Good morning, ladies and gentlemen, and welcome to the Monro Incorporated Earnings Conference Call for the Third Quarter Fiscal 2018. [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'd 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 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's 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. With these formalities out of the way, I'd like to turn the call over to Monro's President and Chief Executive Officer, Brett Ponton. Brett, you may begin.

Thanks, Effie. Good morning everyone. I'd like to welcome you to Monro's third quarter fiscal 2018 earnings call. I would like to start with a brief overview of our third quarter results followed by an update on the progress we've made on our strategic initiatives. As expected, comparable store sales were volatile throughout the quarter ending with the decline of 3%. As was the case last quarter, negative traffic was partially offset by a higher year-over-year ticket. This was particularly true as we lapped an increase of comparable store sales of 15% in December of last year. To provide you with additional color, our monthly comparable store sales were negative 3% in October, negative 1% in November and negative 5% in December. From a regional perspective, we once again saw outperformance in our southern markets as compared to our northern markets with our stores in the south comping positive in the quarter. When we look at sales by category as provided in this morning's press release, we saw declines across the majority of our service and repair categories. In our largest category, tires, we experienced a decline of 4% in comparable store sales, reflecting a decline in yields of 5% which were not surprisingly led by declines in December. This was partially offset by a 1% higher average ticket in the quarter. We also continued to see consistent and a rational retail tire pricing across our major markets. In our fiscal month of January which started on December 24th and ended on January 20th, comparable store sales have improved to an increase of 1% or 2.5% when adjusting for the holiday calendar shift. And thus far in our fiscal month of February, our retail comps have accelerated and are up approximately 4%. The holiday calendar shift in January reflects the…

Thank you, Brett, and good morning everyone. Sales for the quarter totaled $285.7 million, representing a 0.9% or $2.6 million decrease year-over-year. New stores defined the stores opened or acquired after March 26th 2016 added $6.4 million including sales of $2.3 million from our fiscal 2017 and 2018 acquisitions. This was offset by a comparable store sales decrease of 3.1% and a decrease in sales from closed stores of approximately $1.4 million. The third quarter had 90 selling days in line with the prior year period. As of December 23rd, 2017, the company had 1138 company operated stores and 103 franchise locations as compared with 1098 company operated stores and 132 franchise locations as of December 24th, 2016. During the quarter, we had a four company operative stores in closed bill. Gross profit for the third quarter was a $170 million or 37.4% of sales as compared with $105.6 million or 36.6% of sales for the prior year period. The increase in gross margin for the quarter was due primarily to a decrease in material cost as a percentage of sales largely due to sales mix. Labor costs were flat as a percentage of sales as compared to the prior year quarter. Just a fusion in occupancy cost for the quarter increased as a percentage of sales as we lost leverage on these largely fixed cost with a decrease in comparable store sales. Operating expenses for the quarter increased $5.2 million and were $77.7 million or 27.2% of sales as compared with $72.5 million or 25.2% of sales for the prior year period. The increase is primarily attributable to $2.7 million in one-time cost consisting of $2 million in litigation settlement cost and $0.7 million in management transition costs. The remaining year-over-year dollar increase represents expenses from 40 net new…

Thank you. [Operator Instructions] And we will first go to Brian Nagel from Oppenheimer.

Hi, good morning.

Good morning, Brian.

Good morning.

So, my question just on sales or maybe a little more qualitatively. But you weighed out your prepared comments the cadence of I guess some monthly comps and into the fiscal fourth quarter here. More qual, how do you, how is the overall sales environment shaping up. It seems like the weather has got more favorable for you. Is that reflected in the numbers? Do you think you're capitalizing up on that weather or are there other factors that play here sort of that’s driving this better comps?

A couple of points to comment on, Brian. To go back to our Q2 call that we had we knew going into this second half of the year we're going to experience some volatile comps between our Q3 and Q4 largely driven by December and January dynamics we saw last year; driven by pre-favorable winter conditions in December of last year. So, given that fact, we elected to guide flat sales on the year. And our internal [indiscernible] were down three and plus three for Q4. So, based upon that, we certainly feel good that we came in in line with what we're expecting. Albeit I think we all would agree we have opportunities to improve off of that but given the strong comps last year, we felt like that was a reasonable place to be. And we're encouraged that we came in according to that. Related to the dynamics in January, I would say this. In a on a two year stack basis, if you look at December of this year, we were up plus 10 and January down plus 10. So, if you net that out rolling across the calendar year, we're basically flat. As I mentioned, we have seen some nice acceleration in February in particular with sales up 4%. Certainly it's very early in the month. We as we look to the latter half of February, we will be lapping some lighter comps. So, we’re somewhat encouraged by that yet we recognize there's still lot of time left in the quarter and our March comp is certainly one of the harder comps for the quarter we have to overcome. So, the net of that is guiding to three up on the quarter. Couple of other things that we're seeing, certainly the weather conditions provided some favorability namely on tires and we're also encouraged that some of the colder temperatures we would expect to set a nice backdrop for our spring service selling season as well. We'd like to comment just about little bit of a cultural change, then start to see in our team and our organization. Certainly not going to suggest that's driving our improvement in performance but I think it's playing certainly a factor. Like the teams has responded extremely well to our Monro Forward initiative I think they're excited about the new tools that we're going to be rolling out the latter part of the month of February. And we're excited about the forward direction that we have as related to all of these initiatives.

That's very helpful, thank you. And there's this one quick follow-up, with regard to acquisitions, I know in prior conversations we've talked a lot about prospects of the hopes of tax legislation change keeping some of your potential bigger sellers on the sidelines. So, now that we have the tax legislation in place, have you started to see those sellers of larger chains come back in force to you?

Yes. The opportunities that we're now seeing coming into our pipeline, certainly have accelerated after the first of the year. And as a result of that, we've expanded our M&A team to manage those increase in activity, Brian. We are certainly in the game for acquisitions but just to remind everybody, we're in the game with a keen focus on delivering value to our shareholders. We believe that value to our shareholders will come through a combination of the right acquisitions, some Greenfield development where it makes good sense for us and then of course we'll just reinforce the fact we're very focused on the execution of our operational excellence initiatives we've just discussed in this call. But net-net, we definitely see some improvement in the deal flow, if you will on our M&A pipeline.

Got it. Thank you.

Thanks, Brian.

And our next question comes from James Albertine from Consumer Edge.

Hi, good morning everybody. And let me just say thank you for all the detail you provided on that prepared remarks on the call and certainly looking forward to the three-year plan later this year.

Thanks, James.

I wanted to ask if I may, a question that we and others have asked for many years to no avail, really hasn’t been a great data or great answer around it. I'm hopeful we can get a little bit more granular today given all the data that you've laid out and all the work you're doing around data and analytics. But really it's a question of market share and as well sort of the idiosyncrasies of operating in the Northeast versus other parts of your portfolio. Clearly the South is outperforming the Northeast, you said that in prepared remarks. Do you have a better sense and a better handle of where your market share is today relative to peers and maybe help us sort of draw a line in the sand as to where you stand, either an absolute percentage or in terms of the share you believe maybe Monro has yielded over the past several years. Because it does sound like you've been giving up share based on some of the initiatives that you've outlined.

Maybe to start with, I'll give you a little bit of color more on our performance for the quarter. We highlighted that our South outperformed the rest of our portfolio but we also saw relative outperformance of the mid-Atlantic region. We saw some nice strength in our Northeast stores relatively speaking. Our softest performing markets would be in the Great Lakes region that we saw in the quarter. As relates to market shares, in our industry it's pretty difficult to get our arms around that with finite data. However, as I made some comments on my prepared remarks around a company that we partnered with on analytics this is going to allow us or the intention behind that partnership is twofold. One, we want to make better real-estate decisions, analytics associated with that but also want to leverage that data to drive more targeted acquisition efforts from a marketing point-of-view. By virtue of having that data, we will then have a much better view in terms of what our share of market is. But currently where it stands today, I certainly don’t have a lot of visibility there. We certainly look at other metrics that are out there. Performance in the tire category relative to what we see in the form of tire shipments into the trade as well as comments from analysts like yourself and others. I made the comment when I first joined the company I think there has been three drivers that have impacted the performance of our business over the last few years. One, certainly has been the more macro trends that we have faced is related to our cohort, six to 11 year vehicle that's over the last five to six years we've experienced 15 million fewer vehicles in that cohort. So, no doubt that's played a factor and a headwind on our organic growth. Certainly weather up until recently has played a factor but I've also been quickly I think in a position to point out we believe we have opportunities to improve our performance. And if I look at all the initiatives that we are laying out and are committed to executing, those are all geared towards improving not only how our stores look but equally important how we're operating stores. And we believe if we do that well, we will protect the share of market and the markets that we have. And that will translate in a more consistent sustainable organic growth out of the company than what we've seen in the past.

I really appreciate that color, Brett, and as a follow-up if I may. With respect to the comment on the analytics partner, better real-estate decisions, driving more targeted acquisition efforts, are we to take from that an implication that you're going to look to add new markets at a faster rate perhaps than Monro was doing historically? And then to follow-up the demographics and the vehicles in operation data that you have. Is there anything kind of funny in that data that just sort of shows the Northeast is a little bit in a worse positioned perhaps relative into the South and mid-Atlantic. They can help support that? Thanks.

I'll start with the second part. I think when you look at our company, given the fact we have just under a 50% of our business mix is related to tires. Certainly in the Northeast given an outsized exposure to weather dynamics that we see in that portion of our footprint and it creates more exposure to volatility and ties us more closely to weather dynamics that will steer demand stronger or weaker depending upon those conditions. So, I think that's I would say that's the larger backdrop in terms of what we see as related to the Northeast. It's related to analytics, again I think we're going to use that data that just sort of shows that northeast is a little bit in the worst positioned perhaps relative into the south and mid-Atlantic they can help to support that? Thanks.

I’ll start with the second part. I think when you look at our company given the fact that we have just under 50% of our business mix is related to tires, certainly in the northeast given an outsized exposure to weather dynamics that we see in that portion of our footprint and it creates more exposure to volatility and ties us more closely to weather dynamics that will stir demand stronger or weaker dependent upon those conditions. So I think that’s – I would say that’s the larger backdrop in terms of what we see as related to the northeast. As it relates to analytics, again I think we’re going to use that data to help drive better decision across multiple factors. One, we are making better decisions around our leases; number two, will help us optimize our DMAs or MSAs which will drive our targeted acquisition effort as well as Greenfields in terms of filling in. But certainly we’ll use it to help, to lift the potentially accelerated growth in more attractive geographic segments in our business as well. And a third piece that we’ll use that data to help drive in our company is really understanding better what is the potential of our stores will be able to drive forecast based upon market demographic and trends, and we’ll use that as a tool to help better set more appropriate forecast and budgets for our stores. Thanks, Jamie.

And we’ll now move to Brett Jordan from Jefferies.

Good morning, this is Mark Jordan on for Brett. Just going back to reading your performance during the quarter, did the regional gap close or widen maybe from October to December and do you have any reason in the current quarter. I think there was some favorable weather in the northeast that might have fallen into fiscal January?

Yes, so certainly the gap didn’t widen in the quarter particularly highlighted by December. And then secondly, as we move into January here we are seeing that reverse in January and narrowing with better performance in the northeast relative to the south.

Great. And then Q4 [Indiscernible] strength kind of outside or maybe higher traffic, is there any product mix that might be driving the comp improvement?

Yes, still very early in the quarter for us but certainly the traffic trends related to tires we seem to strengthen in our tire category as we walk through January into February.

Great, thank you. And then just following up on the M&A question that was that earlier. Have you seen any difference in acquisition multiples or expect any given tax reform going forward?

I think my commentary is pretty consistent with what we said last quarter related to M&A and you know valuations. I think certainly on the larger deals we’ve seen an increase in the multiples those are trading at. We have yet to see that materially impact the multiples that – the 5 to 40 store operators would expect so no material change at this point that we’ve seen driven in particular by the tax law change.

Okay, great. Thank you very much for taking my questions.

Thank you, Mark.

And we’ll now go to Matt Fassler from Goldman Sachs.

Thanks so much and good morning. My first question focuses on the different scenarios for investment that you see going forward and particularly the range of costs that might get associated within. And I know you're going to share a more detailed accounting of what that might look like on the May conference call, but is it a question of speed, is it a question of some of the IT and other infrastructure that you need to accumulate just understand the range of outcomes as we try to frame the margin paths of the business?

That’s great; it’s a great question Matt. The short answer is yes, there is range and vary based upon speed and our ability to execute and we want to be thoughtful about how quickly we drive change in our organization. So certainly that’s going to be a gating item that we’ll work in our way through that will reflect in our FY'19 and beyond plans. And just to reinforce a couple of other insights or perspective around our investments going forward. There is three broad themes that we are sending to our team internally. Number one we want to invest in our stores, number two, invest in our people in terms of training, capability, group, passing and development. And then three there is a large team you’ve been hearing a lot about which is investing in technology. I will say yes, if you look at the three investment themes, no doubt the most capital intensive one is around our stores in terms of how we look and how we operate, which is driving most of our work right now to really start to break down our portfolio, to understand the state of the stores within the portfolio which will drive the amount of investment that we think we need to do bring them up to our standards. And that of course will drive our timeline and we’d expect to roll that out under. As it relates to the other initiatives around technology and training, really the gating item there is internal resources. As we found out already with a number of technology investments we’ve already made in the company, it’s allowed us to eliminate cost that we have spent in other programs or platforms keeping our net investment in the company net neutral on several of the technology investments we’ve made to this point.

Understood. And then you know because CapEx dollars are ultimately fungible, is it feasible that perhaps you could cut back on Greenfield stores for example in fiscal 2019 and put some of that cash into technology CapEx is that one consideration as we think about outcomes?

Yes, absolutely Matt. If you look at our total CapEx spend on average it’s around 35 million, of which 25 to 30 million is maintenance CapEx. So certainly as part of our forward view here, we will be looking at the total investment and prioritizing the total dollars to really ascertain how much needs to be incremental versus reprioritizing our current spend.

The other important thing about the CapEx spend as well is just their thought. If you listen to Brett’s prepared remarks regarding the timing, certainly related to the light refresh that’s going to be designed and planned throughout the first half of fiscal 2019 and then a pilot across a few markets after that and then the roll out. So certainly as we think about 2019 fiscal 2019 we don’t have full 12-months of this initiative being spent on the light refresh. So I think that will mitigate some of the reinvestment or the investment in our FY 2019.

Understand. And then Brian, just the second question is for you. So I hear you are on the 24% tax rate on an annualized basis, given that the quarter ended in December, can you just explain the line item for the kind of tax benefit that you would have registered, you classified it as a one-time item. And I’m trying to understand whether that relates to marking a part of the quarter or part of the year to the new tax regime and then also I think you talked about only $0.02 for the fourth quarter in terms of lower tax rates. So what are the tax assumptions that feed those items. I understand the right kind of the DTA that’s pretty intuitive but the other piece is just as we finish out this fiscal year and we decide what’s truly one-time in nature like DTA rate down versus what’s the beginning of the adaption of the more normalized element of the new tax bill? Thank you.

Sure. So for a non calendar year tax payor like ourselves our March fiscal that the way you calculate the annual effective tax rate is basically for pro rate. So we basically recalculate our annual effective rate using nine months at the of old federal rate and three months of the new rate. So what that creates is in the third quarter we are supposed to true up to that new effective annual rate. So within that $0.06 of benefit basically not only the benefit recorded in Q3 but the cumulative benefit of recasting Q1 and Q2 to the new effective rate. So that’s why the $0.06 is not a run rate that you could expect just for a quarter, that is basically the full nine months of catch up. And that’s also why the fourth quarter is only $0.02, that’s also due to the rate reduction, but that also reflects that annual prorated rate. And for that reason as we move into 2019, we’ll -- without the proration in effect anymore we’ll get the full benefit of the 21% federal rate.

So in other words, that 6 plus 2 is effectively the fourth quarter benefit which is the only quarter that falls into fiscal – falls into the current fiscal, current calendar year, is that fair?

The $0.08 would be the – basically the annual benefit of the rate related to the fourth quarter being 21% blended back across our full fiscal year.

Perfect. Thank you so much for that.

[Operator Instructions] We’ll now go to Rick Nelson from Stephens.

Hey guys, this is Nick Zangler in for Rick. Just to touch again on those upcoming investments, you know the ones that you went around the strategic initiative standpoint, just a lot going on there. How should we think about from an OpEx standpoint view particularly as we enter fiscal 2019, are we seeing bottomline or redployment of spend or are we to expect incremental spend as we go forward?

Yes, I mean I think that what Brett had explained earlier is that some of the initiatives that we’ve already identified currently is really a redeployment of spend where we are maybe taking some solutions that were already in place and optimizing them for some current technologies in current technology investment. So I think that there is a good portion of our OpEx spend that will not be necessarily incremental but self funded. And then as you move towards the CapEx, we’ve obviously already commented on that and certainly any redeploymnet of CapEx would already be contemplated but any incremental CapEx is going to have a depreciation impact and we’ll provide some more color on that in May.

And maybe to add a little bit more color to that as well. A lot of the investments that we are talking about here over the next six to nine months are primarily technology investments and we’ve elected to pick off the shelf partners and the affordability on the solutions we selected as quite affordable. So as Brian mentioned, just to reinforce the point in many respects we are eliminating cost that we have incurred in the company to fund the initiatives that we’ve laid out here, so we don’t see a lot of incremental spend on the OpEx side going forward.

Great. And then just to get back on acquisitions. I know you’ve touched on it briefly here, but I’m just trying to gauge given the savings that you are going to get from tax reform, are you guys more willing to bid up to get on acquisition pricest to get these deals done? Does the additional capital available change of valuation criteria at all?

Like I think you know as I mentioned in my prepared comments, growth or acquisitions looks it’s going to be a key component of our growth story of the company. And certainly I think that the uncertainty that we saw and with tax law that’s created a little bit of a pause in the second half of last year and I think as a company we took advantage of that to manage the transitional leadership in the company and develop our forward strategy and by the way the forward strategy I think helps me get more confident that we can drive more integration and more value from the companies we acquire and allow us to have more confidence so that you can accelerate in the pace at which we integrate them into the company. So having said that, I think certainly Monro is going to be in the ball game for acquisitions and our appetite for deals is there. We certainly have balance sheet capacity to do that and provided the opportunity that we are looking at creates value for the company and our shareholders, we certainly are going to be in a position to take advantage of that.

Okay, thank you very much guys. Much appreciated.

Thank you.

And we’ll now go to Carolina Jolly from Gabelli.

Good morning, thanks for taking my call. Just quickly on tires I guess, can you talk about price versus volume and any factors that are affecting those two variables and potentially I guess what might affect that going forward?

Yes, I think that the broader backdrop that we provided in our comments we have seen a pretty stable environment on retail pricing throughout Q3 and continued into Q4. As we talked about in the quarter, we did see some favorability in our price mix on tires and part of our margin expansion in the quarter was driven by some favorability on the cost side. But as we highlighted in Q2, we expected the flow through our P&L in the second half of the year. So we characterize the environment is pretty stable, environment right on both pricing and cost.

Perfect, thanks. And then just second quickly regarding weather, when you have this type of favorable weather that we’ve seen in end of December, early January. Do you have any thoughts on when that kind of can be seen through the same store sales over the next quarter?

I think normally speaking tires, the tire side of our business you would see usually somewhat of a realtime pick up in traffic and volume, just given that consumer behaviors relates to tires and as it relates to more service related items on a consumers car, the cold weather has a tendency to create mechanical issues and break things on consumers cars. And in many cases consumers will get around doing that in spring period and as I made the comment my opening remarks, certainly the colder temperatures that we’ve seen certainly sets up we would see as somewhat of a favorable spring service season as a result of the colder temperatures that we have seen.

Okay. Thanks a lot.

Thank you.

And there are no further questions. I’ll turn the conference back over to you Brett for any additional or closing remarks.

Thank you. Before we conclude the call, I want to reiterate how excited I am about the tremendous opportunity to drive improvement across to our organization. I would like to thank all our team mates for their continued hard work and dedication to our customers. I am confident that the strong foundation of our business coupled with our renewed focus on the customer and data-driven approach will create sustainable, long term value for our shareholders. Thank you all for joining us today and for your continued support as we enter a new phase in Monro’s history. Have a great day.

This concludes today’s presentation. Thank you for your participation.