Q4 2025 Valvoline Inc Earnings Call

Speaker #1: Hello, and welcome, everyone, to the Valvoline Q4 earnings conference call and webcast. My name is Becky, and I'll be your operator today. All lines will be muted throughout the presentation portion of the call, with a chance for Q&A at the end.

Speaker #1: If you wish to ask a question in this time, please press start, followed by one on your telephone keypad. I will now hand over to your host, Elizabeth Clevinger, with investor relations to begin.

Speaker #1: Please go ahead.

Speaker #2: Thank you. Good morning, and welcome to Valvoline's fourth-quarter fiscal 2025 conference call and webcast. This morning, Valvoline released results for the fourth quarter and fiscal year ended September 30, 2025.

Speaker #2: This presentation should be viewed in conjunction with that earnings release. A copy of which is available on our investor relations website, at investors.valvoline.com. Please note that these results are preliminary until we file our Form 10-K with the securities and exchange commission.

Speaker #2: On this morning's call is Lori Flees, our president and CEO, and Kevin Willis, our CFO. As shown on slide two, any of our remarks today that are not statements of historical facts are forward-looking statements.

Speaker #2: These forward-looking statements are based on current assumptions as of the date of this presentation, and are subject to certain risks and uncertainties that may cause actual results to differ materially from such statements.

Speaker #2: Valvoline assumes no obligation to update any forward-looking statement unless required by law. In this presentation, and in our remarks, we will be discussing our results on an adjusted non-GAAP basis unless otherwise noted.

Speaker #2: Non-GAAP results are adjusted for key items, which are unusual, non-operational, or restructuring in nature. We believe this approach enhances the understanding of our ongoing business.

Speaker #2: I reconciliation of our GAAP to adjusted non-GAAP results and a discussion of management's use of non-GAAP in key business measures is included in the presentation appendix.

Speaker #2: The information provided is used by our management and may not be comparable to similar measures used by other companies. With that, I will turn it over to Lori.

Speaker #3: Thank you, Elizabeth. And thank you for joining us today. Let's start with a look at some key highlights for fiscal year 2025 on slide three.

Speaker #3: System-wide store sales again saw a double-digit increase, to 3.5 billion dollars, and we delivered our 19th consecutive year of system-wide same-store sales growth. This nearly two-decade-long streak accounts for almost half of our retail business's history.

Speaker #3: And puts us in a special category of retailers. The network continues to grow with the addition of 170 system-wide stores this year, bringing the total to 2,180 across the U.S.

Speaker #3: and Canada. We also saw double-digit growth in adjusted EBITDA, taking into account the impacts of refranchising, and including the investments in technology we made this year.

Speaker #3: This would not be possible without our team and our strong franchise partners, and I'd like to thank both groups for all of their work that went into driving these results.

Speaker #3: Slide four shows our performance over time on key metrics. Our historical performance shows our track record of steady new store growth, strong same-store sales comps, and compelling net sales and profit growth.

Speaker #3: This performance is a function of the attractive market we operate in and the capabilities we've built over time, which allow us to deliver best-in-class customer, employee, and franchisee experiences.

Speaker #3: Turning to slide five, we'll take a look at our fiscal year 2025 performance compared to our updated guidance from August. Net revenues and system-wide same-store sales growth came in at the midpoint of the guidance range, while adjusted EBITDA landed above the midpoint.

Speaker #3: System-wide store additions of 170 demonstrate meaningful progress in new franchise store growth. They added 71 net new stores, and 104 total stores this year, including transfers.

Speaker #3: Adjusted EPS came in at the low end of the range at $1.59 per share, and our capital expenditures were above the range driven by the timing and mix of new store additions at the end of the year.

Speaker #3: Overall, we're pleased with our fiscal year 2025 results and the continued growth of our business. Now, I'd like to provide an update on the progress we've made against our strategic priorities this year.

Speaker #3: Our strategic priorities remain the same. First, drive the full potential of our core business. We are the retail leader in automotive preventative maintenance services, and we'll continue to drive transaction and ticket growth with increased store-level efficiency.

Speaker #3: Second, deliver sustainable network growth. We will continue to extend our reach to more customers across North America, and we will do that in a way that maximizes return on invested capital.

Speaker #3: And last, we will continue to innovate to meet the evolving needs of our customers and the car park. We made very good progress in fiscal 2025 to drive the full potential of our core business, and we continue to believe we have a lot more opportunity in front of us.

Speaker #3: This past year, we saw strong same-store sales growth with a healthy balance from transactions and ticket. Transaction growth continued across the network, including in our mature store base.

Speaker #3: We also saw ticket growth across the network with contributions from premiumization, net pricing, and increased NOCR penetration. Our efficiency initiatives within company-operated stores in fiscal 2025 included a continued focus on labor productivity.

Speaker #3: Workday implementation, combined with scheduling process improvements already underway, drove meaningful efficiencies in our largest cost category. As of Q4, all U.S. company-owned stores have migrated to use Workday's forecasting and automated scheduling tools that enable our field leadership to more easily monitor and optimize schedules to match both team member availability and experience with expected customer demand.

Speaker #3: We recently spent time with both our operations leadership team and our franchise partners across the U.S. and Canada. We celebrated our accomplishments in 2025 and focused on 2026.

Speaker #3: Our core business remains focused on four key things: one, consistent process execution; our technology-enabled super pro process earns a 4.7-star rating from customers, and this builds loyalty; two, increased store efficiency by leveraging fully the work started in FY25 in both labor and store-level expense management; three, enhanced return on marketing spend as we gain benefits from our network scale and reach; and four, continued team member retention to help improve store throughput and NOCR penetration.

Speaker #3: As it relates to network growth, we closed fiscal 2025 with a strong Q4, delivering 56 net new system-wide stores in the quarter. And bringing our total to 170 additions for the year.

Speaker #3: Over 60% of this year's new stores across the system were ground-up builds, a testament to our real estate analytics capabilities and our proven playbook for successfully opening new construction sites.

Speaker #3: Franchise ground-ups drove much of the increase year over year, as they had 41 greenfield additions this year. At the end of 2024 and beginning of fiscal 2025, we refranchised three markets: Denver, Las Vegas, and West Texas.

Speaker #3: Our franchise partners for these markets committed to significant development agreements to grow the markets by 2 to 3 times in size. Since the closing of the refranchising transactions, we have seen the new store additions in these markets grow by more than 150% over prior year.

Speaker #3: And these franchise partners' pipelines continue to grow. And our new store growth will continue to ramp in FY26, with continued momentum across our franchise partners.

Speaker #3: Fiscal 2026 will also include the expected closing of the Breeze AutoCare acquisition. As we shared previously, bringing a year's worth of store growth in one step will allow us to leverage many of the investments we've already put in place across a larger store base.

Speaker #3: Including retail-specific technology investments and fleet sales expansion. At the end of last week, we received regulatory clearance from the FTC and plan to close the transaction on December 1st.

Speaker #3: As part of the agreement with the FTC, we will divest 45 stores bringing the net additions to 162. Although we had to reduce the number of store additions in order to gain FTC approval, we believe this is still a good use of capital and will create long-term shareholder value.

Speaker #3: Turning to the third priority, fleet growth continues to outpace the growth in our consumer business. Our fleet customers tell us that they value the speed and convenience of our service to maximize the productivity of their assets.

Speaker #3: This year, we've increased our work with our franchise partners to grow our fleet business across their geographies. Early days, but significant opportunity for growth.

Speaker #3: Before I turn it over to Kevin to discuss our financial results in more detail, I want to invite you to a planned investor update on December 11th.

Speaker #3: We'll introduce you to more of our management team and provide a deeper look at our strategic priorities, long-term growth targets, and the initiatives driving our business forward.

Speaker #3: Now I'll turn it over to Kevin.

Speaker #2: Thanks, Lori. Let's turn to slide 8 and start with a more detailed look at our financial results. For the fourth quarter, net sales grew to $454 million increasing 4% on a reported basis and 10% when adjusted for the impacts of refranchising.

Speaker #2: System-wide, same-store sales increased 6%, with about one-third coming from transaction growth. We continue to see transaction growth across the portfolio. For the fiscal year, net sales grew 12% when adjusted for the impacts of refranchising to $1.7 billion.

Speaker #2: System-wide, same-store sales grew 6.1% and over 13% on a two-year stack. For the year, transaction growth accounted for just over one-third of the comp, also across the portfolio.

Speaker #2: On the ticket side, we saw contributions from all three levers, premiumization, net price, and NOCR service penetration. Slide 9 looks at the other drivers of the financial results for the quarter.

Speaker #2: The gross margin rate of 39.1% was flat year over year, driven by leverage at the labor line of about 120 basis points, offset by increased product costs.

Speaker #2: We continue to drive operating leverage, generating a 60 basis point year over year improvement, excluding increased depreciation expense. SG&A, as a percentage of sales, increased 40 basis points year

Speaker #1: Sales decreased 30 basis points as we continue to see our growth moderate . Overall , adjusted EBITDA margin 20 basis increased points to 28.7% .

Speaker #1: Turning to the next slide . We'll take a look at the financial drivers for the full year . We'll start with gross margin .

Speaker #1: We are pleased with the benefit coming from labor leverage for the year, which drove 90 basis points of margin expansion. Operating leverage points improved year over year by 70 basis points, excluding increased depreciation expense.

Speaker #1: S G&A as a percentage of net sales increased 80 basis from the points investments in both teams and technology to support growth and provide a better operational foundation for the future .

Speaker #1: As we look forward , fiscal 2026 , we will continue to invest and growth , but do continue to expect growth to moderate adjusted EBITDA margin was flat with G&A investments offsetting gross margin expansion on slide 11 .

Speaker #1: We'll take a look at our overall profitability for the year , adjusted for Refranchising in fiscal 2025 , adjusted EBITDA increased 11% , adjusted net income increased 6% , impacted by increased new store depreciation on a recast basis , adjusted EPs increased 8% , turning to slide 12 , we'll take a look at the details of our balance sheet and cash flow and cover the breeze acquisition .

Speaker #1: We ended fiscal 2025 with a leverage ratio of 3.4 times on a agency . rating Adjusted basis . Our capital allocation priorities have not changed .

Speaker #1: First , fund growth with a focus on strong returns on invested capital . Second , to stay within our target , leverage ratio and third , to use share repurchase as a way to return value to shareholders .

Speaker #1: Turning to cash, our year CapEx for the year was $259 million. About 70% of the spend was for new store additions. Now, let's take a look at some details of the Breeze acquisition.

Speaker #1: As Laurie mentioned , we plan to close on December 1st . We will acquire 162 stores following the divestitures required by the FTC for a net purchase price of $593 million , subject to adjustments for acquisitions and sale leaseback transactions completed by breeze .

Speaker #1: Since signing and customary closing adjustments, we'll fund the purchase price entirely with a newly issued $740 million term loan. The excess proceeds will initially be used to pay down the revolving credit facility.

Speaker #1: The additional will debt increase our leverage ratio to approximately 4.2 times . We it to expect take approximately 18 to 24 months to return to the target .

Speaker #1: Leverage ratio through a combination of EBITDA growth and debt reduction. Now, let's take a look at our outlook for fiscal year 2026.

Speaker #1: On the next slide . These amounts include the breeze acquisition , which makes some of the ranges broader than they might normally be .

Speaker #1: We expect system wide same store sales growth of 4 to 6% . And overall network growth of 330 to 360 . New stores .

Speaker #1: The low end of this range reflects a need to carefully consider our overall capacity in light of the Breeze acquisition. At the midpoint, we expect sales to grow by about 20%, with EBITDA growth of approximately 15%, including Breeze and our planned company store growth.

Speaker #1: We expect fiscal 2026 CapEx of 250 to $280 million . We expect adjusted EPs of $1.60 to $1.70 per share at the midpoint .

Speaker #1: This represents a 4% growth over the prior year , including an impact of approximately $0.20 per share related to interest expense for the acquisition .

Speaker #1: prior Similar to years , we anticipate approximately 40 to 45% of adjusted EBITDA dollars to come in the front half of the year .

Speaker #1: As we move into fiscal 2026 , we are excited by the opportunities in front of us and are confident in our ability to execute .

Speaker #1: We look forward to sharing more details about our long term outlook at our planned investor update on December 11th . I'll now turn it back over to Laurie to wrap up .

Speaker #2: Thanks , Kevin . As we wrap up this fiscal year , I want to again thank our team and our franchise partners . Their dedication to delivering a quick , easy and trusted experience to our guests remains driver of a key our long term growth .

Speaker #2: In fiscal year 2025, we delivered compelling growth in financial results while making investments to support our future. The fiscal year 2026 guidance Kevin laid out underscores our commitment to drive continued financial performance.

Speaker #2: Our resilient and durable positions business model us for ongoing growth in fiscal year 26 and beyond . We look forward to sharing more with you at our planned investor update .

Speaker #2: With that , I'll turn it over to Elizabeth to begin Q&A .

Speaker #3: Thanks , Laurie . Before we start the Q&A , I'd like to remind everyone to limit your question to one in a follow up so that we can get to everyone on the line .

Speaker #3: With that , can the operator please open the line ?

Speaker #4: Thank you . If you wish to ask a question , please press star followed by one on your telephone keypad . Now , if you feel your question has been answered or for any reason you would like to remove yourself from the queue , please press star followed by two .

Speaker #4: When to ask preparing your question , please ensure your device is unmuted locally . Our first question comes from Justin Klebba from Baird .

Speaker #4: Your line is now open . Please go ahead .

Speaker #5: Hey , good morning everyone . Thank you for taking the questions . Just a few on the outlook . I was hoping you could maybe frame the revenue and EBITDA contribution from breeze , just so we can understand how the core Valvoline business is expected to perform .

Speaker #5: And then a follow-up related to guidance: just what's driving the decline in EBITDA margins in fiscal 2026? It looks like about 100 basis points.

Speaker #5: How much of that is kind of core Valvoline versus simply including the Breeze business in your consolidated results?

Speaker #1: Yeah , I'll take I'll take that one . First , we do expect the core business to continue to perform well in fiscal 26 .

Speaker #1: Really ? No , change no in that in in terms of of how we considered what to include for the breeze transaction , it's still early days .

Speaker #1: We haven't closed on the deal yet . We have received recent financial updates on how the business is doing and , and as as part of the conclusion of the FTC .

Speaker #1: Second request process , we're getting reengaged with the team and we tried to take all of that into account and be measured in our approach in what we terms of included in the outlook for breeze .

Speaker #1: And that's that's why some of the ranges are admittedly a little bit broader than we normally would make them without the inclusion of an acquisition like this .

Speaker #1: So we're not prepared at this point to really talk specifically about Breeze in terms of what exactly is included in there. But rest assured, we did.

Speaker #1: We did take a measured approach and consider very that carefully as we included breeze into the into the numbers for the ten months , we expect to own that business in fiscal 26 .

Speaker #5: Okay , thanks for that , Kevin . And then just as it relates to the acquisition , I'm not sure how much you can share .

Speaker #5: You know , given you haven't closed the deal yet , but it looks like the divested locations , right . If we compare the net purchase price relative to what was discussed back in February , it seems like you're divesting those locations for less than $1 million .

Speaker #5: A box and you're acquiring the remaining stores at , you know , close to 4 million a box . So can you just help us reconcile those two numbers and maybe why the divested locations look like , you know , you're selling them at such a lower price relative to what you're buying ?

Speaker #5: The remaining outlets for ? Thank you .

Speaker #2: Yeah . You know , the FTC , when they do their review , they really were looking at maintaining a level of competition across all the markets that oil changers is located .

Speaker #2: And defined they competition significantly more narrowly than what we do and what we see . When we stores or when open we operate stores in the market .

Speaker #2: However, we had the process requires us to go out and divest the 45 stores that have been agreed to with the FTC.

Speaker #2: And so we conducted that process . It was a competitive process and that's where the outcome is and where the numbers that Kevin shared , where the net , the net acquisition price is 593 , which reflects the sale price of the of the locations that we have to divest .

Speaker #2: I will just underscore what I said in my prepared remarks is that we know where the stores are , will that we be integrating them into our portfolio .

Speaker #2: We've assessed them with our real estate analytics capability . And when you take that analysis with our proven playbook around integrating acquisitions , which we have been doing pretty much since we started the business , we have confidence that we're going to deliver long term shareholder returns .

Speaker #2: You know , at the outset , as Kevin mentioned , we do have the latest information through August of the performance of the business that we will be integrating .

Speaker #2: But we have not been able to spend time in detail with their leadership team because of the FTC review. So, as Kevin mentioned, we've tried to incorporate what we know and what we believe we can accomplish in this fiscal year with the new assets that we will be adding to our portfolio.

Speaker #2: But we have been appropriately measured in how we incorporated them in the ranges that we're providing .

Speaker #5: thanks for Okay , all that color and look forward to seeing everyone next month .

Speaker #2: thanks Yes , .

Speaker #4: Thank you. Our next question comes from Simeon Gutman from Morgan Stanley. Your line is now open. Please go ahead.

Speaker #6: Hi , Laurie . My question is we have a slightly lower outlook or algo than what we're used to . And frankly , I think the market has been hoping to have something that's a little bit more conservative .

Speaker #6: So we are getting together . It sounds like in a few weeks . So can you talk about , you know , expectations for the core business ?

Speaker #6: Sounds like nothing's changing . Want to confirm . But how do you think about the core business ? Is the algo change reflective of anything structural or tactical or it is just being prudent and setting up a reasonable range for , you know , for the business to to grow off of .

Speaker #6: Thanks .

Speaker #2: Yeah . Thanks , Simeon . The same store sales guide has really been the material difference in our longer term algorithm and our current year algorithm .

Speaker #2: And as we look at FY 26 , we're very confident in the 4 to 6% range . We will be sharing more of the longer term algorithm , probably more medium term .

Speaker #2: the But fundamentals of our business remain incredibly strong . And when you compare it to where we were in 2022 , the material difference is twofold .

Speaker #2: One is the percentage of new stores within our network . Obviously , new store ramping . You know , contributes a higher same store sales for those stores than our mature stores .

Speaker #2: And so as we continue to scale our business and the new stores become a smaller part of the overall same store sales , you would expect that to naturally come down .

Speaker #2: The second is the interest and the inflation environment . You know , when we were coming off of the Covid , you know , era , there was significant inflation .

Speaker #2: That was running through our same store sales comp . And we're back down to a more moderate , normal level now , obviously , you know , that could change .

Speaker #2: We don't expect it to change . But but we expect if that changes it will only go up . So I feel very think we good about the 4 to 6 think guide .

Speaker #2: we'll be able to share our longer I term outlook in December , and we'll be able to break down why we have confidence in in that longer , in that longer perspective .

Speaker #6: And then a follow up, can we talk about the, I guess, the number of stores in the market and the expansion by you and others?

Speaker #6: You know, it looks like capacity or the number of oil changes is increasing steadily. I'm curious how you look at that, how your own cannibalization rates look, and if there are any markets that you are not going to enter or are thinking twice about because a competitor is already well positioned there?

Speaker #2: Yeah . You know , Simeon , we look at every new unit , both in terms of the demographics of that geographic area , the travel patterns , the household growth , the income , and what's been happening with the income levels .

Speaker #2: We look at broad competition , not just quick lube competition , but others that are competing for customers , preventative maintenance business . And we look at where our stores are in proximity with any any location .

Speaker #2: We know that customers will seek out quick , easy , trusted service in the most convenient locations . So we know when we add a store , we're pretty high precision around knowing what transfers will happen from our existing stores , and we also know what the impact of potential competitive entry are sometimes , you know , sometimes we have a pretty long lead time with that , with construction , timing and sometimes a little less so if it's an acquisition .

Speaker #2: But but the but what's been happening in the market is not changing . So the the competitive environment that we operate has been relatively consistent .

Speaker #2: The competitive it's very fragmented . There's still a significant number of customers that are not going to the most convenient stay in your car , you know , quick , easy , trusted service .

Speaker #2: So whenever we add a site , you know , 70% or more of the customers are coming from outside our specific category , our specific channel .

Speaker #2: But we see normal behaviors from from our competitors as it relates to adding sites . And we we know what the impact is short in the term .

Speaker #2: They typically high have promotions and we may have that go and customers try it in order to get take advantage of a new store opening promotion .

Speaker #2: But then they return . They return back to their trusted service provider . So there's really not any changes that we're seeing . And there are no margins stay away that we from because of the competitive environment .

Speaker #2: Again, the quick lube channel has such a small percentage of the preventative maintenance market that there is a lot of share to be captured by the category, and we have been capturing that share right along with it, or more so.

Speaker #6: Okay . Thank you . Good luck .

Speaker #4: Thank you. Our next question comes from Stephen Zakon from Citi. Your line is now open. Please go ahead.

Speaker #7: Okay . Good morning . Thanks very much for taking my question . Can you help us think through the margin outlook for 26 with the new 4 to 6 same source sales guidance ?

Speaker #7: You know, there was some prior commentary that you were hopeful to see SG&A leverage at some point in 2026. So how does that stack up with the new guidance?

Speaker #1: I'll take I'll take that one . And we were really pleased with how we to continue to see a growth improvement or SG&A growth .

Speaker #1: Moderate in Q4 continue to moderate versus what we saw in Q3 . And that's that we think that's a very good sign . We're going to continue to invest in the growth of the business .

Speaker #1: But as we said before , we do expect to return to leverage in fiscal 26 . I think , you know , a comment , though , worth making , is that with the inclusion of the of the breeze acquisition in the numbers , that's going to be more difficult to tease out .

Speaker #1: And and we'll continue to provide color around that . As we've said before , we would expect to lap the technology investments that we've made sometime in Q1 .

Speaker #1: Again , while continuing to invest in the in the growth of the overall business . So we so we see we do see some opportunities there .

Speaker #1: think I from from a gross margin perspective , we continue to see opportunities . Good progress , great progress , really has been made from from a labor perspective .

Speaker #1: But we we continue to to see room to improve in the overall store operating profit as well . And we're on that . We're going focused to continue to work that , you know , fiscal 26 and beyond as as we you know , as we business and find operate the new ways to improve the profitability .

Speaker #2: The key thing , Steve , just to add on to what Kevin the key thing . Sorry , to add on to what Kevin's saying is whenever we do acquisitions or start new stores , it typically has a lower margin for wall EBITDA and any new store we acquire or , or we build .

Speaker #2: And that ramps over time. In this case, we are adding 162 stores that have a lower margin profile than our existing base.

Speaker #2: And so as those stores , as we can apply our playbook , you should fully expect that margin improvement to happen . We're just taking on a significant increase in new stores in the overall mix .

Speaker #2: But from an SG&A standpoint , you know , we will be we will be levering relative to the the business without , you know , without the breeze addition .

Speaker #2: And we'll work through continuing to leverage SG&A as we integrate .

Speaker #7: Okay . That's helpful . That's helpful . Thank you . The follow up I had is just on the same store sales guidance .

Speaker #7: You know , last year you faced a you faced a difficult compare in the first quarter . So if we think about the quarterly of cadence comps , is there anything to be mindful of .

Speaker #7: You know , below or above that guidance range as we go each quarter ?

Speaker #1: As we look at it , based upon our current view of the fiscal year , we would we would expect the same store sales , sales growth to be pretty consistent across all four quarters .

Speaker #1: We don't really see a any any reason for there to be much variance around around that throughout the course of the year . Obviously , weather can be an impact if it happens , but typically that just changes timing .

Speaker #1: It doesn't . It doesn't necessarily change , you know , change what our our guests actually do as we as we look at where we are , obviously it's still it's still relatively early in Q1 .

Speaker #1: seeing that We're play out , you know , far so so the core business is , is operating as we would expect it to in , in Q1 .

Speaker #1: So that does help support the commentary . I think .

Speaker #7: Okay . Thank very much . Best of luck .

Speaker #6: Thanks .

Speaker #1: you Thank .

Speaker #4: Thank you . next Our question comes from Mark Jordan from Goldman Sachs . Your line is now open . Please go ahead .

Speaker #8: Thank you very much for taking my questions and I'm looking forward to the investor update . You know , for the same store sales guidance , we've gone into a little bit .

Speaker #8: But , you know , how do you build to that 4 to 6 . What's the mix like between traffic and ticket . You know , is it more ticket heavy and how should we think about the mix of franchise versus company operated ?

Speaker #1: Yeah, I'll try to give you a little bit of color on that. As we look at both Q4 and the year.

Speaker #1: We had a we had a nice balance between transactions and ticket across the system . Q4 it was about a third the the same store sales growth was about a third transaction and two thirds ticket .

Speaker #1: And again , that's consistent with both company and franchise . As you look at the full year , very similar . Again , the core business is is is operating and performing as we'd expect it to .

Speaker #1: And so as as we look we at fiscal 26 on an overall basis , I wouldn't really expect that to to change materially over over the course of the year for the for the business as we're operating it today .

Speaker #8: Okay , perfect . And then just just one quick follow up , I guess kind of on your current trends , health of the consumer .

Speaker #8: Seeing you know, we've heard a little bit about concerns around deferral and non-oil change services, or just an extension of oil change intervals.

Speaker #8: Is there anything you're seeing there in your current business ?

Speaker #2: Yeah . Thanks , Mark . You know , automotive maintenance is a non-discretionary spend for consumers . And the demand for our services has been very resilient over this .

Speaker #2: More uncertain macro environment . We to continue see the same dynamics . So we are not seeing customers trade down or defer . Premiumization is up across all customer types , which is a reflection of the car park .

Speaker #2: we saw And growth in customers across all levels of household income . I think interesting the thing at the when we look past five years between , intervals service have been largely stable , although in FY 25 we saw slightly less days and miles between oil changes for our customers .

Speaker #2: Again , we've been talking about car maintenance in almost like a piece of mind becomes a seasonal or time of year sort of consideration .

Speaker #2: than Less a exact number of miles . And so what we've seen in FY 25 is slightly less days and miles between oil changes .

Speaker #2: Now, we are not expecting that to hold or continue to go down. We would expect for the days and miles to be more consistent, but in 2025 it was interesting that we did see a shortening of the cycle.

Speaker #8: Perfect. Thank you very much.

Speaker #4: Thank you. Our next question comes from Chris Cole from Stifel. Your line is now open. Please go ahead.

Speaker #9: Great . Thanks , guys . This is Patrick on for Chris . I had a quick follow up on the comp guidance . The company guided to 4 to 6% this year .

Speaker #9: And I'm just curious what factors you're seeing in the business that could get to you the lower end of that range . Given , you know , kind of where you exited for Q .

Speaker #2: Yeah, I think what we've talked about is at the low end; we would assume a fairly more even balance between transaction and ticket.

Speaker #2: And on the high end, it might be a little bit more weighted to ticket. So some of the things that would factor in are the knocker improvement year over year.

Speaker #2: We've got a few things that our teams are executing against . But but that would sort of depending on how that plays out , that would get the higher end of the us to range .

Speaker #2: Just specifically on knocker . And then there are some we are always doing pricing tests . So again , assuming that our pricing tests show both from a competitive positioning as well as elasticity of demand , that we would move forward with some of the pricing that we have planned and that our franchisees would do the same .

Speaker #2: So, those are the two things that I think pull you up to the high end of the range. But the other fundamentals are consistent across the low and bottom end.

Speaker #9: Got it . That's helpful . Thank you . And then can you provide an update on the company's efforts to improve new unit build costs and just maybe help us understand how much savings you think you can achieve relative to current levels ?

Speaker #9: Is there any other opportunity you see in terms of improving the new unit economics outside of improving the build costs?

Speaker #2: Yeah , great question . And and this is something that I know we'll spend more time on in December because it has been an area of focus for us for the past two years .

Speaker #2: When you look at our new unit costs relative to two years ago , we've actually reduced those costs by about 10% in this year , and we're fairly early in our journey .

Speaker #2: Some of the things that we've done , like we've got a talked about in the last quarter , we had a new prototype design which would reduce the cost of the building .

Speaker #2: We had bids out the last time we spoke, and we just opened our first new prototype design in June, which does deliver a nice savings relative to the old building design.

Speaker #2: And so that was the first one in June . So when you look at where we will be in this year , those factor into our CapEx numbers .

Speaker #2: And and we're in the early days , there's still additional work that we're doing . And so we look forward sharing more of those plans and the impact that that will have on CapEx .

Speaker #2: I will just state , though , that when we look at returns , we've always talked about 30% cash on cash returns and or mid to high teens IRR on a new unit , even through the period of our of our CapEx or new unit capital costs going up our returns have stayed high improved in and many cases .

Speaker #2: And this is because the fundamentals of the core business have gotten stronger . So each box is returning a higher for wall EBITDA margin again , over , a over a slightly elevated CapEx .

Speaker #2: It's still delivered a really fantastic return for both us and franchisees . Now , that will continue to improve as that denominator starts to get more optimized .

Speaker #2: So really excited to share more information on that . In December .

Speaker #1: The only thing I would add to that is there's there's also the aspect of converting acquired stores . There's been a lot of focus also on really , really sharpening the pencil around what we what we spend when we when we buy a store , which we typically do by 30 to 40 stores in a normal year , obviously we'll be taking that into consideration as we as we think through the stores as well .

Speaker #1: Once , once that once that deal is closed .

Speaker #9: Great. That's helpful. Thanks, guys.

Speaker #4: Thank you. Our next question comes from Peter Keith from Piper Sandler. Your line is now open. Please go ahead.

Speaker #10: Thanks . Good morning . And congratulations on getting the breeze acquisition done . Just on a on a separate topic , I wanted to dig into a little bit on the higher product cost impact .

Speaker #10: It look pretty impactful at around 120 basis point drag for the quarter . Could you give a little more detail on what this was ?

Speaker #10: And if we're going to see this headwind continue , or if there's any potential offsets as we step into the new fiscal year ?

Speaker #1: Yeah , as as we as we look at product costs , there are several components to that . As we all know , crude oil pricing continues to be down versus prior year .

Speaker #1: And typically, we would expect to see base oil pricing come down as well. I typically take some time; 3 or 4 months is not uncommon for that curve to catch up.

Speaker #1: And unfortunately , we really haven't seen much there yet . And in the case of supply chain costs , we continue to see to see inflation .

Speaker #1: There , which which does , you know , does create a drag on the product cost side . When base oil pricing does decline .

Speaker #1: And we would expect it to at some point , we would see some benefit from that as well as our franchise partners . And since our franchise partners , the will benefit from this as well as we as we pass those savings along to them .

Speaker #1: Another component to this that has also been a drag and, I would say, has marginally gotten worse would be used oil pricing. It's also a component of product cost.

Speaker #1: Historically , it's been more of a more of an offset . As we sell the used oil . Used oil prices do tend to move with crude oil pricing .

Speaker #1: And that has been the case even even more so than the case , I would say to the extreme , we've seen used oil pricing come down considerably to the point that that some providers out there are starting to charge customers to pick up used oil versus actually buying that .

Speaker #1: It's just a function of the market dynamics , as crude has gone down and stayed , you know , stayed down . There's just less demand on the used oil side .

Speaker #1: And so it becomes more of a drag . But we've seen an outsized impact to that as well . We are not currently paying paying providers to pick up but we're our oil , also not not realizing very much in terms of the sale of our used oil either .

Speaker #1: And we expect to see that trend continue for the time being . And and would , would expect to , you know , expect to see that in fiscal 26 .

Speaker #1: And we've included that in the consideration around our outlook as well.

Speaker #7: Okay .

Speaker #10: All right . That's helpful . And then I guess a simplistic question on optics . So the comp was was quite good for the quarter .

Speaker #10: The EBITDA at the high end and then the EPS at the low end. So, you know, I do guess optics matter.

Speaker #10: You did miss the EPs consensus estimates a bit . To me it looks like you had $0.02 headwind from higher interest expense . Maybe you could comment if why did interest expense jump up so much ?

Speaker #10: And if there's anything in your model that maybe caused that drag on EPS.

Speaker #1: Yeah . There were there were a couple of things in there . Depreciation in the quarter was a little higher than we expected because of the timing and mix of new store additions in the quarter .

Speaker #1: So that's part of it . The effective tax rate is also just a bit higher than what we expected as well . And I would say probably the from an interest perspective , I'd say net interest is probably a little bit higher , meaning interest income .

Speaker #1: That that we would have expected to to see was a was a bit lower as well . So it's it's really pieces of all of that that I would say contributed to us landing at the at the bottom end of the range for the full year .

Speaker #10: Okay. That's helpful. Thank you. Good luck with the new fiscal year.

Speaker #2: Thank you .

Speaker #4: Thank you. This marks the end of our Q&A session for today. So, I’ll hand back to Laurie for closing remarks.

Speaker #2: Well , thank you everyone for joining and for the questions . You know , as we step back and look at FY 25 , we feel really good about what we delivered from compelling growth and financial results .

Speaker #2: And as we look at FY 26 , we know there's more to come as we continue to drive the core business and moderate the G and growth and spend in our existing business .

Speaker #2: Now with breeze , while we're adding 162 stores to our network , this is not something that is new to us . We've been doing bolt on acquisitions for a long time .

Speaker #2: This is obviously larger scale , but we have the playbook in the team ready and we will , you know , following the close on December 1st , will will start our integration process .

Speaker #2: And I feel really good about the breeze team . And again , the strategic rationale for that acquisition remains the same . When we close the transaction , Valvoline will be the category leader in store count , revenue and transactions , both on an absolute and an average per store basis .

Speaker #2: We'll have over 2300 , well over 2300 stores , which we can leverage our investments against . So using our playbook , we'll bring these stores into the portfolio .

Speaker #2: And and we do see significant growth opportunities ahead . Our resilient business model remains unchanged . And it will continue to position us for momentum in FY 26 and beyond .

Speaker #2: So, I want to thank you all again for joining us today. I look forward to seeing you, either in person or virtually, at our investor update in December.

Speaker #2: Thanks all .