Good morning, ladies and gentlemen, and welcome to Monro Muffler Brake’s Earnings Conference Call for the Second Quarter of Fiscal 2017. 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] And 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 that on this morning’s call management may reiterate forward-looking statements made in today’s release. In accordance with the Safe Harbor provision 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, risk 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 on this morning’s call from Management are John Van Heel, President and Chief Executive Officer; Cathy D’Amico, Chief Financial Officer; Brian D’Ambrosia, Chief Accounting Officer; and Rob Gross, Executive Chairman. With these formalities out of the way, I’d like to turn 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’re pleased that you are with us to discuss our second quarter fiscal 2017 performance. Today, we start – we will start with a review of our results and update on our growth strategy and outlook for the remainder of fiscal 2017. Then I’ll turn the call over to Cathy D’Amico, our Chief Financial Officer; and Brian D’Ambrosia, our VP of Finance and Chief Accounting Officer, who will provide additional details on our financial results. Despite the difficult operating environment, our bottom line focus, effective cost control, and successful integration of our recent acquisition allowed us to deliver second quarter earnings in line with our guidance. It is this same discipline and execution that has grown earnings by 50% over the past three years in a weak sales environment. This year, we have accelerated our growth in this tough market by capitalizing on attractive acquisition opportunities, allowing us to both expand our business and increase the concentration of our geographic footprint, particularly in the south. These acquisitions lay the groundwork for sales and earnings growth in fiscal 2018 and beyond. In just the first six months of this fiscal year, the acquisitions we have completed represent $135 million in annualized sales, or 14% sales growth, and there’s still a lot of year left. As was reflected in our guidance, our second quarter results continue to be impacted by the lingering effects of last year’s mild winter, coupled with a tough consumer spending environment. Comparable store sales declined 4.3% versus an increase of 2.1% last year. Similar to our first quarter, consumers continued to allocate their spending with high ticket and more discretionary service categories, such as exhaust and shocks remaining challenged, as were brakes and alignments, which…

Before I turn the call over to the operator, I’d like to say a few words about our plan CFO transition. As you know, we have been planning the transition of our CFO role for some time. Consistent with her contract, Cathy D’Amico will be transitioning the CFO role to Brian D’Ambrosia on January 1 of 2017. Cathy will stay on as a part-time consultant through, at least, August of 2018. Cathy has been with Monro for 23 years all as our Chief Financial Officer. Over that time, she has helped guide us through a period of exceptional growth. Monro is now over 10 times the size it was when Cathy became CFO, and she has built an outstanding finance organization. I thank her for her years of counsel as well as her enormous contribution to this company. I also welcome Brian D’Ambrosia to this important position. Brian has worked closely with Cathy over the last four years as part of a succession plan. He brings strong leadership and extensive financial background and a deep understanding of our company. I’m confident that he will continue Monro’s commitment to financial discipline and stronger shareholder returns. Cathy, thank you, again, and Brian, we look forward to your new role. And with that, I’ll turn the call back over to the operator for questions. Operator?

Thank you. [Operator Instructions] And we’ll take our first question today from Bret Jordan with Jefferies.

Hey, good morning, guys.

Good morning. Catherine D’Amico: Good morning

On the regional performance, John, I think you mentioned that the spread had narrowed to 400 or 500 basis points in September. Could you sort of give us some feeling for what the spread was as its widest? And were the Southern stores comping positive pretty much through the quarter and most of the drag was in the north?

Yes. The Southern stores comp positive each month of the quarter and the northern stores improved during the quarter. It was 700 to 800 basis points at its widest point.

Okay, great. And then on tires, units were up 2%, but the dollar comp was flat. Is that a mix shift within tires to more import products, or is there pricing pressure on tires on a like-for-like basis?

It’s primarily mix shift to lower cost tires.

Okay. And then one last question, you mentioned within the gross profit comments higher outside purchases. Is that higher outside purchase in markets where you don’t have distribution, or is there higher outside purchases in your existing markets as well?

No, I think we just said it was the comment on materials, including outside purchases, that’s all that that was.

Okay. So there’s not any change in an outside buying pattern in your legacy markets?

No, we’re doing well there actually.

Okay. And I guess one last that leads to the Carolina stores, would those be distributed out of Florida, if you built a DC, or is that going to be either outside buying or from the Baltimore DC?

No, that will be – the Carolina stores will be from the wholesale business. That’s what – that’s one of the reasons that we’re so interested in it. We have – we now have the ability to distribute to a 100 of our stores are almost 10% of our entire chain from those DCs and that will also bring the trucks for tires now passed a lot more potential customers. So there’s a benefit on our side from increasing control with distribution and lower cost, and there’s a benefit to that wholesale business, because we are expanding their natural routes, which will give them some sales opportunity.

Okay. So you’re gong to put parts in the – the parts beyond tires, you’re going to actually distributing parts in Carolina as well?

We are taking a look at exactly how we’ll do that, but that will be – those DC’s will be involved, yes.

Okay, great. Thank you.

Yes.

And we’ll take our next question from Rick Nelson with Stephens.

Thanks. Good morning.

Good morning, Rick.

I wanted to ask about the sequential improvement that we are seeing in September October in comps and traffic. I’m curious if the promotions have stepped up at all, or do you think those kind of deferral cycle is coming to an end, or are comparisons just getting easier? What in your mind is driving?

The comparison actually got tougher between September and October. September last year was up 19 and October was up 37. We said two things about the trends. One that the impact of the winter weather would dissipate as we went through the quarter. And secondly, that we would expect the consumer to improve as we as they move through the year and got through some healthcare deductibles. So I think that I’m hopeful that there’s some of that consumer improvement that’s a part of that.

And were promotions going to step up at all?

No. Look, I’m not happy about a – I’m running a minus 2 adjusted for Hurricane Matthew in October. And that’s the reason frankly that we were more conservative on the sales guidance. I’m hopeful that some of these signs that we’re seeing are the result of consumers getting better. As a note, comp – traffic turned positive in October, but we’re still running down a little bit. So we’re not out of the consumer woods yet. But this quarter, it’s going to be significantly impacted by the weather, and I think that’s going to be positive.

Yes, very easy compares there, particularly in November. Gross margin pressures, you talked about being driven by mix. I’m curious, within that tire category on a like-for-like basis, if you are seeing year-over-year pressures there, or are things more stable?

Year-over-year pressures, well, I can say that the costs are down, that’s being trumped by the mix shift that we saw in Q2:

But we’re collecting more dollars per tire than we ever had, and that should continue especially with the 25% increase in units next year and the opportunity that overlapping our cost reductions and the increased volume will deliver the first six months apples-to-apples in fiscal 2018.

Yes, thanks for that color. So that 25% increase in tire unit, how do you see that scale helping with the margins and your costs?

Well, as I said, every dollar of decrease in tire costs is, it is almost $4 million save for the company, so it’s significant. And what I would say to you is, there aren’t many companies walking around with a 25% tire unit increase to be able to shop to tire manufacturers, and we are that company. So I expect it to help significantly on the tire costs next year. And again, what Rob said is and what I said in my prepared comments is that, we expect the tire costs to continue to go down into fiscal 2018 outside of our ability to leverage this 25% increase.

Got it. Yes, thanks a lot and good luck.

Sure. Thank you.

And we’ll take our next question from Matt Fassler with Goldman Sachs.

Thanks a lot and good morning. I’d like to dig a little bit deeper into gross margin. You spoke a bit about the mix of tires relative to services, some of the higher-margin services that perhaps are a bit softer. As you think about your outlook for the remainder of the year and you anticipate the sales recovery, what’s your expectation about the dynamic around those mix factors, please?

Yes, I think that at the – for us the low-end for the remainder of the year, we have minimal mix pressures if we’re at or above the higher-end. We probably get some mixed pressure, because tire is really outperforming. But in that case, we’re going to be doing very well on the sales side.

And so I guess what you are saying is, if you think about where the delta is likely to be kind of between the high and the low-end of sales, you think it to be more tire driven than service driven at this point?

Yes. Well, certainly for this quarter well and Q4, our tire units were down 10% in November and December. So there’s a significant opportunity there. So what we’re seeing is a slight improvement in the consumer, it looks like not dancing in the streets about that where they are right now. But we have a significant opportunity with weather and what we’ve always said is weather impacts the sale of tires significantly. So, I think, that that’s why I look at the low-end being more general less pressure, less variation in margin. And if we outperform in tires, we’re going to get much higher sales and probably a little bit of a mix shift.

Great. And then just a quick follow-up. You were helpful at the beginning of the call in talking about the difference in terms of the impact of gross margin on a comp basis versus the decline that we saw overall. As we think about the impact of acquisitions, including the ones that you closed or announced this quarter on gross margin, how much longer should that kind of impact persist in your view? And does the magnitude that we saw play out in the September quarter look like it’s likely to repeat itself over the rest of the fiscal year?

I wanted to make sure we explained better right now than we did frankly in the first quarter about the impact of the commercial and wholesale businesses on margin and on SG&A leverage. I would expect over the next – the 200 to 250 basis points is a shift that we’ll see for the next year, both in gross margin going down and in SG&A leverage picking up. Remember that we’re a company that does acquisitions and anytime we do acquisitions that are significant, we are diluting our operating margin, and we’re in that phase with these acquisitions. But I wanted to point out that there’s a big shift also just in lower gross margin and higher SG&A. So those factors will play – sorry, in lower SG&A as a percentage of sales. So I wanted to make sure that that was clear. But these acquisitions are that they’re very strategic for us. They give us significant opportunities to grow the business and improve the business model. So to answer your questions, yes, we’re going to see that type of dynamic of lower gross margin and higher SG&A leverage over the next year.

That’s super-clear. I appreciate it. And then one final quick one. You talked about the beneficial impact of, I guess, a lower incentive comp this quarter versus a year ago for better or for worse. As you think about your expense compares for the rest of the year, your incentive comp compares for the rest of the year, how did those look a year ago? I haven’t had a chance to go back and look at your comments yet from Q3 and Q4 of last year?

Yes, we – hopefully that – hopefully it compares favorably to what we did last year or what we had last year from a management perspective that is people getting paid bonuses. But if our results don’t warrant the bonus, we obviously won’t pay it, so we’ll have a little bit of take back in the rest of the year probably mostly Q4.

And that’s with the plan as it stands today? In other words, if you make your numbers, incentive comp is down a little, flat up a little for the rest of the year? Just to understand a little bit of the split?

No, incentive comp is going to be down.

Yes.

I mean, we should think. I think what John was referring to is comp management nothing, potentially, most likely based on where we are now. But I think he was referring to more the ins and outs of as comps get better, as stores are performing better, those managers and those field managers will have an opportunity to get incentive comp.

Got it. Understood. Thank you so much, guys. I appreciate it.

Sure. Catherine D’Amico: Thank you.

We’ll take our next question from Michael Montani with Evercore ISI.

Hey, guys. Just wanted to ask, John, give you the opportunity again, I guess, really to highlight the initiatives that you have under your control outside of the weather and the easier comparison set to really jumpstart the comp base as we get into the next 12 months?

Well, I talked about the initiatives we have in terms of marketing and supporting our field organization. But we’re currently aggressively are pursuing comps and traffic. It’s just been a tough market. And I think we’re not alone in pointing out that the fact that it’s been a tough market particularly in our markets. And I think true to the business model that we’ve established, we are getting acquisitions done in the tough market, including a lot of the greenfield stores, where we’re seeing smaller operators really be pressured. I think you can see the progression that we have talked about in Q2 into September and into October that shows that what we’re doing to drive traffic is paying some dividends, I mean, our traffic in October is positive with the hurricane. So we got a pressured consumer and we’re doing all the right things to drive traffic and pursue comps.

I guess just to follow-up, can you talk a little bit about the balance between potential for future price increases in an environment where, say the traffic were not to improve? How would you weigh balancing those two things moving forward?

Well, I think in general as things get tougher, pricing in the market tends to get a little tighter. So we certainly been through the most amount of top pressure that we’ve seen in years in the first six months of this year. And we did talk about a little bit of pricing pressure in Q1 that abated by the end of it and Q2 is more about a mix shift within tires to lower-priced tire. So our approach again is to have a broad assortment, so consumers can find the right tire that fits their budget and on which we make the most money. We’ve talked about that extensively over the last couple of years and our ability to expand that assortment much of that with import tires, where we’ve been able to expand the amount that we’re making on every tire. So generally, a tougher market is going to lead to tougher pricing. I certainly hope that the remainder of this year, where hopefully we are buoyed by some positive comps driven hopefully by return to normal winter weather will keep the market stable.

And maybe to ask differently, then does the positive comp guidance include any assumed price increases, or is that purely on volume?

No, I think it’s again it’s a mix at the low-end of price and some units and at the higher end, it’s going to be probably more units.

Thank you.

Sure.

We’ll take our next question from Scott Stember with CL King.

Good morning. Catherine D’Amico: Good morning.

Good morning.

You guys talked about in the release here that your comps in September were down 2.6%. Did you give the first two months of the quarter?

Yes, we did. It was down 5.6%, 5.4% and 4.8%.

5.4% and 4.8%? Okay.

And then 2.6% in September.

Got it. And talking about, I guess, tying into the guidance of 1.5% to 2.5% comps growth in the upcoming quarter-over-quarter we’re in right now, October last year was up 3.7%. What was the November number again in December over last year?

Yes, November was down 9% December was flat

Okay. So…

November being the much larger month from a dollar perspective.

Got it. Now just assuming not being able to predict what the weather will do. How much wiggle room is there within guidance if we were to have another mild winter? Just trying to see where things are – how things are calibrated and the sensitivity of, where things could potentially play out?

So I’m not sure what kind of a comp you would incorporate in there. But I try to put out a number that, I think, we can hit if we’re anywhere near the low-end of the comp guidance.

Okay, got it. And just one last question on the – what were acquisition cost again in this quarter, and what are you having guidance?

So we increased the acquisition cost. I said that the $0.05 reduction in guidance on the low – $0.05 reduction in guidance was half due to the comp – the more conservative comps and half due to acquisition costs – increased acquisition costs. Brian D’Ambrosia: Yes, remember, he is talking about the increase. We have acquisition costs and due diligence costs every quarter every year. This was because of the level of activity trying to be conservative and including additional as we’re working on other deals the rest of this year.

I appreciate that. I’m just trying to figure what you expect this year versus last year just to maybe see how much of the headwinds to earnings is really coming from additional acquisition costs? Jut trying to get…? Brian D’Ambrosia: No, the headwinds turning are coming from us not getting any sales.

Fair enough. That’s all I have. Thank you very much.

Thank you. Catherine D’Amico: Thank you.

We’ll take our next question from James Albertine with Consumer Edge Research.

Thanks for taking the question and good morning. I wanted to circle back. It’s great to see the sequential improvement and we really appreciate all the detail you provided there. But you made a comment that we actually were able to pick up in our data as well as it relates to digital. And I think perhaps what I’m getting at is, John, you made some other comments as it relates to the consumer maybe getting a little bit better, we hope. I’m wondering, is there any data at this point that you can provide, where perhaps if you look at customers that schedule appointments online have a propensity to spend X dollars more per service, or if it expands your addressable market by a certain amount, and maybe you can tell that by how far people have to drive to come and get service? I’m just wondering digital sounds like it’s finally turning significantly positive for you guys and could be a – maybe a longer-term trend to watch. So just hopeful that there might be some other sort of color you can provide?

Our consumers that make appointments online aren’t really much different from a sales standpoint than our global consumer base. Most people make their appointments online for oil changes in tires, which are key traffic drivers for us. What I would say is, consumers that are younger tend to skew a little bit more to doing that on line. And I think that’s an important element of us expanding the addressable market and making sure that we’re moving where consumers are, which is exactly what we want to do.

It’s very interesting and helpful. And you made another comment as well on the 13-year old or greater vehicle mix. I think you said it was 29% of your traffic if I wrote that down correctly. I wanted to understand though, as the vehicles age, where the spending shifts? And I’m just – I’m wondering if there’s maybe more sort of higher oil change mix, but a lower front-end shop mix, or a lower brake mix, or a lower tire mix. But just trying to get an understanding of how that dollar trends over time in those much older vehicles?

Sure. The older vehicles require more repair. But typically, they’re trading down on things like tires and and some other things like that. So what’s important to me – if you look at our business between tires, oil changes, brakes and general maintenance, you’ve got basically more than 80% of our business. What we need is a lot of cars out there being driven a lot of miles. The fact that they’re older is good for us, because older cars generally need more repair. So you get a little bit more repair offset by some trade-down, and that ticket is very consistent with our overall average ticket. But both those type of trends in vehicles in operation and in aging of vehicles are trends that are going to help us over the next five years.

So if I can – if I may just try and interpret what you just said in maybe a slightly different way. What my concern would be is that a 15-year-old vehicle is worth less than a 13 than is less than a 11-year-old vehicle. And so the return on my investment in fixing it is lower as it gets older. It sounds like that’s not the case, though, based on the example you provided. Is that fair to say?

Well, if you’re asking about whether consumers are making decisions whether to scrap their car, or buy a new one, or maintain their car, because again I’m talking generally about maintenance.

Sure.

I think the data that we have shows that consumers are choosing to maintain those vehicles, and the fact that they’re made better overall at 10 years to 15 years doesn’t have any impact on the need for an oil change, or the brake pads you had replaced when it was 13-years-old and now that it’s 15-years-old, you need the brake pads again. You’re either looking at a few hundred dollars for a brake job, or going out and spending X thousands on a brand new car, we’re seeing people continue to maintain those vehicles, and that’s good for us.

I wouldn’t say brand-new, clearly. But, yes, I understand what you’re saying. I don’t think they’re brand-new as the option either.

Yes, sure. But you need, that’s why I said thousands of dollars even if it’s only $10,000.

Sure. We’re just seeing a lot of pressure on consumer spending is all, that’s the reason why I asked and it’s healthcare and everything else. And maybe you drive around on crummier brakes and bald tires longer, and that’s contributing to deferred maintenance cycles is really all I was getting at. But you’ve done more than a fair job of answering the question, I appreciate that. I also want to wish Cathy, I know she’s going to be around for a while longer, but the best in her transition, and thank her again for the many, many years of help and service. Catherine D’Amico: Thank you, James, and I appreciate it.

Yes, she’s not going anywhere soon.

Best of luck in the next quarter.

Thank you. Catherine D’Amico: Thanks.

And we’ll take our final question from Carolina Jolly with Gabelli.

Thanks for taking my question. So I just wanted to check in on acquisition multiples, given the continued pressure on your smaller competitors. Are you seeing any changes there?

No, no changes there.

Yes, I mean, as we’ve said, there’s no changes in the multiples, but the prices are going down, because trailing 12 months EBITDA is under pressure.

Okay, perfect. That makes sense. And then did you provide any numbers on the oil changes yet?

Oil changes was – for the quarter, we’re down consistent with our traffic down 2.5 or something like that.

Right.

And that also has improved into September and into October, again, as our traffic has improved through that period.

Okay, perfect, and thanks for all the detail on the call. It was great. Thanks.

Sure. Catherine D’Amico: Thank you. And that will conclude the question-and-answer session. I would now like to turn the call back over to John Van Heel for any additional or closing remarks.

All right. Thank you all for your time this morning. In this difficult market, we’re focused on driving profitable sales and some winter weather should help significantly. At the same time, we’re aggressively expanding our business through acquisition, laying the groundwork for sales and earnings growth next year and beyond. As always, we appreciate your support and our team who works to provide outstanding service to our customers every day. Thanks, again, and have a great day.

And that does conclude today’s conference. Thank you for your participation. And you may now disconnect.