Q2 2024 Valvoline Inc Earnings Call

Elliot: Hello, and welcome to Valvoline's 2Q 2024 earnings conference call and webcast. My name is Elliot, and I'll be coordinating your call today. If you would like to register a question during today's event, please press star followed by one on your telephone keypad. And I'd like to hand over to Elizabeth Russell. The floor is yours. Please go ahead.

Hello, and welcome to Valvoline to Transport earnings Conference call and webcast. My name is and I'll be coordinating your call. Thanks.

Elizabeth Russell: If you would like to register a question during today's events. Please press star followed by one on your telephone keypad.

Elizabeth Russell: I'd now like to hand over to Elisabeth Russell the floor is yours. Please go ahead.

Elizabeth Russell: Thank you. Good morning, and welcome to Valvoline's second quarter fiscal 2024 conference call and webcast. This morning, Valvoline released results for the second quarter and did March 31st, 2024. 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 Flees, our CEO and president, and Mary Meixelsperger, our CFO.

Elizabeth Russell: Thank you good morning, and welcome to Valvoline second quarter fiscal 'twenty 'twenty four conference call and webcast.

Elizabeth Russell: This morning, Valvoline released results for the second quarter ended March 31st 2024.

Elizabeth Russell: 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.

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

Mary E. Meixelsperger: On this morning's call is largely our CEO and president and my remarks, Louis Berger our CFO.

Unknown Executive: 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 and are subject to certain risks and uncertainties that may cause actual results to differ materially from such statements. Valvoline assumes no obligation to update any forward-looking statements unless required by law.

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

Unknown Executive: 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.

Unknown Executive: But we assume no obligation to update any forward looking statements unless required by law.

Unknown Executive: In this presentation and in our remarks, we will be discussing our results on an adjusted non-gas basis, unless otherwise noted. Non-CAP results are adjusted for key items which are unusual, non-operating, 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.

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

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

Unknown Executive: We believe this approach enhances the understanding of our ongoing business.

Unknown Executive: A reconciliation of our adjusted non-GAAP results to amounts reported under GAAP and a discussion of management's use of non-GAAP key business measures is included in the presentation appendix.

Unknown Executive: 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 second quarter, and Mary will then cover our financial results. With that, I will turn it over to Lori.

Unknown Executive: The information provided is used by our management and may not be comparable to similar measures used by other companies.

Lori: As a reminder, the retail services business represents the company's continuing operations in the form of a global product segment is classified as discontinued operations for the purposes of that report.

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

Lori A. Flees: Thanks, Elizabeth, and thank you all for joining us today. For the second quarter of 2024, we saw growth at the top line across the network, with system-wide store sales growing over 13% to $746 million. Profitability was strong, with adjusted EBITDA improving 21% to $105 million and adjusted EPS improving over 60% to $0.37 per share. We added 38 net new stores to the network this quarter, with 14 coming from franchise. This brings our year to date additions to 76 in total, with 33 from franchise.

Lori: Thanks, Elizabeth and thank you all for joining us today.

Lori A. Flees: For the second quarter of 2024, we saw growth at the top line across the network with system wide store sales growing over 13%.

Lori A. Flees: Two $746 million.

Lori A. Flees: <unk> ability was strong with adjusted EBITDA, improving 21% to $105 million and adjusted EPS, improving over 60% to 37 cents per share.

Lori A. Flees: We added 38 net new stores to the network this quarter with 14 coming from franchise. This brings our year to date additions to 76 in total with 33 from franchise.

Lori A. Flees: Also this quarter, we purchased approximately 1 million shares, returning just over $40 million to shareholders through share repurchases. This completes the $1.6 billion share repurchase authorization, well ahead of the 18 month commitment we made at the time we closed the sale of the global products business.

Lori A. Flees: Also this quarter, we purchased approximately 1 million shares returning just over $40 million to shareholders through share repurchases.

Lori A. Flees: This completes the $1.6 billion share repurchase authorization well ahead of the 18 month commitment we made at the time, we closed the sale of the global products business.

Lori A. Flees: Before Mary covers the details of the quarterly results, I'd like to share some additional insights on how these results fit into our strategy. We continue to focus on driving the full potential of the existing business. One of the key metrics to this strategic pillar is same store sales growth. As I mentioned, this quarter, we saw 7.7% system-wide same store sales growth. Nod will change revenue was the largest contributor to this growth across the system, mostly driven by increased service penetration.

Speaker Change: Before Mary covers the details of the quarterly results I'd like to share some additional insights on how these results fit into our strategy.

Lori A. Flees: We continue to focus on driving the full potential of the existing business one of the key metrics to this strategic pillar is same store sales growth as I mentioned this quarter, we saw a seven 7% system wide same store sales growth.

Lori A. Flees: Neither will change revenue was the largest contributor to this growth across the system, mostly driven by increased service penetration.

Lori A. Flees: The team's focus on employee retention and best practice sharing continues to improve how we educate our guests on the additional services their vehicles need. The automotive manufacturer recommended services saw the highest improvement in service penetration in Q2, which is a testament to the training and tenure we've built across our store.

Lori A. Flees: The team's focused on employee retention and best practice sharing continues to improve how we educate our guests on the additional services their vehicles need.

Lori A. Flees: The automotive manufacturer recommended services saw the highest improvement in service penetration in Q2, which is a testament to the training and tenure, we've built across our stores.

Lori A. Flees: On the transaction side, after a choppy start to January due to weather events across the country, we recouped the volume in February and ended the quarter with modest improvement. Year to date, we have performed over 13.7 million services for customers system-wide. The other part of driving full potential is managing our costs to improve profitability. We're pleased with our Q2 performance in this regard. Specifically, strong labor management created a significant benefit in the second quarter in our company store operations, which exceeded our expectations.

Lori A. Flees: On the transaction side after a choppy start to January due to weather events across the country. We recouped the volume in February and ended the quarter with modest improvement.

Lori A. Flees: Year to date, we have performed over $13 7 million services for customers system wide.

Lori A. Flees: The other part of driving full potential is managing our costs to improve profitability.

Lori A. Flees: We're pleased with our Q2 performance in this regard spitz.

Lori A. Flees: Specifically strong labor management created significant benefit in the second quarter, and our company store operations, which exceeded our expectations and our ability to manage scheduling, especially during the weather events that happened in the quarter continues to improve.

Lori A. Flees: Our ability to manage scheduling, especially during the weather events that happened in the quarter, continues to improve. We also saw benefits from improved supply chain costs and store expenses for company stores this quarter. As we enter the back half of the year, we typically see significant labor leverage due to the increase in volume during the summer drive season. While we'll continue to use the labor management tools that have benefited us year to date, we do not expect to have as strong of a year over year improvement in labor efficiency for the remaining half of the year.

Lori A. Flees: We also saw benefit from improved supply chain cost and store expenses for company stores this quarter.

Lori A. Flees: As we enter the back half of the year, we typically see significant labor leverage due to the increase in volume during the summer driving season, well, we'll continue to use the labor management tools that have benefited us year to date, we do not expect to have as strong of a year over year.

Lori A. Flees: <unk> and labor efficiency for the remaining half of the year.

Lori A. Flees: Now I'd like to touch quickly on accelerating network growth. We're really pleased with the 38 net store additions this quarter. It brings our total network to 1928 stores and 8% growth over the prior year. We continue to see a balanced mix of ground-up builds and acquisitions. On the franchise side, half of the net additions this quarter were ground up. As we look at our pipeline for the remainder of the year, we're on track to have the store additions in line with our original guidance of 140 to 170 total additions with 55 to 70 coming from franchise. Now I'll turn it over to Mary to walk us through our Q2 financial results.

Lori A. Flees: Now I'd like to touch quickly on accelerating network growth, we're really pleased with the 38 net store additions this quarter. It brings our total network to 1928 stores and 8% growth over the prior year.

Mary: We continue to see a balanced mix of ground up builds and acquisitions and the franchise side half of the net additions this quarter were ground ups.

Mary: As we look at our pipeline for the remainder of the year. We're on track to have the store additions in line with our original guidance of 140 to 170 total additions with 55% to 70 coming from franchise.

Lori A. Flees: Now I'll turn it over to Mary to walk us through our Q2 financial results.

Mary E. Meixelsperger: Thanks, Lori. On slide five, we'll take a closer look at our top-line growth for the quarter. Adjusted net sales grew to $389 million, a 13% increase over prior years; system-wide same store sales grew 7.7% over prior year and 21.2% on a two-year stack basis. The growth for the quarter continues to be consistent and balanced between company and franchise with 7.4% and 8%, respectively, this quarter. Ticket growth contributed just over 70% to the cut.

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

Mary E. Meixelsperger: Adjusted net sales grew to 389 million% to 13% increase over prior year.

Mary E. Meixelsperger: System wide same store sales grew seven 7% over prior year and 21, 2% on a two year stack basis.

Mary E. Meixelsperger: The growth for the quarter continues to be consistent and balanced between company and franchise was seven 4% and 8% respectively. This quarter.

Mary E. Meixelsperger: Ticket growth contributed just over 70% to the comp.

Mary E. Meixelsperger: As Lori shared, increased non-oil change revenue was the largest driver of ticket growth, with a balance coming from net pricing and premiumization. Transaction growth contributed about 30% to the comp. This includes a contribution of just over 1% to the overall comp mix coming from the net impact of Leap Day, the Easter holiday shift, and Day Mix.

Mary E. Meixelsperger: As Lori shared increased non oil change revenue was the largest driver of ticket growth with the balance coming from net pricing and premium amortization.

Mary E. Meixelsperger: Transaction growth contributed about 30% to the comp.

Mary E. Meixelsperger: This includes a contribution of just over 1% to the overall comp mix coming from the net impact of leap day, the Easter holiday shift and day mix.

Mary E. Meixelsperger: Slide six looks at other drivers of the financial results. First, let's look at our gross margin rate. We saw an expansion from 36.8% to 37.6% and an 80 basis point improvement year over year. This was largely driven by leverage at the labor line coming from the improvements Lori discussed earlier. Sequentially, we saw a 150 basis point expansion. This was driven by labor improvements and lower supply chain costs.

Mary E. Meixelsperger: Slide six to look at other drivers of the financial results.

Mary E. Meixelsperger: First let's look at our gross margin rate.

Mary E. Meixelsperger: Saw expansion from 36, 8% to 37, 6%, an 80 basis point improvement year over year.

Mary E. Meixelsperger: This was largely driven by leverage at the labor line coming from the improvements Laurie discussed earlier.

Mary E. Meixelsperger: Sequentially, we saw a 150 basis point expansion.

Mary E. Meixelsperger: This was driven by labor improvements and lower supply chain costs.

Mary E. Meixelsperger: SG&A as a percentage of net sales decreased modestly over the prior year, while we saw a 140 basis point sequential decline. Top line growth drove additional leverage, while we also saw benefits sequentially from lower travel and meeting costs from the company meetings which are held in the first quarter each year. Depreciation and amortization increased by $5 million year over year, causing about 50 basis points of deleverage in the gross margin rate.

Mary E. Meixelsperger: SG&A as a percentage of net sales decreased modestly over prior year, while we saw a 140 basis point sequential decline.

Mary E. Meixelsperger: Top line growth drove additional leverage while we also saw benefit sequentially from lower travel and meeting costs from the company meetings, which are held in the first quarter each year.

Mary E. Meixelsperger: Depreciation and amortization increased by $5 million year over year, causing about 50 basis points of deleverage in the gross margin rate.

Mary E. Meixelsperger: Overall, the adjusted EBITDA margin improved 170 basis points over the prior year and 280 basis points sequentially. For the back half of the year, we expect to capture the SG&A leverage that comes with the seasonality of our business. However, we expect the gross margin labor leverage to moderate.

Mary E. Meixelsperger: Overall, adjusted EBITDA margin improved 170 basis points over the prior year and 280 basis points sequentially.

Mary E. Meixelsperger: For the back half of the year, we expect to capture the SG&A leverage that comes with the seasonality of our business.

Mary E. Meixelsperger: However, we expect the gross margin labor leverage to moderate.

Mary E. Meixelsperger: On slide seven, we'll take a look at our profitability metric. For Q2, adjusted net income increased 20% to $48.3 million, driven by sales growth and margin rate improvement, which was partially offset by increased investments in SG&A. sequentially, adjusted net income grew 25%, largely driven by improvements in gross margin and lower SG&A, as we just discussed. Adjusted EPS grew 61% from $0.23 to $0.37 per share. The increase in operating income contributed about half of the EPS growth.

Mary E. Meixelsperger: On slide seven we will take a look at our profitability metrics.

Mary E. Meixelsperger: For Q2, adjusted net income increased 20% to $48 3 million driven by sales growth and margin rate improvement, which was partially.

Mary E. Meixelsperger: Really offset by increased investments in SG&A.

Mary E. Meixelsperger: Sequentially adjusted net income grew 25% largely driven by improvements in gross margin and lower SG&A as we just discussed.

Mary E. Meixelsperger: Adjusted EPS grew 61% from 23 to <unk> 37 per share.

Mary E. Meixelsperger: The increase in operating income contributed about half of the EPS growth.

Mary E. Meixelsperger: The balance of the change came from lower net interest expense and a reduction in average share count of about 42 million shares compared to the prior year. Turning to slide 8, we'll look at the balance sheet and cash position. During the quarter, we returned just over $40 million to shareholders via share repurchase. As Lori mentioned earlier, that completes the $1.6 billion authorization. In March, we also announced a tender offer to repurchase $600 million of 2030 Senior Notes.

Mary E. Meixelsperger: The balance of the change came from lower net interest expense and the reduction in average share count of about 42 million shares compared to the prior year.

Mary E. Meixelsperger: That tender offer was completed following the end of the quarter, with final settlement made in April, utilizing cash and cash equivalents and borrowing under the revolving line of credit. In Q2, we earned interest income of $4.6 million on the remaining invested net proceeds from the sale of the global products business. This is not expected to recur in the back half of the year now that the debt tender offer is complete. This fulfills the remaining commitments we made regarding the use of the proceeds from the sale of the global products business.

Mary E. Meixelsperger: Turning to slide eight we will look at the balance sheet and cash position.

Mary E. Meixelsperger: During the quarter, we returned just over $40 million to shareholders via share repurchases as.

Mary E. Meixelsperger: As Lori mentioned earlier that completes the $1 6 billion authorization.

Mary E. Meixelsperger: In March we also announced a tender offer to repurchase the 600 million of 2030 senior notes.

Mary E. Meixelsperger: That tender offer was completed following the end of the quarter with final settlement made in April utilizing cash and cash equivalents and borrowings under the revolving line of credit.

Mary E. Meixelsperger: In Q2, we earned interest income of $4 $6 million on the remaining invested net proceeds from the sale of the global products business. This is not expected to recur in the back half of the year now that the debt tender offer is complete.

Mary E. Meixelsperger: This fulfilled the remaining commitments we made regarding the uses of the proceeds from the sale of the global products business.

Mary E. Meixelsperger: Turning to the cash flow statement, year-to-date cash flows from operating activities were $92.1 million, a decline of $81 million over the prior year. As a reminder, the establishment of the supply agreement with Valvoline Global Operations in the prior year drove a one-time benefit, which represents most of this decline. Additionally, the implementation of our new ERP system during the quarter delayed billings to our franchise partners, creating a short-term increase in accounts receivable that we expect will normalize in the back half of the year.

Mary E. Meixelsperger: Turning to the cash flow statement year to date cash flows from operating activities were $92 1 million a decline of $81 million over the prior year.

Mary E. Meixelsperger: As a reminder, the establishment of the supply agreement with Valvoline Global operations in the prior year drove a one time benefit which represents most of this decline.

Mary E. Meixelsperger: Additionally, the implementation of our new ERP system during the quarter.

Mary E. Meixelsperger: <unk> billings to our franchise partners, creating a short term increase in accounts receivable that we expect will normalize in the back half of the year.

Mary E. Meixelsperger: As noted in our press release, we expect to report a material weakness related to the ERP system implementation that went live on January 1st. We have implemented enhanced manual controls intended to ensure the financial statements for Q2 are accurate. A plan to remediate is already underway, and we expect this to be completed by fiscal year end.

Mary E. Meixelsperger: As we noted in our press release, we expect to report a material weakness related to the ERP system implementation that went live on January one.

Mary E. Meixelsperger: We have implemented enhanced manual controls intended to ensure the financial statements for Q2 are accurate.

Mary E. Meixelsperger: To remediate is already underway and we expect this to be completed by fiscal year end.

Lori A. Flees: Turning to slide nine, we'll take a look at our guidance for fiscal year 24, which we are narrowing from our original outlook. With half the year complete, substantially in line with our expectations, we believe it is appropriate to narrow our guidance. For same store sales growth, we expect 68% for the year with net revenue of $1.6 to $1.65 billion. For adjusted EBITDA, we are narrowing the range to $430 million to $455 million. Finally, for adjusted EPS, the updated range is $1.45 to $1.65 per share. I'll now turn it back over to Lori to wrap up.

Mary E. Meixelsperger: Turning to slide nine.

Mary E. Meixelsperger: We will take a look at our guidance for fiscal year 'twenty for which we are narrowing from our original outlook.

Lori: With half the year complete substantially in line with our expectations. We believe it is appropriate to narrow our guidance.

Lori: Our same store sales growth, we expect 6% to 8% for the year with net revenue of one six to $1 65 billion.

Lori A. Flees: For adjusted EBITDA, we are narrowing the range to $430 million to $455 million.

Lori: Finally for adjusted EPS. The updated range is $1 45 to $1 65 per share.

Lori A. Flees: I'll now turn it back over to Lori to wrap up.

Lori: Mary we.

Lori A. Flees: We delivered strong profit growth for the quarter, added 38 new stores, and completed the $1.6 billion share repurchase authorization. I'd like to take a minute to thank our team and our franchise partners for their continued hard work in the first half of fiscal 2024. I also want to give a special shout out to the team in Ottawa, Tennessee. I recently spent time working and training alongside that team so I could officially achieve my Topside certification. Now, I'll turn the call back over to Elizabeth to begin the Q&A.

Lori: We delivered strong profit growth for the quarter added 38, new stores and completed the $1 $6 billion share repurchase authorization.

Elizabeth Russell: Like to take a minute to thank our team and our franchise partners for their continued hard work in the first half of fiscal 2024.

Elizabeth Russell: Also wanted to give a special shout out to the team in Ottawa, Tennessee, I recently spent time working in training alongside that team. So I can officially achieved my top site certification.

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

Elizabeth Russell: Thanks, Lori. Before we start the Q&A, I want to remind everyone to limit their questions to one and a follow-up so that we can get to everyone on the line. With that, operator, please open the line.

Elizabeth Russell: Thanks, Lori 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: With that operator, please open the line.

Operator: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. The first question comes from David Bellinger with Mizuho. Your line is open. Please go ahead.

Elizabeth Russell: Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star followed by one.

Operator: When preparing to ask a question. Please ensure your devices on mute locally.

Operator: First question comes from David Bellinger with Mizuho. Your line is open. Please go ahead.

David Bellinger: Hey, good morning. Thanks for the questions. The first one is on comp guidance and trimming the upper end of the range. Is that simply reflective of a continuation you've seen in the first half of the year and not something indicative of any deceleration you've seen in Q3 to date? Just help us frame the reasoning behind the guidance change on the comp sales line.

David Leonard Bellinger: Hey, good morning, Thanks for the questions.

David Bellinger: First one is on the comp guidance and trimming the upper end of the range.

David Bellinger: Is that simply reflective of.

David Bellinger: Continuation you've seen in the first half of the year, but not something indicative of any deceleration you've seen in Q3 to date just help us frame the reasoning behind the guidance change on that the comp sales line.

Mary E. Meixelsperger: Thanks, David, for your question. So the year to date same star sales comp of 7.4% did reflect about a 60 basis point benefit from leap day. And we're not expecting any change, nor have we seen any underlying change in the business tempo. With the start of our third quarter, we're really just adjusting down the top end of the range in order to set expectations for pretty consistent performance in the back half versus the front half. I would say that the back half we are comping up against some really strong transaction growth from the prior year back half. And so, you know, we're going to But overall, we're really expecting pretty consistent performance expectations in the back half versus the front half.

Speaker Change: Thanks, David for your question.

Mary E. Meixelsperger: So.

Mary E. Meixelsperger: The year to date same store sales comp of seven 4% did reflect about a 60 basis point benefit from leap day, and we're not expecting any change nor have we seen any underlying change in the business tempo.

Mary E. Meixelsperger: With the startup of our third quarter.

Mary E. Meixelsperger: Really just adjusting down the top end of the range.

Mary E. Meixelsperger: In order to.

Mary E. Meixelsperger: Set expectations for pretty consistent performance in the back half versus the front half I would say that the back half we are comping up against some really strong transaction growth from.

Mary E. Meixelsperger: From the prior year back half.

Mary E. Meixelsperger: And so we're going to monitor that closely.

Mary E. Meixelsperger: But overall, we're really expecting pretty consistent performance expectations in the back half versus the front half.

Speaker Change: That's helpful. Thank you I appreciate that and then just my second question is longer term in nature on a go forward use of capital here.

Mary E. Meixelsperger: The buyback exhausted in this Q2 period can you talk to any potential.

Speaker Change: New buyback capacity with the senior notes now potentially out of the way and also how you would think about any potential trade offs in terms of repurchasing equity versus no added new store growth or even some kind of acquisition strategy just help us think through all of that.

Lori A. Flees: all that.

Mary E. Meixelsperger: A really good question, David. Again, I'll just reiterate our capital allocation priorities. We're first focused on growth. And that growth is coming through new store builds and acquisitions of new stores.

Speaker Change: It really good question David again.

Mary E. Meixelsperger: You know I'll, just reiterate our capital allocation priorities. We're first focused on growth that growth is coming through.

Mary E. Meixelsperger: New store builds acquisitions of new stores.

Mary E. Meixelsperger: And we're certainly open to looking at accretive growth opportunities in terms of that are synergistic with the underlying business. The second capital priority is around our leverage on our balance sheet. We've stated that we wanted two and a half to three five times leverage ratio.

Mary E. Meixelsperger: And, you know, we're certainly open to looking at accretive growth opportunities that are synergistic with the underlying business. The second capital priority is around our leverage on our balance sheet. We've stated that we want a two and a half to three and a half times leverage ratio that's kind of rating agency adjusted that basically takes into account leases and employee benefit obligations. And so we're currently trending just at the higher end of the range at about 3.7 times leverage relative to our goal of two and a half to three and a half times.

Mary E. Meixelsperger: <unk> kind of rating agency adjusted that basically takes into account leases and employee benefit obligations.

Mary E. Meixelsperger: And so we're currently trending just at the higher end of the range at about three seven times.

Mary E. Meixelsperger: Leverage relative to our goal of two and a half to three five times and so we're going to continue to monitor that in relationship to the opportunity for future share repurchases and of course, our third capital allocation priority is return of excess capital to shareholders via share repurchases.

Mary E. Meixelsperger: And so we're going to continue to monitor that in relationship to the opportunity for future share repurchases. And, of course, our third capital allocation priority is the return of excess capital to shareholders via share repurchases. So we'll continue to monitor that closely with our board and, you know, report to our investors on a quarterly basis.

Mary E. Meixelsperger: We will continue to monitor that closely with our board and.

Mary E. Meixelsperger: Report to our investors on a quarterly basis.

Operator: Great, thanks so much.

Speaker Change: Great. Thanks, so much.

Simeon Ari Gutman: We now turn to Simeon Gutman with Morgan Stanley. Your line is open. Please go ahead.

Operator: We now turn to Simeon Gutman with Morgan Stanley. Your line is open. Please go ahead.

Simeon Ari Gutman: Hey, everyone. First, on geography.

Simeon Ari Gutman: Hey, everyone.

Simeon Ari Gutman: First on geography were there any markets that didn't have weather curious if theres a difference in spread in run rate.

Unknown Executive: Were there any markets that didn't have weather? Curious if there's a difference in spread and run rate. And then this is an unrelated follow-up. You mentioned less or less strong labor efficiency in the second half. Is that because of a lag or because you just have forecasted higher labor costs coming through?

Unknown Executive: And then this is not unrelated follow up you mentioned less or less strong labor efficiency in the second half.

Unknown Executive: Is that because of a lap or because you just have forecasted higher labor costs coming through.

Lori A. Flees: I'll cover the first one and ask Mary to join us. Thanks, Simeon, for the questions.

Speaker Change: I'll cover the first one and ask Mary to join thank Simeon for the questions on geography. It was very unusual in January it actually hit across the board across most I would say the majority of our geographies.

Mary: So when you look at the comp performance there werent significant swings across the network.

Lori A. Flees: <unk>.

Lori A. Flees: On geography, it was very unusual in January; it actually hit across the board, across most, I would say, the majority of our geographies. So when you look at the comp performance, there weren't significant swings across the network. So I would just say it was unusual.

Mary: So I would just say it was unusual and I think most retailers had the same experience as we did in January I would say we were very pleased.

Mary E. Meixelsperger: And I think most retailers had the same experience as we did in January. I would say we were very pleased with the return of the traffic in February. And so, as I mentioned, when we closed out the quarter, you know, we had modest growth just given that. So I think we felt very pleased with the traffic across the geographies and the same store sales performance.

Mary E. Meixelsperger: With the return of the traffic in February and so as I mentioned when.

Mary E. Meixelsperger: When we close out the quarter, we had modest growth.

Mary E. Meixelsperger: Given that so I think we felt very pleased.

Mary E. Meixelsperger: With the with the traffic across the geographies and the same store sales performance.

Mary E. Meixelsperger: Okay.

Mary E. Meixelsperger: So on the labor side, Simeon. We are expecting to see labor leverage in the back half. You know, really very consistent with what we saw in the prior year. We just don't expect to see the incremental leverage that we've seen here in the second quarter relative to our performance. You know, we had strong labor performance in the back half of the prior year. And so while we expect that we're going to continue to sequentially see labor leverage, we're not expecting anything unusual from a labor perspective.

Speaker Change: So on on the labor side Simeon.

Mary E. Meixelsperger: We are expecting to see a labor leverage in the back half.

Mary E. Meixelsperger: You know really very consistent with what we saw in the prior year and we just don't expect to see the incremental leverage that we've seen here in the second quarter.

Mary E. Meixelsperger: Relative to our performance, we had strong labor performance in the back half of prior year.

Mary E. Meixelsperger: So while we expect that we're going to continue to sequentially.

Mary E. Meixelsperger: Labor leverage we're.

Mary E. Meixelsperger: We're not expecting anything unusual from a labor perspective, we expect our teams to continue to do the excellent job they've been doing.

Mary E. Meixelsperger: In Labor management, it's just that the opportunity for the kind of leverage we saw in the first quarter. We think is smaller than the back half of the year excuse me. The second quarter is smaller in the back half of the year.

Mary E. Meixelsperger: We expect our teams to continue to do the excellent job they've been doing in labor management. It's just that, you know, the opportunity for the kind of leverage we saw in the first quarter will be smaller in the back half of the year. Excuse me, the second quarter is smaller in the back half of the year.

Mary E. Meixelsperger: Yeah, I'll just add, Simeon, in Q1, we expect, and we shared and expected to see some improvement year over year. In Q2, given the weather impacts are typically more sporadic across the quarter and across regions at different times, it is a bit more challenging to manage labor.

Speaker Change: Yes, I'll just add Simeon.

Mary E. Meixelsperger: In Q1, we expect.

Mary E. Meixelsperger: Shared and expected to see some improvement year over year in Q2, given the weather impacts are typically more sporadic and across the quarter and across regions at different times. It is a bit more challenging to manage labor.

Mary E. Meixelsperger: And what we with the teams did an excellent job.

Mary E. Meixelsperger: It exceeded expectations.

Mary E. Meixelsperger: Was they.

Mary E. Meixelsperger: They were able to manage your trim down schedules around the labor. So as the forecast are coming in trim those schedules and then the week following when we typically see the traffic come back.

Mary E. Meixelsperger: That labor to ensure we can serve the customers when they came back into the stores. So it's just a really proactive approach in managing around the season.

Lori A. Flees: So it's just a really proactive approach to managing around the season, you know, the seasonal wintery effects. And I'm really pleased, and it exceeded our expectations. Frankly, we weren't expecting to perform as well as we did, but our teams really use the tools that we've put in place. And we were able to, you know, capture that benefit. To Mary's point, the back half of the year, we always get leverage from the traffic increase.

Lori A. Flees: The season wintry effects.

Lori A. Flees: I'm really pleased and it exceeded our expectations frankly, we werent expecting to perform as well, but our teams really use the tools that we put in place and.

Lori A. Flees: And we were able to capture that benefit.

Lori A. Flees: To Mary's point, the back half of the year, we always get leveraged from the traffic increase.

Lori A. Flees: And we'll continue to use the tools for the benefit of our business and the margin. It's just when you look year over year, when we look at Q2 quarter over quarter, it was quite an impressive labor leverage that we just do not believe is possible given the leverage that we typically get in the season.

Lori A. Flees: And we will continue to look to use the tools for the benefit of our business and the margin. It's just when you look year over year.

Lori A. Flees: When we look at Q2 quarter over quarter it was quite an impressive.

Lori A. Flees: Labor leverage that where we just do not believe is possible given the leverage that we typically get in the season.

Speaker Change: As a follow up can I ask on price cost on oil.

Unknown Executive: As a follow-up, can I ask about the price of oil where you are in terms of pricing. It looks like base oil, as a proxy, is sort of stable. Curious where you are in corporate stores, and I think pricing the franchisee is there, but is there any lag, meaning catch-up to go, and or benefit that's on the con based on where your prices are? Yeah, you know, we've been in that

Unknown Executive: The where you are in terms of.

Unknown Executive: Pricing it looks like base oil.

Unknown Executive: Proxy is sort of stable I'm curious, where you are corporate stores.

Unknown Executive: The franchisees there, but is there any lag meeting catch up to go <unk> benefit that's on the come based on where your prices are.

Unknown Executive: Yeah, you know, it's been interesting. We've seen some pretty modest changes in our underlying supply chain costs, you know, product costs in the lubricants area. We've benefited from some modest declines. In the first half of the year, we saw, and we're going to see some modest increases in the second half of the year. Now, we continue to monitor the macro situation, you know, with the kind of macro political issues that we're seeing in the Middle East, that's something that we keep a really close eye on. But right now, and in terms of the updated guidance we're providing, we're not expecting to see anything unusual in the back half.

Speaker Change: Yeah, it's it's been interesting and we've seen some pretty modest.

Unknown Executive: Changes in our underlying supply chain cost product costs in the lubricants area.

Unknown Executive: We benefited from some.

Unknown Executive: Modest declines.

Unknown Executive: In the first half of the year, we've seen we're going to see some modest increases in the back half of the year.

Unknown Executive: But.

Unknown Executive: We just recently saw another modest decline announcements so theres nothing it has to be a pretty material change.

Unknown Executive: For it to have a meaningful impact on our business and so we're not really expecting to see anything that would have a really material impact on the business in the back half of the year now we continue to monitor the macro situation.

Unknown Executive: With the kind of macro political issues that we're seeing in the middle East that's something that we keep a really close eye on.

Unknown Executive: But right now in terms of.

Unknown Executive: The updated guidance, we're providing we're not expecting to see anything unusual in the back half.

Speaker Change: Thanks, Good luck.

Speaker Change: Thanks Simeon.

Katharine Amanda McShane: Our next question comes from Kate. Kate McShane with Goldman Sachs. Your line is open. Please go ahead.

Speaker Change: Our next question comes from.

Unknown Executive: Kate Mcshane with Goldman Sachs. Your line is open. Please go ahead.

Lori A. Flees: Hi, good morning. Thank you for taking our question. We were wondering how we should think about the pace of store openings for the remainder of the year. And are you hearing of any issues from franchisees in opening stores to see a higher cost?

Katharine Amanda McShane: Hi, good morning.

Katharine Amanda McShane: Our classroom.

Lori A. Flees: We were wondering how we should think about the piece of our openings for the remainder of the war.

Speaker Change: On an album corridor.

Speaker Change: From closing and opening stores grew a harder comp.

Speaker Change: Uh huh.

Lori A. Flees: Yeah.

Lori A. Flees: Yeah, thanks, Kate. Good morning.

Speaker Change: Yes, Thanks, Kate good morning, and thanks for the question we typically.

Speaker Change: Last year, certainly is not something I would model against on the franchisee side is as you recall in Q3.

Lori A. Flees: Had one net new opening and a lot of that was due to supply chain.

Lori A. Flees: Delays that pushed some openings from Q3 into Q4.

Speaker Change: But we feel we've been really excited about the engagement of our franchise partners.

Speaker Change: Year to date, they've delivered 33, new units and that's compared to 24 last year and in this most recent quarter.

Speaker Change: 50% of the net new openings for ground ups and ground ups I think we feel much better about how we're forecasting those to open given some of the things that we've put in place from a supply chain standpoint, as an example, most recently we've been talking to our franchise Party partners.

Lori A. Flees: And thanks for the question. We typically, last year certainly is not something I would model against on the franchisee side. As you recall, in Q3, we had one new opening, and a lot of that was due to supply chain delays that pushed some openings from Q3 into Q4. Given some of the things that we've put in place from a supply chain standpoint. As an example, most recently, we've been talking to our franchise partners about holding some signs in a general warehouse so that that wouldn't be a gate-limiting move to opening a store.

Lori A. Flees: Brown holding some signs in a in a general warehouse so that that wouldn't be a gate limiting move to opening a store. So just getting really proactive and collaborative with our franchise partners and how we can keep their openings on track.

Lori A. Flees: So just getting really proactive and collaborative with our franchise partners and how we can keep their openings on track. As I mentioned, given where we're at, at the start of the first half, we really do expect to be well within the range of 140 to 170 and 55 to 70 coming from franchises. Now, we do expect Q3 and Q4 to be more balanced than they were last year, so we don't expect any hiccups or anomalies at this stage.

Lori A. Flees: I will say that, sort of getting things into the ground because of some of the weather impacts in January, both us and our franchise partners will have some ground-ups, which will come a little later in the year than we would have liked. But in general, we feel really good about where we are relative to guidance.

Lori A. Flees: As I mentioned, given where we're at at the start.

Lori A. Flees: First half.

Lori A. Flees: We really do expect to be well within the range.

Lori A. Flees: On the 140 to $1 70, and $55 to 70 coming from franchise now we do expect Q3 and Q4 to be more balanced than it was last year.

Lori A. Flees: So we don't expect any hiccups or.

Lori A. Flees: Or anomalies at this stage I will say that.

Lori A. Flees: Sort of getting things into the ground because of some of the weather impacts in January we.

Lori A. Flees: We will have.

Lori A. Flees: Both us and our franchise partners there'll be some ground ups, which will come a little later in the year than we would have liked but in general we feel really good about where we are relative to guidance.

Unknown Executive: Great, thank you for that. And just as a second question, we wondered if you could talk just about the difference between the company-operated and the franchise stores, just the difference in comp there in the second quarter.

Lori A. Flees: For Bob Cook book, a couple cost I'm wondering if you can talk.

Unknown Executive: Between the difference between the company operated on the franchise stores that were different from copper in the second quarter.

Unknown Executive: Yes.

Mary E. Meixelsperger: In terms of general performance, what's interesting is the comps between our franchise partners and us are more consistent than what it has been in terms of the split between ticket and oil changes. And Mary, maybe you can comment more on that. Sure. So, you know, we did.

Unknown Executive: In terms of general performance.

Mary: What's interesting is the comps between our franchise partners and US as is more consistent than what it has been.

Mary E. Meixelsperger: In terms of the split between ticket and oil changes and Mary maybe you can comment.

Mary: More on that.

Mary E. Meixelsperger: Sure. So, you know, we did see a little bit of outperformance in the quarter by our franchise partners. And we saw a little bit stronger ticket performance there. But otherwise, it's been very, very consistent overall in terms of performance. And, you know, one of the interesting things is that we see really consistent performance on both ticket and transactions between franchise and company across all four quartiles of stores, with all of them improving both ticket and transactions across the quartiles in terms of how we think about, you know, store level performance.

Mary: Sure so.

Mary: We did see a little bit about performance.

Mary E. Meixelsperger: In the quarter by our franchise partners and.

Mary E. Meixelsperger: We saw a little bit stronger ticket performance there.

Mary E. Meixelsperger: But else.

Mary E. Meixelsperger: It's.

Mary E. Meixelsperger: <unk> been very very consistent overall in terms of the performance in one of the interesting things is that we see really consistent performance on both ticket and transactions between franchise and company across all four core titles of stores.

Mary E. Meixelsperger: With all of them, improving both ticket and transactions.

Mary E. Meixelsperger: Across the.

Mary E. Meixelsperger: Again, the core titles in terms of how we think about.

Mary E. Meixelsperger: Store level performance and so.

Mary E. Meixelsperger: And so that's really encouraging to see just the consistent consistency of performance. So I think we will likely continue to see that going forward. You know, there are very consistent systems and adoption of our super pro process across our franchise system and in company stores, and we think that's a really critical factor in driving the consistency of comp store sales performance. We do occasionally see some differences related to marketing cadence between the franchise and the company, but for the most part, that's pretty consistent as well.

Speaker Change: That's really encouraging to see.

Mary E. Meixelsperger: Just the consistent consistency of performance, so I think that will.

Mary E. Meixelsperger: Likely continue to see that going forward.

Mary E. Meixelsperger: Very consistent.

Mary E. Meixelsperger: <unk> and adoption of our Super Pro process.

Mary E. Meixelsperger: Across our franchise system and in company stores.

Mary E. Meixelsperger: And we think that's a really critical factor in driving the consistency of the comp store sales performance, we do occasionally see some differences related to marketing cadence.

Mary E. Meixelsperger: Between franchise and company.

Mary E. Meixelsperger: But for the most part that's pretty consistent as well.

Mary E. Meixelsperger: Oh good.

Steven Emanuel Zaccone: We now turn to Steven Zaccone with Citi. Your line is open. Please go ahead. Good morning.

Mary E. Meixelsperger: We now turn to Steven Zaccone with Citi. Your line is open. Please go ahead.

Unknown Executive: Good morning, this is Avanti Chirivarathon on behalf of Steve. Thanks so much for taking our question. We wanted to ask about the low income consumer; we've heard about some commentary on tighter budgets among that cohort. Are you seeing any sort of trade down in your business or slow down in non oil change revenue attached to sales? And then, along those same lines, can you talk about how you provide value relative to peers if consumers are on tighter budgets?

Avanti: Good morning. This is avanti chair of course on for Steve. Thanks, So much for taking our question. We wanted to ask on the low income consumer we've heard about some commentary on tighter budgets. Among that cohort are you seeing any sort of trade down in your business or slow down and non oil change revenue attached to sales and then along those same lines can you.

Unknown Executive: Talk about how you provide value relative to peers, if consumers are on Tiger bucket.

Unknown Executive: Yes.

Unknown Executive: So, you know, we've spent a lot of time looking to understand whether or not we're seeing any impacts from kind of the lingering inflationary effects in the broader macroeconomic environment in the U.S. And frankly, we're not seeing any impact. We're not seeing any trade-off.

Unknown Executive: So we've spent a lot of time looking to understand whether or not we're seeing.

Unknown Executive: Any impacts from.

Unknown Executive: From kind of the.

Unknown Executive: Lingering inflationary.

Unknown Executive: Effects in the broader macroeconomic environment in the U S and frankly, we're not seeing any impact we're not seeing any trade down we're not seen lower income consumers.

Unknown Executive: We're not seeing lower income consumers having a lower retention rate in terms of their returning to our stores versus higher income consumers. And so, nothing to report in terms of our year-to-date results and for the second quarter, but we're gonna continue to keep a really close eye on it. We've heard some of that commentary as well from some other fast food and other types of retail service businesses.

Unknown Executive: And having a lower retention rate.

Unknown Executive: In terms of their returning to our stores versus higher income consumers.

Unknown Executive: And so no.

Unknown Executive: Nothing to report.

Unknown Executive: In terms of our year to date results.

Unknown Executive: For the second quarter, but we're going to continue to keep a really close eye on it we've heard some of those those commentary as well from from some other.

Unknown Executive: Fast food and other types of Oh.

Unknown Executive: Retail service businesses and.

Unknown Executive: And so we're gonna monitor it closely, but we're really not seeing an impact on our business. And, you know, we've got incredibly great good data to be able to help us understand in terms of demographic data on our consumers and, you know, the frequency of they visit our stores, et cetera. We, we, we have very, very strong data analytic capabilities. And as I meant, as I said, we're not seeing any trade down or any differences in retention related to those lower income consumers.

Unknown Executive: So we're going to monitor it closely but we're really not seeing an impact on our business and we've got incredibly good data.

Unknown Executive: To be able to help us understand.

Unknown Executive: In terms of demographic data on our consumers.

Unknown Executive: And the.

Unknown Executive:

Unknown Executive: Frequency of visiting our stores et cetera, we have a very very strong.

Unknown Executive: Data analytic capabilities and as I meant as I said, where we're not seeing any trade down or any differences in retention.

Unknown Executive: Related to those lower income consumers yes.

Unknown Executive: Yeah, I'll just add when she talks about no trade down, that would be on services or premium service. And then as we look at transactions, when you look at miles driven or days, interval days between visits, those are not changing. And we've been, because of some of the economic tones that you hear, looking and analyzing customers at different income levels to just make sure we're not missing anything. We typically put our stores in certain economic demographic clusters, and we look at them in those clusters, and we haven't seen anything. But we've now started even looking at the customer level to make sure that we're, again, getting ahead of those and making sure that we adapt our business to serve the customers.

Unknown Executive: Yeah, I'll just add it.

Speaker Change: I'll just add when she talks about no trade down that would be on services or premium.

Unknown Executive: Service and then as we look at transactions when you look at miles driven or days and interval days between visits those are not changing and we have been because of some of the economic.

Unknown Executive: Tones that you hear we've been looking and analyzing customers at different income levels to just make sure. We're not missing anything we typically put our stores in certain economic demographic clusters, and we look at them in those clusters and haven't seen anything but we've now star.

Unknown Executive: Even looking at a customer level to make sure that we're again getting ahead of those and making sure that we adapt our business.

Unknown Executive: To serve the customers.

Unknown Executive: Great, thank you so much for that color. And then, as a follow-up, can you talk a little bit about how slower electric vehicle adoption factors into your discussions with franchise partners? You have some big partners, but are you seeing any new franchise partners that have more interest in working with So your first question:

Speaker Change: Great. Thank you so much for that color and then as a follow up can you talk a little bit about how Florida electric vehicle adoption factors into your discussions with franchise partners you got some big partners, but are you seeing any new franchise partners that have more interest in working with you.

Lori A. Flees: So your first question is around EVs. In general, obviously, the current temperature and the current sales around EVs have definitely moderated relative to where they would have been last year. But I think if you look at the long-term forecast for penetration of EVs in the car park, I don't anticipate that's going to change materially. And we continue to do research and incubation of services that would be appropriate for a battery electric vehicle.

Unknown Executive: So your first question is around Evs.

Lori A. Flees: In general obviously, the current temperature in the current sales around Evs has definitely moderated relative to where it would have been last year, but I think if you look at the long term forecast for penetration of Evs as the car Park I don't anticipate that's going to change materially.

Lori A. Flees: And we continue to do research and incubation of AV services that would be appropriate.

Lori A. Flees: We're obviously doing the same with hybrids. We serve hybrids today at a higher percentage of the car park than we do ICE vehicles. And there are a number of maintenance services, you know, that we provide hybrids for, and we always look at additional services as that car park grows. As it relates to our franchise partners, you know, the impact of EV on any franchise partner is different. In some of the middle of the country areas where the preponderance of EV sales is quite low, they obviously have no impact and are of very little interest.

Lori A. Flees: For a battery electric vehicle, we're obviously doing the same with hybrid we serve hybrids today actually at a higher percentage of the car of the car Park.

Lori A. Flees: Then our then we do ice vehicles.

Lori A. Flees: And there are a number of maintenance services.

Lori A. Flees: That we provide hybrid and we always look at additional services as that car park grows.

Lori A. Flees: As it relates to our franchise partners.

Lori A. Flees: The impact of EV on any franchise partner.

Lori A. Flees: <unk> is different than some of the middle of the country areas, where the preponderance of EV sales is quite low they obviously have no impact and very little interest.

Lori A. Flees: But even those that are more in geographies where EV sales are higher, some of those geographies are also underserved from an ICE preventative maintenance perspective. And so our franchisees really are, as entrepreneurs, wanting to make sure they maximize the return on invested capital that they're placing into their business. They see a lot more upside in serving the existing car park, although they remain interested and connected to us through the work that we're doing on EV-related services.

Lori A. Flees: But even those that are more in in geographies, where EV sales has higher some of those geographies are also underserved.

Lori A. Flees: From an ice preventative maintenance perspective, and so our franchisees really are as entrepreneurs wanting to make sure they maximize.

Lori A. Flees: The return on invested capital that they are placing into their business.

Lori A. Flees: They don't see they see a lot more upside in serving the existing car park.

Lori A. Flees: Although they remain interested and connected to us on work that we're doing on EV related services.

Lori A. Flees: In terms of the last part of your question, which was around interest levels, I don't think ED is impacting the interest levels of new partners we have. We continue to have very productive dialogue with potential new partners. We've signed a couple of smaller partners, as we've shared before, and are in conversations with more scale partners around joining the Valvoline franchise business. So continued great progress; nothing more to report at this stage. But I wouldn't say EV is a high factor right now on the franchisee side.

Lori A. Flees: In terms of the last part of your question, which was around interest levels I don't think.

Lori A. Flees: D is impacting the interest levels of new partners, we have.

Lori A. Flees: Continue to have very productive dialogue with potential new partners. We've signed a couple of smaller partners as we've shared before and are in conversations with more scale partners around joining in the valvoline franchise business. So.

Lori A. Flees: Continued great progress nothing more to report at this stage, but I Wouldnt say <unk> is a high factor right now on the franchisee side.

Speaker Change: Thank you.

Michael Joseph Harrison: Our next question comes from Mike Harrison with Seaport Research Partners. Your line is open.

Lori A. Flees: Our next question comes from Mike Harrison with Seaport Research Partners. Your line is open. Please go ahead.

Michael Joseph Harrison: Hi, good morning, and congratulations to Lori on getting your topside certification. I'll keep an eye out for you the next time I'm in one of your stores. Now that we're kind of past the winter months, I was wondering if we could get an update on the battery offering and how that performs during those winter months relative to your expectations. And just curious if there's some additional upside next year from the battery offering as you make that available at more of your locations.

Michael Joseph Harrison: Hi, good morning, and congrats to Laura on getting your topside certification I'll keep an eye out for the next time I mean, one of your stores.

Michael Joseph Harrison: [laughter] beg for them.

Michael Joseph Harrison: Now that we're kind of past the winter months. So I was wondering if we could get.

Michael Joseph Harrison: Update on.

Michael Joseph Harrison: The battery offering and how that performed during.

Michael Joseph Harrison: During the winter months relative to your expectations and just curious if there's some additional upside next year from the battery offering.

Michael Joseph Harrison: Make that available at more of your locations.

Lori A. Flees: Yeah, it's a good question, Mike, and something that we've been spending a lot of time on as a management team. The battery offering is probably a more complicated service because the variety of batteries is, is, is just as diverse as the number of air filters, but they take a lot more space in stores to store, and you certainly can't let them sit for a long time if you're not placing them in service.

Speaker Change: Yes, it's a good a good question, Mike and something that we've been spending a lot of time on as a management team and the.

Lori A. Flees: Battery offering is probably a more complicated service because.

Lori A. Flees: The variety of batteries is is is just as a diverse as the number of air filters, but they take a lot more space in the stores to store and you certainly can't let them sit for a long time, if youre not placing them in service.

Lori A. Flees: And so we have a last mile delivery partner that has to deliver the batteries in frequency relative to the car park. It also requires that we test the batteries every time they come in, because not every time will a battery, you know, register red or yellow in terms of its health. And if we don't, if we don't test the battery every time, we don't earn that trust to complete the service with gas.

Lori A. Flees: And so we have a last mile delivery partner.

Lori A. Flees: That has to deliver the batteries in frequency relative to the car Park.

Lori A. Flees: It also requires that we test the batteries.

Lori A. Flees: Every time they come in because not every time with a battery register red or yellow in terms of its health.

Lori A. Flees: And if we don't if we don't test the battery every time, we don't earn that trusted to complete the service with the guest.

Lori A. Flees: And then the last one is that the testing devices; we continue to look at improved testing devices because as the OEMs continue to change the design of the vehicles and lower the cost, so putting more plastic around some of the nodes, it makes some of the testing devices a little bit more tricky to ensure that you can get a really accurate read. So these are all things I'm explaining because we believe there's more opportunity in batteries.

Lori A. Flees: And then the last one is that the testing devices, we continue to look at.

Lori A. Flees: Improved testing devices, because as the Oems continue to change the design of the vehicles.

Lori A. Flees: And lower the cost so putting more plastic around some of the nodes. It makes some of the testing devices, a little bit more tricky to ensure that you can get a really accurate read.

Lori A. Flees: So these are all things I am explaining because we believe there is more opportunity in battery, we have fantastic pricing relative to comparable service providers.

Lori A. Flees: We have fantastic pricing relative to comparable service providers in the market, and it's an area that we're working on because we do believe there's more opportunity there. And it'll be part of our plan for the remainder of this year and into next year for sure.

Lori A. Flees: In the market and it's an area that we're working on because we do believe there's more opportunity there and it'll be part of our are planned for the remainder of this year and into next year for sure.

Mary E. Meixelsperger: All right, thank you for that. And then you mentioned the internal control issue. And I understand you may not want to get into too much detail here, but if you can provide any color to help us understand what the problem was and what needs to be done to fix it, that would be helpful. And maybe just give us a broader update on where you are in that ERP implementation process.

Speaker Change: Alright. Thank you for that and then you mentioned the internal control issue and I understand you may not want to get into too much detail here, but if you can provide any color or help us understand what the problem was and what needs to be done to fix it that would be helpful.

Mary E. Meixelsperger: And maybe just give us a broader update on where you are in.

Mary E. Meixelsperger: ERP implementation process.

Mary E. Meixelsperger: Sure, Mike. So the issue from an internal control perspective was primarily around our information technology general controls for the quarter. We went live with the new system on January 1st. That system implementation was really driven by the sale of the global products business. And the good news is we're implementing a system that's very retail specific versus our legacy system, which was much more driven by chemicals slash materials and supply chain requirements. But in the new system implementation, we saw challenges in the quarter around user access controls and some monitoring controls, documentation related to and monitoring related to IT changes and job scheduling around the ERP system.

Speaker Change: Sure Mike.

Mary E. Meixelsperger: So the the issue from an internal control perspective was primarily around our information.

Mary E. Meixelsperger: And then we also saw some system design issues around business processes. I had mentioned that we saw some invoicing delays in the quarter for our franchisees. And that relates to some of the design issues that we're addressing to ensure that the system is more highly automated. But I would say that we've had no material day-to-day impact on our business operations. And we've been consistently able to serve our customers and support our franchisees. The systems that directly support operating our store operations were not impacted by the implementation. So mostly, as I said, around general IT control.

Mary E. Meixelsperger: Technology General controls.

Mary E. Meixelsperger: In the quarter.

Mary E. Meixelsperger: Sorry, Ed. And is that implementation complete at this point? Or are there still a lot of stores where it needs to be rolled out? No.

Mary E. Meixelsperger: <unk> went live with a new system on January 1st that system implementation was really driven by the sale of the global products business.

Mary E. Meixelsperger: No, it's, it's, it's complete. And again, it didn't affect the store level systems that we operate; it's really the financial systems, and then some of the supply chain operations. The system implementation is complete, but we're continuing to provide enhancements to the system. And, you know, as we go forward over the longer term, we'll be able to leverage some of the new capabilities in the system to provide for increased efficiencies and improved analytics and reporting.

Ed: The good news is we're implementing a system that's very retail specific.

Mary E. Meixelsperger: Versus our legacy system, which was much more driven by chemicals slash materials.

Mary E. Meixelsperger: Supply chain requirements, but in the new system implementation, we saw challenges in the corner around user access controls and.

Mary E. Meixelsperger: Monitoring controls.

Mary E. Meixelsperger: Documentation related to.

Mary E. Meixelsperger: And monitoring related to changes in job scheduling around the ERP system and then we also saw some system design.

Mary E. Meixelsperger: Issues around business processes I had mentioned.

Mary E. Meixelsperger: We saw some invoicing delays in the quarter to our franchisees and that relates to some of the design issues that we're addressing to ensure that the system is more highly automated I would say that we've had no material day to day impact on our business operations and.

Mary E. Meixelsperger: And we've been consistently able to serve our customers and support our franchisees.

Mary E. Meixelsperger: The systems that directly support operating our store operations were not impacted by the implementation.

Mary E. Meixelsperger: So mostly as I sat around the it general controls.

Mary E. Meixelsperger: Okay.

Speaker Change: Got you.

Speaker Change: Is that implementation complete at this point or is there still there's still a lot of storage where it needs to be rolled out.

Mary E. Meixelsperger: No. It's it's it's complete and again it didn't affect the store level.

Mary E. Meixelsperger: Systems that we operate it's really the financial systems and then some of the supply chain.

Mary E. Meixelsperger: Operations.

Mary E. Meixelsperger: And are those the system implementation is complete but we're continuing to provide enhancements.

Mary E. Meixelsperger: To the system.

Mary E. Meixelsperger: And you know.

Mary E. Meixelsperger: As we go forward over the longer term, we'll be able to leverage some of the new capabilities in the system to provide for increased efficiencies and improved analytics and reporting over the longer term.

Mary E. Meixelsperger: There is some real benefits to the new platform, but shorter term we're focused on the remediation plan for the it general control environment, which we expect to complete by the end of the fiscal year.

Mary E. Meixelsperger: Over the longer term, there are some real benefits to the new platform, but in the shorter term, we're focused on the remediation plan for the IT general control environment, which we expect to complete by the end of the fiscal year. And also just focused on, you know, making certain that the core system capabilities are functioning as intended.

Mary E. Meixelsperger: And also just focused on making certain that the.

Mary E. Meixelsperger: The core system capabilities are functioning as intended.

Operator: All right. Thank you very much.

Speaker Change: Alright, Thank you very much.

Jeffrey John Zekauskas: Our next question comes from Jeff Zekauskas with J.P. Morgan. Your line is open. Please go ahead.

Operator: Our next question comes from Jeff Secaucus with Jpmorgan. Your line is open. Please go ahead.

Lydia Huang: Hi, this is Lydia Huang.

Jeffrey John Zekauskas: Hi, This is lidia Huang on for Josh could you break down your volume growth in the quarter by volume from oil change and volume from other product sale. Thank you.

Lori A. Flees: So, if you look at it, are you, I think you're talking about our same store sales breakdown, which Mary covered in her comments that Ticket represented about 70% of our same store sales system-wide, and Transaction was about 30%. Within the Ticket side, NCR, both price and penetration were the largest contributor overall, and that was followed by pricing and premium.

Lydia Huang: So if you look at it I think youre talking about our same store sales breakdown.

Lori A. Flees: Which I think Mary covered in her comments that ticket represented about 70% of the same store sales system wide.

Lori A. Flees: Transaction was about 30% within.

Lori A. Flees: Within the ticket side and CR, both price and penetration was the largest contributor.

Lori A. Flees: Overall, and that was followed by a pricing and premium mix.

Lori A. Flees:

Operator: So I think, I think in general, we feel great because we continue to drive very strong growth in added services or non-oil change revenue. And it's not coming just from our bottom quartile stores; it's actually coming from all of our quartiles, which means there's continued opportunity. So we continue to set the bar for best practice higher within our system, and the average keeps increasing. And the team, you know; they put together a competition in this last quarter.

Lori A. Flees: I think in general we feel great because we continue to drive very strong growth in the added services are non oil change revenue.

Operator: And it's not coming just from our bottom quartile stores, it's actually coming from all of our courthouse, which means there's continued opportunities. So we continue to set the bar for best practice higher.

Operator: Within our system.

Operator: And in the average keeps increasing.

Operator: And the team.

Operator: They put together a competition in this last quarter and what it did is it it re energize the learning of our team around the added services and best practices to presenting them effectively to our guests.

Operator: And what it did is it re-energized the learning of our team around the added services and best practices for presenting them effectively to our guests. And we're really pleased because sometimes when you run those competitions, it gives you a short-term boost. But this really did up the game of our talent, and just to increase the best practice level that they carry out the services and the services presentation. So we continue to see that performance, which we're pleased with. Thank you. As a reminder, if you'd like to ask a question, please press star 1.

Operator: And we're really pleased because sometimes when you run those competitions. It gives you a short term burst, but this really did up the game of our talent.

Operator: And just to increase the the best practice level that they carry out the services.

Operator: And the services presentation. So we continue to see that performance, which which we're pleased with.

Speaker Change: Thank you.

Bret David Jordan: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. We now turn to Bret Jordan with Jeffreys. Your line is open, please go ahead.

Operator: As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad now.

Bret David Jordan: We now turn to Bret Jordan with Jefferies. Your line is open. Please go ahead.

Bret David Jordan: Hey, good morning, guys.

Bret David Jordan: Could you talk good morning. This is where you thought hey, good morning could you talk about in the services category sort of specifically, where you saw the most traction and I know you've been sort of looking at expanding the services menu.

Bret David Jordan: What you are saying that you might add from here.

Unknown Executive: Yeah, so We just the last year, year and a half, we've been focusing on the base. And in this year, in this last quarter, we sort of increased it beyond that.

Bret David Jordan: Yeah. So.

Bret David Jordan: We just at the last year year, and a half we've been focusing on the basics.

Lori A. Flees: So visuals are what we would consider the basics. That's the cabin air filter, the air filter, wiper blades, light bulbs, and batteries. Those are the things that are visual, meaning we visually show the customer how those things are performing; we can visually inspect them, and we share that information with the guests. And it comes down to making sure that we offer to pull every cabin air filter and explain why. During COVID, we had removed that from our service process.

Bret David Jordan: And in this year in this last quarter, we sort of increased it beyond that so visuals as what we would consider the basics that cabin air filter air filter wiper blades.

Lori A. Flees: And in light bulbs and batteries those are the things that our visuals, meaning we visually show the customer how those things are performing we can visually inspect them.

Lori A. Flees: And when you are operating, you know, 1900 stores, to try to get that back into the process for every single technician that's in the window of a customer, it takes time. And I think that we're just getting back to the basics on things like that. The other thing with air filters is taking them out, showing the customer side by side with a brand new one, so they can actually see whether or not they should be changing them.

Lori A. Flees: And we share that information with the guest and it comes down to making sure that we.

Lori A. Flees: We offered to pull every care cabin air filter and explain why during Covid, we had removed that from our service process and when you are operating.

Lori A. Flees: 900 stores to try to get back into the process for every single technician. That's in the window of a customer it takes time and I think that we're just getting back to the basics and things like that the other thing with air filters is taking it out showing the customer side by side with the brand new ones. So they can.

Lori A. Flees: And actually see whether or not they should be changing it. These are just simple basics that have been reinvigorating across our team and they have provided a very big part of the lift.

Lori A. Flees: These are just simple basics that we've been, you know, reinvigorating across our team, and they have provided a very big part of the list. Now, I did mention in my talking points that this quarter, we saw an increase in OEM-recommended services or many automotive manufacturer recommendations. These are things that are not required every visit or every year; they are typically required at certain intervals, say, you know, a 30,000 mile 50,000 mile check.

Lori A. Flees: Now I did mentioned in my in my talking points that this quarter, we saw an increase on OEM recommended services or many automotive manufacturer.

Lori A. Flees: Recommendations. These are things that are not required every visit or every year. They typically are required at certain intervals.

Lori A. Flees: Say, a 30000 mile 50000 mile checkpoint.

Lori A. Flees: And we saw the biggest increase in penetration on the OEM services this quarter, and it's a real testament to both the training that we've made sure our team has and the retention because they're a little bit trickier to perform than just those basic visual items. So things like transmission service were one that we saw a big increase in, and that's something that we trained on and ensured we had the right equipment in every store that was operational.

Lori A. Flees: And we saw the biggest increase of penetration on the OEM services this quarter and it's a real testament to both the training that we've made sure our team has and the retention because they're there a little bit trickier to perform than just those basic visual items.

Lori A. Flees: So things like transmission service was one that we saw a big increase on and that's something that we have trained and ensure we have the right equipment in every store that was operational and the.

Lori A. Flees: And then when we re-energized the team around added services in this last quarter, again, it's a combination of tenure, training, and just a little bit of energy around it, and we got, you know, really great results.

Lori A. Flees: Then when we re energized the team around added services in this last quarter again, it's a combination of tenure training and just a little bit of energy around it and we got really great results.

Lori A. Flees: Okay, great. Now, you did ask about, oh, sorry, go ahead. You had asked about added services, and I forgot.

Speaker Change: Okay. Great now you did ask about <unk> so sorry.

Speaker Change: Go ahead.

Lori A. Flees: You asked about added services, and I forgot I wanted to mention that as well. We have an R&D team that is looking at additional services that can be provided in our store. But we don't have anything yet to report.

Lori A. Flees: You had asked about added services and I forgot I wanted to mention that as well. We are we have an R&D team that is looking at additional services that can be provided in our store.

Lori A. Flees: We don't have anything yet to report I will say that we keep we keep a very.

Lori A. Flees: I will say that we keep very, very clear guardrails around quick, easy, trusted, meaning we have to perform the task and make it easy and quick, not just for just the guests but for our team. And by doing that, we can be trusted to deliver that service at a high quality. And so those are the standards that we raise. And as we continue to look at added services, we need to make sure that there are enough opportunities across the car park for us to add them to every store.

Lori A. Flees: Very clear guardrails around quick easy trusted.

Lori A. Flees: Meaning we have to perform the we have to make it easy and quick not just for just the gas, but for our team and by doing that we can be trusted to deliver that service and a high quality.

Lori A. Flees: So those are the those are the bars that we raise and we continue to look at added services, we need to make sure that there are enough opportunities across the car park for us to add it to every store.

Lori A. Flees: Because you want to make sure that the team has enough reps in order to perform the service. Again, quick, easy, trusted. So nothing to report, but we continue to look at our service menu and how we'll expand it. Great.

Lori A. Flees: Because you want to make sure that the team has enough reps in order to perform the service again quick easy trusted so nothing to report, but we continue to look at our service menu and how we'll expand it.

Speaker Change: Okay, Great and then I think you were also looking at maybe looking at store formats that are lower build out cost could you talk about where you are.

Lori A. Flees: And then I think you were also looking at maybe looking at store formats that have lower build out costs. Could you talk about where you are in that process? Yeah, so the team has been working; our real estate and development team, combined with our operations team, and our franchise teams have been working together to rethink the store design. One of the things I would say is we went some time ago to saying we would only build a three bay store.

Lori A. Flees: That process.

Lori A. Flees: Yes, so the team has been working.

Lori A. Flees: Our real estate.

Lori A. Flees: And development team combined with our operations team and our franchise teams have been working together to really look at the store design.

Lori A. Flees: They're one of the things I would say is we went some time ago to saying, we would only build a three based store and I think part of that is because the volume that we see a three book based store is operationally.

Lori A. Flees: And I think part of that is because the volume that we see a three-bay store is operationally, you know, the right place to eventually be in certain car parks. But there are some areas where you probably don't need the third bay for four or five years. So the team has created a modular design where they can build the two-bay store but build it where the electricity and the water are not on the store end where you would want to add a third bay.

Lori A. Flees: The right place to eventually be in certain car parks.

Lori A. Flees: But there are some areas, where you probably don't need the third bay for four or five years. So the team has created a modular design, where they can build the two bay store, but build it where the electricity in the water or not.

Lori A. Flees: On the store and that you would want to add a third bay, but instead of building that out and spending the capital at the start of a project leading designing it such that that could be easily act. It added as a as are we.

Lori A. Flees: But instead of building that out and spending the capital at the start of a project, weeding, and designing it such that that could be easily added without impacting the day-to-day operation of the store or minimizing that impact.

Lori A. Flees: Without impacting the day to day operation of the store of minimizing that impact and that's something that our company operations has started to move to now we won't see the impact of that immediately.

Lori A. Flees: And that's something that our company operations have started to move to. Now we won't see the impact of that immediately because the stores that we're opening this year, you know, we had designs for those well before the year ever started. But as we move into next year, we'll start to see some of that, and I know we'll share more of that as we get to talk about next year's guidance. But this year, I wouldn't expect any material changes, but it is an active conversation that we've engaged our developing franchisees in pretty heavily with a lot of energy. And Lori, I would add to that we've also engaged

Lori A. Flees: Immediately because the stores that we're opening this year.

Lori A. Flees: We were we had designed for those the well before the year ever started.

Lori A. Flees: But as we move into next year.

Lori A. Flees: Start to see some of that in and I and I know, we'll share more of that as we as we get to talk about next year's guidance, but this year I wouldn't expect any material changes, but it is an active conversation that we've engaged our developing franchisees in pretty heavily with a lot of energy and Lori I would add to that.

Mary E. Meixelsperger: And Lori, I would add to that the same team has also been very focused on taking costs out of the transition capital that's required when we acquire a store. And so we've seen some really good cost reductions there in relationship to the required investments when we're acquiring a store that's helping to drive improved return on invested capital related to those acquisitions.

Mary E. Meixelsperger: We've also that same team has been very focused on taking cost out of the.

Mary E. Meixelsperger: The transition capital that's required when we acquire a store.

Mary E. Meixelsperger: And so we've seen some really good.

Mary E. Meixelsperger: Our cost reductions there in relationship.

Mary E. Meixelsperger: Two the required investments when when we're acquiring a store that's helping to drive improved return on invested capital related to those acquisitions.

Lori: Great. Thank you.

Elizabeth Russell: This concludes our Q&A. I'll now hand it back to Elizabeth Russell for closing remarks.

Mary E. Meixelsperger: This concludes our Q&A I'll now hand back to Elizabeth Russell for closing remarks.

Operator: Thank you all for your time today. We look forward to our ongoing discussions following today's call. This concludes our call for today. Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation.

Elizabeth Russell: Thank you all for your time today, we look forward to our ongoing discussions following todays call. This concludes our call for today.

Operator: Ladies and gentlemen, today's call is now concluded. Thank you for your participation you may now disconnect your lines.

Operator: [music].

Operator: Okay.

Operator: Yeah.

Operator: Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines. Ladies and gentlemen, today's call is now concluded. We'd like to thank you.

Elizabeth Russell: Ladies and gentlemen, today's call is now concluded.