Q2 2025 Valvoline Inc Earnings Call
Hello, everyone, and thank you for joining the Valvoline's second quarter, 2025 earnings conference call and webcast. My name is Marie, and I will be coordinating your call today.
Speaker Change: During the presentation, you can register a question by pressing star, followed by one on your telephone keypad. If you change your mind, please press star, followed by two. I will now hand over to your host, Elizabeth Clevinger, of investor relations to begin. Please go ahead.
Elizabeth Clevinger: Thank you. Good morning, and welcome to Valvoline's second quarter fiscal 2025 conference
Elizabeth Clevinger: This morning's badly-released results for the second quarter ended March 31st, 2025.
Elizabeth Clevinger: Please note that these results are preliminary until we file our form 10Q with the Securities
Speaker Change: On this morning's call is Lori Flees, our president at CEO , and Mary Meixelsperger, RCF
Speaker Change: Ashone on slide 2, 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 and are subject to certain risk and uncertainties that make those actual results to differ materially from such statements.
Speaker Change: Stoplight assumes no obligation to update any forward-looking statements unless required by the law.
Speaker Change: In this presentation and in our remarks, we will be discussing our results on an adjusted non-Gat faces and most otherwise noted.
Speaker Change: non-GAAP results are adjusted for key items, which are unusual, non-operational, or restructuring in nature.
Speaker Change: We believe this approach enhances the understanding of our ongoing business.
Speaker Change: A reconciliation of our gap to adjust it, non-GAAP results, and a discussion of my otherwise use of non-GAAP and key business measures is included in the presentation of Pinnix.
Speaker Change: The information provided is used by management and may not be comparable to similar measures used by other companies. With that, I will turn it over to Lori.
Lori Flees: Thanks, Elizabeth, and thank you for joining us today. I'd like to start with a quick look at our second quarter highlights on slide three. Our system-wide sales increased 11% to $826 million, and our same-store sales growth for the quarter was 5.8%.
Lori Flees: Total net sales increased 11% to $403 million when adjusted for the impact of re-franchising.
Adjusted EBITDA increased 6 percent, also including the impact of re-franchising [inaudible]
Lori Flees: Our system-wide store count is now 2078, up 8% over the prior year, and we announce this morning that Kevin Willis would be joining our team as CFO , effective May 19th.
David Lantz, Thomas Wendler, David Lantz, Thomas Wendler, David Lantz,
Lori Flees: Before I provide an update on our strategic priorities, I want to cover a couple of topics that are top of mind given the current market environment.
Lori Flees: First on slide four, I want to provide our current assessment on tariffs.
Lori Flees: With what we know today, we expect the impact to be minimal.
Lori Flees: We put together a cross-functional team more than six months ago to collaborate with our suppliers.
Lori Flees: Our largest product cost is finished lubricants, which are primarily composed of batoyles and additives.
Lori Flees: It's our understanding that base oils remain exempt from tariffs as of now, and we expect most added to remain exempt from tariffs as well.
Lori Flees: The next largest supply category is Incelerary Products, like Filters and Wipers.
Lori Flees: We've worked with our suppliers to shift the majority of our supply from China to Vietnam and we continue to review alternate sources to optimize our flexibility.
Lori Flees: When we look at our inventory on hand, in fact, are in the 90-day pause on the reciprocal tariffs, we do not expect a significant change in cost for fiscal year 2025.
Lori Flees: and we continue to look at other areas of spend to evaluate any turf impact.
Lori Flees: As it relates to construction materials and equipment for our store additions, we expect a single digit percentage increase on news store capital costs.
Lori Flees: As it relates to other costs like store maintenance and technology, we expect a low single-digit increase as well.
Lori Flees: In total, for fiscal year 2025, we expect an operating cost impact of less than $4 million system-wide. This includes the impact on franchisees, but excludes any additional mitigating actions.
Lori Flees: and we estimate the annualized impact to be about 1 to 2% increase to our cost of sales, which we will mitigate through cost reduction efforts, alternative supply strategies, or a pricing pastor to customers.
Lori Flees: As a result, we feel very well positioned to navigate the changes as they come.
Lori Flees: The other topic is around the macro uncertainty and state of the consumer.
Lori Flees: It's important to remember that we are a strong business in a very resilient industry with a lot of growth potential.
Our industry has strong fundamentals and resilient long-term demand drivers.
Lori Flees: Customers are continuing to drive more, keep their vehicles longer, and seek convenience, and we have not seen evidence of deferral of service or trade them from our customers.
Lori Flees: We are well positioned within the industry to provide customers the quick easy trusted service necessary to maintain their vehicles.
Lori Flees: Our powerful brand, Superior Service Experience, Strong Franchise Partnerships, and robust customer data differentiate us from our competitors and position us to meet customer's needs for preventative vehicle maintenance.
Lori Flees: As we look at the total available market, there is considerable opportunity for growth, considering we currently only have about 5% of the overall market share related to the do-it-for-me oil changes.
Lori Flees: Now let me provide an update on some of our strategic priorities.
Lori Flees: This quarter, we saw growth in our business across all quartiles of household income and growth in N.O.C.R. across all store quartiles.
Lori Flees: We had healthy transaction growth across our business, including for our mature store base.
Lori Flees: Our Marketing Certification is a key competitive advantage that helps us drive strong demand.
Lori Flees: We recently completed the transition of our customer and marketing database into the cloud, which will enable us to deliver increased efficiency and personalization of our marketing spend.
Lori Flees: and we had a great launch of the University of Athletic Partnerships in two company markets, a Ohio insinacy during March Madness targeted towards new customer acquisition.
Lori Flees: We also continue to make progress on talent management with rolling 12-month nutrition rates remaining low and wage inflation moderating.
Lori Flees: To enhance capabilities, we successfully implemented the first phase of our HRIS System Workday.
Lori Flees: This new platform enables further development of our labor management capabilities and improves our ability to engage directly with our over 11,000 team members.
Lori Flees: As we approach the summer drive season, our team is staffed and ready to deliver outstanding customer experience.
Lori Flees: Given about 80% of the customers we serve, our customers we serve before, delivering a consistent and high-quality experience is fundamental to our growth.
Lori Flees: We are pleased to report that based on over a million surveys in the past 12 months, our customers have increased their rating of Valvoline Inc. to 4.7 out of 5 stars.
Lori Flees: I want to thank our company and franchise store teams for the work they do every day to deliver their best in class service to our guests.
Lori Flees: On Accelerating Network Growth, this quarter we added another 33 net news store additions.
bringing our year-to-date total to 68. [inaudible]
Lori Flees: Our pipeline for the year is more back half loaded than we would have liked. However, when we look at stores already in construction and the acquisition pipeline for both company and franchisees, we have confidence in our ability to deliver store additions well within our guidance range.
Lori Flees: During the quarter, we announced that we would be adding approximately 200 additional stores through the acquisition of breeze auto care.
Lori Flees: In early April we received a second request from the FTC. We remain excited about this opportunity and we continue to work to gain approval to close the transaction.
Lori Flees: While we do not have complete control over the timeline, we hope we can close the transaction in the second half of fiscal 2025.
Lori Flees: Before I wrap up my comments on accelerating network growth, I want to give an update on what we're seeing in the markets that we re-franchised on slide 7.
Lori Flees: You recalled during Q4 last year in Q1 of this year, we completed three refranchising transactions which included bringing on a new franchise partner in our Central and West Texas market.
Lori Flees: These transactions deliver shareholder value when the sum of the transaction price.
Lori Flees: Combined with the present value of the future cash flow streams from existing and committed store growth represents a higher overall EBITDAB multiple than our current trading. The key factor is delivering on the committed store growth, so I'd like to provide an update
Lori Flees: While we are just a few months in, we're already seeing the new store pipeline grow from these pre-franchised markets.
Lori Flees: and we expect to have double digit editions by the end of the year.
Lori Flees: We also have two new franchise partners that join the system in the last two years and have now ramped their pipeline from one store every couple of years to already opening four new stores this year. And their pipeline growth is exciting.
David Lantz, Thomas Wendler, David Lantz, Thomas Wendler,
Lori Flees: I'm pleased with the momentum that we have been able to create with our franchise partners to accelerate network growth.
Lori Flees: While these refranchising transactions will create long-term shareholder value, they do create near-term comparison challenges.
Lori Flees: So Mary will provide additional information on how these transactions impact our financial comparisons as she reviews the results.
Lori Flees: But before I turn it over to Mary to take us through our financial results in more detail, I'd like to thank her for her dedicated service to Valvoline since the company's IPO in 2016.
Lori Flees: I want to personally thank her for her leadership and the many ways she supported me as I joined the company and then stepped into the CEO rule.
Lori Flees: While she'll be supporting the transition, we want to take this opportunity to wish her all the best in her much deserved retirement. With that, I'll turn it over to Mary. [inaudible]
Mary Meixelsperger: Thanks, Lori. It's been an honor and a privilege to be part of the Valvoline team.
Mary Meixelsperger: I'm looking forward to my retirement and I'm grateful to have had the opportunity to work with amazing teammates and franchisees over the past nine years.
Speaker Change: Let's now turn to take a look at the financial results for the second quarter.
Mary Meixelsperger: Knit sales with a quarter increased 4% on a reported basis, and 11% when adjusted for the impacts of refranchising.
Mary Meixelsperger: System-wide same-store sales increased 5.8% and 14% on a two-year stack.
Mary Meixelsperger: For the quarter, approximately one-third of the count broke, came from transactions despite the impact of weekday and the shift of the Easter holiday during the quarter, which had a combined net-50 basis point headwind for the cons.
Mary Meixelsperger: On the ticket side, premiumization and net pricing were significant contributors.
Mary Meixelsperger: NOCR service penetration was also positive and as expected did decelerate as we lapped the training initiatives put in place in late Q1 of last year.
Mary Meixelsperger: Turning to the next slide. We'll take a look at the financial drivers for the quarter.
Mary Meixelsperger: Groke's margin rate declined 30 basis points zero-rear to 37.3 percent.
Mary Meixelsperger: During the quarter, there was delivery on product cost and store expenses, primarily driven by depreciation from new stores.
Mary Meixelsperger: These items were partly offset by leverage in labor due to top-line growth, moderating wage inflation, and continued strong labor management.
Mary Meixelsperger: As we shared at the end of fiscal year 2024, we would expect maturing stores to add about $70 million of additional EBITDA over time.
Mary Meixelsperger: S-GNA is a percentage of sales increased 150 basis points to 19.3%. The deal average is primarily driven by the impact of re-franchising while technology investments account for most of the remainder.
Mary Meixelsperger: Our adjusted EBITDA margin of 25.9% is 110 basis point decrease over the prior year.
and Slido Leven will take a look at overall profitability.
Lori Flees: As Lori mentions, the re-franchising transactions impact the comparisons to the prior year.
Lori Flees: Adjected EBITDA is 104 million, a 6% increase over the prior year on a recast basis.
Lori Flees: During the quarter, adjusted net income of 44 million increased 3% taking into account
Lori Flees: On a gaff basis, net income to the quarter is $38 million.
Lori Flees: Adjusted EPS in 34 cents per share also increased 3% considering the re-franchising him next.
Lori Flees: Turning to slide 12, we'll take a look at the balance sheet and cash flow.
Lori Flees: Netette increased 44 million during the quarter from additional barwins on the revolver.
Lori Flees: We end at the quarter at 3.4 times leverage ratio on a rating agency adjusted basis.
Looking at cash for impact [inaudible]
Lori Flees: Looting growth caps decreased 1% and was also negatively impacted by the refranchising transactions.
or Capitol Allocation Priorities remain the same. [inaudible]
First, the gun row.
Speaker Change: Thanks, Mary I'm pleased with the performance of our business in Q2, a resilient and durable business is built to deliver growth despite the macro environment uncertainty.
Speaker Change: We anticipate the potential tariff increases will have a minimal impact in fiscal 2025, and we will continue to take actions to mitigate including the flexibility to adjust pricing when needed.
Speaker Change: With the continued customer demand for our non discretionary services, we remain confident in the business momentum and are reaffirming guidance with that I'll turn it back over to Elizabeth for Q&A.
Speaker Change: Yeah.
Elizabeth Clevinger: Thank you Lori before we start the Q&A I'd like to remind everyone to limit your question to one and a follow up so that we can get to everyone on the line.
Speaker Change: Can you please open the lines.
Speaker Change: To ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed Baidu and preparing to ask your question. Please ensure that your device is automated locally.
Speaker Change: Our first question comes from the line of Mike Harrison of Seaport Research Partners. Please go ahead.
Mike Harrison: Hi, good morning.
Speaker Change: Good morning, Mike.
Speaker Change: Apologize if I missed this but.
Speaker Change: You can you break out the 5.8% our same store sales between ticket and car count I know you mentioned.
Speaker Change: The non oil change revenue was decelerating.
Speaker Change: In terms of the the average ticket contribution and it sounds like there was some mix headwind to the car count, but roughly how did that breakout.
Mike Harrison: No, Mike we said that.
Mike Harrison: Transactions drove about a third of the overall calm and two thirds were driven by ticket transactions were adversely impacted by the net impact of leap day offset by the Easter shift.
Mike Harrison: The Easter shift.
Mike Harrison: Last year, we were closed on one Sunday that we were open this year. So the net headwind from the combination of those two things was about 50 basis points to the overall comp and most of that would've been transaction. So if you were to adjust transactions for that we would have been closer to two two.
Mike Harrison: 50, 50 in terms of transaction growth versus ticket growth.
Mike Harrison:
Mike Harrison: So it was pretty fairly balanced for the quarter, which we're pleased to see continued growth in transactions.
Speaker Change: Alright, thanks for the detail there and then just in terms of the EBITDA margin decline compared to the prior year.
Speaker Change: It seems like that's kind of related to what's going on with SG&A costs, and you mentioned the reformer Refranchising impact.
Speaker Change: SG&A costs and I'm, just curious is that.
Speaker Change: An area, where youre going to be taking some cost actions at some point in the rest of the year or is it something that we just need to see you kind of grow into.
Speaker Change: In terms of.
Speaker Change: Additional store growth over time any thoughts on how we should see that SG&A as a percent of sales.
Speaker Change: Trend in the second half and into next year would be very helpful.
Speaker Change: Yeah. So when we set guidance for this year. We knew this was going to be a bit of a reset year. The refranchising transactions combined with some of the technology investments that we've made.
Speaker Change: We knew that we were going to see some deleverage in SG&A.
Speaker Change: My expectation is as we move forward.
Speaker Change: You'll see that SG&A increase moderate and we will be lapping the impact of the refranchising transactions.
Speaker Change: I would expect over time.
Speaker Change: That you should see.
Speaker Change: Some more.
Speaker Change:
Laurie: Less challenges in relationship to deleverage on the SG&A line anything you'd add Laurie.
Laurie: No Mike I think Mary has it exactly right is here, we talked about being a reset year because of the decrease in the top line.
Laurie: And a lot of the costs to support the full network continuing combined with the step up on the technology side, which is not those kind of step ups are ones that we foresee continuing to have to make them and so when we talked about the long term algorithm, we talked about SG&A growing at a lower percentage.
Laurie: And the sales growth.
Laurie: This year because of the changed on the Refranchising impacting the top line of that put pressure but.
Laurie: But we don't expect that to continue we expect to get back towards.
Laurie: Leveraging our G&A as we continued to accelerate network growth and drive the core business and Mike on your question on cost.
Laurie: Joining me aware of the need for cost efficiency and cost management.
Laurie: So it's an area that gets a lot of attention internally.
Laurie: As you think about balancing our growth initiatives.
Laurie: Yes.
Laurie: Type of investments that we need.
Laurie: Certainly we've named some some big investments on the technology side with our new ERP, a new HR system.
Laurie: The new platform into the cloud of our marketing database.
Laurie: And continued work that we're doing around some of the re platforming and tech not with store level technology as well.
Laurie: But you know as you as we think about.
Laurie: The management of overall class it certainly is an area.
Laurie: We're paying a lot of attention to it.
Laurie: We'll be wanting to drive efficiencies.
Laurie: We implement some of these systems you basically implementing them.
Laurie: Yes.
Laurie: Hum.
Laurie: Minimum viable product level, and then being able to start really leveraging their capabilities over time, and I see theyre being real opportunities for the organization to be able to take advantage of some of the cost.
Laurie: Cost efficiencies and labor management as well as in some of the G&A categories.
Laurie: To better automation et cetera from some of these investments that we've made over time.
Laurie: Alright, thanks very much.
Laurie: Thank you.
Speaker Change: We have a question from Steve Shemesh of RBC capital markets. Please go ahead.
Speaker Change: Great. Thank you for taking the question just gets higher level Theres, obviously, a lot of hesitation around the state of the consumer right now.
Speaker Change: So against that backdrop can you maybe just provide a little perspective on the cadence of comps throughout the quarter and what you guys are seeing quarter to date.
Speaker Change: Yeah, so you'd be happy to do that.
Speaker Change: We did see.
Speaker Change: Weaker.
Speaker Change: Weaker February and that was driven primarily by really challenging weather in certain mostly company geographies.
Speaker Change: But other than that.
Speaker Change: We saw some pretty consistent January January and March.
Speaker Change: And we're pleased with the continued strength of the business as we come through April here and into the early early first week in May.
Speaker Change: I would just add that.
Speaker Change: This industry is a very resilient very resilient demand because it's non discretionary and there are a lot of underlining and positive tailwind that we get some consignors in driving more miles and that's back.
Speaker Change: Back to close to pre COVID-19 levels and growing.
Speaker Change: Keeping their vehicles longer and looking for convenience. So those things all bode very well in terms of the underlining.
Speaker Change: Factors that are driving.
Speaker Change: Our business.
Speaker Change: I would just reiterate based on my.
Speaker Change: Prepared remarks, we continue to not see customers trading down or deferring their service overall.
Speaker Change: And we look at that by income demographic segment as well as store performance tiers and overall, we saw growth across every dimension that we look at and that was on a transaction basis as well as in our CRE basis.
Speaker Change: Got it that's that's very helpful. And then just a follow up on gross margin.
Speaker Change: Or are you seeing any impact from base oil deflation any benefit at this point and maybe just a refresher on how exactly your contracts work and when that would actually flow through the P&L.
Speaker Change: Yeah, we've seen some.
Speaker Change: Saw some modest deleverage in product cost in the quarter.
Speaker Change: Which were impacted.
Speaker Change: To some degree by some of the reductions that we saw in our waste oil collection Benny.
Speaker Change: Benefits.
Speaker Change: We also are you know as we look forward, there's been about a $10 per barrel decline in crude and we know that over the longer term timeframe base oils tend to follow crude.
Speaker Change: And we're looking forward, Steve Steve we haven't really seen them.
Speaker Change: That benefit start coming through.
Speaker Change: Certainly the indexes have been adjusted.
Speaker Change: But we'll continue to monitor it closely with our primary supplier I'll remind you that we're kind of in that high demand season for lubricants.
Speaker Change: So I'm not terribly surprised but I'm hopeful that over time, you will see some nice tail winds.
Speaker Change: From declining product cost and all of that again is offset by some of the other uncertainties that.
Speaker Change: Reduce mt.
Speaker Change: Reduced consumer demand for crude can continue to drive downloads product cost whereas.
Speaker Change: If there's any kind of refinery interruptions with turnarounds and those types of things.
Speaker Change: And tightened demand and so we keep a close eye on it.
Speaker Change: With our supplier but.
Speaker Change: Right now we haven't seen.
Speaker Change: Uh huh.
Speaker Change: On specifics as it relates to the balance of the year.
Speaker Change: In terms of and nor have you baked anything into our guidance for potential future reductions well just add Steve that you know could be 3% roughly of our store base is franchise operators and based on the contracts that we have with them, we pass that through on that and a pen.
Speaker Change: Adjusted basis, when the index comes through so you have a few things that counter any base oil impact or tailwind that we might get in margin one to pass it through to the franchisees to waste oil we sold tends to move up and down as base faithful index changes. So there are a lot of.
Speaker Change: Things that will negate, having the tailwind, but obviously, we'll look and continue to work with our supplier to lower our product cost.
Mary Meixelsperger: Got it thanks, very much and that's best wishes Mary.
Mary Meixelsperger: Thank you.
Speaker Change: We have a question from Simon Gutman of Morgan Stanley. Please go ahead.
Simon Gutman: Hey, good morning, everyone and congratulations.
Speaker Change: Congratulations Mary.
Speaker Change: My first question.
Speaker Change: <unk> comments, you know quarter to date sounded fine.
Speaker Change: If we take the run rate that you did in the second quarter, and then add back 50 basis points.
Speaker Change: Is that like holding everything else constant, which I realize there's a lot of assumption in there that should be the baseline run rate going forward for comps for the second half of the year.
Speaker Change: So I mean, there's other things that come into play.
Speaker Change: Certainly lapping last year's numbers, both from a transaction and a ticket perspective come into play.
Speaker Change: We're we're lapping some of the initiatives on ticket for MLC are although we're still seeing positive MLC our penetration.
Speaker Change: Were lapping some weaker transaction numbers from last year, which are helping there.
Speaker Change: Yeah.
Speaker Change: We also are entering into summer driving season.
Speaker Change: We expect.
Speaker Change: Strong growth from our summer driving season perspective.
Speaker Change: And always working on new marketing initiatives that will help us to drive.
Speaker Change: Higher levels of new customer acquisition as well as existing customer retention. So.
Speaker Change: I would certainly say that you could think of that.
Speaker Change: It is certainly being part of a range, but you know our expectations our guidance for same store sales for the full year in that 5% to 7% range still hold.
Speaker Change: Okay, and my follow up the franchise store comp being a bit ahead of the company owned we've seen spreads like this before so it may just be.
Speaker Change: Seasonal location, but can you just talk about Simplistically I guess on paper. It you could argue that you should franchise more and then or it should be the rate of refranchising. This year puts that spread or even a little bit higher what should we expect that that spread and how do we read it like well how should we look at it.
Simon Gutman: Yeah, It's a good question Simeon.
Simon Gutman: What I would say is year over year comparisons always you don't have a play but when we look at the comparison and what really drove the difference between the two is it was net pricing.
Simon Gutman: And when we look at our franchise base system by system. They have done pricing changes at different times and so we just see that that that is the biggest difference driver between the two comps is but the number of our system.
Simon Gutman: Changes the price.
Simon Gutman: Thing changes that have happened on the franchise side. It is not fully lapped a full year.
Simon Gutman: Going back to the last question you have that does have an impact on the on the go forward. Some of those we'll lap some of them will not our franchisees have full.
Simon Gutman: Pricing authority for their businesses.
Simon Gutman: He can do benchmarking in the marketplace broadly with dealers and other competitors and we provide that information to them, but they decide when there's pricing actions needed to get taken I'll also just remind you that some of our franchisees are in different geographic areas.
Simon Gutman: So as they have labor other inflationary pressures they may pass that through more quickly than we might see in the in the central part of the U S where most of our company stores operate.
Simon Gutman: Okay. Thanks, a lot and good luck.
Simon Gutman: Thank you.
Speaker Change: We have a question from Max Raquel and call of duty Kelvin. Please go ahead.
Speaker Change: Great. Thanks, a lot and congrats on a nice quarter.
Speaker Change: Let's first discuss the pricing environment there.
Speaker Change: You're seeing in weather appears are starting to move their price points around and then bigger picture. How do you think the competitive environment could evolve.
Speaker Change: Backdrop were to soften.
Speaker Change: Yeah, I mean, the pricing environment.
Speaker Change: We're not actually seeing any significant changes from the competition.
Speaker Change: And I say that very broadly.
Speaker Change: Looking at so many dealers are competing the way.
Speaker Change: Auto repair shops, or tire centers, who also do oil changes or pricing as well as like the retail auto service centers.
Speaker Change: And quickly what we would say is there's.
Speaker Change: Do look at pricing and we are watching to see if given.
Speaker Change: Given the tariff related environment. If there are folks that are changing their pricing, we're not seeing it pervasive but it is a very fragmented marketplace and so it's something that you do have to watch and look at it in detail by region, but we're not seeing.
Speaker Change: We're not seeing significant pricing changes, we do we have seen over the past year, some competitive spots, where they have caught up to the market, but I don't think they're going beyond or significantly outpacing the market from a pricing increase perspective.
Speaker Change: As it relates to the competitive environment.
Speaker Change: No.
Speaker Change: To say that we don't see any significant changes in terms of the competitive landscape again, it's very fragmented. So it's it's difficult to see anything meaningful happening across the entire market.
Speaker Change: But we're not really seeing anything significantly different we do expect that marketing spend overall for the industry will increase as we move into summer drive you know just looking at the Google search the number of searches for all change near me goes up at this time of year and therefore it.
Speaker Change: It's got a great return on investment for not just us but others.
Speaker Change: So to spend in marketing in that way.
Speaker Change: But when we when we step back we know that we're going to continue to win share and grow transactions across geographies and even in our mature stores, which we've done.
Speaker Change: Got it thanks Michelle.
Speaker Change: Yes.
Speaker Change: Oh go ahead go ahead.
Speaker Change: Okay. So the next question has stopped curious because the pricing component of ticket accelerated into Q and a.
Speaker Change: So what do you attribute that to.
Speaker Change: I missed that question can you I mean, it's just started that question sorry can you repeat it.
Speaker Change: Oh, the pricing component of ticket accelerated in Q2, and if it did what do you attribute that to.
Speaker Change: But the pricing component of ticket overall.
Speaker Change: With strong I don't think it was accelerated relative to past performance it was largely consistent.
Speaker Change: And when we look at the contributors in Q2, I think Mary covered this.
Speaker Change: Premium mix.
Speaker Change: <unk> and net pricing where were the two main contributors are contributing roughly equally to the ticket overall, but <unk> was also a positive contribution.
Speaker Change: And I think the biggest challenge as it relates to ticket from Q2 relative to Q1 is on the company side, we lapped the N O C. Our initiatives, which were such a huge contributor to our same store not huge but a significant contributor.
Speaker Change: Our same store sales comp over the last four quarters, it's still positive. It's just not at the same magnitude as it has been.
Speaker Change: Got it thanks, a lot and best regards.
Speaker Change: Yeah.
Speaker Change: You have a question from Stephen Zaccone of Citi. Please go ahead.
Speaker Change: Hi, This is another one and armed with all the cold goes with a unique.
Speaker Change: The first question is on what cole capital.
Speaker Change: Possible drivers obtain full circle, almost like a half between ticket and transaction.
Speaker Change: Okay.
Speaker Change: I just have one.
Speaker Change: Muscled, let me just clarify I think your question was what do we see the drivers for future growth in the company as it relates to a balance between ticket and transaction is that right.
Speaker Change: Yeah. It same store sales growth in the second half.
Speaker Change: Oh in the second half yes.
Speaker Change: Okay. Thanks for clarifying that.
Mike Harrison: Ask Mary to comment, but as we've been saying throughout the year, we see a really nice balance between transaction and ticket.
Speaker Change: For the entire year.
Speaker Change: More so than what we've been in the past as we lapped a number of initiatives from pricing as well as in OCR growth.
Speaker Change: So I think as you look forward to the back half of the year, we continue to expect that our balance between transaction growth and ticket growth.
Speaker Change: History, a when we look at Q2 performance, we saw growth in transactions across our store quartile, even in our mature stores, we're continuing to grow vehicles per day.
Speaker Change: So and that's exactly what we're trying to do is we're trying to grow the number of transactions, we have in our existing stores ramp up new stores, while continuing to give great service, which will drive that ticket component as well.
Speaker Change: Got it. Thank you and then my follow up is can you talk about more about gross margin performance in.
Speaker Change: In the second quarter, and how it performed versus your own expectations.
Speaker Change: And if your full year view on gross margin being flattish year over year change at all.
Speaker Change: Your gross margin.
Speaker Change: Overall was pretty much in line with our expectations. If you look at the impact of new store depreciation.
Speaker Change: Gross margin would've actually been up 10 basis points, if you exclude the impact of new store depreciation.
Speaker Change: So.
Speaker Change: We had talked about a.
Speaker Change: Margin over the year being relatively flat year over year.
Speaker Change: In our last quarter's call in when we set guidance originally so.
Speaker Change: Did see overall.
Speaker Change: Overall, a little bit of deleveraging in the quarter, but it really is pretty much consistent with what we expected.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: We have a question from David Van der of Mizuho. Please go ahead.
Speaker Change: Hey, good morning, Thanks for the question Mary Thanks for all your help over the years.
Speaker Change: First one just another crack on the SG&A side.
Speaker Change: Are there any areas of the business what are you seeing opex overages are running hotter than your internal plan.
Speaker Change: Should we expect you to leverage SG&A as we go into fiscal 2026.
Speaker Change: So we are not seeing any hot areas of SG&A overages relative to how we plan the year.
Speaker Change: I think we're doing a good job of managing SG&A relative to what our expectations are for the year were when we set guidance.
Speaker Change: So I think.
Speaker Change: The answer to your first question is no nothing nothing happening that's a surprise there.
Speaker Change: Again, the biggest challenges, we're faced with and that deleverage has been the refranchising as well as the.
Speaker Change:
Speaker Change: Technology investments on the technology side, we moved from legacy systems that had been in place and fully depreciated and amortized to.
Speaker Change: Both the implementation costs as well as the operating costs were new systems on new platforms that were significantly higher so we see a one time step up unrelated to those investments that we've made on the technology side.
Speaker Change: As it relates to moving forward.
Lori Flees: <unk> guidance at the appropriate time, but I think Lori mentioned earlier in this call that we do expect SG&A growth to moderate.
Speaker Change: And to be below where.
Speaker Change: Where we see sales growth going forward. So we would expect that we will see some leverage in SG&A moving forward.
Speaker Change: In the new fiscal year.
Speaker Change: Okay got it thanks, thanks for that.
Speaker Change: Just a follow up on an earlier one but it was still a little unclear.
Speaker Change: However, lower oil prices impact your gross margins can you talk about the amount and timing of any impact that you might see.
Speaker Change: Yeah. So you know again lubricants.
Speaker Change: Generally trailed the pricing for lubricants generally trail or and specifically base oils and additives that go into the makeup of lubricants generally trailed the broader market for crude so overtime.
Speaker Change: Theyre very poorly core are correlated.
Speaker Change: So over time as you see changes in crude either up or down.
Speaker Change: Those changes stay in place for a protracted period of time, you generally will see the cost of lubricants either go up or down.
Speaker Change: Over the longer term timeframe so.
Speaker Change: You know that's that's what we have seen and experienced in the business.
Speaker Change: Where we are right now is we certainly short term have seen declines in crude but always have not flowed through to the index base oil index prices yet.
Speaker Change: Your.
Speaker Change: It is our supplier communicated.
Speaker Change: But they are seeing significant opportunities.
Speaker Change: Opportunities moving forward.
Speaker Change: For lower class, but we still believe that it's if crude stays at this depressed level over time that we should see some tailwind.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: And those arent necessarily passed onto consumers are you you would hold your pricing firm or is that a lever you could play if if we do get more promotional in anyway.
Speaker Change: Yeah, we haven't I don't think across the industry, you've seen people lower their posted prices.
Speaker Change: You can make decisions around reinvesting some of that to drive more growth.
Speaker Change: But.
Speaker Change: Posted prices Havent really come down as well.
Speaker Change: Base oil and crude prices vary in the same way, though when you've always talked about when the when the base oil prices go up you know we have to pass that through to franchisees, which is an offset.
Speaker Change: And we look to pass that through to consumers, but typically it's not the reverse when the base oil prices come down you don't see people, calling back the pricing and we haven't had a history of doing that either and we don't plan to do so.
Speaker Change: The other thing I would remind you of.
Speaker Change: David is our largest component of our cost of goods sold is or.
Speaker Change: Labor cost as.
Speaker Change: As well as our store expenses.
Speaker Change: So product class.
Speaker Change: Hum.
Speaker Change: Lesser component of the total cost of goods sold so it does have a impact both up and down in terms of margins, but it's certainly we spend a lot of time looking at the larger aspects of our overall cost of goods sold in terms of managing our margins.
Mike Harrison: Yeah very helpful commentary, Thanks again Mary.
Speaker Change: We have a question from Kate Mcshane of Goldman Sachs. Please go ahead.
Speaker Change: Good morning. This is mark Jordan on for Kate. Thank you for taking our question.
Speaker Change: It sounds like non oil change revenue continues to be a tailwind here, but maybe in the near term it'll be less so as we lap last year's initiatives. So can you remind us what your penetration is right now we're not all change and how that varies by quartile.
Speaker Change: Yeah.
Speaker Change: I'll start and then I'll ask Mary we actually don't share the details on penetration rate what I can say is that our penetration rate has been growing across our non oil change revenue services in it. It did increase this last quarter as well.
Speaker Change: When we look at what services increased <unk> penetration.
Speaker Change: The visual elements of our non oil change revenue services are the ones that have been increasing and continue to pick up those are the things that we can physically show the customer.
Speaker Change: How the performance of those items are doing a windshield wipers blades battery air filters cabin air filters et cetera, that's the biggest component and the reason it's the biggest component is also because it's the things that the customer needs more regularly as as.
Speaker Change: Miles driven go up.
Speaker Change: The need for those in the frequency of those also increases with miles driven.
Speaker Change: So we continue to grow our penetration.
Speaker Change: Look at it both from a income demographic as well as from our store performance demographic and on an income demographic in stores with lower income demographics.
Speaker Change: There is some difference, but we continue to increase penetration even in those and that's really we attribute that to the operating excellence of our process and just making sure that we can communicate them what is needed and show the customer so when our teams followed the process.
Speaker Change: That process. So those services on its own but we don't have to do a heavy sales approach and just maybe just show the customer the performance of the items.
Lori Flees: And I think importantly, Laurie we're seeing growth in core non oil change revenue impacted ticket across every quartile. So even though we do have differences in performance by quartile.
Lori Flees: There's growth across all four trials, which we really like to see and we've seen it the increase in penetration for low income household demographic stores I'm pretty consistent with with the high income so and part of it is educating our team on the importance of these items in that.
Lori Flees: Under selling them to consumers in those areas because it does drive safety for our customers. So really just educating our team on why these are important and ensuring that they have the right stock and they can do them quickly and driving convenience and easy for customers those things actually really.
Lori Flees: Madam.
Speaker Change: Laura you mentioned earlier as well, but one of the big differences in them.
Speaker Change: Lower turnover in the right talent in the right places.
Speaker Change: We actually with them the right talent well trained.
Speaker Change: We see higher MLC are.
Speaker Change: Attrition.
Speaker Change: This was driven by that training and education of the customer on the survey services being provided so you.
Speaker Change: You mentioned earlier, we're really well positioned going into the summer driving season.
Speaker Change: We're feeling really good about the position where we are right now.
Speaker Change: Great.
Speaker Change: Perfect. Thank you for that.
Speaker Change: And then you know I guess it sounds like Youre not seeing any changes in customer behavior, which is good to hear.
Speaker Change: But if we think about the potential for maybe a softer macro at some point would you expect to see some degree of deferral with oil change intervals, maybe extending out a month or two or another 1000 miles.
Speaker Change: And would you expect to see certain of these attachment rates for some non oil change services come under pressure.
Speaker Change: You know before I came to valvoline that would've been my assumptions, but part of what you have to understand how the customers thinking about it is as the price of a new vehicle or changing their vehicle is increasing so the worry about what the.
Speaker Change: The outlay would be.
Speaker Change: For upgrading their vehicle and or repairing their vehicle that they didn't maintain it.
Speaker Change: The price of those things is actually I think created the demand or the realizations from the costs for most of the customers I'm not saying that everybody will differ but for most customers. They will continue to maintain the vehicle they have to lower their overall.
Speaker Change: Sort of outlay of cash so.
Speaker Change: As customers are driving more and if they are keeping their vehicles longer.
Speaker Change: I think some of the macro uncertainty and tariff implications create more uncertainty around <unk>.
Speaker Change: A large repair bills and or car vehicle replacement or upgrades that actually create the resiliency in our industry. So I would say.
Speaker Change: It feels like there are more resistant.
Speaker Change: More resistant to defer a trade down although I know that's not going to be the case for 100% of customers. When we look at the customers that we serve we don't see it and we continue to watch for it.
Speaker Change: Okay.
Speaker Change: Perfect. Thank you very much.
Speaker Change: Okay.
Speaker Change: We have a question from Thomas Wendler of Stephens. Please go ahead.
Thomas Wendler: Hey, good morning, everyone.
Speaker Change: Maybe just one more from me.
Speaker Change: If we think about the development agreements you have how should we be thinking of the pace of new locations. There I think you noted the 20, new stores and 25, then you've kind of talked around the franchisee going from one to four new locations a year.
Speaker Change: Any color on that.
Speaker Change: Yeah.
Speaker Change: Why we gave the update is because.
Speaker Change: We always expected that when we reframed Mark Refranchising market or when there is a franchisee change in ownership. It does take time to build momentum.
Speaker Change: And so as we are just a few months and we're already seeing that momentum change in a very positive way and I and I don't want to say that you know three or four stores is enough for us to declare a victory, but it is coming very quickly the opportunities in the marketplace to grow in.
Speaker Change: Put more stores on just given our stores only cover 35% of the population.
Speaker Change: We're seeing that momentum accelerate and when we laid out our overall strategy to accelerate network growth, which included Refranchising.
Speaker Change: And changing out a franchise ownership with franchisees that have more opportunity in their market, but we're not investing appropriately against that opportunity, but we knew that we would it would take US a couple of years to get those in place and then the momentum start to build and that's exactly what we're seeing.
Speaker Change: <unk>.
Speaker Change: Well this year the delivery in the first half as you know is lower than and what might've been expected. We look at the construction that's underway and the pipeline of acquisitions and feel very strong for guidance and we feel we still feel very good about the momentum we have to get to our 250.
Speaker Change: New units per year by FY 'twenty seven.
Speaker Change: So.
Speaker Change: I think the development agreements help we have carrots, and sticks and those agreements and they've been serving us well.
Speaker Change: And we continue to ask our franchise partners, what we can do to support them and their growth.
Speaker Change: Perfect I appreciate the color.
Speaker Change: Okay.
Speaker Change: We have a question from Chris O'connell of Stifel. Please go ahead.
Speaker Change: Oh, Thanks, good morning, guys.
Speaker Change: Laurie I had a question about the Breeze auto care system can you talk a little bit about the level of investment needed to integrate that system and I'm thinking about rebranding technology investments.
Speaker Change: Curious what you discovered during their due diligence.
Speaker Change: Yeah. Thanks for the question on Breeze I was wondering if any was it was going to was going to ask because it's a pretty exciting opportunity for us to grow our network at a considerable clip with just one transaction and we continue to be very excited about breeze, it's a well run.
Speaker Change: Business that complements us from a geographic perspective.
Speaker Change: Our main focus right now is to work with the FTC to close the transaction.
Speaker Change: And obviously, we look forward to providing more updates once we can get to that point.
Speaker Change: I think as we do our diligence we we look at every location and we look at it as if we were running it like we run our current network and how much upside.
Speaker Change: We would expect to drive with our brand with our marketing sophistication our fleet sales activity.
Speaker Change:
Speaker Change: There are always are implementation costs, but I think the platforms. We've been investing in that Mary talked about earlier, our ERP system, our HR and systems.
Speaker Change: Even moving the marketing data into the cloud, which allows us to integrate data and more quickly more seamlessly all of those things will drive a more efficient.
Speaker Change: Integration over time, but obviously our main focus is to work with the FTC closely so that we can close the transaction.
Speaker Change: And then I I'll be exciting when that day comes and we can talk more about the forward.
Speaker Change: Looking plans that we have for the combined business.
Speaker Change: Okay. Thank you.
Speaker Change: We have a question from Justin Kleber of Baird. Please go ahead.
Justin Kleber: Hi, good morning, Thanks, everyone for taking the questions curious if you gave any thought to tightening the comp outlook.
Speaker Change: Like you did last year after <unk> it doesn't sound to me like the business is getting any more volatile, but the implied back half guide is pretty wide and.
Speaker Change: It looks like it would include something below 4% at the low end I assume they're not planning the business at that level, but I guess just trying to understand what the biggest swing factors are in your view as it relates to the second half comp is it more about transactions or is it more about ticket.
Speaker Change: Yeah. Good question, we didn't narrow our guidance I think it was important for us to reaffirm our guidance.
Speaker Change: As you'll remember the first half of the year typically contributes 40% to 45% of our year.
Speaker Change: From a profit standpoint, and 655% to 60% of it come during the dry season, which is Q3 Q4.
Speaker Change: So I think given how much we have ahead of US I think we just didn't feel that now is the right time to narrow guidance I will say that we feel very confident.
Speaker Change: All in all elements of our guidance. So I think we feel very good that are the momentum of our business is on track and we expect to deliver within the guidance on every element here or did you have anything to add to that.
Speaker Change: Some of them are.
Speaker Change: Got it okay. Thanks for that and then just a modeling question as we think about.
Speaker Change: The third quarter and it sounds like Youre going to have an Easter shift headwind I don't know if theres any other offsetting de mix impacts, but just how are you thinking about or how should we think about the headwind to the comp from Easter moving into fiscal <unk>. This year.
Speaker Change: You know I'm sure you know, we had a little bit of a benefit in Q2 from Easter where we were closed on a Sunday last year. This year, we were closed on Sunday in April.
Speaker Change: The benefit that we saw in the month of March excuse me in the quarter related to that was about 80 basis points, which offset.
Speaker Change: 130 basis points from these days so that was a net 50 basis point headwind in the second quarter.
Speaker Change: So we will see a little bit of that reverse have wind on the Easter shift.
Speaker Change:
Speaker Change: Third quarter, but overall, we've got that pretty well factored into our guidance and expectations. When we when we when we plan in the quarter.
Speaker Change: Alright.
Speaker Change: Thanks, so much.
Speaker Change: We have a question from Peter Keith of Piper Sandler. Please go ahead.
Speaker Change: Hi, Thanks, Good morning, everyone I'm on.
Speaker Change: On the Refranchising.
Speaker Change: I don't think it was quantified but is there a way that you could give us the lost sales and EBITDA in.
Speaker Change: In the quarter from from the Refranchising and.
Speaker Change: What those numbers will then look like for Q3, so we can make sure we get our models set appropriately.
Speaker Change: Yeah. So in the press release that we issued this morning.
Speaker Change: Included a chart that shows both revenue and adjusted EBITDA.
Speaker Change: Recast for Lam.
Speaker Change: Last year and just the Refranchising had occurred.
Speaker Change: <unk> been in place last year.
Speaker Change: And of course or the current year.
Speaker Change: We reported it so well.
Speaker Change: You can actually see that impact.
Speaker Change: The impact on them.
Speaker Change: Revenues and EBITDA kind of detailed out there and you know for the quarter.
Speaker Change: We had.
Speaker Change: And impact.
Speaker Change: EBITDA recast for the Refranchising was up 6%.
Speaker Change: And other than that I think.
Speaker Change: That chart that's in the press release should be able to help you with that modeling question.
Speaker Change: Okay. Thank you for that we're swimming in elaborating. This morning, So I'll take a closer look once the call concludes.
Speaker Change: What about on the EBITDA margin decline, including the Refranchising for the rest of the year and all the various puts and takes is this the low watermark for year on year EBITDA margin decline.
Speaker Change: There's continued declines, but just not to the tune of what we saw in Q2.
Speaker Change: Yeah.
Speaker Change: I think if you just look at your modeling relative to the guidance that we provided.
Speaker Change: You should be able to see the overall.
Speaker Change: Interacting.
Speaker Change: We reiterated our guidance with the $450 million to $470 million of EBITDA.
Speaker Change: And we've reiterated our net revenue guidance as well and the $1 67 to $1 73 billion range. So I just think.
Speaker Change: If you look at that from a quarterly basis and do your math and you should be able to see that play out I would expect that the deleveraging SG&A will moderate in the back half of the year.
Speaker Change: So helping you with that math, a little bit I think that we should see some improvement in EBITDA margins in the back half of the year.
Speaker Change: Okay. Thank you very much.
Speaker Change: Okay.
Speaker Change: We have a question from David <unk> of Wells Fargo. Please go ahead.
Speaker Change: Hey, good morning, and thanks for taking my questions can you talk about the cadence of new store openings in the second half of the year and if demand curves choppy here than expected on the back of tariffs would you contemplate pushing any of those openings to 26.
Speaker Change: Yeah. Good question as I mentioned, we did 33, new store additions for the quarter and were at 68 for the year, it's a little slower start than what we had in FY 'twenty four I think largely just given the timing of M&A closure closings.
Speaker Change: But when we look at our like what units are in construction, meaning they're already broke ground there already moving forward.
Speaker Change: All the work we've done in the past 18 months around permitting.
Speaker Change: Permitting support to work with cities to make sure you know as we get trades done and they have to be approved before we can move forward I think we feel pretty strong about the timing of those construction openings. Obviously, they can always move you know a week or two around but in general we feel good about those.
Speaker Change: And then when you look at the acquisition pipeline, both for us and for franchisees in terms of those that are already under LOI or we're actively negotiating the final details on it when we add all of those up with some wiggle room as we always would have.
Speaker Change: Yes.
Speaker Change: We feel pretty comfortable in our guide of 160 to 185 for the year.
Speaker Change: And that will be well within that range.
Speaker Change: Got it that's helpful.
Paul: Paul mentioned it.
Paul: I don't think we mentioned it we did have a couple of closures on the franchise side.
Paul: And that's pretty unusual to have two in a quarter, but these related to lease expiries.
Paul: And we typically have them from lease Expiries and store relocations, it's very rare given the profitability of our stores across the network, but we did have two this quarter, which we factored into the numbers I shared.
Speaker Change: Got it that's helpful. And then on gross margin. It seems like expectations are still flat for the year, but is there anything we should keep in mind in Q3 and Q4 is as we're modeling outside of the compares.
Speaker Change: You know just the fact that we're going into summer driving season, just kind of naturally.
Speaker Change:
Speaker Change: With higher sales expectation, which will help us with.
Speaker Change: A little bit of leverage there on the margin side. If you look at the cadence of margin rates over the four quarters over the last few years typically the back half of the year's stronger margin rates in the front half of the year and we certainly.
Speaker Change: Correct now beginning this year.
Speaker Change: Got it thank you.
Speaker Change: We currently have no further questions. So I'll hand back to <unk> for closing remarks.
Speaker Change: Thank you I appreciate all the great questions today I wanted to take a minute on behalf of the entire valvoline team to extend a heartfelt. Thanks to Mary you once again for her exceptional partnership and leadership on the Valvoline team, we certainly would not be.
Speaker Change: The company, we are today without having had mary's expertise in and just thoughtful leadership on the team. Additionally, we're thrilled to welcome Kevin who brings deep financial expertise and whatnot will undoubtedly hit the ground running with our teams given his past experience with valves.
Speaker Change: Ilene.
Speaker Change: We delivered a very strong quarter in line with our expectation. That's why we're re enforcing a re confirming our guidance and we feel good about the momentum of the business.
Speaker Change: With our differentiated service model.
Speaker Change: We are really in good shape to continue driving market share gains and delivering strong profitable growth. So appreciate the time that you've all spent today with us.
Speaker Change: Okay.
Speaker Change: This concludes today's call. Thank you all for joining you may now disconnect your lines.
Speaker Change: [music].