Q1 2024 Valvoline Inc Earnings Call

Nadia: Hello everyone, and welcome to Valvoline's first quarter 2024 earnings conference call and webcast. My name is Nadia, and I'll be coordinating the call today.

Hello, everyone and welcome Judy about only first quarter 2020 full earnings conference call and webcast. My name is not yet and I will be coordinating the call today.

Nadia: If you would like to ask a question, please press star three by one on your telephone pad. I will now hand over to your host, Elizabeth Russell, Senior Director, Information Relations, to begin. Elizabeth, please go ahead.

If you would like to ask a question. Please press star one don't know telephony Pat.

Speaker Change: I will now hand over to hoist.

Speaker Change: Russell Senior director of Investor Relations to begin Elisabeth. Please go ahead.

Speaker Change: Yes.

Elizabeth Russell: Good morning, and welcome to Valvoline's first quarter fiscal 2024 conference call and webinar. This morning, Valvoline released results for the first quarter ended December 31st, 2023. 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 10-Q with the Securities and Exchange Commission. On this morning's call is Lori Fleece, our CEO and President, and Mary Meixelsperger, our CFO. As shown on slide 2, 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 those statements. Valvoline assumes no obligation to update any forward-looking statements, unless required by law.

Russell: Good morning, and welcome to the Abilene first quarter fiscal 2024 conference call and webcast.

Russell Senior: This morning, Valvoline released results for the first quarter ended December 31 2023.

Russell Senior: 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 Dot com.

Please note that these results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission.

Russell Senior: On this morning's call is Laurie please our CEO and president and my remarks with Burger our CFO.

Russell Senior: As shown on slide two any of our remarks today that are not statements of historical fact are forward looking statements.

Russell Senior: 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.

Russell Senior: So I believe assumes no obligation to update any forward looking statements unless required by law.

Elizabeth Russell: 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... A reconciliation of our adjusted non-GAAP results to amounts reported under GAAP and a discussion of management's use of non-GAAP in key business measures is included in the presentation opinion. 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, and the former global product segment is classified as discontinued operations for the purposes of GAAP reporting. Today, Lori will begin with a look at the key highlights from our first quarter, and Mary will then cover our financial results. With that, I will turn it over to Lori. Thanks, Elizabeth, and thank you all for joining us today.

Russell Senior: In this presentation and in our remarks, we will be discussing our results on an adjusted non-GAAP basis, unless otherwise noted.

Russell Senior: non-GAAP results are adjusted for key items, which are unusual non operational or restructuring in nature.

Russell Senior: 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.

Russell Senior: The information provided is used by management and may not be comparable to similar measures used by other companies.

Russell Senior: As a reminder, the retail services business represents the company's continuing operations and a former global products segment is classified as discontinued operations for the purposes of GAAP reporting.

Russell Senior: Today I will begin with a look at the key highlights from our first quarter and Mary will then cover our financial results with that I will turn it over to Laurie.

Laurie: Thanks, Elizabeth and thank you all for joining us today for the first quarter of 'twenty 'twenty four we saw growth at the top line across the network with system wide store sales growing 12, 3% to $723 million.

Lori Fleece: For the first quarter of 2024, we saw growth at the top line across the network, with system-wide store sales growing 12.3% to $723 million. Profitability was in line with our expectations, with adjusted EBITDA improving 23% to $90 million and adjusted EPS improving 81% to $0.29 per share. We remain on track with our full year guidance. We started the year strong with new store additions, adding 38 for the quarter, half of which were from franchises. This brings our network total to 1,890 stores.

Laurie: Profitability was in line with our expectations with adjusted EBITDA, improving 23% to $90 million and adjusted EPS, improving 81% to <unk> 29 per share we remain on track with our full year guidance.

Laurie: We started the year strong with new store additions, adding 38 for the quarter half of which were from franchise. This brings our network total to 1800 and 90 stores.

Lori Fleece: From a capital spend standpoint, we continue to focus the majority of our capital toward growth, which we expect will continue to drive a high return on invested capital. We also made additional progress on our commitment to return a substantial portion of the net proceeds from the sale of global products to shareholders through share repurchase, with over $170 million returned this quarter. Before Mary covers the details of our first quarter results, I'd like to share the progress we've made on the three pillars of our growth strategy. First, we continue to drive the full potential of our existing business. This quarter, we delivered 7.1% system-wide same-store sales, coming from both transaction and We also improved our margins through better labor management. Team retention rates are an important contributor to labor management.

Laurie: From a capital spend standpoint, we continue to focus the majority of our capital towards growth, which we expect will continue to drive a high return on invested capital.

Laurie: We also made additional progress on our commitment to return a substantial portion of the net proceeds from the sale of global products to shareholders through share repurchases with over $170 million return this quarter.

Speaker Change: Before Larry covers the details of our first quarter results I'd like to share the progress we've made on the three pillars of our growth strategy.

Speaker Change: First we continue to drive the full potential of our existing business. This quarter, we delivered seven 1% system wide same store sales growth coming from both transaction and ticket growth.

Speaker Change: We also improved our margins through better labor management.

Speaker Change: Team retention rates are an important contributor to labor management and in December we had our lowest attrition rate since pre COVID-19.

Lori Fleece: And in December, we had our lowest attrition rate since pre-COVID. Higher retention allows us to minimize recruiting and training costs while also ensuring that our stores are well-staffed with team members who have more tenure delivering our best-in-class customer experience and added services. In November, Valvoline Instant Oil Change was named number 11 on the Forbes 2024 Best Customer Service list. I'm proud that our Valvoline and franchise-operated stores have been recognized for the best-in-class customer service they provide to our guests every day, alongside companies like Chick-fil-A, who are also known for their great service.

Speaker Change: Higher retention allows us to minimize recruiting and training cost while also ensuring that our stores are well staffed with team members, who have more tenure delivering our best in class customer experience and added services.

Speaker Change: In November Valvoline instant oil change was named number 11 on the Forbes 2020 for best customer service list.

Speaker Change: I'm proud that our valvoline and franchise operated stores had been recognized for the best in class customer service. They provide to our guests every day alongside companies like Chick Fil a who are also known for their great service.

Lori Fleece: On accelerating network growth, as I mentioned, 2024 is off to a great start with 38 store additions. We continue to see a healthy mix of ground-up builds and acquisitions contributing to our growth across the system, with 21 ground-up builds and 17 acquisitions this quarter. We have a robust pipeline and continue to work towards our goal of growing the network to more than 3,500 stores and focusing on accelerating franchise growth within that. And just this week, we celebrated our 1,000th franchise store as Quality Automotive Services, or QAS, a 20-year franchise partner with us, opened a store in Raleigh, North Carolina.

Speaker Change: And accelerating network growth as I mentioned 2024 is off to a great start with 38 store additions, we continue to see a healthy mix of ground up builds and acquisitions contributing to our growth across the system.

Speaker Change: With 21 ground up builds and 17 acquisitions this quarter.

Speaker Change: We have a robust pipeline and continue to work towards our goal of growing the network to more than 3500 stores and a focus on accelerating franchise growth within that.

Speaker Change: And just this week, we celebrated our 1000th franchise store is quality automotive services or <unk> as a 20 year franchise partner with US opened a store in Raleigh North Carolina.

Lori Fleece: We also were recently recognized as a top franchisor in our category and number 27th overall in Entrepreneur's Franchise 500. We have the best franchise partners in our category, and are thrilled to share this recognition with them. On our third strategic priority, we continue to see favorable contribution in same-store sales from both the non-old-change revenue service penetration and our fleet. As part of our separation from the global products business, our fleet team has implemented a new CRM, which will enable continued growth of new fleet customers as well as growth within our existing fleet customers portfolio. Both the NOCR service penetration and our fleet continue to have long runways of opportunity for ongoing improvement. Our team is focused on delivering fiscal year 2024 while also building the capabilities that ensure continued delivery of our long-term growth algorithm. Now I'll turn it over to Mary to walk us through our Q1 financials. Thanks, Lori.

We also were recognized recently as a top franchise or in our category and number 27th overall and entrepreneurs franchise 500.

Speaker Change: We have the best franchise partners in our category and are thrilled to share this recognition with them.

Speaker Change: On our third strategic priority, we continue to see favorable contribution and same store sales from both non oil change revenue service penetration and our fleet business as.

Speaker Change: As part of our separation from the global products business. Our fleet team has implemented a new CRM system, which will enable continued growth of new fleet customers as well as growth within our existing fleet customers portfolios.

Speaker Change: Both it and OCR service penetration and fleet continue to have long runways of opportunity for ongoing improvement.

Our team is focused on delivering fiscal year 2024, while also building the capabilities that ensure continued delivery of our long term growth algorithm.

Speaker Change: Now I'll turn it over to Mary to walk us through our Q1 financial results.

Mary: Thanks, Laurie on slide five we'll take a closer look at our top line growth for the quarter.

Mary Meixelsperger: On slide five, we'll take a closer look at our top line growth for the quarter. Net sales grew 12.3% to $373 million. System-wide, we saw same-star sales growth of 7.1% compared to 11.9% growth for the first quarter of the prior year. You'll recall that in the first quarter of 2023, we benefited from the inflationary price increases that occurred later in fiscal year 2022. That accounts for the majority of the year-over-year deceleration in same-star sales.

Mary: Net sales grew 12, 3% to $373 million.

Mary: Systemwide, we saw same store sales grew seven 1% compared to 11, 9% growth for the first quarter of the prior year.

Mary: You'll recall that in the first quarter of 2023, we benefited from the inflationary price increases that occurred later in fiscal year 2022.

Mary: That accounts for the majority of the year over year deceleration in same store sales.

Mary Meixelsperger: This quarter, both company and franchise same-store sales grew within our guidance range, with 6.1% and 8% growth, respectively. The franchise side saw modestly better growth, largely driven by improvements in non-oil change revenue service penetration as franchisees continued to implement many of the best practices that have been proven out in company and franchise stores over the past year. Transaction growth contributed about 25% to the comp, driven by an increase in the customer base as well as modest contributions from miles driven. As we shared in our last earnings call, we did see some customer softness at the beginning of the quarter. Ticket revenue contributed about 75% of the comp for the quarter. Just over half of the ticket growth came from premiumization and increased non-oil change revenue service penetration with a balance from price.

Mary: This quarter, both company and franchise same store sales grew within our guidance range with six 1% and 8% growth respectively.

Mary: The franchise side saw modestly better growth largely driven by improvements in non oil change revenue service penetration as franchisees continue to implement many of the best practices that have been proven out in company and franchise stores over the past year.

Mary: Transaction growth contributed about 25% to the comp driven by an increase in the customer base as well as modest contributions from miles driven.

Mary: As we shared in our last earnings call, we did see some customer softness at the beginning of the quarter.

Mary: Ticket contributed about 75% of the comp for the quarter just over half of the ticket growth came from premium amortization and increased non oil change revenue service penetration with a balanced from pricing.

Mary Meixelsperger: As we mentioned in our last call, we increased prices in early November in about one-third of our stores, and we have made further adjustments already in Q2. Next, let's consider some of the other drivers of the financial results. Starting with growth in rate, we saw improvement from 35.7% to 36.1%, or 40 basis points year-over-year. However, you may recall that in the first quarter of fiscal 2023, our gross margin was pressured by increased additive and delivery costs.

Mary: As we mentioned in our last call we increased pricing in early November and about one third of our stores and we have made further adjustments already in Q2.

Speaker Change: Next let's consider some of the other drivers of the financial results.

Speaker Change: Setting with growth rate, we saw an improvement from 35, 7% to 36, 1% or 40 basis points year over year.

You may recall that in the first quarter of fiscal 2023, our gross margin was pressured by increased additive and delivery costs.

Mary Meixelsperger: As Lori mentioned, during the first quarter of this year, we saw labor leverage benefiting gross profit margin as we continue to focus on this as our largest cost of sales driver. We continue to see improvement in SG&A as a percentage of net sales, with a 60 basis point decrease over prior years. This was driven by a decrease in costs from right-sizing the stand-alone organization structure and partially offset by an increase in travel.

Speaker Change: As Lori mentioned during the first quarter of this year, we saw labor leverage benefiting gross profit margin as we continue to focus on this is our largest cost of sales driver.

Speaker Change: We continue to see improvement in SG&A as a percentage of net sales with a 60 basis point decrease over prior year.

Speaker Change: This was driven by a decrease in costs from right sizing the Standalone organization structure, and partially offset by an increase in travel.

Mary Meixelsperger: sequentially, we saw an increase in SG&A rate of approximately 140 basis points, which was expected for the first quarter due to the seasonality of our business, including the timing of our annual meetings that occur in the first quarter each year. As a reminder, our adjusted EBITDA for the first half of the year typically is in the low 40s as a percentage of the full year. Depreciation and amortization increased by $6 million from the prior year quarter due to new stores and store-related IT assets placed in service, causing about 100 basis points of deleverage in gross margin and 100 basis points of leverage in adjusted EBITDA.

Speaker Change: Sequentially, we saw an increase in SG&A rate of approximately 140 basis points, which was expected for the first quarter due to the seasonality of our business, including the timing of our annual meetings that occur in the first quarter each year.

Speaker Change: As a reminder, our adjusted EBITDA for the first half of the year typically is in the low forties as a percentage of the full year.

Speaker Change: Depreciation and amortization increased by $6 million from the prior year quarter due to new stores and store related assets placed in service, causing about 100 basis points of deleverage in gross margin and 100 basis points in leverage in adjusted EBITDA.

Mary Meixelsperger: Overall, the adjusted EBITDA margin improved 220 basis points over the prior year. On slide 7, we'll take an additional look at our profitability metrics. As Lori mentioned, bottom-line results were consistent with our expectations, with adjusted net income increasing 36% to $38.5 million, driven by an increase in operating income of just under 20%. Net interest expense also declined due to the interest income earned on the investment of the remaining proceeds from the global product sale and was effectively offset by a modest increase in the effective tax rate in the current year.

Speaker Change: Overall, adjusted EBITDA margin improved 220 basis points over the prior year.

On slide seven we will take an additional look at our profitability metrics as Lorie mentioned bottom line results were consistent with our expectations with adjusted net income increasing 36% to $38 5 million driven by an increase in operating income of just under 20%.

Speaker Change: Net interest expense also declined due to the interest income earned on the investment of the remaining proceeds from the global product sale and was effectively offset by a modest increase in the effective tax rate in the current year.

Mary Meixelsperger: Adjusted EPS saw growth of over 80% from $0.16 to $0.29 per share. The increase in operating income contributed about 40% of the EBS growth, with the balance coming from the reduction in net interest expense and the change in share count due to the substantial share repurchases over the course of the prior year. Turning to slide 8, we'll look at the balance sheet and cash position. During the first quarter, we returned just over $170 million to shareholders via share repurchase. That leaves $40 million remaining on the current $1.6 billion authorization.

Speaker Change: Adjusted EPS saw growth of over 80% from 16 to 29 per share the increase in operating income contributed about 40% of the EPS growth with the balance coming from the reduction in net interest expense and the change in share count due to the substantial share repurchases over the course of the prior year.

Speaker Change: Sure.

Speaker Change: Turning to slide eight we'll look at the balance sheet and cash position.

Speaker Change: During the first quarter, we returned just over $170 million to shareholders via share repurchases.

Speaker Change: That leaves $40 million remaining on our current $1 6 billion authorization.

Mary Meixelsperger: We anticipate the completion of the current authorization in the near term. As we have provided before, we anticipate share repurchases being an important part of our capital allocation strategy. We will continue to evaluate after the completion of the current authorization as we target a 2.5 to 3.5 times rating agency adjusted leverage ratio. In the upcoming quarter, we expect to make an offer to repurchase the 2030 notes as required by the asset sale covenant triggered by the sale of the global products business. For Q1, cash flow from operating activities was $21.9 million, and capital expenditures were $42.3 million, resulting in a negative free cash flow of $20.4 million, consistent with our expectations.

We anticipate the completion of the current authorization in the near term.

Speaker Change: As we have provided before we anticipate share repurchases being an important part of our capital allocation strategy. We will continue to evaluate after the completion of the current authorization as we target at two five to three five times rating agency adjusted leverage ratio.

Speaker Change: In the upcoming quarter, we expect to make an offer to repurchase the 2030 notes as required by the asset sale covenants triggered by the sale of the global products business.

Speaker Change: For Q1 cash flow from operating activities was $21 9 million and capital expenditures were $42 3 million, resulting in negative free cash flow of $24 million consistent with our expectations.

Lori Fleece: CapEx was up modestly over the prior year, and working capital investment increased due to the timing of payment. We continue to have a strong cash position and earned interest income of $8 million during the quarter. I'll now turn it back over to Lori to wrap up. Thanks, Mary.

Speaker Change: Capex was up modestly over the prior year and working capital investment increased due to the timing of payments.

Speaker Change: We continue to have a strong cash position and earned interest income of $8 million during the quarter.

Speaker Change: I'll now turn it back over to Lori to wrap up.

Lori: Thanks, Mary we continued to deliver results consistent with our transition to a high growth retailer driven by growth in both our same store sales and the addition of new stores and we're making progress across all three of our strategic pillars as we wrap.

Lori Fleece: We continue to deliver results consistent with our transition to a high growth retailer, driven by growth in both our same store sales and the addition of new stores, and we are making progress across all three of our strategic pillars. As we wrap, I want to thank our team and our franchise partners for their continued hard work to start fiscal year 2024. Now I'll turn it back over to Elizabeth to begin the Q&A. Thanks, Lori.

Lori: Want to thank our team and our franchise partners for their continued hard work to start fiscal year 2024.

Lori: Now I'll turn it back over to Elizabeth to begin the Q&A.

Elizabeth: Thanks, Laura 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.

Elizabeth Russell: Before we start the Q&A, I want to remind everyone to limit their question to one and a follow-up so that we can get to everyone on the line. With that said, please open the line. Thank you. If you would like to ask a question, please press the star followed by one on your telephone keypad. If you would like to retract your question, please press the star followed by two.

Elizabeth: With that please open the line.

Elizabeth: Thank you if you would like to ask a question. Please press star followed by one on the telephone keypad. If you would like to attract your question. Please press star followed by Tate.

Speaker Change: When the paint question in patients you will starting to send me to directly.

Speaker Change: We ask you please limit yourself to one question I wanted to follow up.

Elizabeth Russell: When preparing to ask your question, please ensure your phone is unmuted locally. We ask you to limit yourself to one question and one follow-up. Our first question today goes to Stephen Zacon of City. Stephen, please go ahead; your line is open.

Speaker Change: Our first question today, guys to that Steven at the kind of city. Steven. Please go ahead. Your line is open.

Steven: Great. Good morning, Thanks, very much for taking my question.

Steven: Our first question was on the ticket versus transaction performance in the quarter could you just elaborate a little bit more how your outlook for the year has changed versus when you spoke to us in November I think it was more 50 50. So just curious there and then along those same lines you had a comment about adjusting pricing in the second quarter.

Elizabeth Russell: Okay, good morning. Thanks very much for taking my question. Our first question was on the ticket versus transaction performance in the quarter. Could you just elaborate a little bit more on how your outlook for the year has changed versus when you spoke to us in November? I think it was more 50-50.

Steven: Could you just elaborate on that also.

Speaker Change: Sure Steve ill start with tick.

Speaker Change: Ticket.

Speaker Change: Did you see in the quarter about 25% of the comp come from transactions.

Lori Fleece: So just curious there. And then, along those same lines, you had a comment about adjusting pricing in the second quarter. Could you just elaborate on that also? Sure, Steve. I'll start with Ticket.

Speaker Change: And we do expect longer term to see a more balanced contribution from transactions versus ticket.

Speaker Change: The first quarter was impacted by a day mixed change that caused just under a 100 basis points of impact on the transaction side. So if you exclude that they mix impact we would have been more like one third coming from transactions and two thirds coming from ticket.

Lori Fleece: We did see in the quarter about 25% of the comp come from transactions, and we do expect longer term to see a more balanced contribution from transactions versus Ticket. The first quarter was impacted by a day mix change that caused just under 100 basis points of impact on the transaction side. So if you exclude that day mix impact, we would have been more like one-third coming from transactions and two-thirds coming from Ticket. Long term, we still expect to see a more balanced approach from transactions and Ticket, but we're continuing to benefit from some pricing changes. Just under half of the ticket portion of our comp store sales growth came from pricing, with just over half coming from premiumization and non-oil change revenue service penetration improvements. So I would tell you that, longer term, I'm still expecting to see more of a balance. Short term, in the quarter, we did see a little bit of a heavier tilt toward Ticket for the quarter. As it relates to the second part of your question, Yeah, I'll just comment first.

Speaker Change: Long term, we still expect to see a more balanced approach.

Speaker Change: From transactions and ticket, but we are continuing to benefit.

Speaker Change: From some pricing changes.

Speaker Change: Just.

Speaker Change: Just under half of.

Speaker Change: The.

Ticket portion of our comp store sales growth came from pricing with just over half coming from premium amortization.

Speaker Change: In.

Speaker Change: Non oil change revenue service penetration improvements.

Speaker Change: So I would tell you that I think longer term I am still expecting to see a more of a balance.

Short term in the quarter, we did see a little bit of a heavier tilt toward ticket for the quarter.

Speaker Change: As it relates to the second part of your question, Yes, I'll just comment first.

Speaker Change: I think when we talked about this year, we said there would long term earlier last quarter. We said long term, we would track we'd be getting a balance between ticket and transaction within fiscal 'twenty. Four we would see an overweight on the ticket side given a number of initiatives that we've been working.

Lori Fleece: I think when we talked about this year, we said there would be a long-term or earlier last quarter, we said long-term, we would be getting a balance between Ticket and transaction. But in fiscal 24, we see an overweight on the Ticket side, given a number of initiatives that we've been working on. Just recall, focus on optimizing discounting, which improves the net price, and also just continued work on NOCR and then the tailwind for premium. As it relates to pricing, Stephen, we continue to benchmark our pricing. And we have multiple pricing tests. And I think our actions are very consistent with what we've been talking about in the last few quarters, which is we look at our pricing by store by region based on competitive dynamics, as well as just based on the acquisitions that we may have done in stores, and we continually adjust our pricing to get to our target rates.

Speaker Change: Just recall focus on optimizing discounting, which improves the net price.

Speaker Change: Also just continued work on LCR and then the tailwind for premium mix.

Speaker Change: As it relates to pricing Stephen.

Stephen: We continue to benchmark, our pricing and we have multiple pricing tests and I think our our actions are very consistent with what we've been talking about in the last few quarters.

Stephen: As we look at our pricing by store by region based on the.

Stephen: Based on that.

Stephen: Competitive dynamics as well as just based on the acquisitions that we may have done in stores and we continually adjust our pricing to get to our target rates.

Stephen: When I say target rates, we have a target pricing list that we're trying to optimize all stores to <unk>.

Lori Fleece: When I say target rates, we have a target pricing list that we're trying to optimize all stores for all three tiers of our oil change services, and we continue to make changes there. Recently, we've been benchmarking, and we added services. And there are a couple of services where we did not take inflationary increases last year because they weren't coming through the supply.

Stephen: All three tiers of our oil change.

Stephen: Services, and we continue to make changes there.

Stephen: Recently, we've been benchmarking.

Stephen: Our added services and there are a couple of services, where we did not take inflationary increases last year, because they werent coming through through the supply and we have recently benchmark.

Lori Fleece: And we have recently benchmarked ourselves relative to others and made some adjustments across all our stores. So those are things that we continue to do. We will continue to do it, and our long-term and current year guidance is between 6% and 9% same-store sales. And we see both this year, tickets being a very good part of that. In future years, we expect tickets to contribute roughly half, and pricing to be a big component of that. Okay, that's all helpful detail. Thanks for that. Just a brief follow-up, then if we stick with game store sales, is there anything to be mindful of from a performance in the second quarter relative to the overall year? I know the one-year comparison is a little bit tougher.

Stephen: Relative to others and made some adjustments across all of our stores. So those are things that we continue to do we will continue to do it.

Stephen: We have.

Stephen: Our long term and current year guidance is between six and 9% same store sales and we see both this year ticket being a very good point part of that in future years, we expect ticket.

Stephen: To contribute.

Stephen: Roughly half and pricing to be a big component of that.

Speaker Change: Okay. That's all helpful detail thanks for that.

Just a brief follow up then if we stick with same store sales is there anything to be mindful of from a.

Speaker Change: Performance in the second quarter relative to the overall year I know the one year compare it's a little bit tougher and then we've heard about some choppy trends across retail in terms of weather, but anything you can say on the second quarter performance relative to the full year would be helpful.

Lori Fleece: And then we've heard about some, you know, choppy trends across retail in terms of weather, but anything you can say on the second quarter performance relative to the full year would be helpful. Yes, Stephen, we certainly saw some choppiness in January and the start of the second quarter, primarily weather-related. You know, I think you're aware that we saw some pretty significant Arctic cold across the country in January that really lasted for a couple weeks.

Speaker Change: Yes, Stephen we've certainly seen some choppiness in January and the start of the second quarter.

Speaker Change: Primarily weather related I think youre aware that we saw some pretty significant Arctic cold across the country.

Speaker Change: In January that really lasted for a couple of weeks.

Speaker Change: Typically our business is non discretionary and so when we see those kind of weather impacts to our business, we typically see pent up demand.

Lori Fleece: Typically, our business is, you know, non-discretionary, and so when we see those kind of weather impacts on our business, we typically see pent-up demand that occurs after that weather pattern clears, and in fact, that's what we're experiencing now with some of the weather-related weakness we saw earlier in the month of January. We've seen that bounce back nicely. So, I would tell you that, you know, there haven't really been any surprises for us in terms of where sales are trending, and we're feeling good about the guidance that we've provided for the full year. Okay, great.

Speaker Change: That occurs after that weather pattern clears and in fact, that's what we're experiencing now.

Speaker Change: With some of the weather.

Speaker Change: Weather related weakness, we saw earlier in the month of January we've seen that bounce back nicely.

Speaker Change: So I would tell you that.

Speaker Change: There.

Speaker Change: It Hasnt really been any surprises for us in terms of where sales are trending and we're feeling good about the guidance that we've provided for the full year.

Speaker Change: Okay, great. Thanks, so much for the detail.

Elizabeth Russell: Thanks so much for the detail. Thank you, the next question goes to Simeon Gutman of Morgan Stanley. Simeon, please go ahead; your line is open.

Speaker Change: Okay.

Speaker Change: Thank you the next question in queue.

Speaker Change: Simeon It gets men of Morgan Stanley Simeon. Please go ahead your line is open.

Elizabeth Russell: All right, guys, this is Michael Kasparnak. Maybe first on unit growth. It was pretty solid in Q1 on both sides, both companies, and franchises. So just curious, you know, visibility for the rest of the year and the pipeline and then any updates that we've talked about in the past about some of the actions you've taken to, you know, further improve visibility in the pipeline on the franchisee side, both with existing franchises and also sourcing new ones. So I just would love an update on how that works. Sure.

Speaker Change: Great Hey, guys. This is Michael Kessler on for Simeon Thanks for taking our questions.

Michael Joseph Harrison: Maybe first on unit growth.

Michael Joseph Harrison: It was pretty solid in Q1 on both.

Both sides company and franchise. So just curious your visibility for the rest of the year and the pipeline and then any updates and we start to think in the past about some of the actions you've taken to <unk>.

Michael Joseph Harrison: Further improved visibility in the pipeline on the franchisee side, both with existing franchisees and also sourcing new ones. So she'll love an update on how that's going.

Speaker Change: Sure. Thanks, Michael we did as I mentioned had a really strong start to 2024 with 38 total new additions in our niche that split between franchise and company.

Lori Fleece: Thanks, Michael. We did, as I mentioned, have a really strong start to 2024 with 38 total new additions and a split between franchise and company. The Q4 typically tends, at least on the acquisition side, to be a strong quarter. I wouldn't say every quarter wins, but calendar Q4 is typically strong as acquisitions tend to try to close out, particularly on the franchise side, where their calendar and fiscal align to the end of the year. So we did expect these. These were in the pipeline. We had full visibility of them.

<unk>.

Speaker Change: The Q4, typically 10 at least on the acquisition side tends to be a strong quarter I wouldn't say every Q.

Speaker Change: Cylinder quarter one.

Speaker Change: But calendar Q4 is typically strong as acquisitions tend to try to close out, particularly on the franchise side, where their calendar and fiscal aligned to the end of the year.

Speaker Change: So we did expect these these were in the pipeline, we had full visibility of them.

Lori Fleece: And it was a really strong start. As you would expect, we very much feel great about the guidance we've given of 140 to 170 for the year, of which 55 to 70 will come from our franchise partners. That should, unlike last year, be more balanced throughout the year, although Q2, January through March, given the weather, you can have a seasonally lower number of new builds or new ads in the quarter. But we expect that to be pretty balanced, and we feel really good about the guidance that we've provided. Now, you mentioned just broadly, you know, we have been very clear in our acceleration of the network to get over 3,500 units. We're going to really increase the number of new units coming on the franchise side. We've been very clear that we're working to get to 150 new units per year by 2027.

Speaker Change: And it was a really strong start you should expect we're very much feel great about the guidance, we've given of 140 to 170 for the year.

Speaker Change: Of which 55% to 70% will come from our franchise partners.

Speaker Change: That should unlike last year b.

Speaker Change: More balanced throughout the year, although Q2 <unk>.

Speaker Change: January through March given the weather.

Speaker Change: You can have the seasonally lower number of new builds or ads in the quarter, but we expect that to be pretty balanced and we feel really good about the guidance range that we've provided.

Speaker Change: Now you mentioned.

Speaker Change: Just broadly we have been very clear in our acceleration of the network to get over 3500 units.

Speaker Change: Going to really increase the number of new units coming on the franchise side, we've been very clear that we're working to get to 150.

Speaker Change: Units per year by 2027, and we continued to make progress against that now that comes from both the existing franchise partners. We have in our conversations with them have been.

Lori Fleece: And we continue to make progress against that. Now, that comes from both the existing franchise partners we have, and our conversations with them have been very positive. And we continue to look for ways that we can support them with more detailed retail analytics, some real estate support, business development, pipeline generation from an M&A perspective, et cetera. And so we feel really good about the lift that we will get from our existing partners. And then the second part is about recruiting, again, just a handful of more scale franchise partners to develop some white space regions or to help transition existing franchise players who are at points in their careers where they want to cash out on the significant wealth that's been created through the franchise that they've built with us and bring in new partners who want to develop the areas that those businesses sit in. Now we did expect that it was going to take time. One thing you've got to line up the transition timing as well as the white space timing with those conversations.

Speaker Change: Very positive.

Speaker Change: And we continue to look for ways that we can support them with more detailed retail analytics, some real estate support.

Business development.

Speaker Change: Pipeline generation from an M&A perspective et cetera.

Speaker Change: And so we feel really good about the ramp that we will get from our existing partners and then the second part is about recruiting again, just a handful of more scale franchise partners to develop some white space regions or to help transition existing.

Speaker Change: Existing franchise players who are at points in their career, where they want to cash out on the significant wealth. That's been created through the franchise that they've built with us.

Speaker Change: And bring in new partners, who want to develop the areas that those businesses sit in now.

Speaker Change: We did expect that was going to take time.

Speaker Change: One is you've got a lineup.

Speaker Change: The transition timing as well as the white space timing with those conversations, but the conversations continue and progress and and again, we feel very good about the progress that we're making.

Lori Fleece: But the conversations continue and progress, and again, we feel very good about the progress that we're making. Thank you. Maybe just a follow-up on capital allocation. I know Q2 will be a big one, the purchase of the notes plus the buyback. I'm sure you're probably thinking through what may happen after that, but given where leverage is today, which is, I think, pretty healthy in the range or maybe at the lower end of the range that you've outlined, is like, I guess I'm curious about the range of options that are on the table, including maybe even re-levering up to accelerate returns once you exhaust the buyback, or is this more conservative, just kind of see What are the decision factors as you approach that post?

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Okay. Thank you and maybe just a follow up on capital allocation and shareholder returns.

It'll be a big one there would be the repurchase of the notes plus the buyback I'm sure you're probably thinking through what may happen after that but given I think where leverages today, which is pretty healthy in the range or maybe at the lower end of the range that you've outlined is like I guess I'm curious kind of the range of options that are on the table.

Speaker Change: <unk>, including maybe even re levering up to accelerate returns once you exhaust the buyback or is this more conservative just kind of see how it plays out just kind of what what.

Speaker Change: What are the decision factors as you as you approach that post Q2.

Mary Meixelsperger: Yeah, Michael, I'd start just in terms of our target leverage ratio, which is an adjusted leverage ratio based on how rating agencies, or S&P, in particular, measure our leverage. And just for everyone's information, if you forgot, the rating agency adjusts for both operating leases as well as employee benefit plan obligations. So when you make those adjustments, the sum of the outstanding liabilities related to those operating leases and pensions is about $400 million, which is about a full turn of leverage.

Speaker Change: Yeah, Michael I'd start just in terms of our target leverage ratio, which is an adjusted leverage ratio based on how rating agencies or S&P in particular.

Speaker Change: Measures.

Speaker Change: Our leverage and just for <unk>.

Speaker Change: Everyone's information.

Speaker Change: If you forgot the rating agency adjusted for both operating leases as well as employee benefit plan obligations. So when you make those adjustments the some of the outstanding liabilities related to those operating leases and pensions is about $400 million.

Speaker Change: Which is about a full turn.

Speaker Change: Of leverage.

Mary Meixelsperger: We are actually just slightly above the high end of our targeted leverage range. So our first capital allocation priority will be to get us within that range that we've targeted, and then we'll look at using the balance sheet as well as our operating cash flows to provide further returns to shareholders. My expectation is it'll take us a little bit of time in the short term here in the next couple quarters to get that range, that target leverage range, back below the high end of our expectations. And then, from there on, I would expect that we would again be focused on capital allocation to return cash to shareholders via share repurchases once we're back within that targeted leverage ratio. Thank you, the next question goes to Daniel Imbro of Stephens Inc. Daniel, please go ahead; your line is open. Yeah, hey, good morning, everybody. Thanks for taking our questions. Morning, Mayor.

Speaker Change: We actually are just slightly above the high end of our targeted leverage range.

Speaker Change: So our first capital allocation priority will be to get us within that range that we've targeted.

Speaker Change: And then we'll look at.

Speaker Change: Using the balance sheet as well as our operating cash flows.

Speaker Change: Provide further returns to shareholders my expectation is it'll take us a little bit of time short term here in the next couple of quarters to get that range.

Speaker Change: Target leverage range back into below the high end of our expectations.

Speaker Change: And then of what we're targeting and from there on I would expect that we would.

Speaker Change: Again be focused on.

Speaker Change: Capital allocation to return.

Speaker Change: Cash to shareholders via share repurchases.

Speaker Change: Once we're back within that targeted leverage ratio.

Speaker Change: Okay, great. Thanks.

Speaker Change: Thanks, guys. Thank you.

Speaker Change: Okay.

Speaker Change: Thank you. The next question goes to Daniel <unk> of Stephens, Inc. Daniel. Please go ahead. Your line is open.

Daniel: Hey, good morning, everybody. Thanks for taking my questions.

Daniel: Good morning.

Mary Meixelsperger: Maybe we want to start on gross margins this morning. We saw a little bit of a larger step down, maybe 4Q to 1Q on the growth margin side than we have seasonalally in the past, especially with the easy comparison last year. Can you just talk through maybe the drivers of growth margin, like labor, and how you're thinking about that line item for the rest of the year as the comps maybe improve with easy comparisons? Yeah, absolutely, Daniel.

Daniel: Gross margins.

Daniel: Good morning, we saw a little bit of a larger step down maybe <unk> on the gross margin side, then we have seasonally in the past, especially with the easy comparison last year can you just talk through maybe the drivers of gross margin like labor and how youre thinking about that line item for the rest of the year.

Daniel: Maybe improve with easing comparisons.

Speaker Change: Yes, absolutely Daniel I will tell you.

Mary Meixelsperger: I will tell you, you know, we saw year-over-year gross margin leverage of about 40 basis points. And if you take out the depreciation impact, we actually saw 140 basis points of leverage before the impact of higher levels of depreciation. And that's certainly one of the things that impacted margins sequentially from Q4 to Q1 as well, the depreciation impact. We were pleased with the labor leverage we saw in the quarter.

Speaker Change: We saw.

Speaker Change: Year over year gross margin leverage of about 40 basis points and if you take out the depreciation impact we actually saw a 140 basis points of leverage before the impact of higher levels of depreciation and that's certainly one of the things that impacted.

Speaker Change: Arjun sequentially.

Speaker Change: From Q4 to Q1 as well.

Is the depreciation impact.

Speaker Change: We're pleased with the labor leverage we saw in the quarter.

Mary Meixelsperger: You know, we saw some very meaningful labor leverage that was offset modestly by some operating expense deleverage that's really timing-related in the quarter. You know, it is a seasonally low quarter from a sales perspective, and we also, you know, have done a better job, if you would, of managing our maintenance expenses throughout the year. We also, with new stores opening, you know, saw some deleverage from those new stores as well. So there were no surprises for us in terms of how we managed, I would say, for the balance of the year. We will likely continue to see leverage at the margin line, although I wouldn't necessarily expect to see as much labor leverage as we saw in the first quarter. Yeah, Danny, I'll just add, You know, Q1.

Speaker Change: We saw some very meaningful labor leverage.

Speaker Change: That was offset modestly from by some operating expense deleverage.

Speaker Change: It's really timing related in the quarter.

Speaker Change: It is a seasonally low quarter from a sales perspective.

Speaker Change:

Speaker Change: And we also.

Speaker Change: We have done a better balancing if you would of managing our maintenance expenses throughout the year. We also with new stores opening saw some deleverage from those new stores as well.

Speaker Change: So there was.

Speaker Change: No surprises for us in terms of how we managed I would say for the balance of the year.

Speaker Change: We will likely continue to see.

Leverage at the margin line, although I wouldn't expect.

Speaker Change: To see as much labor leverage as we saw in the first quarter necessarily.

Speaker Change: Yeah, Danielle I'll just add.

Speaker Change: Q Q1.

Lori Fleece: We have to manage our labor, and there's always a step down as folks transition from summer jobs back into college. And then as our volume starts to drop, we have to manage that labor pretty extensively. So when you see the difference between Q4 and Q1, some of that is literally just the leverage of the cars coming through the stores and how we balance labor. But the year-over-year comparison from a margin perspective was really strong, and our teams have made a lot of progress since last year.

Speaker Change: We have to manage our labor and there is always a step down as folks transition from the summer jobs back into college.

Speaker Change: And then as our volume starts to drop we have to manage that labor.

Speaker Change: Extensively so when you see the difference Q4 to Q1 some of that is literally just the leverage of the cars coming through the stores and how we balance.

Speaker Change: Labor, but the year over year compare from a margin perspective was really strong and our teams have made a lot of progress since last year we.

Lori Fleece: We would have talked about the fact that we were focused on labor management and optimization and better scheduling, as you'll recall from previous earnings calls. And really, a lot of the improvement year-over-year is a testament to that, although some of those low-hanging fruit improvements happened in Q2. So the year-over-year comparison from a labor management standpoint won't be quite as strong because you'll have started to see some of the labor impact hitting in Q2. So this is the last cycle.

Speaker Change: We would have talked about the fact that we were focused on labor management and optimization and better scale scheduling as you'll recall from previous.

Earnings calls.

Speaker Change: And really a lot of the improvement year over year is a testament to that although some of those.

Speaker Change: Low hanging fruit improvements happened in Q2, so the year over year compare from a labor management won't be quite as strong because you'll you'll.

You'll have started to see some of the labor impact hitting in Q2. So this is the last.

Lori Fleece: Though we still have opportunities, and we continue to manage the labor line, which is our largest cost of sales item. And the biggest thing we're proud of is that our attrition rates are so low. As I mentioned, we've got the lowest attrition rate ending the quarter that we've had since pre-COVID, which is really a testament to the work our team's been doing across the recruiting side and setting expectations and how we attract talent, and also how we onboard and train the talent to ensure that we can keep the technicians that we're training in the stores for longer. And those things are the things that we're really proud about.

Speaker Change: Last cycle, though we still have opportunity and we continue.

Speaker Change: To manage the labor line, which is our largest cost of sales items.

Speaker Change: And the biggest thing we're proud of is that our attrition rates are so low as I mentioned.

Speaker Change: We've got the lowest attrition rate and.

Ending the quarter that we've had since pre COVID-19, which is really a testament to the work our team has been doing across the recruiting side and setting expectations in how we attract talent.

Speaker Change: <unk> also how we onboard and train the talent.

Speaker Change: To ensure that that we can keep the technicians that were training in the stores for longer.

And those things are the things that we're really proud about and then our central ops team that we've put in place has really been driving.

Lori Fleece: And our central operations team that we put in place has really been driving some of the tools that have enabled them to manage that so effectively. Appreciate all the color and then maybe a follow up on the comp growth outlook. So you said there was 100 basis points of a negative impact from the calendar in the fiscal first quarter that will improve. I guess can you remind us how winter weather historically should impact non oil change revenue?

Speaker Change: With operations some of the tools that have enabled them to manage that.

Speaker Change: So effectively.

Speaker Change: Understood I appreciate all the color and then maybe a follow up on the comp growth outlook. So you said there was a 100 basis points of negative impact from the calendar.

Speaker Change: In the fiscal first quarter that will improve I guess can you remind us how winter weather historically should impact non oil change revenue would you see a higher service battery attachment here in the second quarter, where that becomes more of a positive tailwind for for the ticket growth just trying to think about what are the impact as you can see that pent up demand come back into the stores.

Lori Fleece: Would you see a higher service and battery attachment here in the second quarter, where that becomes more of a positive tailwind for ticket growth? Just trying to think about what are the impacts as you see that pent-up demand come back into the stores? Thanks.

Lori Fleece: Yep, great question, Daniel. Battery sales typically peak when it gets cold, when the cold weather really sets in. Normally, we see that in December. But this December, it was fairly muted because it was a milder December this year for the majority of our regions.

Speaker Change: Yes, Great question, Daniel battery sales typically tip up when it when you get cold when the cold weather really certain normally we see that in December.

Speaker Change: And in December it was fairly muted because it was a milder December this year for the majority of our regions.

Lori Fleece: But in January, we definitely have, you know, I think all of retail was impacted by pretty broad-based Arctic cold coming in and making people not want to go out and schools being closed, etc. That's actually created some of that pent-up battery demand pushing into January and February, as they get back in their cars and realize that their battery needs to be replaced. So we are, we do see those seasonal things. Battery is a small piece of our overall ticket, as an average, but we do see those things and, as we would have expected with the colder weather. Understood. Thanks for all the color and best of luck.

Speaker Change: But in January we definitely have I think all of retail was impacted by pretty broad based Arctic cold coming in.

Speaker Change: And making people not wanting to go out and schools being closed et cetera.

Speaker Change: That's actually created we can see.

Speaker Change: Some of that pent up battery demand pushing into January and February.

Speaker Change: As they get back in their cars and realize that their battery needs to be replaced. So we are we are we do see those seasonal things battery is a small piece of our overall ticket as an average, but we do see those things and.

Speaker Change: And as we would have expected with the colder weather.

Speaker Change: Understood. Thanks for all the color and best of luck.

Lori Fleece: Thank you, and the next question goes to Kate McShane of Goldman Sachs. Kate, please go ahead, your line is open. Hi, good morning. Thanks for taking our question. We wanted to ask about your initiative on reducing costs of the new builds and where you are, I guess, in that process, and how we should think about unit economics going forward as a result of this initiative. Thanks, Kate.

Speaker Change: Thank you and the next question goes to Kate Mcshane of Goldman Sachs. Please go ahead. Your line is open.

Kate Mcshane: Hi, good morning, Thanks for taking our question.

Kate Mcshane: Wanted to ask about your initiative on reducing costs of the new builds and where you are I guess in that process and how we should think about unit economics going forward as a result of this initiative.

Lori Fleece: As we mentioned in our last earnings, we've been working internally on the design of our stores and taking out elements of the design that add cost but don't add value. Some of those things will take time to cycle through. We're in the process now of reviewing some of the opportunities with our franchise partners and getting and doing some comparisons around build costs and site costs that they've had. So what I would say is we still believe there's opportunity. Things that we can implement, we already are.

Kate Mcshane: Thanks, Kate as we mentioned in our last earnings we've been both working internally on the design of our stores and taking out elements of the design that add costs that don't add value. Some of those things will take time to cycle through.

Kate Mcshane: We're in the process now of reviewing some of the opportunities with our franchise partners and getting and doing some compares around the build cost and site costs that they've had.

Kate Mcshane: What I would say is we still believe there is opportunity things that we can implement we are you are we are implementing things to reduce the cost of converting an acquisition store to available lean store as an example.

Lori Fleece: We are implementing things to reduce the cost of converting an acquisition store to a Valvoline store, as an example. Some of those things will start to show in our capital costs for new builds. Sorry, the capital costs for conversions for new units.

Kate Mcshane: Some of those things will start to show in our capital cost for new builds but.

Kate Mcshane: Sorry, the capital costs for conversions for new units.

Lori Fleece: But the new builds will take time to implement, and we'll share more when we have locked that down and can definitively share the difference or the delta that should be expected. But there's opportunity, and the teams are working to work with the contractors as well as the permitting companies and the landlords to line everything up so we can capture it. And in terms of unit economics, Kate, with the current construction costs, we continue to see mid-teens returns substantially higher than our weighted average cost of capital and still feel really good about the relative unit economics of the ground up or new builds that we're doing from a company perspective as well. We're continuing to see growth in new builds from our franchise partners as well. So any benefit we receive from lower overall capital costs will simply help us to increase that return even further. Thank you. Thank you. The next question goes to Brett Jordan of Jefferies. Brett, please go ahead; your line is open.

But the new builds will take us time to implement and and we'll share more when we have locked that down and could can definitively share the difference or the delta that should be expected.

Kate Mcshane: But there's opportunity and the teams are working.

Kate Mcshane: To work with the contractors as well as the permitting companies.

And the landlords too.

Kate Mcshane: To line everything up so we can capture it and in terms of unit economics Kate.

Kate Mcshane: With the with the current construction costs, we continue to see mid teens.

Kate Mcshane: Returns substantially higher than our weighted average cost of capital and still feel really good about the relative unit economics of the.

Kate Mcshane: The ground up for new builds that were doing from.

Kate Mcshane: From a company perspective, as well, where we're continuing to see growth in new builds from our franchise partners as well so.

Kate Mcshane: Any benefit we receive.

From lower overall capital costs will simply help us to increase that return even further.

Kate Mcshane: Yes.

Speaker Change: Thank you.

Speaker Change: Thank you the next question.

Speaker Change: Jordan of Jefferies. Please go ahead your line is open.

Lori Fleece: Hey, good morning. Could you give us any updates on the non-oil change offerings, you know, what's been particularly successful, or what you see sort of adding to that product list? Sure. On the non-old change revenue, really, the performance year over year is about having a more tenured team in the store that knows how to sell the product and just getting more consistent with how that service is presented and performed. So we continue to see gains as we focus on training, making sure the equipment to do the service is updated in the store and is available to be used, and supply chain. We have had supply chain issues, as you know, over the past several years post-COVID, and just getting our supply chain back in line so we have the right air filters for all the vehicles that we serve, the right cabin air filters, etc. And then process execution, so making sure that the team is trained and understands why the service is necessary.

Hey, good morning.

Jordan: Can you give us any updates on the non oil change offerings whats been particularly successful or what do you see sort of adding to that product.

Jordan: Sure.

Jordan: On the non oil change revenue.

Speaker Change: Really the performance year over year is about having a more tenured team in the store that knows how to sell the product.

Speaker Change: And just getting more consistent on how that services presented and performed.

Speaker Change: So we continue to see gains as we focus on training, making sure the equipment to do the service is updated and the store and is available to be used.

Speaker Change: Supply chain, we have had supply chain issues as you know over the past.

Speaker Change: Every year is post COVID-19 and just getting our supply chain back in line. So we have the right air filters for all the vehicles that we serve the right cabin air filters et cetera.

Speaker Change: And then process execution, so making sure that the team is trained and understands why the services necessary.

Lori Fleece: And when we quartile our stores, we know we have opportunity. The top quartile stores perform 50% better from a non-old change revenue ticket contribution, roughly double, or roughly 50% better. And so part of it is, how do you get the training and the tools and rise up the back end of our store base to perform like the top quartile? Now, the car park is aging, which is a tailwind given many of our OEM recommended services become more relevant with the mileage of the vehicle going up. So, you know, really what we see is visuals, so things like Wiper Blades, cabin air filters, air filters, those are the things where we can visually show the customer that they need to be replaced.

Speaker Change: And when we core tile our stores, we know we have opportunity there.

Speaker Change: The top quartile stores perform 50% better from a non oil change revenue ticket.

Speaker Change: Contribution roughly double.

Speaker Change: Roughly 50% better and so part of it is how do you do the training and the tools and rise up the backend of our store base to perform like the top quartile.

Speaker Change: Now the car park is aging.

Speaker Change: Which is a tailwind given many of our OEM recommended services become more relevant with the mileage of the vehicle going up so really what we see is visuals, so things like wiper blades.

Speaker Change: Cabin Air filters air filters those are the things we're visually we can show the customer that they need to be replaced that's just basic process execution and supply chain and that's where we see a lot of improvement.

Lori Fleece: That's just basic process execution and supply chain management, and that's where we see a lot of improvement. When it comes to OEM services, it's about the tenure of the team, and it's about the equipment in the store. And those are the things that we've been making sure that our maintenance team, for example, is ahead of. We look for breaks, we look for breakdowns, break, break; we break down the barriers, if you will, to what is preventing us from servicing a vehicle. And when we find those opportunities, we either focus on the training or the things necessary to overcome those barriers. For example, every time a customer comes in, part of our 18-point check is a battery test, and this requires us to use a battery tester which we put on the vehicle to read the health of the battery.

Speaker Change: When it comes to OEM services, it's about the tenure of the team and it's about the equipment in the store and those are the things that we've.

Speaker Change: And then making sure that our maintenance team for example is ahead of us.

We look for break we look for breakdown break break we break down the barriers. If you will to what is preventing us from servicing of vehicles and and when we find those opportunities we either focus on the training or the things necessary.

Speaker Change: Sorry to overcome those barriers for example.

Speaker Change: Every time, a customer comes in part of our 18.

Speaker Change: $18 check is a battery test.

Speaker Change: And this requires us to use a battery tester, which we put out in the vehicle to read the health of the battery.

Lori Fleece: Now... We have not been as consistent in testing. And what we've learned is that a customer typically doesn't buy the battery on the spot. They actually take our advice and then return to us, either because they may have had issues with their battery started, and we were the one to tell them that they had a battery issue.

Speaker Change: Now.

Speaker Change: We have not been as consistent in testing.

Speaker Change: And what we've learned.

Speaker Change: Is that a customer typically doesn't buy the battery on the spot they actually take the advice and then returned to us either because they may have had issues with their battery started and we were the one to tell them that they had a battery issue or they may go out and and determine whether or not our pricing is competitive.

Lori Fleece: Or they may go out and determine whether or not our pricing is competitive, which it is very competitive, and then they come back to us for just the battery service at another time. We also found that our battery testers need to be placed on a specific part of the battery.

Speaker Change: <unk>, which is very competitive.

Speaker Change: And then they come back to us for just the battery service at another time.

Speaker Change: We also found that our battery testers.

Speaker Change: Need to be placed in a specific part on the battery and the newer vehicles have a plastic casing, where that can get in a way with a good test and so when we find those issues, we update training and.

Lori Fleece: And the newer vehicles have a plastic casing that can get in the way of a good test. And so when we find those issues, we update training, and we make sure we have an online training module that goes out that all of our company-operated and franchise-operated store team members need to go through so that they actually know how to attach those battery testers in some of the newer vehicles. When I say newer, I mean five years or younger; five or six years old or younger.

Speaker Change: And we make sure we have online training.

Speaker Change: Module that goes out that all of our company operated and franchise operated store team members need to go through so that they actually know how to attach those battery testers in some of the newer vehicles and when I say newer I mean, five years or younger five or six years or younger.

Lori Fleece: So those are the things that we're doing on nano change revenue. And I would just say we still have some while some of the improvements we've made, I would call them hanging fruit. We still have a lot of opportunity, and it's just the basic disciplines. Okay. Great. And then on regional performance, was there any dispersion to note, and I guess maybe a spread between softer regions versus stronger regions in the complex? Yeah, no, there's something that we do need to look at.

Speaker Change: So those are the things that we're doing and nano change revenue and I would just say, we still while some of the improvements we've made I would call low hanging fruit, we still have a lot of opportunity and it's just the basic disciplines.

Speaker Change: Okay, Great and then on regional performance was there any dispersion.

Speaker Change: Of note.

Speaker Change: Yes, maybe a spread between softer regions versus stronger regions on the call.

Speaker Change: Yeah. No. This is something that we do look at obviously weather can in this time of year can can slide volume car volume around based on regional weather patterns, but in general we don't see any significant differences across the U S and Canada in <unk>.

Lori Fleece: Obviously, weather can, in this time of year, slide volume, car volume, around based on regional weather patterns. But in general, we don't see any significant differences across the US and Canada in terms of performance. We also look for demographics around a store. We look for customer patterns. And we see things really staying fairly consistent, with the exception of when weather may push or slide customers from coming in from one week to the next. But other than that, there are no significant or material differences.

Speaker Change: <unk> performance.

Speaker Change: We also we look for demographic demographics around a store, we look for customer patterns, and we see things really staying fairly consistent with the exception of win whether may push or slide out.

Speaker Change: Customers from coming in.

Speaker Change: From one week to the next but other than that no significant or material differences.

Speaker Change: Okay, great. Thank you.

Lori Fleece: Great, thank you. Thank you, and as a reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypad. And our next question goes to David Lance of Wells Fargo. David, please go ahead; your line is open.

Speaker Change: Mhm.

Speaker Change: Thank you and as a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad.

Speaker Change: And our next question goes to you David Lance of Wells Fargo. David. Please go ahead. Your line is open.

Elizabeth Russell: Hey, good morning, guys. Thanks for taking my question. So I was just curious if you'd walk through the building blocks to this 6 to 9% system-wide comp outlook and size some of the expected benefits from non-oil change revenues and premiumization. Yeah, in the building blocks from a same-store sales perspective, we saw from a ticket perspective, we saw the benefits from premiumization and non-oil change revenue, as I had mentioned. We also saw benefits from price. And then, on the transaction side, we certainly benefited from the expansion of our customer base, as well as a nice benefit from miles driven, although a lesser benefit than what we saw in the expansion of our customer base. And then we saw that just under 100 basis points of unfavorable impact from the day mix on the transaction side.

David Lance: Hey, good morning, guys. Thanks for taking my question. So I was just curious if you could walk through the building blocks to the 6% to 9% system wide comp outlook. Some of the expected benefits from an oil change revenues and premium position.

David Lance: Yeah.

David Lance: The building blocks from a same store sales perspective.

David Lance: We saw from a.

David Lance: Ticket perspective, we saw the benefits from premium position in non oil change revenue as I had mentioned we also saw.

David Lance: Benefit from price.

David Lance: And then on the transaction side.

David Lance: We certainly benefited from expansion of our customer base.

David Lance: As well as a nice benefit from miles driven although the lesser benefit than what we saw in the expansion of the customer base and then we saw that just under 100 basis point impact of unfavorable impact from the <unk> on the transaction side.

Elizabeth Russell: So again, on the ticket, it was premiumization, non-oil change revenue, penetration improvements, and then pricing, which includes some improvements in discounting that we saw for the quarter, in addition to price increases that we took as well. And of course, all of those are across the system from a system-wide same-store sales benefit. And then I think I would just add David, oops, sorry David.

David Lance: So again on ticket it was premium amortization non oil change revenue penetration improvements and then pricing, which includes some improvements and discounting that we saw for the quarter.

David Lance: In addition to price increases that we that we took as well and of course all of those are are across the system from a system wide same store sales benefit.

David Lance: Okay.

Speaker Change: And then just add David Oops, sorry, David sorry.

Mary Meixelsperger: I was just going to add, as you think about the guidance that we've provided in the 6 to 9% for the year, we said that that's going to be, you know, more skewed towards ticket revenue but more balanced than what we saw in the last year. And as you think about that, we have premiumization, which has been consistently driving between 100 and 150 basis points. We have NOCR, which has been driving 100 to 150 basis points. And then you've got pricing, which adds to the ticket inclusive of any optimization of discounting.

David Lance: I was just going to add as you think about the guidance that we've provided in the 6% to 9% for the year.

David Lance: We've said that that's going to be.

David Lance: Yeah.

David Lance: More skewed towards ticket, but more balance than what we saw in the last year.

David Lance: And as you think about that we have premium innovation, which.

David Lance: <unk> has been consistently driving between 100 and 150 basis points.

David Lance: We have an OCR, which has been driving a 110 or 50 basis points.

David Lance: And then you've got pricing, adding to the ticket.

David Lance: Inclusive of any optimization of discounting and then you've got the transaction increase so when you look at all those variables.

Mary Meixelsperger: And then you've got the transaction increase. So when you look at all those variables, you can see why Ticket will be a slightly higher contributor this year. But overall, really feel strong about the 6 to 9% system-wide same-store sales group. Got it. Okay, that's helpful.

David Lance: You can see why ticket will be a slightly higher contributor.

David Lance: In this year, but overall.

David Lance: Really.

David Lance: Strong about the 6% to 9%.

David Lance: System wide same store sales growth.

Speaker Change: Got it Okay. That's helpful. And then you mentioned that the fleet business contributed to comps in the quarter. I was just curious if you could give a few more specifics around there in terms of top line performance versus the chain average and any account wins that you had in the quarter.

Mary Meixelsperger: And then you mentioned that the fleet business contributed to comps in the quarter. I was just curious if you could give a few more specifics around there in terms of, you know, top line performance versus the chain average and any account wins that you had. Sure. We haven't been reporting fleet out specifically on a quarter-to-quarter basis.

Speaker Change: Sure.

Speaker Change: We don't we haven't been reporting fleet out specifically on a quarter to quarter basis, I can say that we continue to see great opportunity and the.

Mary Meixelsperger: I can say that we continue to see great opportunity, and our fleet business is growing both on the ticket side as well as on the vehicle served per day side faster than our overall business. So it's definitely contributing to both the non-old-change revenue growth, the premium mix, as well as the transaction growth from a same-store sales perspective.

Speaker Change: Our fleet business is growing both on the ticket side as well as on the vehicle serve per day side faster than our overall business. So it's definitely contributing to.

Speaker Change: Both the nano change revenue growth.

Speaker Change: Premium mix as well as the transaction growth.

Speaker Change: From a same store sales perspective.

Elizabeth Russell: That's helpful. Thank you, the next question goes to Jim Chartier of Moness, Crespi, and Hart. Jim, please go ahead; your line is open.

Speaker Change: Got it Thats helpful.

Speaker Change: Okay.

Speaker Change: Thank you. The next question you guys, Jim Chartier of <unk> Crespi and Hot Kim. Please go ahead. Your line is open.

Jim Chartier: Good morning, Thanks for taking my questions.

Elizabeth Russell: Thank you. Thank you, Morgan. The day-mix pressure in the first quarter, is that going to be positive in the second quarter, or is that more spread out across? No, it'll reverse the positive in the second quarter.

Jim Chartier: First.

Jim Chartier: The mix pressure in first quarter is that going to be positive the second quarter was that more spread out across the year.

Jim Chartier: No it will reverse the positive in the second quarter, we will see a benefit from <unk> in Q2.

Mary Meixelsperger: We'll see a benefit from Damix in Q2. Okay, great. And then you mentioned the implementation of a new CRM system. Can you help us understand what the incremental capabilities of this system are and then, you know, where you see the biggest opportunities in terms of driving transactions? So I'll cover, I think your question on CRM is specific to fleet, but your margin and transaction, was that also specific to fleet or more broad? Uh, I guess it was on the new CRM system, so it was, yeah, I don't know.

Speaker Change: Okay, great. Thank you.

Speaker Change: You mentioned the implementation of a new CRM system.

Speaker Change: Help us understand what the incremental capabilities of the system are and then where you see the biggest opportunities in terms of driving transactions and margins. Thanks.

Speaker Change: So I'll cover I think your question on CRM is specific to fleet, but your margin and transaction was that also specific to fleet are more broad.

Speaker Change: I guess is on <unk>.

Speaker Change: CRM system.

Speaker Change: On the fleet.

Speaker Change: Okay.

Speaker Change: So from a CRM system as we separated from global products, we used to share a CRM system with them and we use it for many many different aspects of our business won all of our business development.

Lori Fleece: Okay, so from a CRM system, as we separated from global products, we used to share a CRM system with them. And we use it for many, many different aspects of our business. One, all of our business development work, you know, in cutting in contact with potential new franchisees, as well as independents. You know, we use that system.

Speaker Change: Work in.

Speaker Change: <unk>.

Speaker Change: In contact with potential new franchisees as well as independents.

Speaker Change: We use that system and so they also converted but on the fleet side.

Lori Fleece: And so they also converted, but on the fleet side. We have an inside sales team that is constantly outreaching. We have marketing that goes out when customers can come directly, or we can approach customers that we get. And it allows them to be very efficient.

Speaker Change: We have an inside sales team.

Speaker Change: It is constantly out reaching we are marketing that goes out one customers can come directly or we can approach customers.

Speaker Change: That we get and it allows them to be very efficient. So from an inside sales standpoint that system and I think there are some new capabilities relative to the old system, we had because it's been more built for our use.

Lori Fleece: So from an inside sales standpoint, that system, and I think there are some new capabilities relative to the old system we had because it's been built more for our use. And so I think it will create more efficiency in our inside sales team, which allows us to sign up and follow up with existing customers, sign up new fleet accounts, and follow up with existing fleet accounts more efficiently and keep track of all of those. And as our fleet customer base grows, you can imagine how important a CRM system is as we do account management, as well as follow up on all leads for new fleet accounts. So it's really going to make our team more efficient and allow them to do more sales and more account management, you know, more efficiently.

Speaker Change: And so I think it will create more efficiency in our inside sales team, which allows us to sign up and follow up with existing sign up new fleet accounts.

Speaker Change: And follow up with existing fleet accounts.

Speaker Change: More efficiently and keep track of all of those and as our fleet customer base grows.

Speaker Change: Can imagine how important CRM system is as we do account management.

Speaker Change: As well as following up on all leads.

Speaker Change: For new fleet accounts, so it's really it will make our team more efficient and allow them to do more sales.

Speaker Change: And more account management.

Speaker Change: More efficiently.

Speaker Change: Okay.

Lori Fleece: And then, you know, we're. Transactions are becoming a bigger part of the comp going forward, which kind of implies an acceleration and growth in transactions. What do you see as the biggest drivers for Accelerate? So I think on a same source and an overall perspective, obviously, as we grow the network, that's going to drive transaction growth, but on a same store sales perspective, really the things that we're doing around marketing optimization and really leaning into best practices from a high-growth retail perspective, not just looking at what's done in our category, but what's being done in high Two is Fleet.

Speaker Change: And then.

Speaker Change: Transactions, becoming a bigger part of the comp going forward.

Speaker Change: The plaza and acceleration in growth in transactions.

Speaker Change: What do you see as the biggest drivers to accelerate the transaction group.

Speaker Change: Yeah.

Speaker Change: So I think kind of same stores and an overall perspective, obviously as we grow the network that's going to drive transaction growth, but on a same store sales perspective.

Speaker Change: Really the the thing.

Speaker Change: Things that we're doing around marketing optimization and.

Speaker Change: And really leaning into best practice from our high growth retail perspective, not just.

Speaker Change: Looking at what's done in our category, but what's being done in high growth retail more broadly and using some of those tactics will drive customers to US fleet, we expect fleet to continue to be a contributor to transaction growth.

Lori Fleece: We expect Fleet to continue to be a contributor to transaction growth, and the other piece, Laurie, is really just a continued benefit from Miles Driven. We'll continue to see, you know, a lesser but continuing benefit as we see miles driven continue to increase. Yep. And the last one I think to add is around speed of service. So we continue to look at our process and the technology that we use in stores to make our process and our best-in-class customer experience easier and faster to deliver. And we know that if we can take a minute out of that service time, it's more cars that can go through the bays during peak periods. And so that, we believe, will continue to be an important part of our process and give us a tailwind on transactions going forward. So it's all four of those things.

Speaker Change: And the.

Speaker Change: And the other piece Laurie is really just continued benefit from miles driven.

Speaker Change: We will continue to see.

Speaker Change: Lesser but continuing benefit as we see miles driven continue to increase and the last one I think to add is.

Speaker Change: Around the speed of service. So we continue to look at our process and the technology that we use in stores to make our our process and our best in class customer experience easier and faster to deliver and we know that if we can take a minute out of that service.

Speaker Change: Time, it's more cars that can go through the base during peak periods and so that we believe will continue to be.

Speaker Change: Provide us a tailwind on transactions going forward. So it's all four of those things.

Lori Fleece: Aunt Jim that will drive the transaction side. The Ellis Productions Company, 2020. Thank you, we have no further questions. I'll now hand back to Elizabeth for any closing comments. Thank you all for your time today and for your thoughtful questions. We look forward to our ongoing discussions. This concludes our call for today. Thank you, this now concludes today's call. Thank you all for joining us, you may now disconnect your line.

Speaker Change: Jim that will drive the transaction side.

Great: Great. Thank you.

Great: Yeah.

Great: Thank you we have no further questions I will now how 'bout to Elizabeth for any closing comments.

Elizabeth: Thank you all for your time today and for your thoughtful questions. We look forward to our ongoing discussions. This concludes our call for today.

Elizabeth: Yeah.

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

Elizabeth:

Yeah.