Q2 2022 Valvoline Inc Earnings Call
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 non-GAAP basis, unless otherwise noted.
non-GAAP results are adjusted for key items, which are unusual nonoperational or restructuring in nature.
We believe this approach enhances the understanding of our ongoing business.
A reconciliation of our adjusted non-GAAP results to amounts reported under GAAP and a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix the.
The 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 I'd like to turn the call over to Sam.
Yes.
Thanks, Sean and thank you everyone for joining us this morning.
The strength of our topline results continued in Q2 highlighted by a 26% increase in sales both segments contributed to the strong performance with retail services sales growing 23% and global product sales up 29% as demand for our products and services remains robust.
Global products volume growth of 9% and retail services same store sales growth of 13% led by an increase in transactions demonstrate that we continue to gain share.
Profitability in the quarter was impacted by an inflationary environment that remained challenging with adjusted EBITDA increasing 1%.
Our team is managing well through the supply chain and raw material cost challenges.
Positioning us for improved profit growth in the second half of the fiscal year.
Let's turn to the next slide.
Given our share gains and our pricing actions, we are raising our guidance for sales growth.
And we are reaffirming our guidance for adjusted EBITDA, reflecting confidence in our business plans margin recovery and continued volume growth.
Let's take a closer look at segment highlights starting with retail services on slide six.
The momentum in our retail services segment continues with Q2 sales increasing 23%.
System wide store sales increased 19% driven by 13% same store sales growth and a 7% increase in units.
For the fiscal year, we expect system wide store sales in excess of $2 2 billion.
We added 113 stores to the network year over year.
Our system wide store growth is accelerating and we are raising our full year guidance for store additions to 140 to 160 new unit drill.
Driven by outperformance in our franchisee store growth.
The partnership with our franchisees remained strong and we're encouraged by their continued investment in growth.
Our confidence in ongoing share gains combined with the pricing actions that we executed in April has led us to raise our same store sales growth guidance to 12% to 14%.
Let's review our transaction growth across the system on the next slide.
Our.
Actions are increasing faster than the broader do it for me oil change market.
<unk> growth continues to be broad based.
Our store level car counts measured as oil changes per day are increasing across the system.
In company and franchise stores across performance levels, and among mature and new stores.
We are also seeing strength across geographies with all regions delivering growth in transactions year to date.
Our quick easy trusted experience continues to win new customers.
Given the competitive advantages of our model, we are confident that our momentum in transaction growth will continue.
Let's turn to the next slide.
We've taken actions to improve profitability and margins in retail services.
We have increased pricing to address inflationary pressures from both rising labor rates and higher product related costs.
Based on April's performance, our new pricing is already benefiting Q3, and we are seeing continued transaction growth.
Optimizing our staffing levels is important to drive continued share gains and further penetration of non oil change services.
Especially as we move into the summer driving season.
We pulled forward important labor investments to retain and attract key talent.
And we have reinvigorated, our training and Onboarding programs for the post Covid environment.
These actions in combination will improve average ticket performance.
While we focus on adding value for our customers, we anticipate our pricing power to enhance profitability in Q3 and Q4.
Let's move to the next slide.
Our confidence in our long term margin outlook of 30% to 32% for retail services is based on the performance of our mature stores, which continued to drive strong margin leverage.
Our mature stores have improved margins by nearly 300 basis points since 2018, and we expect further expansion going forward as we continue to grow share and average ticket.
As a reminder, our total segment margins include the dilutive effects from new stores.
As well as from price pass through of product sales to our franchisees.
In Q2. These effects combined were a nearly 300 basis point impact versus last year.
Let's review global products on the next slide.
Sure.
Q2 demonstrated the ongoing top line strength in global products sales.
Sales grew 29% year over year with all regions contributing to this impressive increase.
Sales growth outpaced a strong volume increase of 9%.
Highlighting our continued success in passing through cost increases with pricing.
While price pass through was currently dilutive to our margin rates adjusted EBITDA grew modestly in the quarter versus last year overcoming significantly higher raw material costs.
Discretionary free cash flow generation remains steady and on track for roughly $200 million this fiscal year.
Let's take a closer look at demand and cost recovery on the next slide.
Demand signals for our products and solutions are robust highlighting ongoing share gains across regions and channels.
<unk> and DIY, where we have increased our distribution remains impressive in the installer channel continues to recover from the impacts of Covid.
International volume growth has been strong over the past few years as.
As we focused on building our channels and brand.
The current supply chain environment has created both challenges and opportunities.
We believe that we are outperforming competition in our ability to supply customers, which is contributing to our volume growth and share gains as our team continues to do an outstanding job of keeping up with demand.
A core differentiator for our business is our ability to deliver added value for our customers, while providing outstanding customer service.
We believe this approach coupled with our ability to meet demand positions us well to continue to capture share and expand margins.
As we anticipated Q4 of last fiscal year and Q1 of this year were low points for unit margins we.
We saw meaningful sequential impact in unit margins for Q2, as we continue to pass through raw material cost increases from 2021.
While cost inflation has continued this year, we remain confident in our ability to recover cost.
As we have in previous inflationary periods.
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With that I'll hand, things to Mary to discuss our financial results in more detail.
Thanks, Sam our Q2 results are summarized on slide 13, we continue to see strong topline growth across both segments.
Overall sales growth of 26% in the quarter was driven by 16 points of pricing and nearly 10 points from favorable volume and mix.
Growth from acquisitions was largely offset by unfavorable year over year foreign exchange impacts.
Flow through to profitability of significant volume mix benefits as well as pricing was largely offset by higher raw material and labor costs, leading to a modest increase in adjusted EBITDA.
Let's take a closer look at segment results on the next slide.
Yes.
Strong transaction growth in retail services and volume growth in global products are indicators of continued share gains and robust demand in both segments.
Our two year stack of system wide same store sales remained about 30% in Q2, and we expect this pace to continue in the second half of the fiscal year.
250 basis points of the year over year decline in margin rates in retail services was due to the dilutive effect of pass through pricing of higher raw material costs with the remainder primarily driven by product and labor related costs.
We have executed incremental pricing actions that are anticipated to improve margins beginning in Q3.
Sales growth in global products continued to run well ahead of strong volume increases highlighting our ability to pass through inflationary cost with pricing or.
Our unit margins increased noticeably in Q2 versus Q1, and we expect to pass through recent raw material cost increases efficiently driving unit margins back toward their pre pandemic average.
Let's review our updated guidance on the next slide.
We are raising our top line guidance metrics, reflecting the benefits of share gains and pricing power in both segments. We now expect low 20% growth in total sales.
System wide same store sales are anticipated to grow in the low teens range, while we are raising our expectations for unit growth to 140 to 160 additions.
We continue to expect overall adjusted EBITDA between 675% to $700 million.
Resenting high single digit year over year growth in adjusted EBIT EPS of $2 seven to $2 20.
Excluding the impact of separation related expenses, we anticipate strong free cash flow generation of $260 to $280 million.
Now as we turn to slide 16, I will turn things back over to Sam to wrap up Sam.
Thanks Mary.
Despite significant inflationary in supply chain related headwinds, our two businesses are performing well.
We are addressing near term margin pressure from cost increases with pricing actions. Most importantly demand for our preventative maintenance products and services continues to be very strong.
We have confidence in our strategy pricing power and operational execution to drive margin normalization and ongoing profit growth.
Yes.
While we don't have any significant news to share today, we are making good progress on our separation process and we will be announcing details at the appropriate time.
Now I will turn the call back to Sean to open the line for Q&A.
Thanks, Sam before we open the line for Q&A, just like to remind everyone to limit your questions to one and a few follow ups. So that we can get to everyone and with that Maxine. Please open the line.
Thank you. Thank you I'd like to ask a question. Please press star followed by one on your tier. Thank you pack now if you do change your mind. Please press star followed by chain.
So ask your question. Please ensure your line is on mute.
Our first question comes from Simeon Gutman from Morgan Stanley . Your line is now open. Please go ahead.
Hey, guys. This is Michael Kessler on for Simeon Thanks for taking my questions.
First of all I wanted to start with retail services.
That raised same store sales guidance implies a little more of an acceleration on the multiyear stacks I assume most if not all of that is due to the pricing I guess is that the case the 2% to 3% you cited in the in the presentation is that kind of roughly how we should be thinking about how much prices being taken and then.
As you think about how you are now priced I guess versus the competition versus peers is this kind of marking to market.
What are you seeing as far as responses from others.
And would you kind of consider these investments youre, making to be I guess.
Also marketing to market jumping ahead.
<unk> I guess kind of where we are in the state of play with.
These adjustments both on cost and pricing.
Okay.
First Michael regarding the transaction growth in the guidance. The transaction growth has continued to be quite strong. So we saw that in Q1 and again in Q2 and so that is a.
One of the drivers behind our our guidance for the full fiscal year.
Because we're just continue to see that broad based strength that we pointed out in the presentation.
Pricing certainly is going to have an impact on the back half of the year. So we'll see a nice benefit in ticket performance in the back half of the year and so the combination of the.
Continued growth in transactions.
Yes.
Above expectations and then the increased pricing is going to put us in that 12% to 14% range for the full fiscal year.
That does imply that.
The growth that we saw in the first half will be lower in the second half because of the nature of the comps as we move past the COVID-19 comparisons.
With regard to <unk>.
Price increase.
We have a very disciplined process for how we take pricing.
And.
It involves measuring.
This increases and potential impacts on our on our volume and transaction performance.
But as cost moved up pretty significantly both both on the product side and on the labor side.
These price increases are very important for us to take.
As we've made these adjustments.
As noted earlier that we took these in April .
We have also noted that our competitors have taken similar price increases. So when you take a look at pricing across the do it for me market.
Prices to consumers are up across the board.
And then Michael I would just add if you look at the acceleration of the two year stack that you asked about.
For Q3, you almost have to look at a three year stack because it was in Q3 of our fiscal 'twenty that we had a negative 8% comp that was in the in.
In the early the depths of the lockdown from Covid when Covid first started so.
Yes, there is some.
Acceleration in the two year stack, but that's primarily because.
The prior year was with Comping up against that really deep COVID-19 impact from the earlier periods. So I would say the.
First half two year stack in the in.
In the mid <unk> that we're expecting to see a little bit stronger than that in the back half primarily driven by the price changes.
Got it okay. That's all super helpful.
Just one follow up shifting to global products.
I don't know if you could maybe dissect a little bit.
Where the volume growth is coming from I guess.
Where the most growth is coming from whether it's.
We're seeing accelerations on the core North America side, the old core North America disclosure versus International and then you mentioned.
The recovery on the installer side still trailing a little bit the DIY international.
Are we still in that recovery process does it feel like that segment is recovered in this isn't going anywhere kind of Rebase funding, where we are just I guess.
The progress of that recovery relative to the other segments.
First.
Where we're seeing the growth the good news is that it is across regions and yet North America is particularly strong this fiscal year and so that's contributing to the outperformance.
We've seen some some real strength in the DIY business, where we've picked up distribution and our product line at key retailers also expanding into new channels.
And so that has been a nice driver this year on.
On the installer Difm's side of the business. We're also seeing good volume and I'd say, that's more of the recovery picture as you recall the DIY business remained strong through the COVID-19 impacts, whereas the installer business.
<unk>.
Pretty significant volume hit and so we're now seeing some pretty good recovery I would say close to what I would consider more normalized levels.
So we're feeling really good about just the core strength of the North American business and then on the international side, we're seeing growth in excess of 6%.
In total excluding we also have included in our totals sales to China joint venture, but when we exclude that so we look at.
Apples to apples just strength of the international business, we're seeing good growth across regions.
The China business, certainly is feeling the effects of the Covid Lockdown right now so we're seeing.
Some softness there in the current performance and so that is a bit of a risk in the back half of the year, but.
Not a significant impact to profitability.
And.
But we look at strength in Latin America.
Parts of.
Europe and Asia Pacific.
It's really encouraging to see the momentum that we've got in the international business across regions right now.
I would note too that of course, Russia.
Russia.
A bit of an impact to not significantly so we had a small business in Russia.
Sales through distributors and so we've suspended operations in Russia, we took.
Two a $5 million write off primarily accounts receivable.
For that decision.
Okay.
Thanks, so much.
Youre welcome.
Thank you as you know as a reminder, if you would like to ask a question. Please press star followed by one on your tier. Thank you Pat now.
Our next question comes from Mike Harrison from Seaport Research Partners. Your line is now open. Please go ahead.
Hi, good morning.
In terms of good morning, Mike the hires.
That higher store additions guidance first of all thats great to see.
It seems like this is driven by franchisees.
What is driving that additional momentum from your franchisees.
Is this a handful of larger franchisees.
It is.
Contributing to this growth or is it a broader group.
How might this be changing how you are thinking about company store additions as you think about the rest of this year and into fiscal 'twenty three.
Yes.
Franchise growth is being driven by.
Our largest franchisees that are well capitalized and we've worked really closely with them over the last couple of years.
In putting together strong development agreements.
We've done analysis with them on the historic growth opportunities in their markets and.
And put incentives in place for them to build those markets out through a combination of store build an acquisition and so we're beginning to see the fruits of that work.
So it is really encouraging I would say.
The the competence that we have that and that franchise growth is growing as we project out to the next.
Number of years.
So the.
The company store growth continues to be quite strong too and as you know we had a number of successful acquisitions a year ago.
But our store build program has picked up steam and.
And so the combination of the two is helping us deliver another year and that $1 40 to $1 60 range, so really encouraging.
For us.
And as far as the.
Split between company and franchise.
Our focus right now is continuing to drive penetration in markets, where we have presence and where there is opportunity we have a robust real estate model and so if we're best positioned for company growth in that market. That's our focus or if we have a strong franchise operator, we will be working with them, we are working with them to.
To drive their store growth to better penetrate markets as we've shared in earlier presentations.
Our store base were roughly reaching.
15% of households that are within a five mile driving distance.
On the Valvoline location and so we see significant opportunity for store growth and we think that both company and franchise.
Opportunities will continue.
To be in front of us in the years ahead. So we've got a good aggressive program that <unk> got good momentum I'm, especially encouraged by the performance of these new stores.
Both acquisition and the ground ups.
We're seeing really good performance and just moving up that maturity curve.
Quite quickly and you saw that in one of the presentations, where we're seeing very strong growth in the newer stores.
Alright, Great and then a question on the inflationary environment as consumers are seeing more inflation at the gas pump have you started to see any pressure on your non oil change revenue or delayed vehicle maintenance or treating.
<unk> from premium lubricants to conventional just trying to understand if there is any impact on demand.
From some of the inflationary pressure thank you.
That's a great question and the answer is no we have not seen any.
Negative pressure downward pressure on our performance with regard to our pricing and so again as we study the business and we look at performance in higher priced markets like California.
We're seeing outstanding volume growth and and ticket performance too.
So.
So far the consumer has is not resisting the cost increases.
And the model is performing quite well.
So we'll continue to watch it closely but I think it.
It really supports the superior customer experience that we're able to deliver across our system and that gives us the pricing power to keep up with cost.
So again as we look at the performance of the last.
Five six weeks since we took price increases we're really encouraged by that.
Alright, thanks very much.
As a final reminder, if you'd like to ask a question. Please press star followed by one on your pillar <unk>.
<unk> Pak now.
We have no further questions. So I'll hand, it back to the valvoline team for closing remarks.
Alright, well thank you I appreciate.
Everyone listening in today, but the good news is that the business is performing quite well for both retail services and global products.
We're quite confident in our pricing actions and we expect that to benefit the back half of the year with.
Steady improvements in Q3, and we will see pretty significant increases in profitability, particularly in Q4.
And.
And so again I would point everyones attention back to the strong demand for our products and services and the ability to continue to drive that performance and in our future. Thank you very much.
Ladies and gentlemen, this concludes today's call. Thank you for joining you may now disconnect.