
Topline growth was exceptional and we do think there is some benefit to the.
The COVID-19 recovery process, where we benefited from inventories building back up so I would expect growth and the international business to continue for share into the back half of the year, but not at the same rate that it contributed to the first half performance and.
So back to the guidance then you've got a very strong performer.
Performance coming from quickly international will continue to be good, but it will feel a little bit of that price lag impact because raw material costs are rising across the product business and the core North America will be a bit more challenged.
As we execute pricing and we will feel some price lag effect and the back half of the year, but all in all adding up to just a truly phenomenal year for the company.
Yes, the other thing I would add to that Sam and we are monitoring carefully some of the increase.
Incidence of COVID-19.
We're seeing and India, where we operated joint venture with comments.
As well as in some parts of Asia, where we had the strong business within the international segment, and we expect that to create some additional pressure in the back half of the year. So.
We.
And are concerned about our teams in India and.
Certainly.
Hopeful that they'll be able to get ahead of.
This slide and their COVID-19 incidents and.
Be able to see some of the improvements that we have.
And see hear and experience and in the U S and other parts of the world and.
That also has a little bit of a negative outlook for us in relationship to the back half of the year in terms of our guidance.
Yeah got it and I've actually gets back to ask about NSX and <unk> extra for addressing that as well I guess one other question on quick lubes, and thinking and I guess bigger picture longer term and about the mix overtime as far as where the EBITDA is coming from I think you guys have had.
And of the majority being generated by quickly to out there as a target for a couple of years now going into next year is there any updated thoughts on how and where that could go in the next call. It two to three years and we're ahead and any kind of thinking changed given what we saw this quarter with a record high as far as the mix of liquids.
Yes.
The good news is is that the trends that we see and quick lubes, we definitely feel that they are sustainable and and.
And so we're bullish on the long term performance of the business as it relates both to the same store sales growth, where there is just tremendous leverage and value and how.
And how we care for our customers and how we.
And capture more of the service opportunities with those customers and continue to build market share.
That's number one we're also building market share by adding more stores and we've got three important levers for adding stores, we've been investing and new store growth and they are beginning to contribute significantly this year and even and expanded contribution in fiscal 'twenty to making acquisitions and then working with our franchisees on their growth programs to them.
Make sure that they are adding stores and were.
<unk> ourselves to reach more and more households, so long term growth looks good.
And we're very confident and that.
We are looking at those.
Long term forecasts and we look forward to providing updates on that and the near future.
So hopefully that helps.
Yes. It does thank you very much and can the first year.
Your next question comes from the line of Stephanie Benjamin with Truest.
Hi, good morning.
Good morning, Stephanie.
And just a quick follow up from an earlier question and Sam you've kind of walked through.
Margin expectation for core North America, and I, just wanted to confirm kind of your thoughts as you look at unit margins and the back half of the year. So just given what we're seeing with the ryzen and <unk> and base oil and just the price log impact, we really shouldn't see that return to your target call. It high threes low for margin.
So really early next year early fiscal 'twenty, one is that I'm sorry early fiscal 'twenty two is that the right way to think about it.
Yes, Stephanie.
In terms of the.
And the margin compression will see short term from the price cost lag in.
In the corner of America business, we do expect it to be a more significant impact on margin.
In the back half of the year given the recent increases that we've seen and base oil costs.
Having said that if you look at.
And our forecast for the back half excluding the impact of the LIFO changes, we actually think that we're going to be and the high threes.
And and yes, we.
We will see a full recovery into the first half of next year as we're able to get our pricing through.
Over time here and the next six months, but.
And with the impact of LIFO it'll be.
Lower than that that without the non cash.
LIFO impact, which had a significant and <unk>.
Difference this year versus last year, given that the shorter term decline and cost last year with the increases that we're seeing this year.
Excluding net LIFO impact, we expect to be and the high threes.
Great and that's really helpful. And then switching gears I'd love to hear your thoughts on and then the underlying industry growth that youre seeing both in quick Lubes and North America. So if you could kind of frame. How you think your quick group business has performed.
You called out a low double digits on a normalized basis quickly with how you think that compares to.
And what's going on and the overall market and then also on and core North America, particularly looking at the DIY channel I think another another quarter of unit growth, where do you think the industry is at the moment.
Is there a more favorable comp and March just as we lap the pandemic and kind of what's your outlook going forward just from industry growth and core North America as well as how youre outperforming with quick lubes.
Yeah.
Well I'll address core North America, first and come back that quickly.
But in core North America, what we've seen over the past year and the COVID-19 impact is that the DIY has remained pretty steady in terms of like overall category demand has been been very solid and we've seen that and our results too. So that's been really encouraging and then on debt instead.
<unk> and <unk> side of the business, that's where demand has been off.
Pretty substantially probably.
In line with miles driven and so if you look over the last 12 months miles driven has been off around 10% versus normalized drive and if you go back to comparing to 2019 for example, and.
So the industry and segment is definitely felt that we've been outperforming.
And the overall industry I think in terms of how our volume has held up but we think as miles driven and begins to improve and the U S debt that installer channel will start to benefit from improved traffic and so that will create some opportunity to start to see more consistent growth and installer channels.
And the back half of the year and into 2022.
So thats, how we see core North America in terms of like the industry outlook is very much influenced by.
Miles driven with DIY.
Again healthy versus installer, which has which has of course been been hurt more.
Regarding quickly. So obviously, we've been growing share for quite some time and so when you look at our same store sales performance over the past year, where miles driven has been off 10%, but yet our traffic continues to be up and we're taking share and it's.
And certainly within quick lubes.
We have a business model that outperforms, our competitors pretty substantially when you look at the.
Traffic.
And the car counts that we have from and where our stores are roughly 50% more productive and the industry average and quick lubes and it's because of the investments that we make and our people and the customer experience and digital marketing capabilities. The data analytics behind digital marketing and continue to get better and and they really benefited.
And when we look at this past year, our ability to attract new customers new trial to our stores has been really strong and addition to the strong loyalty that we have and so it's that combination that gives us yet.
The ability to keep driving market share within our existing footprint and then on top of that of course, adding the new stores and and so.
Performance of quick lubes, and and ability to attract new customers as consumers look for more and more convenient.
Really good position there are when we look at breakdown and new customer growth, yes, part of it is coming from other competing quick lubes, but we're capturing much from the broader <unk>.
Industry, so that includes tire and repair.
Even customers shifting over from car dealers and as Diyer has become debt zimmers.
And.
And we're in a really good place to capture that business. So we've shared in the past debt our market share is only about 4% of the do it for me oil changes out there and so a big part of our strategy is growing that market share, reaching more households, and then of course the benefit of driving the services that we talked about the non unchanged revenue.
The presentation today, so it's exciting to see the dynamics and how well positioned we are with this business.
Absolutely. Thank you so much from the Cai.
You bet.
Okay.
Our next question comes from Jeff Zekauskas.
Thanks very much.
And it looks like base oil prices.
And went up 40 cents per gallon the sweep motiva, but and everybody else is that incorporated in your guidance or have you read the current movement and Facebook.
And yes, hi, Jeff good morning.
Did you guys see and increase.
And in base oil costs, ranging from 30% to 40% depending on debt excuse me, 30% to 40, depending on the grade.
And.
And we've considered that and relationship to our guidance and we believe debt.
<unk>.
Our guidance is still appropriate with the range that we provided even with the impact.
We might see from that chain and recent change.
So.
And it's likely to have.
Impact more toward or towards the end of our fourth quarter.
And as Sam mentioned.
And it takes a little longer to get all of our pricing through.
And into the first quarter of next year, but that is fully fully considered in terms of our updated guidance Jeff.
Okay and then.
And when I look at your waterfall charts, I don't see like raw material element.
Where you say raw materials.
Mr that.
Maybe in the future you might incur.
And that but my last question and then.
16 stores and <unk>.
Texas.
What did you pay for that and what was the multiple of EBITDA.
Sure, We recently announced a transaction to convert 16 franchise stores to company owned.
And a market debt, where we've been investing and building a strong company owned presence it was.
The last kind of.
Outlier.
And we believe there are substantial opportunities for us to leverage our field sales force and our marketing across company owned stores by concentrating net market.
In company owned stores.
Typically see I really.
Strong mid teens return outlook.
And we typically.
Pay from a price multiple across most deals that we do.
And the high single digit range.
Before synergies that we can bring to the business. So that's consistent with its most recent acquisition as well and.
And your first question on the waterfalls, we breakout volume mix from margin and we've started to break out the LIFO impact as well and those waterfalls that margin impact is primarily related to the price cost lag.
On the waterfalls Jeff.
Okay, great. Thank you so much.
Your next question comes from the line of Chris Shaw.
On this.
<unk>.
Hey, good morning, everyone. How are you doing.
Good morning.
I was trying to parse out.
The the.
And the ticket.
The higher ticket the non oil change piece.
Okay.
Sequential improvement.
Same store sales do.
Do you have a sense how much.
You benefit from stimulus checks.
I just thought maybe the the non oil change ticket piece might be.
People spending.
A little extra and because they have more money in their pockets or do you have any sense of that and do you do any work around that and and server worker.
And how you would actually be able to figure that out, but just curious yes.
So it's a great question and we.
We do try and understand the different impacts and what that benefit has been.
With regard to non oil change revenue, though we've seen and a pretty steady progression and it wasn't like there was a big pop and non oil change revenue performance with the ticket. So that also and people felt like they could afford more services and we think it's more dependent on how consistent we are.
And how effective we are presenting the services that our customers are due for so we think it's more and our control that said.
Both in January and in April with the stimulus checks.
That did provide a boost to our overall traffic and so.
We think it's been very helpful to us and so when we think about the health of the consumer.
Right now and miles driven and beginning to improve.
I mentioned over.
Over the past 12 months, we've been down roughly 10% and look at over the last months the last four weeks or so we're looking at.
Fuel sales being down and the three to four 5% range versus 2019. So I think we are close to seeing miles driven returned to normal.
And as people look to hit the road this summer.
I think some of that pent up demand, we're always busy before the driving holidays from home.
Morial day, and and July 4th.
Think.
It's going to be particularly exciting and challenging for our stores to keep up with the volume thats coming their way.
Number so I feel really good about that and Chris.
Chris the other thing I would add and we certainly.
And we do think we saw benefits from stimulus.
But even as we move further out from consumers receiving those checks we continue to see really strong momentum.
So I do think there is the miles driven impact and the reopening and combined with our incredibly effective marketing and customer satisfaction with with our service levels and convenience is continuing to drive really strong demand.
And sales commentary on this.
Upcoming driving season.
Pretty robust maybe take a couple of things and I forget can each day.
Wait times at your.
Retail locations on the App.
Yes, so the app.
Which provides consumers the opportunity to.
See what they expected wait time it'd be before they come to the store that is a program. That's in place for all of our company stores. It has been for the past year now and now it has rolled to our franchisees. So now fortunately across all of our markets consumers can download the app and see what those wait.
Times are before they get to the store, there's a lot of benefits of course to the consumer there they can target the timing of their their trips.
And the store.
Or even decide debt.
They're they're store closest to them has a 20 minute wait times at a store that might be a couple of miles down the road and other direction has no wait time. They may decide to go to that store. So it actually works to our benefit too and how.
And being spread out the demand, particularly during the busiest times of day. So there is a real nice benefit there. We're excited about the fact that its now rolled across the whole system and service App, where we're still in the process of.
Bringing more and more and more customers onto the app as we bring more value to the app for the consumers to use that as a way for convenient transactions with thousands and so it's an exciting new tool for us and we hope to report on some really good progress and the years ahead.
And what's your strategy, if you get really busy and our location or in a market and wait times are up a lot and is it easier for you or you add days at a certain location or would you just added another location.
And there through a franchisee or yourself.
And it's interesting and that.
Some of our top performing stores.
And they they show us that we have a lot of capacity within our existing stores to handle more customers. So when you say look at the top per file of our of our stores.
They do well into the 60 oil changes per day.
So the number of transactions that theyre doing compared to an overall system wide average and that just under 50. So.
So there is plenty of capacity and the stores and we also see that some of our top performing stores can do both very well on transactions and ticket. So it's not a matter of.
And that we focus on volume over and over ticket and these other services. We can do both that said.
We're looking to fill in.
And add stores, where there's opportunity and so when you have stores that are at the high end of transactions, we know that typically theres going to be and opportunity to add another store in that neighborhood, where the market has been expanding so.
There is a third.
Opportunity plenty of opportunity for us to continue to add stores and better penetrate the market and as I mentioned, we really only have a.
A four share of that overall to inform the market when it comes to oil changes, we do have the best model and so how do we and.
Where do we add these stores and so that we're growing at a steady pace to better reach more and more households.
And so we've invested and have been developing a very sophisticated real estate model that gives us the confidence when we add a new store.
And that store being well above average in terms of its potential for growth. So as we have been penetrating new markets Mary talked about our investments that we've been making and Texas.
And we're also looking at the historical corporate markets and and looking for those fill and opportunities and making sure that we're making those investments to and working with those franchisees on their fill in opportunities which of course are significant so the opportunity per store growth is a long term opportunity for us.
We this year, we're going to be adding.
I think at the high end of the guidance.
And then we gave a 140 to 160 new stores this year with the combination of.
New store builds franchise growth and the acquisitions that we've made.
We and we want to be adding more than 100 stores every year.
Alright, thanks, so much.
Our next question comes from the line of Wendy Nicholson with Citi.
Hi, good morning.
A couple of questions Mary just a follow up on India can you remind us how big India is for you and given the joint venture structure is it disproportionately profitable for you still think it works there and how much should we worry about that that's my first question.
Sure.
We don't provide.
Detailed specific disclosure, but if you look at the overall international business, we're talking about.
Historically, India.
Providing a mid teens to 20% of the overall profit contribution so.
Our national overall contributes.
20% or so to the overall business.
And so it's.
It's a smaller percent, but it can be a few million dollars. If we continue to see degradation there because of the shutdowns with.
With the rise of the.
Incidents of the pandemic there so.
It could have a small impact but not material.
Okay perfect. Okay, and then also net.
And maybe for you just in terms of the Difc business.
Much are you spending on.
And PPE the elevated COVID-19 costs, I know you do a great job and a big priority and keeping people safe, but are you beginning to see that abate just as people get fascinated and just wondering kind of as we look at it on a normalized basis your margin expansion and emerging trends are good but can they get even better and some of that extra or incremental spending.
Maybe fades away.
And we've already seen significant improvements in some of the labor spending related to quarantining.
Because of that substantial.
A reduction and the COVID-19 incidents. So that's we had unproductive labor, we talked about and the first quarter and and <unk>.
Certainly last year as we were also cautious with our teammates.
And to ensure if there had been any exposure to someone who has tested COVID-19 positive that we paid those teammates to quarantine.
And move people around debt that has substantially abated.
Having said that we think it's the right thing to do to continue to invest and PPE for our teammates and I.
Expect that to be a continued part of our ongoing operating expenses as long as we see active.
Active COVID-19 incidents.
Keeping our employees and our customers safe continues to be a very high priority for us Wendy, but the unproductive and unproductive labor costs have substantially been eliminated.
Terrific and then if I can sorry for asking from any but Sam.
And CR business, I mean, I know historically part of your.
Our strategy from a marketing perspective has been Q E Mail people, Hey expense X months, or Hey, we think you'd probably driven and 10000 miles come back and so the marketing has been really heavily oriented towards the oil change side of thing.
Do you think theres, some opportunity to broaden that or expand that or is there a risk and sort of walking too far away from the historical oil change heritage and just from a marketing perspective, how do you get the message out that like Hey, we offer so much more.
Yeah marketing to our existing customer base.
There is.
It's very sophisticated because we have so much data and we have their service history, we know how many miles they travel we know how and when they typically come in for oil changes.
Myles basis or time basis and.
So with those loyal customers, we definitely market to them with regard to the other services that they are due for and so that kind of help set them up for the presentation when they come in and so they may not appreciate.
Another OEM award forward et cetera are recommending that their cooling system service happens every 40000 50000 miles, but we will provide that email reminder, as to what the service is about why they need it and then receive that presentation and the store so it's par.
Our marketing programs and of course, there'll be it a discount attached to that to which.
Kind of tee them up again for.
And for saying, yes to that service getting that service taking care of at Valvoline, where they typically youre going to save money versus going back to a dealership so marketing.
And ways that benefit ticket is part of our overall approach.
And when it comes to attracting new customers that marketing is more about.
And maybe initial savings too to have them try valvoline with a communication around our stay in your car service and the convenience of our service. So that's more geared towards transactions, whereas the existing customer base as both reminding them. It's time to come in but also making sure they have the message from.
And on the other services.
Terrific. Thank you so much.
Sure.
And once again, ladies and gentlemen that is star then the number one for any audio questions. Your next question comes from the line of Mike Harrison with Seaport Global Securities.
Hi, good morning, Congrats on the second quarter.
Going back to this.
Battery change offering I think of that as being a service that is relatively expensive compared to <unk>.
Filter change or a light bulb change or something like that does that service still bring.
And the more attractive margin that you suggested should we think of it maybe more and it's good margin on a dollar basis, but maybe more dilutive on a percentage basis.
And that specific service.
No.
It's really strong margin both on a percentage basis and on a dollar contribution basis. So.
And like you said it is people do understand their battery they don't pay particular attention to it though and so we're in the process of making sure that our customers know that we provide that battery service and the.
And the investment that we made and improve patchy and equipment. So its equipment, that's only available and valvoline stores allows our customers to see their progression or degradation of their battery over time, which we think will lead to more.
More transactions for us when they are and where their battery goes from say green and yellow to red and batteries essentially have to be replaced every.
And four to five years, and so we want to be and positioned to capture very high.
Dollar service opportunity with excellent margin.
Yes.
I can tell you, it's something that I pay attention to living and our northern climate you don't want to have a battery died when it's super cold out.
That's right.
The other question I had is about the marketing efforts obviously the debt.
Digital marketing has been very effective and bringing in new customers and helping with retention are you going to be increasing your marketing spend.
And either the core North America or quick lube segments.
Given the strength that you've seen in your overall earnings and the first half of the year.
Yeah.
On that quickly.
Got the plant that we put in place at the beginning of the year are.
The plans that we're executing so we're not expecting to see an increase and those dollars versus what we had planned if you look historically over what we've been spending on a per store basis that has gone up over time as we've discovered new marketing programs that can help drive drive traffic.
And for US so we've been making those investments on a percent of.
Revenue basis that has not been increasing and and so we're in a really healthy place with our marketing spend I think that will continue to be the case, we might see.
Small incremental improve increases and.
And the dollar per store basis, but really.
Not seeing it grow as a percent of revenue we should get some leverage on these programs and in fact, that's what we look for and these programs is a really high return on investment and and typically and the quicker space.
And those incremental dollars are paying out within the debt.
The year, if this isn't it's different than say.
A traditional.
Advertising spend and where the payout is over multiple years, we see that return on investment within the year because of the new traffic that we're generating so we're.
And we've been continuing to learn and invest appropriately and that side of the business.
And the marketing spend and core North America is important, particularly in the DIY side.
And particularly to our long term brand health and.
And and yet we.
We've been more steady with net spend.
Increased levels versus the depths of the COVID-19 impact and if you go back to last year, but were more than a normalized spend.
And in fiscal 'twenty, one for that business and and we're pleased with the progress that we've been making and just our consumer marketing approach.
I think there is.
Helping the performance that we've seen and the DIY channel.
This past year and.
And Mike I'd, just remind you last year during our third quarter, we did pull back pretty hard on spending both kind of across the board across all three segments and we didn't think that marketing into an economy that was substantially shutdown across the globe.
It can be very effective and so.
Year over year will be seen.
And pretty significant increases and our marketing to back to more normalized levels as a percentage of sales based on what Sam said, but just a reminder, if you just look at balance of the year year over year comparisons.
Our advertising will be up for share for the balance of the year.
Alright that makes sense, thanks very much.
Ladies and gentlemen, this does conclude today's ethylene incorporated Q2 thousand 21 earnings Conference call you may now disconnect.
Thank you.
And.