Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake's Earnings Conference Call for the second quarter of fiscal 2016. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in whole or in part without permission from the Company. I would now like to introduce Ms. Effie Veres of FTI Consulting. Please go ahead.

Thank you. Hello everyone and thank you for joining us on this morning's call. I would just like to remind you, on this morning's call, management may reiterate forward-looking statements made in today's release. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the Company's filings with the Securities and Exchange Commission. These risks and uncertainties include but are not necessarily limited to uncertainties affecting retail generally such as consumer confidence and demand for auto repair, risks relating to leverage and debt service including sensitivity to fluctuations in interest rates, dependence on and competition within the primary markets in which the Company stores are located, and the need for and costs associated with store renovations and other capital expenditures. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material. Joining us for this morning's call from management are John Van Heel, President and Chief Executive Officer; Cathy D'Amico, Chief Financial Officer; and Rob Gross, Executive Chairman. With these formalities out of the way, I'd like to turn the call over to John Van Heel. John, you may begin.

Thanks, Effie. Good morning and thank you for joining us on today's call. We are pleased that you are with us to discuss our second quarter fiscal 2016 performance. I'll start today with a review of our results, key initiatives and outlook for fiscal 2016. I'll then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results. In the second quarter, we delivered on our key objectives of increasing traffic, leveraging our scale and supply-chain, and effectively managing operating expenses while driving strong contributions from our recent acquisitions and maintaining a robust pipeline of new acquisition opportunities. Our team's strong execution drove positive results on both the top and bottom line. Sales in the second quarter increased by over 8%. Comparable store sales were positive 2.1%, led by a 2% increase in traffic, and were consistent throughout the quarter. Earnings per share grew 14% to a record $0.57, the midpoint of our guidance, supported by operating margin expansion of 120 basis points. For the first six months of the fiscal year, sales have increased by 8%, operating margin expanded 90 basis points and net income increased by 13%. These results clearly demonstrate that our business model is working. We are also pleased that the sales momentum we experienced in the second quarter has strengthened into October with a 4.2% increase in comparable store sales month to date and continued positive traffic. During the second quarter, sales grew across our key categories. Most notably, comparable sales for alignments increased by 11%, tires and exhaust each increased by 3% and brakes increased by 2%, maintenance services and front end shocks were both flat. We are encouraged by the 3% increase in tire sales in the second quarter led by higher retail tire…

Thanks, John. Good morning, everyone. Sales increased 8.1% and $17.9 million for the quarter. New stores, which we define as stores opened or acquired after March 29, 2014, added $18.5 million including sales of $17.5 million from fiscal 2015 and 2016 acquired stores. Comparable store sales increased 2.1%. Partially offsetting these increases was a decrease in sales from closed stores of approximately $5.2 million, largely related to the BJ's store closures in fiscal 2015. Additionally, during the quarter ended September 2015, the Company completed the bulk sale of approximately $2 million of inventory to a [indiscernible] company as compared to a $2.9 million transaction in the second quarter of last year. There were 91 selling days in both the current and prior year's second quarters. Year to date, sales increased $36.9 million and 8.4%. New stores contributed $43.8 million of the increase, including $40.7 million from fiscal 2015 and 2016 acquisitions. Additionally, there was a comparable store sales increase of 0.8%. These increases were partially offset by a decrease in sales from closed stores of approximately $11.3 million, again largely related to the BJ's store closures. And there were 181 selling days for the first six months of this and last fiscal year. At September 26, 2015, the Company had 1,029 Company-operated stores and 143 franchised locations, as compared with 1,003 Company-operated stores and one franchised location at September 27, 2014. During the quarter ended September 2015, the Company added 35 Company-operated stores and closed five. Year to date, we added 39 stores and closed nine. Gross profit for the quarter ended September 2015 was $100.7 million or 42.1% of sales, as compared with $89.5 million or 40.4% of sales for the quarter ended September 2014. The increase in gross profit for the quarter ended September 2015 as a percentage…

[Operator Instructions] We'll take our first question from Bret Jordan with Jefferies.

On the gross margin, some pretty good performance in the quarter. Was there any contribution from leftover Chinese tire inventory that was still turning in there?

No. Obviously we are turning the tires as we go, but what we said is we expect tire cost overall to be slightly down this year. So we've really been able to hold those costs in check. So [no change] [ph] from that.

Okay. And then the supply chain, what markets are you sourcing out of now given the fact that the Chinese product is less attractive, and maybe could you tell us what the mix of import was versus branded tires in the quarter?

There are other Pacific rim countries and they are, as we said before, some new manufacturer relationship as well as some continuing that have shifted their production outside of China. And then the mix is roughly the same this year and last year, it's right around 40%.

Okay, great. And then just on segments, [indiscernible] 11% comp in alignment and it outperforming tires so much and [they have] [ph] certain non-alignment fees, and what do you make of that, is that something that was promoted in the quarter?

Yes, I think again it relates back to what we said about tire units being flat. I think consumers are still deferring larger ticket purchases, and in those cases they are making sure and accepting our alignment recommendations more often to keep the tires that they have on their cars going longer, and I mean that's where we put an operational focus on that as well because we think that is the case and we are doing a much better job of this than we were doing prior.

Okay. And then the quarter, October to date comp, is segment trends in that 4.2% roughly the same or is there anything sort of outlying in that current performance?

So traffic is up as I said, tires are about plus 3 I think [whereas the] [ph] service is getting better.

Okay. Great, thank you.

Moving on, we'll go to Rick Nelson of Stephens.

This is Nick Zangler in for Rick. Just hitting on that 4.2% October comp, that's really strong. It looks like to me the strongest number since January of 2012. Now it looks like November could be a little bit of a harder month to lap but December kind of looks like from a competitive basis like October. So given your guide of 2% to 4%, what needs to happen in this quarter for you to get to high end of that range, and we're kind of hearing titbits on a milder winter this quarter or into next year, how does that factor in and is that good for you guys, bad for you guys, just some reflections on that?

I think we have seen a quarter of plus 2%, that we think is the floor. We are running plus 4% right now on higher traffic. We have gotten good contributions from our initiatives there, and as I look at it, November and December really offset themselves, so we are really running up against the slightly negative comp over the next couple of months, and I think there is significant opportunity to continue at this plus 4%. I'd like to see that for the remainder of the quarter.

Great. And then just wanted to jump back over to the Car-X acquisition. Obviously I would imagine the franchise owners were able to purchase product from Monro which has the potential to provide benefits to both Monro and the franchise owners given your scale. Can you talk about any progress you have made with those owners since the acquisition, have you been able to improve those franchise operations, did they benefit you, just what your interaction has been with those owners?

Sure. Things are going well at Car-X. We are looking to use all of the advantages that we have that you just talked about to help improve the businesses of the franchise owners. We are bringing opportunities to them as we get those sorted out. So they've been running well but overall that's a $2 million EBITDA opportunity on a $160 million plus EBITDA company. So it's going well, we're very pleased with it and we continue to work hard to help these guys improve their business and grow the chain.

Great. And then finally, has that served as a potential acquisition pool, how are the dynamics, what does it look like, do you have like a right of first refusal? I would imagine the owners would go to you guys first but is there anything contractually that's baked in there?

No, there isn't. Again, our objective is to help these guys improve their businesses and grow the chain. We think that where they would come to us if they want to sell their business, they would have more of an opportunity than perhaps they've had in the past, but we're very happy with the franchise model there and we're trying to grow that with them.

Great. Congratulations on the results, positive comps and the good start to 3Q, good luck.

And next we'll hear from Tony Cristello with BB&T Capital Markets.

One question, I wanted to talk a little bit about, and obviously you got to be careful in terms of comp trend and where you're forecasting, and I know you are running a 4% in October, can you give me the sort of cadence of how the quarter shaped up, and then on the sustainability of a positive October, what do you typically see heading into November on that?

So the second quarter was plus 2.3% in July, plus 2.1% in August and plus 1.9% in September. And again in this quarter, is a key quarter for tire sales, November is a very important month there, as we just talked about we were up something like 3.9% last September, but then had a negative month in December. So I think if the consumer – hopefully, our traffic initiative which has brought in a bunch of new customers in the second quarter are going to help us sustain that plus 4% throughout the third quarter here.

Yes, I think we were up 3.9% in November, is what we were going to say, and we would hope the 4% is the new norm, but one month does not make a trend.

Right. Patience but you hope that the pent-up demand flows through?

No, we have no patience.

Maybe shifting gears a little bit to, you expanded into some newer markets in Florida and Georgia which are very good markets but atypical to Monro, you don't have a big infrastructure still, you don't get the benefits of distribution, and I'm just trying to understand then, one, I'm assuming you are getting good sales results but you may not get the full leverage that you would get in those markets, how should we think about contribution on a go forward basis as you are backfilling and building out those markets?

In particular Florida and Georgia, you're right we don't have the distribution down there. The sales results are good. We are happy with that. We typically talk about 100 to 150 basis points of operating margin improvement that we get from distribution synergies. Right now we are delivering product down to those markets. So our distribution costs are higher. So basically right now we are not getting that 100 to 150 basis point on distribution and that represents an opportunity. We said in the past that we would look at opening a DC when we're more like triple digit stores down in those markets, and at that point we would spend some money on the DC, on a larger store base to get after that distribution synergies.

Okay. And I'm assuming that your targeted growth of acquisitions is inclusive of those newer markets. Are those markets that you feel comfortable enough to continue to maybe add stores via greenfield?

Yes, we absolutely are adding both greenfield stores and looking at those for acquisitions. We have a number of acquisition opportunities in those markets which I view as very positive. They are large, dense markets, and they balance our exposure to more Northeast and North Central markets. So I think it's a great opportunity for us.

And how long would it take you to sort of get a DC up and running, is that a couple of years venture and therefore maybe you don't get the full efficiencies in those markets for another two, three years?

No, that would be more like somewhere plus or minus, probably a little bit plus 12 months once we made that decision.

Okay, great. Thank you for your time.

Next we'll hear from Michael Montani with Evercore ISI.

I want to ask about the NDA pipeline, if I could for a moment. There was a comment that you all had made about increasing the credit line and potentially being related to larger sized deals. So could there be any in the pipeline now that are larger sized, how should we sort of think about that?

The more than 10 NDAs that we talked about are 5 to 40 stores within our markets. So if we were a bigger company with more opportunities, and with respect to larger deals we have always said that anything that makes sense for our Company and the shareholder of the Company, that we would look at, but right now I want to make sure that we have the opportunity to take advantage of all the acquisition opportunities that we see. We said this was going to be a good year for acquisitions, we wanted to have the flexibility to take advantage.

Great. And just to follow up, the digital initiatives that you have embarked on sound to be paying off a little bit. Can you quantify at all, if you look at the traffic, up 2, and it sounds like it hasn't gotten any worse than that in October, how much of that might be related to those initiatives, and also what are oil changes looking like?

So oil changes are up, and when you look at the traffic, we're bringing in a lot of new customers here. That's our focus in the field and I view the digital initiatives as supporting that. So the big push is all of our guys in the field doing a great job for customers, bringing in new customers, doing more, getting them out happy with our service on a first visit that might be something more like an oil change or a lower-cost service, and giving them a reason to come back to us. So that plus 2 traffic in the quarter should help pay off in the second quarter, should help pay off in the third quarter with consumers coming back and needing more costly repairs that they can't delay anymore.

Got it. Just one last housekeeping thing which was, if you could share what the mix was this quarter in terms of revenue by category?

Sure. So for the quarter tires was 43, steering was 10, exhaust was 4, brakes was 16 and maintenance was 28, and as always don't hold me to the rounding.

Sounds good. Thanks a lot.

[Operator Instructions] Next we'll hear from Jamie Albertine with Stifel.

So first of all congratulations, you had a solid quarter, the gross margin I think it was already asked about was exceptional, and it looks like what you're doing to drive the comp leverage point lower is benefiting yourselves now as comp appears to be a bit down to accelerating, but really if I may, I know you have asked, it's been asked a bunch of different ways, I want to drill on the comp a little bit. Is it too early given where we are in October, I know I saw [Bill's] [ph] highlight last weekend, there was some snowfall, I don't know if upstate New York is different, but is it too early to make a call on whether folks are getting into snow tires and replacing what you've told us in the past are heavily used bald deferred tire purchases?

This is Rob. It's too early, I mean we said tires in October are doing the same thing they did in Q2, and I don't think people are thinking about buying some tires in July, August or September. So we continue to run flat units which would say they are not unbelievably nervous about winter weather. I mean the few snowflakes we saw last weekend is not a driver, and I think as we said, flat units with inflation are going to be the driver of the tire comp, and the improvement at least we've seen in October, John said relates to a service business. We really need to see November and December to make a call on whether the consumer is going to stop deferring tires. We certainly know they need them, we've certainly seen a lot of ugly ones and when we do change them, they are bald, but too early to call and we hope that push us towards a plus 4 as opposed to what John said was the floor of plus 2.

Let me ask then as well, it sounds like you're doing a great job to bring in new customers, I guess first, is there any data to suggest where you are pulling those customers from, and what can you tell us about those new customers, are they more inclined to spend or they have a higher income level versus maybe your core base, so how should we think about the impact, however small, because I'm really trying to get a sense here of when can we expect the deferred maintenance cycle to end, right, and I'm looking for any evidence so that we confine to that extent? So is there anything on the new customer side that can help us?

The plus 2 in traffic for the quarter is a high number for us, it's a good number for us, and it is a lot of new customers. With regard to where they're coming from, I guess I could say to you that I think our sales trends in general are ahead of the other companies that I'm seeing in those NDAs. So I think we're doing well there. But those customers are coming in for oil changes and again we are looking to bring them back for additional service on their return visit. And I think with regard to whether this is a real shift in the customer, I would say that it's not right now given the flat tire units, but we'll let you know after the end of the quarter.

Okay. And I'm still beating the comp horse here, but last question on comp, from a regional perspective as you've grown into newer markets, and I know they're not flowing through your comp base in many cases yet, but is there a clear or definitive performance difference in the newer markets versus the Northeast, and so to that end could you make the argument that perhaps your comp will be a little bit more predictable or be more stable over the next few years as they roll into your base?

Yes, Florida and Georgia are doing well for us, and I think the more exposure we get to those markets, that will certainly help reduce some of the volatility that we have seen from winter weather and this discussion we're having about November and December. I view that as a positive. The most important thing for us is to grow and increase our store density in our existing markets and as we're talking about in Florida and Georgia here, in these contiguous markets.

Okay, great. John and everyone, thanks again. I appreciate and good luck in the current quarter.

Moving on, we'll go to Scott Stember with C.L. King.

Most of my questions have been asked already, but just going back to the comp range that you gave for the full year, 1.5 to 2.5, it looks like you paired down the high end by just a smidge, and in October we saw probably stronger than anybody expected comps up north of 4%. I know you guys like to be conservative and justly so, but is there anything else that we're missing that we should be looking at, any concerns that you have that is giving you any pause to maybe be a little bit more aggressive on the comp end?

No. October was consistent with the overall comp, last year it was down too and in the fourth quarter we were down 1.8, in the third quarter and fourth quarter it was down 2.5. So I think there's nothing there that you're not seeing, it's just a bit of a conservatism, giving [out] [ph] conservatism. I'd like to make sure we hit the number.

Got it, that's fair enough. And just last question, I mean you guys have obviously done a very good job of attracting your customers into your stores for the services that you already sell, but is there anything else out there, anything new that you guys are working on, any new services that is part of your broad initiative to increase your sales, whether it would be more temperature controlled items or whatnot, but is there anything that's in the works that possibly could be an additional driver going forward?

What our focus is operationally is driving new customers in, they need the basic work that we provide and our doing a better job with those customers. You can see that as an example in the alignment category. There is a need out there, we've got an operational focus on it, it's a very high profit category for us and high customer satisfaction category because it helps them preserve the investments that they've made in their tires. That's where our focus is and that's where we think the biggest gains are for us. We are looking at, we are trying to do the best job we can addressing all the needs that our customers have.

Got it. That's all I have. Thanks so much for taking my questions.

That will conclude our question-and-answer session. I'd like to turn it back to John Van Heel for any additional or closing comments.

Thank you all for your time this morning. I'm looking forward to reporting on the continued positive impacts of our focus on sales and traffic and contributions from the acquisition opportunities we're acting on. Our business model should produce another year of double-digit EPS growth on top of the 40% increase over the past two years. We appreciate your continued support and the efforts of our employees that work hard to take care of our customers every day. Thanks again and have a great day.

And that will conclude today's conference. We'd like to thank everyone for their participation.