Q4 2023 Valvoline Inc Earnings Call
Hello, everyone and welcome to the Valvoline for <unk> 2023 earnings conference call and webcast. My name is M&A and it'll be cool with 19 Yoko today. After the presentation there will be the opportunity for any questions, which you can ask by pressing star followed by the number one on your telephone.
Pat I will now turn the call over to our highest Elizabeth Russell. Please go ahead Elizabeth.
Thanks, Good morning, and welcome to Valvoline fourth quarter fiscal 2023 conference call and webcast.
This morning at approximately seven a M. Eastern time traveling released results for the fiscal year and fourth quarter ended September 32023.
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 dotcom.
Please note that these results are preliminary until we file our Form 10-K with the Securities and Exchange Commission.
On this morning's call is Laurie please our president and CEO and my remarks with Burger our CFO.
Yeah.
As shown on slide two any of our remarks today that are not statements of historical facts are forward looking statements.
These forward looking statements are based on current assumptions as of the date of this presentation.
Get to certain risks and uncertainties that may cause actual results to differ materially from such statements.
Well I think I 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 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 retail services business represents the company's continuing operations.
The former global product segment is classified as discontinued operations for the purposes of GAAP reports.
On slide three you'll see the agenda for today's call will begin by discussing our best in class retail services platform and proven formula for growth we.
We will then look at a review of our financial results and guidance.
Now I'd like to turn the call over to ward.
Thanks, Elizabeth and great to be with you all today.
2023 was a transformational year for valvoline as it was our first year as a pure play retail business in.
In addition to delivering the expected results for the year, we completed the sale of global products and made substantial progress on our promise to return the sales proceeds to shareholders with $1 5 billion in share repurchases. This year.
With both a strong results track record and a clear strategy, our retail services platform is well positioned for long term growth.
Valvoline is the quick easy trusted leader in automotive preventive maintenance and also is a best in class retail services provider.
We have a proven track record of growth fiscal year 2023 marked our 17th consecutive year of positive same store sales with system wide sales growing to $2 $8 billion.
Our network of 852 stores is over 50% franchised and Valvoline has been named the top franchise or in our category by both entrepreneur and franchise times.
We also have a proven track record of strong profit and returns with mid teens, IRR and EBITDA margin growing to 26, 3% for the year.
As we've laid out previously valvoline offers a best in class value proposition to investors based on growth brand and performance.
With a 150 year old brand and a scaled platform of over 850 locations.
Valvoline has a proven leader that has created significant revenue and EBIT growth in recent years through store additions same store sales growth and accretive M&A.
The market, we serve is large and non discretionary with an estimated 470 million do it for me all changes performed annually in the United States.
While we've delivered an 18% compound annual growth rate in our system wide sales since the IPO Valvoline still has significant opportunity to build upon our estimated 5% market share.
We have confidence in our ability to grow to 3500, plus stores, while lowering our capital requirements through exploration franchise growth.
Our model of quick easy trusted service will allow us to continue winning market share and generate attractive returns and significant cash flows in the years to come this creates an incredible value proposition for investors.
Slide eight shows our key metric performance over recent years, demonstrating our strong history of financial performance, including fiscal year 2023.
With 137 stores added in 2023, including 51 franchise stores, our total store count is now 852.
Systemwide sales grew to about $2 $8 billion in 2023, an impressive 18% compound annual growth rate from our IPO in 2016.
System wide same store sales also saw strong and consistent growth across the network with 11, 9% growth for both company and franchise systems in 2023 and from a profit perspective, adjusted EBITDA grew 20% to $380 million in fiscal 2023.
<unk>, resulting in a 32% compound annual growth rate since 2020.
Turning to slide nine you can see our full year FY2023 results along with our FY2023 guidance and long term guidance, we provided last year.
Valvoline delivered strong growth across all metrics not only did we deliver against our fiscal 'twenty three guidance. Our performance was aligned with our long term algorithm across all metrics as well.
In addition to strong sales and store growth or EBITDA growth outpaced the topline sales growth capturing leverage across the business and improving margins to 26, 3% for the year.
For FY 'twenty, three we saw 62% growth in adjusted EPS to $1 18, which was significantly impacted for the year by items related to the sale of global products, including share count reductions due to share repurchases and interest income from the investment of the net proceeds Mary will discuss.
The FY 'twenty four guidance in more detail in a moment, but we do anticipate fiscal year 2024 results to fall within our long term algorithm guidance as well.
Turning to slide 11.
We have a simple, but highly effective formula for delivering long term value to our shareholders.
First shared our three pillar strategy last year, which includes one driving full potential of our existing business to accelerating network growth and three expanding services to meet the needs of an evolving customer race and car Park.
This proven formula will drive higher revenue strong margins free cash flow and attractive return on invested capital, let's take a look at each of those in more detail starting with the potential in the core business.
As you can see on slide 12, we have seen significant operational improvements in recent years our.
Our marketing sophistication continues to be a standout in the automotive services industry.
We continue to build brand awareness and optimize the cost to acquire new customers. Our quick easy trusted service consistently delivers a strong customer experience and drives customer retention.
Our average ticket continues to increase demonstrating our pricing power as well as strong execution of non oil change revenue service penetration and premium innovation.
As we see cost increase notably in product and labor, we take pricing actions, which we have already done in FY 'twenty four.
We do this with confidence in our pricing power as we continue to look for but not see trade downs or service deferrals at this time.
This can be seen in.
In our mature store performance and we anticipate an additional $70 million of EBITDA.
As current non mature stores mature.
Yeah.
Next let's look at an update on new units as I mentioned earlier, we finished the year with a strong delivery of store additions, bringing our new store additions for the year to 137.
After a challenging Q3, our franchise partners delivered 26 total units in Q4.
We mentioned in Q3 that we expected some of the delayed units in Q3 to push into Q4 or Q1.
But our franchise partners were able to deliver most of the delayed units in Q4.
We also had a record number of new builds for the year for both company and franchise systems with $47 24 units respectively.
With nearly 50% of the new units being Newbuild. This demonstrates that our franchisees see the value in continuing to take advantage of both M&A and ground up opportunities.
While we expect the challenges we saw in Q3 in construction and permitting continue our company and franchise franchise teams are finding new ways of partnering to improve processes across the development cycle.
For example in fiscal 2023, Valvoline formed a development Council, which includes our corporate real estate and developing franchise partners across the system.
Our development Council is highly engaged and focused on pipeline execution strategies.
Capital reduction plans and reinvestments into the business.
As we turn to slide 14, I am proud of our progress toward accelerating network growth, both our team and our franchise partners recognized the significant opportunity we have to expand our store footprint.
Auto care remains a growing highly fragmented market with significant white space for expansion.
As we set out in FY 'twenty, two we see potential to grow our retail system to over 3500 units.
We continue to target 250 units new units per year by 2027 with 150 coming from franchise, we see multiple levers to fuel new growth, including partnering with our existing franchisees, adding new franchise partners, which we continue to pursue and opportunistic.
M&A.
We anticipate taking a step towards that goal with the projected 140 to 170 total unit additions for fiscal 'twenty, four with 55% to 70 coming from additional franchise units largely from our existing partners.
On slide 15.
We turn to the third pillar of our strategy customer and service expansion today I'd like to highlight our progress in the fleet business.
And non oil change revenue service penetration.
Currently fleet is less than 10% of our total system wide business and continues to grow at a faster rate than the consumer business.
In fiscal 'twenty three the fleet business saw 25% sales growth as we added over 3000, new accounts and increased our business within existing accounts.
The fleet business ticket average is about 20% higher than the average consumer ticket based on company store performance.
This is largely driven by the fleet owners, taking advantage of the non oil change services, we offer in order to maintain their important business assets.
For fleet customers, our proposition is compelling.
Quick easy trusted service is not only convenient but it helps fleet owners keep their vehicles safe and on the road. We're excited about the progress of the business and the growth potential it offers.
Now, let's take a look at non oil change revenue across the system.
The growth in the fleet service business is certainly a contributor to our improvements in non oil change revenue service penetration, but we're also seeing that improvement within our consumer base.
The system wide non oil change revenue has grown consistently with an increase of $1 93. This year, our largest dollar increase in four years.
For company stores about half of this was driven by service penetration, which was enabled by an increase in training and new tools deployed to increase the consistency of our presentation of these services as well as ensuring a quick easy trusted delivery.
Now I'll turn it over to Mary to discuss our financial results.
Thanks, Laurie, let's start with a look at our revenue growth, we saw significant sales growth for both Q4 and fiscal 'twenty three.
For the quarter sales grew 16, 3% to $390 million and for the year with growth of almost 17% to $1 4 billion.
System wide same store sales grew 10% for the quarter with approximately two thirds driven by ticket and one third from transaction growth.
For the year system wide same store sales grew 11, 9% with approximately 70% driven by ticket.
Ticket growth in the quarter and the year was largely driven by pricing, but we also saw meaningful contributions from non oil change revenue service penetration and premium amortization on.
On the transaction side growth in customers was the largest contributor.
The convenient and trusted service, we are providing to our customers continues to drive strong customer retention.
Yes.
On slide 18, we have a look at margin performance year over year for the quarter EBITDA margin increased 190 basis points to 28%.
Driven primarily by improved labor efficiencies, along with the lubricant cost declines that were largely offset by waste oil headwinds.
Sequentially.
Margin rate decreased 130 basis points, which was largely driven by seasonally higher benefits expense within the labor line.
As Lori mentioned for the fiscal year, we saw EBITDA growth of 20% outpacing the 17% topline growth.
EBITDA margin improved as well, increasing 50 basis points to 26, 3% largely driven by SG&A leverage.
Turning to slide 19, you'll see additional financial results for the quarter and the year.
Adjusted EBITDA improved 24, 8% to $109 million for the quarter and 20% to $380 million for the year. We also saw strong growth in adjusted EPS was <unk> 39 for the quarter and 86% improvement over the prior year and $1 18 for the year.
An increase of 62%.
Both driven by stronger operating results higher interest income and share repurchase activity.
Turning to slide 20, we have an updated look at the balance sheet and cash position.
We continue to make progress on our commitment to return a substantial amount of the proceeds of the global product sale to shareholders in.
In fiscal 'twenty, three we returned $1 5 billion to shareholders.
During the month of October we repurchased an additional two 8 million shares, leaving a $124 million on the current one 6 billion authorization as of October 31.
We continue to have a strong cash position and still anticipate the completion of the current authorization in the coming months.
Our target leverage ratio remains.
Two five to three five times EBITDA on a rating agency adjusted basis, which translates to $1 five to two five times from a non rating agency adjusted basis.
Cash flows from operating activity increased $219 million over the prior year to $353 million.
As we mentioned earlier in the year. This includes favorable changes in networking capital due to the onetime benefit of the growth in payables as a result of the new supply agreement with global products.
This quarter, we once again saw favorable interest income from the investments of the net proceeds from the sale of global products.
Earnings 11 million for the quarter and bringing the total to $44 million for the year.
On slide 21, we have our guidance for fiscal year 'twenty four as Lori mentioned, we expect fiscal year 'twenty forward to be in an algorithm year.
Top line revenues are expected to grow to one six to $1 7 billion driven by expected same store sales growth of 6% to 9% and store additions of 140 to 170 with 55% to 70 stores from franchisees.
From a profit perspective, we expect EBITDA to grow to $420 million to $460 million.
As a reminder, with seasonality around customer driving patterns and the timing of our annual company meetings, we expect just over 40% of EBITDA to come in the first half of the year with the balance coming in the back half.
Capital expenditures are expected to be $185 million to $215 million, which includes amounts for additional new company store growth increase maintenance and technology costs.
We expect adjusted EPS to be $1 40 to $1 65.
Now I'll turn it back over to Lori to wrap up.
Thanks Mary.
I want to thank our talented team of over 10000, and our strong franchise partners for the hard work that deliver these results in fiscal year 2023.
We continue to deliver best in class performance relative to high growth retail peers.
We're focused on creating shareholder value with our long term algorithm of driving the full potential of our core business accelerating network growth with a focus on franchise.
And innovating to meet the needs of an evolving car Park now I will turn it back over to Elizabeth to begin the Q&A session.
Yeah.
Thanks, Barry before we start the Q&A I want to remind everyone to limit your question to one and a follow up so that we can get to everyone on the line with that the operator. Please open the line.
Thank you.
I would like to ask a question today. Please do so now by pressing star followed by the number one on your telephone keypad.
If you change your mind I would like to be removed from the key star followed by one Penny to ask your question pieces, Judy or device, Andrew microphone on mute it lately.
Our first question today comes from the line of Daniel <unk> with Stephens Inc. Please go ahead Daniel Your line is open.
Okay.
Yeah, Hey, good morning, everybody. Thanks, taking my questions.
Good morning, Dan.
On the unit growth side.
Good morning, sorry on the unit growth side, obviously franchise openings caught up a bit how do you feel about the pipeline and cadence for 2004, and and maybe how are the conversations going with potential new franchisees and the Refranchising discussion you guys talked about last quarter.
Yeah, Great Great question, Danielle we were really pleased with the progress in Q4, obviously Q1 was.
Surprise and a disappointment.
Based on the push outs, we saw but given some very quick actions that we took.
To support our franchisees and helping them.
But stores up and get them running given supply chain and permitting challenges. We felt really good about where we landed in Q4 as that our franchise partners and we have an opportunity two weeks ago to actually meet with our franchise partners. We have an annual workshop with them.
And in that we had a development council, where we had our real estate and construction leadership and the leaders of the developing franchise partners all come together and talk about FY 'twenty, four and beyond and I would say there is significant excitement.
<unk> about the opportunities in the market.
Both on the M&A side and on the Newbuild side I mean, this market is still very fragmented.
And while valvoline as a brand is the market leader in this space, we only have 5% market share, which means that there is incredible white space to develop our footprint.
And so in working with the franchise partners as we've stated we have a goal of getting to 250 new units per year.
Developed by 2027, and 150 of those coming from our franchise partners now within the 150.
About two thirds will come from our existing partners. So that meeting that we had two weeks ago was really reinforcing on both sides about how we'll work together to get to that and so we feel good about the pipeline our franchisees, we have franchisees asking for some expansion of.
Their territories, we have active <unk>.
Development agreement updates underway and so we feel really strong about the guide that we have laid out for FY 'twenty four of 140 to 170, new units with 55 to 70 coming from franchise and we expect the franchise piece to continue to build year over year.
From our existing players as a big component of that 150 total target.
And Laurie I would just comment that the comparison that you've made in your early comments was really against Q3, where we only saw one franchise unit.
And so we felt really good about where Q4 came in with 26 new franchise units.
I would also say we've seen progress in speaking with.
New franchisees.
We really only want a handful of those.
That are capable of.
Really driving meaningful growth.
We've seen the addition of a couple smaller new franchisees and are making good progress in discussions with other franchisees as well as making some progress in talking with new franchisees on the Refranchising side. So.
We're making good progress nothing nothing specific to report on this call, but progress is being made on all fronts.
Great and then an area for a follow up maybe just one on the guidance feeling a very Aldo type guide in line with historical ranges can you maybe talk about what kind of comp momentum you're carrying into this year and what puts and takes would get you to the higher low end from here of the comp guide and then to clarify on EPS does that.
<unk> any buyback activity this year, and then sandy clarifier on the release.
Sure on the second part of your question on EPS.
The EPS guide includes the.
The completion of the one six.
Billion authorization, but doesn't include any additional share repurchase.
The authorizations that we might do over and beyond the $1 6 billion.
On the first part of your question I feel really confident about the guide for the new year.
We're seeing good performance coming into the first quarter.
And.
We are.
Well positioned.
Both in terms of the operating side of the business.
I am, especially excited about the fact that our SG&A growth continues to be in just the mid to high single digits, while we're seeing sales in.
Growth in the mid in the mid teens, and we're going to continue to see nice margin leverage.
Coming from the Delta between that sales growth in the slower slower growth on the SG&A side.
So good.
Good confidence in guidance Laurie I don't know, if there's anything you'd like to add to that.
No I would I would add the same I think.
Yeah.
The teams are really energized around opportunities to both grow cars in our existing stores and drive ticket and our franchise partners and and we on the company operating side, both feel like we're going into FY 'twenty four with really strong momentum.
I would also add we saw some very modest leverage from lubricant costs in the fourth quarter.
Well.
It was about 10 basis points from a sequential quarter perspective of benefit from lower lubricant costs overall, which is the.
The product cost net of the waste oil.
Sales.
So I think going forward and into the new year, we're well positioned.
We take.
We watch the cost carefully bolt on product and our largest cost in our cost of goods sold is our labor cost.
And we've already taken some price increases to begin in fiscal year 'twenty four but we'll continue to watch that carefully as the year moves on if we see any necessary adjustments.
Within the cost.
Areas that might require some additional pricing increase.
We feel pretty good about our pricing power and ability to make those adjustments.
Alright, I'll leave it there thanks, a lot for the color and best of luck.
Thank you.
Our next question comes from Stephens <unk> with Citi. Please go ahead, Steven Your line is open.
Okay.
Great. Good morning, everyone and thank you for question.
Follow up on the prior question around that same store sales I'm, just curious on the cadence of the year.
Got that.
Got it Okay and then.
How should we think about the mixture of ticket versus transactions do you think youre at a point with pricing stabilizing in the industry.
Great question, Stephen I think as we looked at Q4, we are in is as we move into FY 'twenty four we felt.
We finished very strong at 10% same store sales growth.
As expected September was slightly lower than the rest of the quarter, because we lapped a pricing increase that we did year over year.
But I think overall, we delivered the quarter as we would expect as we moved into the new year.
At the October the start of October was a little soft.
And that was relative to a very strong compare year over year.
And as we moved through October we saw the momentum year over years start to increase and we feel really good about.
Where our guide is in getting having a six to nine year percent same store sales across the board.
Across the business for the year.
So I think the guidance is is very good.
There is always we're working to hit.
As high in the guidance as we can and that comes from initiatives that we have around continuing to focus on non oil change revenue presentation, we have some marketing optimization to drive new customer.
<unk> acquisition at a lower.
CAC rate.
And then we have a bunch of initiatives around the fleet to get higher penetration of existing accounts and as those things start to come then obviously the same store sales growth will be stronger, but we feel really good about where we're coming into the year and how the teams have gone after the business so far.
Okay, and then just on the.
Just to clarify Sheila.
Just in terms of the cadence as it also first half second half I do think you know because the first half to be a bit above that range are you with it.
But it's all about ticket transaction.
Yeah. So in terms of the overall same store sales.
We actually see a fair amount of consistency in the first half versus second half.
And so I do expect.
<unk>.
That will still see a little bit stronger amount of the comp coming from ticket versus transactions. This year.
But it'll be but certainly more balanced than what we saw in fiscal 'twenty three.
Okay, Great and then just.
Second question.
Capital allocation.
Completed this authorization, what's the Walmart.
You know continue to buyback stock how do you think about.
Priority for.
Nashville.
Yeah, well, we've made a commitment to turn excess capital return excess capital to shareholders. So as our EBITDA grows and as we manage through our target leverage ratio of two and a half to three five times rating agencies. The adjusted leverage ratio I expect that we will see continued returns of capital to <unk>.
<unk> holders over time, the business will continue to generate strong free cash flow.
And again with growing EBITDA I don't expect us to allow the balance sheet to get lazy and I do think that we should see.
<unk> returns of capital over time.
I think we will re evaluate.
Evaluate that subject to market conditions.
After we complete the current out.
The authorization.
And so I think you should expect to hear more about what our plans are with with our next earnings call on.
Q1.
Okay, great. Thank you so much for the detail both waukesha.
Thank you.
Okay.
Our next question comes from Simeon Gutman with Morgan Stanley. Please go ahead. Your line is open.
Hi, everyone. Good morning.
Mary one of your answers preempted. This question I was going to ask surprise surprise on base oils and the gross margin outlook.
So you kind of suggested that product cost have already come in I'm curious, how that's embedded into the guidance and then if those expectations changed at all as you actually move through the fourth quarter.
Yes.
Typically.
Simeon we take what we know today.
And reflect that in the guidance so to the extent that we see base oil increases that ultimately would flow through to them.
Lubricant cost increases under our supply agreement.
That's not factored in we are really factoring in and the same goes for base oil reductions. If we saw incremental base oil reductions from where we are today that opportunity is not factored in either.
We did do some math to try to help you better understand the impact of.
So if there was a dollar increase in base oils. It would take about a 50% increase in price on the company side.
So I am sorry, 50 cent increase excuse me.
For a dollar increase in base oils that would take about a 50% increase in price to be able to cover that cost increase.
Said, a little differently about a dollar increase in base oil cost would impact unfavorably gross margins by about 50 basis points and that 50 points basis points would be made up with about a 50% increase in prices now that's just on the company side of the business on the franchise side of the business, we pass through base oil costs.
Lubricant costs on a quarterly basis under our contracts with the franchisees.
Yeah.
Okay, and then I'm going to ask a follow up and then with the second question. When you mentioned that the product cost got better and you mentioned both the waste oil is it that the underlying base oil got better or the waste.
Both and then completely separate question is can you talk about promotional the promotional environment whats happening is the.
The higher prices that you're getting in the marketplace. They are sticking but are they being call. It funded by promotions can you talk about that overall.
So our waste oil contracts are tied to base oil indexes. So when we saw modestly a modest improvement in the quarter.
It was a modest improvement on both ends.
Because they are they're kind of integrally tied to contractually.
Laura do you want to talk about the promotional sure Simeon.
We're actually seeing.
We see pockets of of discounting happening by competitors, but it hasn't actually changed our overall approach and when we look at our retention rate for new to file customers, that's customers who've never been to <unk>.
Yossi location.
We have not seen any difference in retention rates over last year, and we don't expect to in the coming year, we actually have initiatives to try to increase retention by just addressing some of the feedback around our process for new customers.
In fact, if we look at FY2023 we have been doing a lot of work to optimize our marketing spend and really get more almost personalization approach to discounts that are offered in our year over year discount has come down.
Even in an environment, where I think people are concerned about the resiliency of the customer we're just getting smarter around what discounts are required for which type of customer based on the channel that we're acquiring from.
On the promotional side.
Not seeing any deterioration on the retention of a new to file customer or the active customer base.
Thank you.
Yeah.
Our next question comes from Kate Mcshane with Goldman Sachs.
Please go ahead your line is open.
Hi, good morning, Thanks for taking our questions.
We wonder if we could ask first.
What the average age of vehicles are that are coming to valvoline and just given what we've seen.
At the dealerships with affordability headwinds are you seeing any change in the age of cars coming in.
The average age of vehicles that we see our sweet spot Kate is really between.
Right around three years when cars come off of warranty.
Up to about 12 years. So the average age of a vehicle that we see is kind of in the mid eight year.
Range and that really we haven't seen any significant change in that.
In the quarter so.
I would tell you that.
Our consumer.
Is continuing to show.
Then demonstrate their need for this kind of non discretionary service and maintaining their vehicles.
And.
We continue.
To like the spot that we see we do think there's opportunities for us to take some more share from dealerships because our <unk>.
Processes very convenient so over time, we see that entry spot come down from that kind of three year point I think there's real opportunity for us there as we continue to market and really drive the point of how convenient our services, yes, I'll just add Kate that.
The.
The sweet spot or the highest percentage of penetration of the car park is between years six to nine a vehicle life, but that said the average age of the vehicle.
This year this past year that came in relative to the year before was 10 months older.
So we are seeing people keep their cars longer we know that that's data that's out in the market and that is actually also been consistent with our customers' vehicle age.
But the level of penetration is the highest in year six through about 10.
And then it continues to expand out as customers keep their cars.
I do agree with Mary.
We have been expecting the dealers.
To start to use oil changes or preventative maintenance as a way to bring people back in.
To to look for cars I think with the automotive strike that they may have held off on that just given where supply is but that's our assumption because we're not we're not seeing it at this time, we may see pockets of it in a specific market, but we're not actually seeing those kind of dynamics happening from a.
Customer retention or acquisition standpoint.
Yes.
Okay.
Thank you.
Thanks Kate.
Yeah.
Our next question comes from Bret Jordan with Jefferies. Please go ahead. Your line is open.
Okay.
Hey, good morning, guys.
Good morning, Brett in your prepared remarks, when you talked about yours.
You talked about your recent franchise Canadian you mentioned capital reduction plans could you give us more color on that and is it is it sort of a way to make franchise acquisition more achievable or.
The back story on that.
Actually great question, Thanks for asking it.
As with all retailers. These past couple of years construction costs have been going up because of inflation both on the.
GC labor side.
Just given the tightness.
But just in terms of material costs have been going up and so we as a company and trying to make sure that we're maximizing our return on capital invested are looking at ways to reduce the capital cost of new builds.
In order to ensure that we continue to deliver really attractive return on invested capital, which we have been doing despite the increase in capital cost for new builds.
We've taken an opportunity to earn higher than any firm to re look at our drawings from with a fresh perspective to actually figure out where we can take capital costs out of our design.
And we're early on in that process, we've gotten back some initial.
Some initial results we've engaged our franchise partners two weeks ago on some of those initial results and we'll be taking some of the new designs to the market to bid out.
And this is really just trying to get ahead of our continued cost inflation and how can we bring down the capital cost.
This is something that we've done proactively we haven't done it because our franchise partners have asked us to or because they're delaying any new builds in fact as I mentioned the pipeline of new builds on the franchise side is higher than it's ever been and the reason why is because when you look at a fresh retail site.
That is in the right location given traffic and population density the amount of traffic that you can gain with an optimized marketing spend is very attractive from a cash on cash return, although it does take more time to build up to that.
Buying an existing site and converting it.
So we're just getting ahead of trying to make sure that we drive the highest return on invested capital.
We continue to do that.
And exceed by a significant amount of our cost of capital, but we're always looking for ways to cut that down. One example, I have used is we build out the ceiling in our stores.
But nobody gets out of their car. So why do we need to have a completed ceiling. That's just extra costs, which is not necessary and so those are just the things that we're looking at.
Our design hasn't changed in many years and it's just an opportunity to take a fresh perspective.
And Lori I want to go back real quickly you might like to that.
Yes.
No go ahead.
Okay.
Go ahead, Jim if you had fall if you have more on that prior question that's great.
The follow up question, I guess would be tied to that.
What youre seeing in the non oil change services attachment I guess youre talking about more business with the fleet or is that more of the same service or are you finding new services to add and as you look at our new store format.
Possibility of maybe another bay to provide services other than.
Oil change system.
Yeah.
The non oil change revenue increases that we've seen and I've mentioned, a $1 93.
In fiscal year, 'twenty, three which was our highest within.
$10 for non oil change revenue services is really focused on the services that we provide and so we started the year just going through a do we have the supply and the equipment and as the equipment all in working order such that.
The services can be provided for any customer who's vehicle requires them. The second is is our team trained in those services to provide a quick easy trusted service delivery of those items of those services and then a third with how do we present the services to the customers such that the cut.
<unk> understands why their vehicle needs it and our proposition on doing them relative to others in the marketplace.
And it's really just going back to basics to make sure that our team is equipped and trained and can communicate with the customer requires based on the age or the functioning of the vehicle as it presents itself to our stores.
We are and always look at adding additional services and we do see opportunities, but we have to make sure that they fit our proposition of quick easy trusted.
<unk> that we can we can train our team to do them.
Effectively and efficiently.
And then make sure that we understand the requirements from a capital perspective, but we're always looking for ways to expand our reach and.
When as we talk to fleet managers, they're really leading some of that discussion are helping us evaluate because they love the one stop shop nature and the more that we can do in our stores in a quick easy trusted way.
That's been a good discussion point in us validating where we should focus but we don't have anything to report at this time.
We'll obviously give updates and and.
And share more as we have it.
Yeah.
Great. Thank you.
So Laurie I just wanted to go back and clarify.
A comment I made earlier.
The average age of a vehicle we serve I mentioned eight to nine years, that's actually the time.
Where we over index the most to the car park. The actual average age of a vehicle. We serve is a little bit lower than the average age of the car Park had 11 years versus the car park being at about 12, and a half years. So I misspoke, a little earlier I wanted to correct that.
Our next question comes from David <unk> with Wells Fargo. Please.
Please go ahead your line is open.
Hey, good morning, and thanks for taking my questions. So SG&A management was impressive in the quarter can you talk about some of the moving pieces in that line and how you expect that to look as we move through fiscal 'twenty four.
Yeah.
Yes, so we did see really nice leverage year over year that was largely driven by SG&A management.
We saw 190 basis points of EBITDA margin improvement.
Year over year for the quarter of which two or three for US was related to the SG&A leverage and about a quarter of it was related to gross profit leverage where we saw some good labor efficiencies year over year in the quarter.
I would tell you that theres a lot of time and attention being paid on the SG&A line, we know that.
We're investing in the business.
Two.
Maintain our higher growth rate and that does require.
Some investment in SG&A, but we think that there's a real opportunity from an efficiency perspective to be able to scale as well so a lot of focus in that area.
A lot of time and attention being paid paid in that process, especially with our.
Our new plan in place and our guidance for the coming year, we expect to continue to see leverage on the SG&A line.
Yeah.
Got it that's helpful and then on the fleet business, it's less than 10% of system wide sales today, but growing really strongly at 25%. So curious how you're thinking about one the long term penetration and then two how that sales growth rate could look through next year.
Yes.
The one thing I'd add just set context on is our market share of the fleet business is I think less than 1% or around 1%.
And our overall market share.
In the oil change.
Space is about 5%. So we see significant opportunity just to get our fleet penetration or share up to where we are overall as a market.
We haven't we haven't shared what our growth rate is on the fleet side, but we expect that it will continue to outpace our overall growth.
Because we are having fantastic discussions with our with our with the fleet management companies as well as with small fleet operators.
In this past year, we actually expand.
Banded some of our fleet work to cover our franchise partners. So when you look at growth in fleet overall.
<unk> fleet of our company stores is is a much stronger.
Growth rate, but it is I think on the fleet side, we'll start to see that accelerate in the less than 10% was on a system wide basis. So.
Again, we see a lot of opportunity on fleet.
And we're trying to make sure that we can enable our franchisees to get the benefit of the work we've been doing for the company operated stores and Laura I would add that one of the biggest request we get from our National fleet customers is an expanded footprint.
We currently are not in certain locations, where they would like us to be and so.
To expand that footprint will act as a tailwind to our growth in the fleet business as well absolutely.
Great. Thanks.
Our next question comes from Mike Harrison with Seaport Research Partners. Please go ahead. Your line is open.
Yeah.
Hi, good morning.
Laura you mentioned.
Earlier that you are undertaking some efforts this year to optimize your marketing efforts.
Work to improve retention was just hoping you could talk a little bit more detail about <unk>.
Some of those optimization actions are.
And also do you expect to see marketing spend.
Pretty similar to where it was last year or is it moving higher year on year.
I'll, let Mary talk about the marketing spend overall, but in terms of our efforts around it.
Look at new store marketing so some of our marketing spend is tied around the.
The number of stores that we're launching and where those stores are obviously, we've mentioned before that we're trying to focus our are our new store entry in key markets, where we're where we're in filling the market and therefore marketing costs would be lower than a market that is is much less penetrated or.
New and therefore requires a lot more brand building, but some of the optimist optimization, we're doing both for company and four franchise is around new store marketing and what are the most effective tactics given the penetration and the brand that already exists so that we get a faster ramp.
On new store sales second is.
Some of the tactics that we're doing and how to reactivate customers, who are inactive and by inactive. It just means that they haven't come to us within the last 12 months and we want to find ways to reengage them and we ran a number of pilots last year on how to do that doing things like a father's day.
A motion for inactive customers those are days, where our volume is tends to be lower than than what our capacity would be and so if we can market to inactive customers to come in on days that are are not as busy one they're going to get a great experience. The speed is going to be fantastic and it's a chance.
Re engage a customer before they before they would affect.
The other thing is really optimizing the channels that we go after new customers and doing that in a more surgical way based on our store base.
So we have stores that have been in market for 20 years and the demographics around those stores are not growing at the same pace than other stores and.
Making sure that we're spending new customer acquisition dollars in areas that are growing and that we are maybe less mature in the marketplace. So these are taking the dollars that we have both in reminding existing customers that they need to get another oil change.
Given the time that we last saw them, but also optimizing our new customer acquisition. So that our cost of customer acquisition is down on a per customer basis.
The last one is we just continue to look at new digital channels and digital tools.
We've had a robust marketing and CRM backbone.
Relative to our industry. It really is a standout but when you compare the things that we have done relative to what a broader retail is doing on the digital side, we still see there's opportunities for us to be more effective and more efficient on the marketing side, but Mary do you want to comment on our marketing spend expectation yeah. So.
Overall, our marketing as a component of SG&A for the new year will be growing in line with new store count growth for our company stores.
So I expect it to be pretty consistent with.
High single.
Digit SG&A growth that I mentioned earlier, we will see growth in marketing, but it'll be pretty much in line with with with store growth, which is the primary driver of the increases in marketing spend a lot of what Lori talked about is driving efficiencies in our existing mark.
<unk> spend.
So overall I.
I'd say that were likely seen high single digit increase in.
Marketing for the year for the new year.
Yeah.
Alright, that's very helpful. And then a couple of housekeeping questions Mary.
First of all can you help us understand a little bit what drove that DNA number to move up so much sequentially to that 28 shareholder level.
And can you give us maybe some from guidance for D&A expense as well as interest expense next year.
Yeah, we certainly expected some of it about 25% of the increase related to just new stores coming online, 75% was related to new technology that was placed in service now a component of that probably about half of it was some catch up from the prior quarters.
Where we had placed technology and service earlier in the year and didn't get the depreciation captured in the quarter.
But I would tell you that moving forward, we will continue to see increases in depreciation and amortization related to new stores kind of consistent with where we saw it.
In the four quarters of this year, but I expect to see modestly higher depreciation and amortization moving forward as we make more technology investments to drive improved experience and more efficiencies in the stores. So I think.
The quarter fourth quarter itself was a bit unusual because we had some of that catch up.
But going forward, you'll likely see a little bit higher.
Growth rate because some of the new technology investments that we're making.
Great.
Interest expense for next year.
Yeah. So interest expense I think if you look at our interest income.
In the current year, we had $44 million of interest income that offset interest expense.
And so.
We still have $757 million at year end cash and cash cash equivalents and short term investments.
See some of that go away given market conditions.
With the tender for the 2030 bonds.
But I would expect some time in our second fiscal quarter.
So.
You'll continue to see a little bit elevated or benefit to interest income in the current year.
Given our cash position.
But once we.
Net through that I think euro.
Start to see a more normalized interest expense.
Based on the outstanding 2031 bonds that are just under 4% discount rate.
Could it be interest rate and the <unk>.
Loan a.
Which has a variable rate based on sulfur plus a spread so.
I think we're in good shape I will tell you that we built in a little bit of cushion in our guidance, our EPS guidance, assuming that we're going to see the fed move interest rates.
Another.
100 basis points or so.
And so that is built into our EPS guidance.
Alright, Thank you very much.
Thanks, Mike.
And with that we have no further questions. So I'll turn the call back to Larry for any closing comments.
Thanks, Emily and thank you all for joining us today and for your thoughtful questions.
Since our last update I've enjoyed spending time with many of you and our investors and I look forward to the ongoing discussions.
We have a resilient and durable business and I am excited about the momentum that we're taking into FY 'twenty four so I appreciate your time today. Thanks.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
Yeah.
Okay.
Yeah.
Yeah.