Q1 2023 Valvoline Inc Earnings Call
And.
Good morning, all good afternoon. Oh, welcome to the valve lane. First quarter, FY 23, earnings, webcast. My name is Adam and I'll be your operator for today. If you'd like to ask a question at the Q&A portion of today's school, you may do so by pressing star full of point one on your telephone keypad. I will now hand the floor over to Elizabeth Russell to begin to Elizabeth, please go ahead when you are ready. Thanks Adam. Good morning and welcome to valve lane. First quarter, fiscal 2023 conference fall and webcast.
On February 7th at approximately 7 a.m. Eastern time, Savling released results for the first quarter and a December 31st, 2022.
This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our Investor Relations website at investors.valvoline.com.
Please note that these results are preliminary until we file our Form 10Q with Securities and Exchange Commission.
On this morning's call is Sam Mitchell, our CEO , Lori Fleece, our President of Retail Services, and Mary Meiselsberger, our CFO .
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.
That might assume is 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-gat basis unless otherwise noted.
Non-GAF 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 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 information provided is used by our management and may not be comparable to similar measures used by other companies.
As a reminder, the announcement that Valvelin signed a definitive agreement to sell its global products business.
resulted in the former global product segment being classified as discontinued operations for purposes of GAAP reporting.
with the retail services segment becoming the company's continuing operation.
On slide three, you'll see the agenda for today's call.
We'll begin by providing an update on the Sales Global products that we announced in August of 2022.
We will then talk about our first quarter highlight, share operational insights, and end with review of our first quarter results and got it.
Now I'd like to turn the call over to Sam.
Thanks, Elizabeth, and thank you all for joining us today.
Today's call will focus on the results of the continuing operations of our retail services business But first I want to share an update on the progress we are making to complete the sale of the global products business
Our team is working diligently to finalize the separation, and we still anticipate the closing to occur early this calendar year.
We expect total proceeds from the transaction to be $2.65 billion in cash and approximately $2.25 billion after tax and other adjustments. We expect to return the majority of the proceeds to shareholders through share buybacks. The remaining portion of the net proceeds will be used for debt reduction, which will further strengthen our capital structure and position our company for long-term success.
investments to capture attractive growth opportunities in an evolving car park.
while returning excess cash to shareholders.
a significant acceleration, forecasting a significant acceleration in our five-year financial outlook, with top-line revenue growing 14 to 16 percent and an adjusted EBITDA compound annual growth rate of between 16 and 18 percent. Our retail business model is simple but highly effective and has repeatedly proven to deliver growth. Turning to slide 8, I'd like to share some key highlights from the quarter that demonstrate our positive continued performance.
We are focused on driving strong top line growth for both company operated and franchise locations with $644 million dollars in system wide store sales for the quarter.
which is nearly a 17% increase over prior year.
For same store sales, we saw just under 12% growth with company operated units having 13% year-over-year growth and 11% for franchise units.
Our profits performed slightly ahead of the strong quarter we posted in fiscal 2022.
We anticipate the profit growth to accelerate in the balance of the year, and we remain confident in our EBITDA guidance target of between $370 and $390 million dollars for fiscal year 2023.
Let's turn to slide nine.
Our simple growth algorithm of driving same store sales plus adding units and incremental services continues to deliver.
We have an impressive long-term track record of driving same-store sales performance and unit growth, and our Q1 results are in line with that continued growth trajectory.
However, adjusted EBITDA grew only 1.2% year over year.
Turning to slide 10. As the new valving transitions to being a pure play retailer in the preventive maintenance space, the seasonality of the business is an important dynamic to understand. For Q1, our retail services business performed in lines the typical seasonality that we have come to expect. We generally see volumes following the driving patterns of our customers, which tend to increase throughout the spring and summer.
coinciding with the second half of our fiscal year.
It is also typical for us to see profit and margin improve as the fiscal year progresses.
The margin improvement is driven by the leverage of fixed costs as volumes increase with our customers increase driving.
Accounting for the appropriate seasonality in the later quarters of the year, we remain confident in our $370 to $390 million EBITDA guidance. Now I'd like to turn the call over to Laurie to discuss more details from our first quarter. am well and
Thank you, Sam, and good morning.
As Sam shared, Q1 is generally our lowest profit quarter for the year.
Valvoline's EBITDA for Q123 was modestly below management expectations.
Versus the prior year, there are two things that impacted EBITDA margin in the first quarter of the year.
First, about a third of the year-over-year difference is due to a higher relative weighting of company operations contributing to our overall margins. While company stores generate high returns, the margin rate on our franchise business is approximately three times higher.
and thus a change in mix will impact our overall margin rate.
That said, we remain focused on accelerating our franchise growth over the next five years.
Then the remainder of the year-over-year margin reduction is a result of cost of goods inflation.
Most was expected given fiscal year 2022 saw considerable inflation on both product costs and wages.
For company stores, we've been pleased with our ability to pass through pricing to deliver higher unit margins per vehicle served. But these actions have not recaptured the full percent margin.
As we shared in our last earnings call, we've established a central operations team to focus on driving efficiencies through both process improvement.
and technology enablement.
For our franchise business, the announced base oil decreases to start fiscal 23 took longer to materialize, and margin was further eroded by increased additive and delivery cost.
We've taken actions necessary to mitigate the cost increases, thus limiting the full-year impact on EBITDA.
For the full year, we still expect to deliver EBITDA margins within the long-term target range that we shared in our five-year plan.
The key drivers for the higher full year margin rate include first, the impact of seasonality related to driving behaviors of our customers as Sam shared.
Increase transactions drive higher labor efficiency in S-GNA leverage for the balance of the year.
Second, the actions we've taken to mitigate the cost of goods increase in Q1 will benefit the second half of the year. And last, our quarterly SG&A for the remainder of the year will not repeat expenses from Q1 for key meetings with both our franchise partners and store managers that always kick off our financial year.
Now let's turn to slide 13 to discuss the strength of the same store sales.
We delivered strong top-line growth this past quarter with same-store sales increasing approximately 12%.
Just over 60% of the same store sales growth was driven by pricing actions taken in the second half of last year with the most recent pricing done in September .
The balance of growth was driven by volume, premium mix, and non-oil change revenue growth.
On the volume side, we're pleased to see continued customer growth of over 3% year-over-year in our same stores.
On non-old change revenue growth, last year I shared that we had invested in training and new reporting.
or last quarter, sorry. I talked about the investment in training and new reporting to drive more consistent process execution across company-operated stores.
We are encouraged by the early results of these actions and the right hand of this slide highlights the impact we're seeing.
Our bottom quartile stores accelerated, none will change revenue growth at nearly three times the rate of our top quartile stores.
And our top quartile stores showed us that there's still room for growth even in our very best stores.
The team has done an excellent job and still sees opportunity to improve as they learn from the initial rollout.
Closing the performance gap between the bottom and the top quartile stores across our system is expected to be an important contributor to the delivery of our long-term, same-store sales growth.
Turning to slide 14.
We continue to believe we can double our unit count over time. We delivered 31 units in the first quarter and expect unit delivery to accelerate in the remaining quarters.
We have significant opportunity to improve our geographic coverage and this quarter we want to share more details around our confidence to deliver the new units.
Our real estate team has completed a detailed market prioritization that is helping us focus our development team resources to markets with the highest potential.
The work has identified target trade areas attractive for new builds and those attractive for acquisitions or a combination.
Our current pipeline is robust.
Valveline has a diligent but efficient process to ensure that new sites, whether for new build or acquisition, meet our standards to deliver high returns.
Over 220 sites have been approved by our new unit review committee.
Thank you.
and are in various stages of the deal process.
Our new build sites continue to accelerate system-wide, and the quick-lube market remains highly fragmented, providing ample opportunity for acquisition.
We have over 90 sites that are currently in construction or under a signed purchase agreement to be acquired.
Our degree of confidence in opening these sites is incredibly high.
It's important to note that the normal timing on acquisition opportunities for both us and our franchisees. Thank you.
means these figures do not fully capture our expected full year growth from acquisitions.
With our current momentum though we are confident in our full year forecast.
Our objective is to accelerate unit growth across the system, and I'm very pleased with our progress toward achieving this long-term goal.
With that, Mary will discuss our earnings results and guidance. Mary? Mary?
Thanks, Laurie. Our Q1 results are summarized on slide 16.
Although we are camping against a strong Q1 in the prior year, we saw top-line growth with sales from continuing operations increasing 17%.
Sales for the quarter were largely driven by ticket as we continue to see benefit from pricing adjustments, premiumization, and non-oil change revenue growth.
Gap operating income from continuing operations was $29.3 million.
This was unfavorably impacted by a large non-recurring key item related to legacy tax assets.
The impact includes 24 million of pre-tax expense that was offset by a $26 million tax benefit below the line.
As Sam mentioned earlier, the first quarter also saw tremendous work by our team working towards the anticipated close of the sale of the global products business.
We continue to focus on the regulatory and administrative steps necessary to complete the transaction and are on track to do that in early calendar 2023 with just a handful of pre-closing conditions remaining.
Slide 17 shows our fiscal year 2023 guidance.
We are reiterating our guidance across all metrics.
Now I'd like to turn it back over to Sam to close.
Thanks, Mary.
We will continue to drive same-store sales through our proven model of quick, easy and trusted service.
This allows us to continue taking market share and build on our strong customer loyalty.
Our opportunity to add both company-operated and franchise units remains strong, and we continue to work towards our goal of 3,500-plus stores. We also have the opportunity for enhanced margin as we move to a pure-play retail business.
As I noted at the beginning of the call, we're in the final stages of completing the sale of the global products business.
The separation will allow us to enhance our capital structure and capital allocation policy and drive shareholder value over time.
Subject to market conditions, we continue to expect to return $1.6 billion to shareholders via share repurchases within 18 months following close.
I like to express my thanks to our teams around the world for their hard work and dedication on getting this work done and supporting the growth and long-term success of battling.
And I'll turn the call back to Elizabeth to open the line for Q&A.
Thanks, Sam. Before we start the Q&A, I want to remind everyone to limit your question to one follow-up so that we can get to everyone on the line.
With that, Adam, please open the line.
As a reminder, if you'd like to ask a question today, please press star for the 1 on your telephone keypad now. From the parent-houser question, please ensure your head is fully plugged in and unmute locally. That star for the 1 to ask a question.
And our first question today, because I'm Simmy and Gwieeman from Vulcan Stanley, Simmy and please go ahead, your line is open.
Hi, good morning, everyone. My question is on the margins, please, the amount of these and pricing power. Thank you.
So I think last quarter we talked about that we would be in a better place on pricing after the previous quarter is I guess a little bit of a mess.
Given that base oil prices were stabilizing and it sounds like we had some incremental cost pressure. But one, how confident are you that these actions that you're taking have narrowed the gap and then structurally, I guess pricing power at the front end for the consumer.
Is there something that's holding it back or is there ability to keep changing that so that you can keep marking to this? I guess this is current cost environment.
Thanks Simeon, good questions. First of all on pricing, in FY22 we saw significant cost increases and we did and we do believe that the base oil pricing is starting to mm
Normalize. Now, we made pricing changes throughout the year, mostly in the back half, starting in April as you remember as we started Q3, but we also made additional changes in September to actually start to ensure that our unit margins on every vehicle served were increasing.
So we feel really good about that. Now we continue to analyze pricing on a regional level and we look at that relative to competition and we also look at what's happening with the non-Quick Lube focused players.
to make sure that our pricing is in line when they start to try to market, to bring customers back to dealerships, for example, because they want to sell cars.
So we want to be very thoughtful about our price increases. We want to make sure that we are positioned in every market relative to our competition and ensure that we're priced appropriately for our service but not go too high. We have been looking at our consumer behavior both in...
markets where the demographics are lower income across the board. And we are not seeing any instance that there is inflationary pressures impacting the customers' demand, both in terms of when they get service and or the services they're getting.
and we've been able to manage discounting. So we feel really good about where we're at. I will say some of the other actions that we've taken around additives and delivery costs were to change some of the incentives to our franchisees. We always look at incentives.
to try to drive growth. And so we have implemented some changes to our franchisee incentives which will have an impact in the back half and counter some of the inflation that we've seen continue but we also know that the basal decreases will start to come through as we continue on in the year. A couple of things that were
Putting in place in advance of to ensure that we're managing our cost of goods is our central operations team is focused on labor scheduling. We've implemented a new labor scheduling tool. To try to get better schedule optimization and tools to pull down labor when we when we have weather patterns.
which we definitely had at the back half right around Christmas to make sure that we're not spending the labor if we don't have the vehicles.
And the other part is we've set up a new supply chain team.
and a procurement team focus specifically on retail services to look for more procurement efficiencies. And so those are things that we expect will continue to help us with cost of goods margin or cost of goods.
decrease to help us with margins as well. So we feel really good about where our pricing is, though we continue to look at it. We feel good about the changes we've made. And that's why we are reiterating our guidance, our confidence around the guidance. I'll just add one more point to what we're doing.
labor inflation. So we believe we're when we look at our product costs even though we're absorbing a little bit more additive increase the basal market looks to be more positive in terms of moderating price or potential price reduction.
And on the labor front, much more manageable increases in terms of what we're forecasting and some of the trends that we're seeing in our hiring and retention are very positive.
Thanks both, I'll leave it there.
The next question comes from Mike Harrison from Seaport Research Partners. Mike, please go ahead, your line is open.
Hi, good morning.
Come on in, Mike. You mentioned that you expect earnings to be accelerating as fiscal 23 goes on and I think the seasonality point is well understood, but maybe just give some additional color on how you guys are seeing the EBITDA cadence.
particularly as we're looking at Q2 and cut-of-refining arrestabits so that you can get to your guidance range. And maybe with the slower start in Q1 relative to your expectations, is it fair to say that the outlook is in the lower half of the guidance range or do you think the midpoint is still the right place to be guiding to?
The guidance that we've given we think is very appropriate. So as we've said, we're very confident in that. So I think the key thing to adjust in models would be the understanding and factoring in the seasonality. And so when.
You take a look at the valving retail business over the last number of years. Typically, the first half is going to deliver around 45% of the full year EBITDA.
with the back half making up for that with increased leverage and increased volume.
This year, with a little bit softer on the profit delivery than we would have expected for Q1, we'll see a good step up in Q2 in profitability, and then importantly, another step up in profitability year over year growth in Q3 and Q4. So Mike, as you're thinking about modeling...
more waiting toward the back half this year.
And I agree with Sam, you know, we typically don't point you anywhere within the range from a guidance perspective. We still believe that that's a very good range.
All right, thank you. That's very helpful. And then wanted to look at the SG&A costs. Obviously a pretty big step up there year on year. You mentioned that maybe there were some additional...
like sales kickoff meetings or I guess maybe things that were in person this year that were virtual in the prior year. But maybe talk also about what you guys are seeing in terms of advertising costs or corporate costs.
And I guess we're just trying to get a better sense of where that SG&A expense number should be for the rest of the year.
Yeah so you're right Mike, we do have our both company and franchise meetings occur in the first quarter of each fiscal year and we saw that again this year. This is the second year post COVID that we've done those meetings in person but because of the number of stores increasing and our need to continue to develop.
that is in support of the increased unit count. And we're seeing and measuring very strong return on that investment, driving growth and new customers as well as retention of existing customers. And I feel really good about that advertising investment. And then finally...
We've also made some investments in people as we continue to drive growth in the model. We've had some indirect cost increase as well just in relationship to the separation and the fact that we're seeing a little bit higher.
indirect expense as a percentage of sales as a result of some deleverage that we've seen as a part of the separation. So I would tell you that it's
very much a big focus for us to ensure that we have the right balance of S-GNA investment relative to growth and efficiency and we'll be spending you know more time just making certain that we're being as efficient as possible while all not you
still be enabled to ensure that we're investing appropriately to meet our growth targets. All right, very helpful.
As a reminder, that's star one to ask a question today.
And our next question comes from Lawrence Alexander from Jeffries. Lawrence, please go ahead. Your line is open. Good morning everyone. It's Dan Rizwan for Lawrence. Thank you for taking my call on my question. So I think you mentioned having a target of 55% franchisees and the rest store owned. I think you're long-term target.
But it seems that you're opening more company-owned stores. I was just wondering when we can expect the mix to shift and what will kind of change it or how we should expect that to kind of play out.
I do, if you look at Q122, we had a franchise mix of 55%. And given the pace of our builds and our acquisitions on the company side over the last 15 months,
the mix has dropped us.
dropped to 53%. And I think the question is valid. We are working with our franchise partners.
in both looking at existing development agreements as well as incentives around you new units and how we bring in new franchise partners.
Those activities will take time and I think we talked about accelerating the franchise new unit growth to 150 units, but that would take us some time. I think FY27 is when we would project to get there though we are working hard to accelerate that even further. So if you just look at.
Adding 100 stores on the company side, which we won't get to this year, but we'll move to 100 additional stores on the company side and then accelerate franchise. You can see when the math slips to getting us back to 55 percent, but it happens later in the five-year forecast.
Okay, and does a recession, I would think so, but does a recession kind of make it that much harder to attract new franchisees or historically speaking has it not been that much of a factor?
Yeah, we're some of the discussions that we're having with potential new franchisees have been very positive. So the strength of the model, the fact that it's a strong cast generating model and the competitive advantages that our model has is really a strong draw. And so...
As Laurie described in our goal to increase our franchise growth, we're seeing
We're having some very good conversations, productive conversations with our existing franchisees. And again, we focus on well-capitalized, professionally managed franchisees to partner with us to deliver that great customer service. We expect stronger growth from our existing franchisees, but then also...
I'll just add, Sam, to your point. There are over 4,000, at least, that we know independent quick lube operators.
And we're having active dialogue with between 500 and 700 of them every year. And what I would say is through COVID and the war for talent and the increase in inflation, we're finding that many of the independent operators are looking for help to drive
the kind of performance that they may have seen previous to COVID. And so the conversations that we're having are accelerating whether they want to be a franchisee and what help would that provide. But also is now the time for them to sell their business and either remain a part of it and or they exit completely.
And so we're seeing that the inflationary pressures are changing the game for the independent quick loop operators. And that will help us both on the acquisition front, but also on the franchise recruitment front.
Thank you very much.
The next question is from Chris Short from Menace Crestby and Harps. Chris, your line is open. Please go ahead.
Yeah, good morning everyone. How are you doing?
morning or what? How you doing? Morning Chris.
I just want to get a handle on the quarter itself a little bit more.
Internally, was the surprise for you on the cost side, the mix between franchise and company-owned stores or was it...
was it the sales of some annual sales growth was strong but were you expecting something even stronger at some point i'm just trying to figure out where the
if you internally you guys kind of missed.
Sure, I'll speak to it and Mary can add.
relative to our internal plan, the piece that was not planned was we had expected base oil decreases to come through in our cost of goods.
And when we pass on product costs to our franchisees, we have a very clear mechanism that is tied to the base oil index.
And so as Bay Soil Index pricing is announced, we have very clear rules around how those get passed on to our franchise partners.
when there is a lag on when we pass those versus what we pass.
when they materialize and through the inventory movement, when there is a gap that will cause price or margin pressure to us.
meaningful impact at all this quarter or was it pretty similar to it?
typical winter quarters.
Well, we did have more weather in the Q4 than what we would typically see in that moved volume around. We saw more extreme weather in November in Minnesota in the Pacific Northwest. Our Q1. Our Q1, sorry, in the calendar quarter.
But there was a bit of a push because of the major freeze that happened right around Christmas.
that pushed a little bit of volume from the last week that we would typically see in December into January . So across the year we feel good that we captured the demand and we're right on pace when we look at a rolling 30 days. But within the calendar quarter Q1.
We hit our plan, but we would have been pacing slightly over plan and vehicle served and overall sales than where we ended. But we feel really good how we started Q1. We had RE Little
Got it. Thanks. Let's help them.
We have a follow-up from Mike Harrison from Seaport. Mike, please go ahead, your line is open.
Hi, just a couple more for me. First of all, I'm intrigued by slide 13 where you break out the non-oil change revenue growth by quartile. Maybe just give a little bit more color on that.
So on slide 13 on the right-hand side, we put in an initiative and we did have that in our sales plan to actually improve our non-oil change revenue penetration. So we saw variation as we were working on our plan for the year and where we were going to drive sales growth and growth and profit and we saw a non-oil change penetration as an opportunity where our execution in some stores was not as consistent.
and leading to different outcomes from a non-all change revenue percentage of sales. So we went after that hard in our annual meeting and the company stores in October . And we re-emphasized around presentation, how to present.
the non-oil change services based on the success in our top quartile stores. And we basically rolled that out with all the store managers and then through the month of October rolled that to every CSA or customer service assistant in our store.
so that they were consistently presenting the non-oil change services. And what you see is a significant improvement in penetration across the system. And so the stores that were lagging have gotten more consistent. There's still opportunity.
Obviously in retail there's opportunity every day to present better to the customer, but you can see a significant improvement.
And Mike, it's primarily driven by the penetration increase, not by pricing. We did do some pricing in non-oil change services that had a modest benefit, but where we really saw the biggest benefit was on the penetration because of the improved presentations.
Yeah, I guess what I was trying to get at is understanding how the improvement in non-oil change revenue compared to the pricing that you got overall, including oil changes.
So if you look at our overall comps, we said just over 60% of the comp was driven by pricing changes. And you know, we saw
more significant impact from ticket overall. So I would tell you the non-oil change revenue was worth between 2% and 3% of our comp increase.
And then the other question I had is with regard to the global product sale.
It sounded like you're still waiting for a couple of pre-closing conditions to get past. And I guess I wanted to understand if those are internal pre-closing issues that you're working through, or if they are...
related to government approvals and or other third party approvals. And I guess any additional precision that you can provide on the timing, I feel like we're in early calendar 23. So I'll just try and understand if...
the timing is imminent or if you're guiding more toward first half of 23.
So.
First of all, there are no barriers to close and we're continuing to make good progress. And we are really down to just a handful of regulatory approvals that need to come through. And so largely external and...
based on our understanding of expected timing, where we continue to be very confident in the guidance that we've given that we will close in the.
the early part of calendar 2023.
As a final reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now.
As we have no further questions, I'll hand back to the management team for any concluding remarks.
All right, thank you. Appreciate everyone listening in today. We are really confident about the performance and the business, the strength of the consumer, our customers and the transit we're seeing in our businesses.
We enter our second quarter and look at the trends for the back part of the year. And as we've stated, we're confident in completing the sale in the early part of 2023 of global products. And that will set up the new valvling for what will be an exciting year for us.
actions have been taken to address some of the margin shortfall in Q1.
And so that again gives us confidence along with the consumer trends that we're going to have an excellent year. So again, thank you for your participation today. This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
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