Q1 2025 Valvoline Inc Earnings Call
Hello, everyone.
Marie: And thank you for joining the Valvoline as first quarter 2025 earnings conference call and webcast. My name is Marie and I will be coordinating your call today. During the presentation. You can register your question by pressing Star followed by one on your telephone keypad and if you change your mind. Please press star followed by two.
Marie: I will now hand over to your host Elizabeth Clevenger Investor Relations to begin. Please go ahead.
Marie: Thank you.
Marie: And welcome to the <unk> first quarter fiscal 2025 conference call and webcast.
Marie: This morning, Valvoline released results for the first quarter ended December 31 2024.
Marie: This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our investor Relations website at investors got Valvoline dotcom.
Marie: Please note that these results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission.
Speaker Change: On this morning's call is Laurie Lee, our president and CEO and very thankful for our CFO.
Speaker Change: As shown on slide two any of our remarks today that are not statements of historical facts are forward looking statements.
Speaker Change: These forward looking statements are based on current assumptions as of the date of this presentation are subject to certain risks and uncertainties that may cause actual results to differ materially from such statements.
Speaker Change: We assume no obligation to update any forward looking statements unless required by law.
Speaker Change: In this presentation and in our remarks, we will be discussing our results on an adjusted non-GAAP basis, unless otherwise noted.
non-GAAP results are adjusted for key items, which are unusual nonoperational or restructuring in nature.
Speaker Change: We believe this approach enhances the understanding of our ongoing bid.
Speaker Change: A reconciliation of our GAAP to adjusted non-GAAP results and a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix.
Speaker Change: The information provided is used by management and may not be comparable to similar measures used by other companies.
Laurie Lee: With that I will turn it over to Laurie.
Elizabeth Clevenger: So Elizabeth.
Elizabeth Clevenger: And thank you all for joining us today.
Elizabeth Clevenger: Let's start with a look at our first quarter highlights on slide three.
Elizabeth Clevenger: We delivered financial results substantially in line with our expectations for the quarter.
Elizabeth Clevenger: Our system wide store sales grew 14% to $820 million and our same store sales growth for the quarter was 8%.
Elizabeth Clevenger: Net sales increased 11% to $414 million and adjusted EBITDA increased 14% to $103 million we.
Elizabeth Clevenger: We had a good quarter of new store additions delivering 35, net new stores across the network.
Elizabeth Clevenger: In addition, we closed our recently announced refranchising effort in Central and West, Texas, transferring 39 stores to a new franchise partner.
Elizabeth Clevenger: This refranchising transaction along with the two we completed in Q4 give us great momentum to develop these markets significantly faster than the otherwise would have while delivering long term value to shareholders.
Elizabeth Clevenger: Now, let's turn to an update on our strategic priorities.
Elizabeth Clevenger: We remain focused on three priorities driving full potential in existing business accelerating network growth and targeting customer and service expansion.
Elizabeth Clevenger: Actions across these three areas will enable us to deliver strong financial growth and best in class returns.
Elizabeth Clevenger: Highlight of this past quarter with our two annual meetings, where we brought together our company operations team and our franchise partners.
Elizabeth Clevenger: These events are a time for us to celebrate the progress we've made align our focus for the coming year and provide training that can be taken back to the stores.
Elizabeth Clevenger: The theme for both meetings this year with elevate as we look to elevate our performance in all aspects of the business.
Elizabeth Clevenger: And our company meeting, which we call our family reunion, we hosted our service center managers from across the United States, and Canada with our field operations management and key support team members.
Elizabeth Clevenger: We recognize team members, who have 20 or more years with the company. We celebrated our first company store to surpass $5 million in annual sales and we read.
Elizabeth Clevenger: Recognize the stores and markets with the highest customer satisfaction scores and the highest employee retention.
The most impactful training sessions.
Elizabeth Clevenger: Focused on customer experience and employee engagement key drivers of successful is this performance and growth.
Elizabeth Clevenger: And customer experience, we continue to focus on how to educate our guests on the services their vehicles require without making a heavy sales push.
Elizabeth Clevenger: Our session called Boomtown was focused on behaviors opportunities ownership and mindset or two to grow the ticket in the right way the training needs to be memorable and fun. So the information can make its way back into our stores.
Elizabeth Clevenger: Our investment in this training is a huge payback as seen by the increase in our non oil change services growth in Q1 non oil change revenue was again, a significant contributor to ticket growth and we see a continued runway as our teams focus on improving the presentation of these services to educate guests.
Elizabeth Clevenger: Yes.
Elizabeth Clevenger: And employee engagement, we provided our store managers the tools to attract.
Elizabeth Clevenger: Train and develop their teams and ultimately retain them.
Elizabeth Clevenger: We have seen our retention rates improved significantly post COVID-19 with the trailing 12 month retention once again decreasing as we closed the first quarter.
Elizabeth Clevenger: Our effective training, which starts with a 270 hour program for all technicians helps employees feel confident in delivering our services to guests.
Elizabeth Clevenger: We also see stronger performance in vehicles per day in non oil change revenue service penetration in the stores with longer tenured employees.
Elizabeth Clevenger: And our annual franchise workshop, we were joined by partners, representing over 90% of our franchise stores, including all of the partners, who recently joined our network. The engagement of our franchise community has never been higher.
Elizabeth Clevenger: A significant focus of our time with franchisees was around development as we work towards our target of a 3500 plus store network with the development commitments at all of our large franchisees have made we were focused on how to continue to build a robust pipeline we.
Elizabeth Clevenger: We spent time on our real estate analytics tools and how they can be further leveraged to assess new build locations.
Elizabeth Clevenger: And we discussed how to convert the pipeline of acquisition targets or business development team has been successful engaging with nearly 4000 independent quick lube operators to identify attractive acquisition targets those targets span both company and franchise geographies. So our focus was on how to transfer.
Elizabeth Clevenger: For and convert the opportunities within the franchise territories.
Elizabeth Clevenger: But before we move on to look at our financials I'd like to congratulate our franchise team on the recent recognitions our brand received from both the entrepreneur and franchise times.
Elizabeth Clevenger: We were recognized as the leading automotive services retailer and number 24 overall on the entrepreneur franchise 500 list for 2025. This recognition is a testament to the quality of our operating model and our franchise partners.
Elizabeth Clevenger: Getting to spend time with our teams was a great way to kick off fiscal 2025, I'd like to thank our team members and franchise partners for their work to start this fiscal year strong.
Elizabeth Clevenger: The talents and capabilities of both our franchisees and team members truly differentiates our brand and provides a meaningful competitive advantage for valvoline now.
Mary: Now, let's turn it over to Mary to look at our financial results.
Mary: Thanks Laurie.
Slide five let's take a look at the topline performance for Q1.
Mary: For the first quarter net sales grew to $414 million, an 11% increase over the prior year.
Mary: System wide same store sales grew 8% and 15, 2% on a two year stack with company stores up eight 2% and franchise stores up seven 8%.
Mary: As a reminder, we have updated our approach to determining same store sales beginning in fiscal 2025 the.
Mary: The amount shown on the slide represent the updated approach for both the current quarter and the prior year's comparison.
Mary: We are pleased to see a return to a more balanced contribution from ticket and transaction this quarter with transaction growth contributing nearly 50% of the comp.
Mary: We saw a modest benefit in the quarter from weather that impacted the latter part of September and the South east pushing some volume into early Q1.
Mary: Non oil change revenue service penetration continued to be the largest contributor to the ticket component of same store sales.
Mary: Next quarter, we will lap the start of non oil change revenue initiatives and some protein actions.
Mary: As a result, we expect to see some deceleration in the Q2 same store sales comp that will remain for the balance of the year.
Mary: In addition in the second quarter, we will be comping up against the benefit we saw from leap day in the prior year.
Mary: Turning to the next slide.
Mary: We'll take a look at the financial drivers for the quarter.
Mary: Gross margin rate increased 80 basis points year over year to 36, 9% driven by labor efficiency as well as modestly lower product costs.
Mary: Increased depreciation expense, primarily from new stores offset these benefits by about 30 basis points.
Mary: SG&A as a percentage of sales increased 40 basis points to 19, 6% year over year.
Mary: As we mentioned in Q4, we are continuing to invest in technology, which is the main driver of the deleverage in SG&A for the quarter.
Mary: The timing of the annual mediums and the typical seasonality of sales drove the sequential change.
Mary: Our adjusted EBITDA margin of 24, 8% is a 60 basis point improvement over prior year.
Mary: On slide seven we will take a look at overall profitability.
Mary: During the quarter adjusted net income increased 9% to 42 million driven by adjusted operating income growth of 14%.
Mary: This was partially offset by higher net interest expense of $4 million.
Mary: As you May recall, the remaining proceeds from the global product sales that were used to retire. The 2030 bonds were invested through the end of the second quarter of last fiscal year.
Mary: On a GAAP basis net income for the quarter is $94 million and includes a $71 million pre tax gain related to the refranchising transactions.
Mary: Adjusted EBITDA increased 14% to $103 million largely from top line growth and improvements in gross profit.
Mary: Partially offset by additional SG&A over the prior year.
Mary: We saw modest impacts from the three refranchising transactions in the first quarter and we expect a larger impact from Refranchising in the remainder of the year given the early December closing of the most recent transaction.
Mary: Adjusted EPS increased 10% to 32 per share primarily from the growth in earnings partially offset by the increase in net interest expense.
Mary: Turning to slide eight.
Mary: We'll look at the balance sheet and cash position.
We ended the quarter with just over $1 billion of net debt and with a leverage ratio of three three times on a rating agency adjusted basis.
Mary: Cash flows from operating activities were $41 million, an increase of $20 million over the prior year.
Mary: Free cash flow was negative $12 million, an improvement of $8 million over the prior year driven by an improvement in cash from operations.
Mary: Share repurchases totaled $39 million for the quarter.
Mary: As we look at the remainder of the year, we remain confident in our guidance with full year same store sales comp of 5% to 7% net store additions of 160 to 185 units and adjusted EBITDA of $450 million to $470 million.
Mary: Consistent with prior years, we expect to see 40% to 45% of adjusted EBITDA in the front half of the year.
Mary: With 55% to 60% coming in the back half due to the seasonality of the business.
Speaker Change: I will now turn it back to Lori for some closing remarks, thanks, Mary I'm pleased with our results for the first quarter. The fundamentals of our business remain strong, allowing us to consistently deliver compelling growth as we demonstrate the attractiveness of our customer value proposition and the robustness of our business model.
Mary: Accelerating network growth enables us to drive market share gains and capture the benefits of scale.
Mary: Completing the three refranchising transactions and seeing the momentum that our new franchise partners are adding we're confident that we're on track to achieve our new store growth goals.
Mary: We're well positioned to deliver strong and durable growth in fiscal year, 2025, and unhappy with our start of the year.
Elizabeth Clevenger: With that I will turn it back over to Elizabeth.
Mary: Yeah.
Mary: Thanks, Lori before we start the Q&A I want to remind everyone to limit your questions to one and a follow up so that we can get to everyone on the line.
Speaker Change: With that operator, please open the line.
To ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by two.
Bank to ask your question. Please ensure that your devices on muted locally we have a question from Steve Shemesh of RBC capital markets. Please go ahead.
Speaker Change: Good morning, and thanks for taking the question.
Speaker Change: Wanted to start off on same store sales. So you know you guys have made clear that your compares on pricing in non oil change revenue are going to be a little bit tougher as we as we move into two queue. Just any any initial thoughts on what you're seeing quarter to date and how you expect the quarter to play out.
Steve: Yes, Steve Thanks for the question.
Steve: We've continued to see good momentum at the beginning of the quarter, although it's been a little choppy because some of the weather that we've seen but consistent with our history. When we see difficult weather and one we typically get that volume back in the following week.
Steve: The month of January with some of the Choppiness in weather, especially down in the south.
Steve: We've seen good recovery subsequent to the weather.
Steve: Encouragingly, we are continuing to see strong transaction growth consistent with what we saw in the first quarter as well as.
Steve: As we're moving into the quarter.
Steve: Youre right, we are lapping some key initiatives pricing and non oil change.
Steve: Our initiatives that we started in the second quarter of last year. So we expect to see some deceleration there.
Steve: And then the other key thing I would call out for Q2 is the impact of Leap day.
Steve: We expect the impact of leap day to have.
Steve:
Steve: Negative 120 basis point impact on our comp for the quarter.
Steve: So, it's a pretty big impact for the quarter for leap day year less so that the full year impact is more like 30 basis points, but.
Steve: We are running up against that leap day headwind as well for the second quarter.
Speaker Change: And Steve I'll, just comment on NFC are well, we're lapping a bunch of initiatives, we we doubled down in our family reunion.
Steve: To talk about process.
Steve: Our value proposition is about quick easy trusted and we've got the technology to pull all of the information on our customers vehicles, when they're when they pull up to the bay and that allows us our team members to know what what added services are required under the vehicle and so as you think about since we started talking about in OCR, we did it.
Steve: A lot of work focused on making sure we had machines in working order to do the services.
Steve: In supplies, particularly on the visuals.
Steve: For any vehicle that will come into our store and we shifted to focus on training and process excellence and I'd, just say that while we're lapping sort of an oversized contribution and the comps we still expect to have positive contribution from and OCR service penetration.
Steve: For some time to come and we we look at that by saying what is the cars or customers that are coming into our store on average what do we think their mileage gains will be and what services will be required versus the services, we deliver and there's there's a very good opportunity there for us to continue to manage and it.
Steve: Comes down to process execution and training.
Speaker Change: And so again I think Mary's comments are right it'll it'll lessen in the comp, but it still will be a positive contribution and we as we've been talking about for the last couple of years.
Speaker Change: Okay. That's that's great. Thank you and and maybe just a quick follow up here on gross margin Mary.
Speaker Change: You guys had previously talked about gross margin being in the ballpark of a flat for the year, obviously, a really strong start to <unk> up 80 basis points again, though that pricing in non oil change revenue contribution should be less which should come out of that but just any changes to how you're thinking about gross margin flow.
Speaker Change: Going through the full year.
Speaker Change: We're we're.
Speaker Change: Encouraged by the first quarter results.
Laurie Lee: Lori mentioned in her remarks, it is pretty consistent with our expectations. So.
Speaker Change: We saw good margin performance.
Speaker Change: But we do expect to see some deleverage impact from the Refranchising transactions.
Speaker Change: That we announced last year.
Speaker Change: And we.
Speaker Change: We certainly are continuing to work on benefits from both scale and efficiency.
Speaker Change: But overall our guidance for the year is unchanged.
Speaker Change: Okay. That's great. Thank you.
Speaker Change: We have a question from Simeon Gutman of Morgan Stanley. Please go ahead.
Simeon Gutman: Hello, Good morning, I'm going to ask them I wanted to follow up on just kind of noisy spot first it was a it was a good quarter I wanted to ask the word substantially in line that was used in the transcript and in the press release curious what.
Speaker Change: What was substantial.
Either missed or what was better and then the follow up is on the prior question around the guidance range for the rest of the year.
Speaker Change: You were you always expecting we knew it would be above the range or at the high end.
Speaker Change: Saying the business is still running strong.
Speaker Change: And we're not flowing upside for them because it performed consistent with our expectations. So are you being more conservative.
Speaker Change: Especially given that trends are continuing in the second quarter. So far just thinking about upside to it like underlying run rate versus conservatism.
Speaker Change: Yeah.
Simeon Gutman: So on your first question Simeon in terms of substantially in line I mean, I think it was substantially in line.
Simeon Gutman: Yeah, No no performance is ever perfect in terms of meeting expectations. There as you said there is things that are slightly above slightly below but overall, we were we were very substantially in line with our expectations for the quarter.
Simeon Gutman: In terms of your second comment on the guide range for the balance of the year.
Simeon Gutman: We still have a lot of the year to go.
Simeon Gutman: We are cautiously optimistic based on the.
Simeon Gutman: The good performance we saw in Q1.
Simeon Gutman: We're really pleased that we've seen transaction growth.
Simeon Gutman: Ticked up to a more balanced level and.
Simeon Gutman: And continue here into the early parts of Q2 and.
Simeon Gutman: I would tell you that I, certainly think that we have some upside.
Simeon Gutman: Opportunity.
Simeon Gutman: Towards the top end of our range our guidance range.
Simeon Gutman: We're going to continue.
Simeon Gutman: Focus on managing the business to be able to deliver really great outcomes for the year.
Simeon Gutman: But as.
Simeon Gutman: As we sit right now we're still very comfortable with the guidance range that we provided last quarter.
Simeon Gutman: I think some of Sydney and some of the difference maybe between that.
Simeon Gutman: It could be around the transaction and the timing of the transaction for the last Refranchising I'm not sure overall the assumptions made in for Q1 may have been consistent with what we were expecting so I think that maybe drove some of the consensus being lower than where.
Simeon Gutman: We were expecting but other than that I think Mary's comments are spot on around were substantially in line and theres always going to be pluses and minuses, but we're really pleased with where we started.
Simeon Gutman: Yeah.
Speaker Change: Thanks, Lori Thanks, Matt.
Speaker Change: Do you have a question from Chris <unk> from Stifel. Please go ahead.
Speaker Change: Good morning, everyone. Thanks for taking the question.
Speaker Change:
Speaker Change: I know the company has been working on ways to reduce the investment outlay for new units can you provide an update on the amount of costs do you expect to take out of the build out or what you're targeting for the investment outlay and then I had a follow up.
Speaker Change: Sure. It's a great question and one that we spend a lot of time on in fact, just spend some time with our board last week.
Speaker Change: We have always talked to we started this process a.
Speaker Change: A year ago give or take.
Speaker Change: And we went through a process to redesign our prototype which hadn't been done in quite some time.
Speaker Change: We looked at the size of the building we looked at the structural elements that add cost and make us different than other competitors, who have touted lower capital costs and really.
Speaker Change: Value engineered the building, we also value engineered every piece of equipment.
Speaker Change: The equipment changes were already flowing through some of the builds that will happen. This week. That's actually those are hundreds of thousands of savings with every change, but it could be five to 10000 by element and those add up to really attractive savings and they don't take away from the.
Speaker Change: The team member experience and efficiency and they certainly don't take away from the customer experience they're just.
Re contracting with suppliers to get the best rates on the equipment that we need to serve our guests.
Speaker Change: On the prototype builds we are we are just getting the bids back from contractors, we have some franchisees who've already gotten bids back and very encouraged obviously.
Speaker Change: We haven't we haven't gone we're going to construction. So I don't want to overstate, what the savings will be until we actually see final build costs at the end cause or there is plus or minuses with our contractors as they start to build them, but we've always said, we think 10% to 20% is certainly reasonable.
Speaker Change: And I think and I think the other thing we're looking at we've been very open about is really looking at right sizing the number of base to the market and going through an exercise of do we need to build a three day or Willie or will two to base serve the market better drive more share and higher return.
Speaker Change: So we've gone to more of them were moving to more of a modular design. It it won't impact a lot of what we have in place to open this year, but I think in future years, you'll see the mix shifts between three Bay and <unk> will also bring our average new unit build costs down and the way that we've done is we keep flexibility to.
Speaker Change: <unk> Bay.
Speaker Change: Both in the way, we design all of the electrical and plumbing as well as the pit design and everything. So we can we can actually add a third base should we need it.
And not spend the capital today, but spend it when we need it which actually does drive our capital costs down.
Speaker Change: And we factor in future build into the overall NPV calculations that were expecting and so I feel really good about our our new store returns.
Speaker Change: My follow up is are there opportunities to reduce the time it takes for a new store to reach maturity I believe it's now three to five years, but can you shorten that in order to improve the return as well.
Okay.
Speaker Change: Yeah. It definitely is something we've spent some time on in the last couple of years as we've opened up new builds.
Speaker Change: At a higher rate I think part of what we're doing is it depends by the market. So if the market is already got a good presence with the Valvoline brand we tend to see the first year ramp be a little higher and the ramp to maturity a little shorter, but as we try to extend our footprint into March.
Speaker Change: So we had less presence, which by the way there's fantastic returns in those markets.
Speaker Change: We have to balance the right marketing spend pre opening and then in the opening to build the car count more quickly.
So that's always when we look at every location, we look at marketing spend for the area of marketing spend for the new unit and we try to adjust to try to bring those maturities.
Speaker Change: The maturity faster.
Speaker Change: If you look over time, the maturity has shortened but we still it still varies by location and that's why we talk about it from a three to five year perspective.
Speaker Change: Okay. Thanks, guys.
Speaker Change: Okay.
Speaker Change: Thanks, Chris we have a question from Steven the calling from Citi. Please go ahead.
Steven: Hi, good morning, Thanks, very much for taking my question.
Steven: I was hoping you could talk a bit more about that improved transaction performance. What do you think is driving that are you seeing some changes in the competitive landscape just anything too.
Steven: I'm in there and then on a follow up on semi and <unk> question. Just in the context of same store sales you had some prior commentary on the last call that you could potentially have a quarter below the comp range given the strength that you've seen here in the first quarter and that's carried into two Q is it.
Steven: Fair to say, that's kind of off the table that you should should pretty much be in the range for the remainder of the year.
Steven: Sure I'll cover the first one I'll, let Mary cover the the same store sales.
Steven: Range for the rest of the year.
Steven: When we look at performance in Q1, we.
Steven: We were pretty clear on last quarter's guide or a discussion that we knew we would have some increased transaction flow.
Steven: From the push out given the two hurricanes that happened and hit most of the southeast region.
Steven: More outsized on the franchise, but still hitting some of our company stores.
Steven: So we knew that transactions would be quite strong in October we also had a.
Steven: As you may recall, a year ago, we talked about softness in the starting last financial year.
Steven: Just given some marketing agency changes so we knew going in to October that we'd have a really strong transaction growth in October.
Steven: When we look at the rest of the quarter, we still had very good transaction growth and really the most most of that comes from the compounding effect of growing our customer base. So as we acquire new customers into our location when we serve them well and we are.
Steven: Our customer satisfaction scores are 200 basis points higher year over year, then they and they have been and when that happens.
Steven: Our retention rate is strong and we are building on the base. So the biggest the biggest contributor to transaction growth is our active custom customer base growing year over year.
Steven: Obviously, we know how much new stores contribute.
Steven: As well, but I would say there is theres nothing competitive wise that is creating an outsized impact. These are just the core fundamentals of our business. In fact, I would just say that the there's not really been any change in what we're seeing from a competitive standpoint apart from the typical pullback that starts after the busy.
Steven: <unk> season.
Steven: So we feel really good about our performance really good about our ability to acquire new customers and retain the customers. We've served.
Steven: Barry do you want to comment on sure on your question on same store sales in a range.
There's always the risk of a significant weather event happening at the end of a quarter that can shift volume.
Steven: Between quarters, you know in January we actually saw the significant weather events happen.
Steven: Early in the second week of the month and that shifted a lot of volume into the third week of the month.
Steven: But those types of timing things can happen.
Speaker Change: During the quarter due what do I think that it's a probability or a likelihood no I don't.
Speaker Change: But I think there's there's always a remote possibility that those both.
Speaker Change: Those types of events could happen, we feel good about our guidance for the.
Speaker Change: For the full year, we had a strong start to the first quarter and we've continued to see good momentum in the early part of the second quarter I did mention that we're lapping some pricing and.
Speaker Change:
Speaker Change: Not all change.
Speaker Change: Our initiatives that we started in the second quarter of last year that'll cause some deceleration and then again leap day won't have a significant year over year over year impact on Q2.
Speaker Change: Well in excess of 100 basis points.
Speaker Change: So those are really kind of a highlight in terms of same store sales.
Speaker Change: Okay. Thanks for all the detail the brief follow up I had was just on gross margin I know someone asked earlier, but on the last call you had talked about some risk with some of your.
Speaker Change: I guess, you'd say people youre selling waste oil to adjusting their pricing has anything changed in that scenario. It sounds like your gross margin are the same but just help us understand if anything is coming in a little bit better or worse than expected.
Speaker Change: Yeah, Nothing has really changed you know we've worked hard to be able to minimize the impact from the waste oil collection.
Speaker Change: Challenges, but typical with what we've seen historically when the revenue from waste oil collection goes down it typically is correlated with the underlying product costs declining as well.
Speaker Change: And you might have noticed in my comments I said, we saw some modest benefits in margin for Q1 from lower product cost and so.
Speaker Change: We did not see and did not expect to see the lower waste oil recovery in Q1, we expect that more of that in Q2.
Speaker Change: But again I do believe that we will see correlation with some modestly lower product cost as well.
Speaker Change: I don't expect it to have a significant impact on us for the year.
Speaker Change: Okay, Thanks for that detail.
Speaker Change: We have a question from Justin Kleber from Baird. Please go ahead.
Speaker Change: Justin Your line is now open. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Hey, good morning, everyone, sorry about that thanks for taking the questions. So first one just on guidance.
Speaker Change: 14% EBITDA growth here in <unk>, the midpoint of our full year guide implies sub 2% over the balance of the year. It seems like a fairly big.
Speaker Change: Big change, even if we take into account the greater headwind from Refranchising. So can.
Speaker Change: Can you maybe unpack, what's changing it doesn't sound like waste oil.
Speaker Change: The dynamics are a major headwind here. So is the pacing of your investment spend weighted to the back half of the year or you're just maintaining our conservative approach to guidance.
Justin Kleber: So Justin Thanks for the question.
Justin Kleber: I don't think you can discount the impact that refranchising will have for the balance of the year.
Justin Kleber: So there from a Q1 perspective, we saw some modest impacts from Refranchising.
Justin Kleber: But we didn't close on the largest of the three transactions until early December.
Justin Kleber: The quarter and so we had the benefit of those 39 stores in our quarterly results for most of the quarter.
Justin Kleber: If I were to take out.
Justin Kleber: And show the quarter on a pro forma basis.
Justin Kleber: For Refranchising I would remove an additional $12 million of revenue and an additional $3 million of EBITDA.
Justin Kleber: For the quarter and.
Speaker Change: You have to do a similar kind of pro forma adjustment for last year's first quarter.
Speaker Change: Taking out the re franchise stores I would've reduced revenue by about $24 million and EBITDA by about $5 million for the first quarter of last year and so I think when you look at the balance of the year on a pro forma basis for Refranchising, you would expect to see sales.
Speaker Change: And EBITDA growth numbers that are very consistent with our trend.
Speaker Change: Longer term, but I think that the year over year compare with those stores in last year and out of the current year is going to cause.
EBITDA growth to be substantially lower on a on a reported basis.
Speaker Change: We will make sure that we call it out.
Speaker Change: For you all to <unk>.
Speaker Change: Did say last quarter that the full year impact.
Speaker Change: Last year was about $100 million in sales and about $25 million in earnings.
Speaker Change: So I think if you put that that kind of $25 million in earnings back in you'd get back to a more normalized EBITDA growth level and Thats the primary driver of.
Speaker Change: The deceleration in the growth rate.
Speaker Change: Okay. That's very helpful. Mary Thanks for framing the Refranchising impact and my follow ups just related to the.
Speaker Change: The tailwind from premium innovation.
Speaker Change: Looked at your latest sdd. It shows your premium oil mix is about 80% curious how much higher do you think that penetration.
Speaker Change: Can realistically go and then also.
Speaker Change: Just if you could share any insights on maybe how that 80% breaks down between.
Speaker Change: Alrighty synthetic versus some sort of synthetic blend.
Speaker Change: Yeah, I think the point is that when we reported in the F. T D.
Speaker Change: They include both Max life, which is our synthetic blend and our full synthetic and so it's we're seeing and we've been looking at consumer behavior. We're seeing continued trade up to from.
Speaker Change: From conventional to both the.
Speaker Change: The Max life.
Speaker Change: Product as well as the full synthetic and we see a trade up from Max life into full synthetic and that continues to be a very positive.
Speaker Change: Tailwind for us that will continue.
Speaker Change: Some of that is driven really two key drivers. The biggest one is that the car park as it evolves there are more vehicles coming into that four to six year window. When we start to see an oversized percentage of the car Park.
Speaker Change: That are that are requiring we're recommending full synthetic.
Speaker Change: So that that's an easy education for the customers, but the other the other factor. That's contributing is the age of the vehicle, which I think is clicked over 12 years now and when we get to older vehicles with high mileage high mileage being over 100000 miles we tend to educate the customers around how to take care of.
Speaker Change: Their vehicles, so that it can stay on the road for even longer and that creates a trade up environment even for customers that we have that we have seen for four years.
Speaker Change: So both of those things, we've always talked about it being <unk>.
Speaker Change: 100 to 150 basis points.
Speaker Change:
Speaker Change: Of of comp tailwind for many years to come and I think that still remains to be true.
Speaker Change: Alright, thanks, so much for the insights and best of luck.
Speaker Change: Thank you.
Speaker Change: We have a question from David Bellinger of Mizuho. Please go ahead.
Speaker Change: Thank you al and good morning.
Speaker Change: We will go back to us.
Speaker Change: Two comments just on the detail again, but maybe you could take a bigger step back here right. Just it seems like the Q2 comp it mainly.
Speaker Change: Impacted by the ticket comparison, the leap day ship.
Speaker Change: If you ex out all of that it still seems like the transaction piece of the business is running pretty strong quarter to date.
Speaker Change: Correct.
Speaker Change: The second part of it you mentioned some of the transaction flow being pushed out from the hurricanes and some of the other weather.
Speaker Change: Is that all in the system now and we should look at.
Speaker Change: Actually post Q2 back half of the year getting to somewhat of a more normalized transaction growth level.
David Bellinger: So on the first part of your question David in terms of.
Speaker Change: The Q2 comp.
Speaker Change: If I understand your question correctly.
Speaker Change: <unk>.
Speaker Change:
Speaker Change: From a.
Speaker Change: From a comp deceleration perspective.
Speaker Change: We certainly expect to see continued transaction growth, we certainly will see offsets to that transaction growth from leap day, and lapping leap day, so it won't be.
Speaker Change: Once we get here through the end of February we're going to see some offset.
Speaker Change: The transactions because we had the extra day in the quarter last year.
Speaker Change: That will affect.
Transactions more significantly than it will affect ticket.
Speaker Change: Because ticket what we would expect to see some relative consistency over the quarter timeframe.
Speaker Change: So.
Speaker Change: I'm not sure if that answers the first part of your question in terms of.
Speaker Change: The.
Speaker Change: Deceleration of the comp and the impact of that deceleration on transactions.
Speaker Change: No that's fair enough, but it's not like you've seen that.
Speaker Change: That came down the turns out transaction growth side as you entered Q2 being absent these no.
Speaker Change: The other pieces of the business. It is one time like shifts the underlying growth rate on the transaction side has not changed materially.
Speaker Change: No. We think we continued to see strong.
Speaker Change: Good good performance in terms of the transaction contribution to the overall comp and I think also still still balanced so again, while we're going to lap some of the ticket items.
Speaker Change: We're still having growth on the ticket side. So I think what I think your question is is right in that one we're seeing continued good transaction growth as we're getting as we're into Q2.
Speaker Change: And we're continuing to see good ticket growth, although slightly slower than what we would've seen in the past 12 months because of some of the lapping activity on and OCR improvement as well as some pricing actions.
Speaker Change: And then your second part of your question on the transaction.
Speaker Change: Go ahead.
David Bellinger: Go ahead, David No go ahead, sorry, sorry for putting up go ahead.
David Bellinger: I was just going to say on the second part of your trend. Your question in terms of transaction growth for the balance of the year.
David Bellinger: We are comping up against weaker transaction growth in the back half of last year.
David Bellinger: So when we get to the back half of the year My expectation would be we'll continue to see some good balanced.
David Bellinger: Balanced between transactions and ticket in the back half, especially given that we're going to be comping up against some.
David Bellinger: Some weaker numbers from from fiscal 'twenty four.
Speaker Change: No understood that's very helpful.
David Bellinger: Shift over.
David Bellinger: Changing gears onto the buybacks.
David Bellinger: <unk> repurchased almost $40 million this quarter alone.
David Bellinger: That's really towards the low end of your full year guide, but how should we think about buybacks over the balance of the year and what would allow you to potentially go to the high end of the range or even above is very good you need to see in the marketplace or just how are you thinking about that change over the balance of the year.
David Bellinger: Sure so you'll see that.
David Bellinger: When we issue our 10-Q that subsequent to the end of the quarter, we did some additional buyback as.
David Bellinger: As well, we did about $20 million of additional buyback.
David Bellinger: Since the end of Q1 so.
David Bellinger: The fiscal year to date, we're more in the $60 million in terms of total buybacks.
And we've looked opportunistically, we saw weakness in the share price after our last quarter call and we're taking advantage of that we think that there's significant undervaluation of the business in the marketplace and we thought it was.
David Bellinger: Made a lot of good sense for us to accelerate some of that buyback.
David Bellinger: Take advantage of that.
David Bellinger: Perfect. Thank you.
David Bellinger: We have a question from Peter Keith of Piper Sandler. Please go ahead.
Alexia Morgan: Hi, This is Alexia Morgan on for Peter Keith Thanks for taking our question.
Alexia Morgan: My first question would be on the promotional environment. We've heard from our checks that are the promotions have come down a bit or promotions have moderated recently.
Alexia Morgan: Can you talk about what you saw there in Q1, just as it related to prior quarters, and then how you're thinking about promotions in Q2.
Alexia Morgan: Sure I think you know, we're not seeing any significant change on the competitive standpoint from a promotion standpoint.
Alexia Morgan: We feel really good about our performance I think in the last couple of quarters, we talked about some episodic activity from our competitors outside of our quick lube segment.
Alexia Morgan: And it's been.
Alexia Morgan: Pretty transitory in nature.
Alexia Morgan: And that had a material impact on our business now that's.
Alexia Morgan: Whether we think about discounting in the category or discounting by folks in our category.
Alexia Morgan: And I think as we step back and reflect them, we have a very high quality brand.
Alexia Morgan: And that really.
Yeah.
Alexia Morgan: Really attracts customers for trial and then we have a best in class customer experience. Once they are there which enables us to continue to capture share of the do it for me market and outperform the market overall, so again, we're not seeing any outside outsized competitor.
Alexia Morgan: <unk> promotional or marketing, that's having a significant impact on us and we're really pleased on how our marketing team is.
Alexia Morgan: Driving really good return on Ad spend.
Alexia Morgan: Yeah.
Alexia Morgan: Great. Thank you and then my follow up it's just more on unit growth.
Speaker Change: On the franchise side are you still on track to them for your longer term target 115 franchise opens a year by 2027.
Alexia Morgan: Or how you're thinking about the bridge to that yeah.
Speaker Change: Yeah as I've mentioned in my remarks, you know.
Speaker Change: We have really strong engagement from our franchise partners in the U S. We have about 40 partners and that our workshop, we had the most engagement and focus on development.
Speaker Change: All of our large franchisees and many of the smaller ones have committed to upsize development agreements and our pipeline for new units is very strong.
Speaker Change: So the momentum of both the existing partners that we've been working with as well as the new partners. We welcome to the network.
Speaker Change: It really has increased our confidence in our new unit growth goes.
Speaker Change: Overall, we stated we wanted to get to 250, new units by fiscal 'twenty seven with 100.
Speaker Change: Give or take 100 coming from company and 150 coming from franchise and I think the momentum that our franchisees have as well as some of the things we're doing to support them gives us a lot of confidence we are on track to hit those goals.
Speaker Change: Thank you.
Speaker Change: We have a question from pharma Swindler of Stephens. Please go ahead.
Speaker Change: Hey, good morning, everyone I just wanted to touch on the waste oil one more time.
Pharma Swindler: It sounds like that didn't really flow through are becoming the answer to the margins this quarter, but I think it was mentioned maybe it impacting Q2. So maybe you could touch on that and then just maybe your thoughts on how the company could be impacted if we see increasing oil prices.
Speaker Change: Yes, good questions.
Speaker Change: In terms of waste oil.
Speaker Change: For Q2 and beyond.
Speaker Change: Our expectation is that.
Speaker Change: There'll be a very very little impact because we think that the.
Speaker Change: Any reduction in waste oil recoveries will be offset by lower product costs.
Speaker Change: And so.
Speaker Change: We're in so we're really expecting that to have a negligible impact in the balance of the year.
Speaker Change: As it relates to.
Speaker Change: Right rising oil prices it typically would take a while for any kind of increases in crude oil to pass through into the base oil markets and those base oil markets.
Speaker Change: <unk>.
Speaker Change: Impacting the cost of our lubricant products.
Speaker Change: <unk>.
Speaker Change: That also has an impact by the inventory that's in the system that has to flow through as well so.
Speaker Change: Rising crude prices at this point in the year would likely not have a really significant impact to us until the back half of the year.
Speaker Change: And we would of course be looking at opportunities for us to offset any increases through any efficiencies and then we always would have the opportunity to potentially look at our pricing and pass through pricing as well our expectation is that any increases.
Speaker Change: Would impact competitors in the same way that it would impact us in.
Speaker Change: And the market is always behaved pretty rationally when it comes to passing through cost increases.
Speaker Change: From a pricing perspective, so I wouldn't expect it to have a significant impact on our results for the year, we did see some increases.
Speaker Change: Alright, I appreciate the color. Thank you.
Speaker Change: We have a question from Bret Jordan of Jefferies. Please go ahead.
Bret Jordan: Hey, good morning, guys.
Bret Jordan: Could you talk about any seasonality or the non oil change business or you know, obviously, you think batteries and wipers would benefit from the winter weather, we've been having but could you sort of talk about the mix there.
Bret Jordan: The impact has been.
Bret Jordan: Yeah. That's a great question when you look at our services. There are very there are a few things that are highly seasonal wipers.
Bret Jordan: Wipers, obviously, we have an outsized.
Bret Jordan: Demand for those as we get into wet weather seasons.
Bret Jordan: In the spring and also in the fall.
Battery definitely impacts and in the winter and we've seen a significant uptake in battery.
Bret Jordan: In our battery.
Bret Jordan: In our battery penetration, which which we would expect in the summer.
Bret Jordan: Our air conditioning recharge services, obviously is when that starts to come into play, but most of the services that we have.
Bret Jordan: It's really driven by the.
Bret Jordan: Miles driven.
Bret Jordan: Of the vehicles.
Bret Jordan: So tire rotations every 5000 miles.
Bret Jordan: When we when we look at air filters and cabin air filters and the things that drive most of the non oil change revenue because they are highly recurring.
Bret Jordan: Most of those have limited seasonality.
Speaker Change: Okay, and then Mike you talked about the independent quick lube operators as sort of a potential acquisition.
Bret Jordan: <unk>.
Bret Jordan: No problem.
Bret Jordan: Devaluation trends there.
Bret Jordan: Are they sort of looking at this business as you're seeing a lot of.
Bret Jordan: Franchise quick wind conditions in the market, making them, Mike wanted to sell or how do you.
Bret Jordan: Average multiple for those independents.
Bret Jordan: Well the most the multiple definitely varies.
Bret Jordan: Based on the quality of the asset in the real estate location, but what we're not seeing I think post COVID-19 when when employment and the turnover of people was really high and supply chain was more challenging we had a lot of independent operators just.
Bret Jordan: Putting their hands up saying, okay. This is too difficult I don't have all the support in place.
Bret Jordan: And so we went through a period of time when there may have been more interest.
Bret Jordan: I don't I think we're gone back to a normal course and people just getting to an age and or a point in their career, where they are not transitioning the business down to the next generation and they're looking to exit.
Bret Jordan: I don't I don't think there's any significant changes that are driving more or less of the independent operators in terms of them wanting to transition.
Bret Jordan: I do think that when we come into a market and we start to build.
Bret Jordan: Some of the independents that impacts them and then they are expressed more interest because they see us.
Bret Jordan: Slowly taking business away from them and adding business from dealers.
Bret Jordan: And that sometimes will precipitate a raising of the hand and if the location is additive then we're very interested.
But I don't think there's any significant changes in that dynamic other than its still incredibly fragmented there stope 4000 independent quick lube operators out there not all of them do we want to own them, but.
Bret Jordan: If it's in the right real estate location, that's complementary to our network. We have a playbook, we know how to do that whether it's a onesie twosies owner or something of more scale.
Bret Jordan: Is it is a great return on invested capital.
Bret Jordan: It has a faster path to maturity because you're buying a business that's already existing and Youre building upon it.
Bret Jordan: So we.
Bret Jordan: We love those.
Bret Jordan: Obviously, we're selective when we buy them.
Bret Jordan: Great. Thank you.
Speaker Change: We have a question from David length of Wells Fargo. Please go ahead.
David: Hey, good morning, and thanks for taking my questions. So SG&A per store for company operated store grew high single digits in Q1, but considering the franchising activity and the recently closed acquisition curious how you're thinking about these trends throughout the balance of the year.
David: Yeah, So we talked last quarter David about.
David: We expected to see some deleverage in SG&A, partially due to our refranchising, but really driven by some of the investments that we're making in technology. So we really since we sold the products business are focusing on systems that are retail focused that can help us too.
David: To support the continued growth.
David: And scaling of the business over time.
David: We've replaced our ERP system, we're in the process of replacing our HR system both with.
David: Systems that are really have the ability to help us from a from a pure play retail perspective to drive growth in the business. So I do expect to see.
David: Some modest deleverage in SG&A over time excuse me over the remainder of the year.
David: And it's primarily being driven by our technology investments.
David: The only other thing I did want to add for some clarity in terms of some of the questions. We've had about the cadence of earnings in <unk>.
David: What we're what our expectations are for the balance of the years in my comments I did say that we expect the first half of this fiscal year to be produce 40% to 45% of our overall earnings and.
David: Because of the Refranchising impact I do expect that to be the towards the top of that range in the front half.
David: Relative to the 55% to 60% in the back half.
David: So.
David: I just wanted to provide some clarity in terms of the cadence of earnings as well.
Got it that's really helpful. Do you have another parcel and David can you just talk.
David: Yeah, just one more.
David: Can you talk about free performance in the quarter and you know any additional color you can provide around the current ones as well.
David: Yeah. It continues to be a great business, our investments in both team and capabilities are.
David: That our fleet managers look for is is really paying off as the growth continues to outpace our consumer transaction growth.
David: The business our service proposition is very attractive to fleets and we've had.
David: Some success growing the account base, but continue to focus on increasing penetration and ensuring as we grow our network of stores. The fleet customers that we're already serving no that we can handle more of their portfolio as their geographies.
David: As there are geographies span ours.
David: I think.
David: We have a significant market opportunity to continue to drive same store sales coming from fleet. That's some of the transactional growth.
David: We've been driving and expect to continue to drive.
David: And at our franchise workshop, we did have some discussion with franchisees around how we can partner and support them, we're actually helping all of our large franchisees as it as it relates to administrative support in terms of billing with the franchisees, but also some regional sales support just taking the tools and programs that have been.
David: A very successful in company markets and ensuring that our franchisees get the benefit of those.
David: Okay.
David: Got it thanks, so much.
David: Yeah.
Speaker Change: We currently have no further questions. So I'll hand back to Elizabeth Clevenger for closing remarks.
Elizabeth Clevenger: Thank you all for joining US today. This concludes our call.
Elizabeth Clevenger: This concludes today's call. Thank you for joining you may now disconnect your lines.