Good morning, ladies and gentlemen, and welcome to Monro, Inc.'s Earnings Conference Call for the Third Quarter of Fiscal 2022. 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 is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce Felix Veksler, Senior Director of Invest Relations at Monro. Please go ahead, sir.

Thank you. Hello, everyone and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we'll be referencing a presentation that is available on the Investors Section of our website at corporate.monro.com/investors/investorresources. If I could draw your attention to the safe harbor statement on Slide 2, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release and include the significant uncertainty relating to the duration and scope of the COVID-19 pandemic and its impact on our customers, executive officers, and employees. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise except as required by law. Additionally, on today's call management's statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliation of such supplemental information to the comparable GAAP measures will be included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Mike Broderick.

Thank you, Felix, and good morning, everyone. Thanks for joining us. Let me start off by saying that our Monro Forward Strategy and the meaningful investments we're making, are driving significant change. We are on a journey to transform this great organization and unleash its full potential. Our accomplishments in the third quarter indicate clear progress towards the achievement of our transformational goals. As highlighted on Slide 3 and 4, we delivered another solid quarter and continued our momentum, from the first half of the fiscal year. Q3 marks our third consecutive quarter of double-digit comparable store sales growth. Top-line performance also exceeded pre -pandemic sales levels for the third straight quarter. We once again posted double-digit comp sales growth across all of our regions and categories. Our comp sales growth was led by our key Brake and Alignment service categories, both of which grew 28% in the quarter. We are confident that normal fall and winter weather in the Northeast would have more positively impacted our tire category, which would have helped us to deliver an even stronger topline result. Encouragingly, tire unit sales were in line with the industry trends and variable gross profit per tire increased 9% year-over-year. The overall strength of our sales in the third quarter reflects robust demand for our product and service categories, as well as the quality of our execution and the continued traction of our Monro Forward Strategy. We continue to increase the mix of our higher-margin service sales, which contributed to the improvement in gross margin during the quarter. I will discuss the specific progress we made in the critical area of staff in just a few moments. I do want to highlight that in the third quarter, we saw higher technician payroll costs as a percentage of sales. This…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] In the interest of time, we ask that you each keep to one question and one follow-up. We'll pause a moment to poll for questions. Thank you, our question comes from the line of Jonathan Lamers with BMO Capital Market. Please proceed with your question.

Good morning. Brian D’Ambrosia: Good morning.

Good morning, Jon.

So thanks for all the comments on labor and your efforts to increase capacity. Sequentially, did the need for overtime hours increased from Q2 into Q3 and into January?

Yes, that's a good question, because I'm very proud of the work that the team has done. I would say we addressed overtime. It was one of the big [Indiscernible] margin when we looked at the quality of our teammates and we looked at really addressing our turnover, our retention initiatives, and really our people initiatives. We looked at overtime as not only an opportunity for our financials improving our financial, but also how do we improve our business model? So when I look at the overtime, I'm very happy with the 24% reduction of where we did invest, we did invest additional -- obviously we spent on overtime when we're managing really the people agenda as people were dealing with sickness and we definitely saw that over the last six weeks, we were still investing in overtime. So when I look at our performance, 24% improvement, I do feel like we still invested in overtime. We could have seen actually better results and obviously that would have -- if we didn't have this new pandemic or the COVID wave upon us.

Okay. And just a follow-up on that. That 24% reduction, that's versus prior year?

Versus Q2.

And thanks. And just Brian, is that -- this is all separate from the investment that was made in payroll costs. And would you expect that that will reduce overtime further going forward as the pandemic recedes? Brian D’Ambrosia: Yeah, Jonathan. As we continue to invest in the high-quality technicians in our stores, we would expect to continue to see overtime come down. And as Mike said over the last six weeks, I think we would have seen an even further reduction over time than we saw. But we did augment our store staffing with overtime just to really managing get through the COVID-related absences that we saw a spike over the last period of time. But on the other side of that wave, we'll continue to see the trend as we add labor.

Okay, I'll pass the line. Thank you.

Thank you.

Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Hey, good morning, guys.

Good morning, Bret. Brian D’Ambrosia: Good morning, Bret.

Could you talk about the impact of price versus traffic in the comp in the quarter as well as January? Brian D’Ambrosia: Yeah. The comp sale was led by ticket as it has been. We're seeing better traffic trends, particularly year-over-year. But it was led by ticket and that has continued into the quarter. Our team has done a really good job of executing in-store when the guest comes in with recommending other needed work, and that's really done through our courtesy inspection. But you need the staffing and store to be able to do that and the training in the attachment selling. So all of that's really I think coming to life in that in-store selling. And that's helping to support improvements in ticket and [Indiscernible] ultimately, we believe will be supportive of our traffic trends going forward.

Okay, since I only get two questions, I'll put the two of them into the second one. But could you give us the housekeeping numbers on monthly comp for the quarter, as well as maybe some regional performance spread between West, Southeast, Northeast? Brian D’Ambrosia: Yeah, we laid out on Slide 4 the monthly comps, but it was 13.8 in October, 17.5 in November, and nine in December And geographically, we saw double-digit comps across all of our regions year-over-year, but we did see a little bit out performance in the West and in the North, a little bit only because of they're still coming out of more difficult year-over-year comparisons.

Okay. Because your comment about weather impact, I would have expected maybe under-performance in the northern markets was it not -- was the weather not enough to offset what was an easy year-over-year compare? Brian D’Ambrosia: Exactly. Exactly. I do think, though, if you look at all across our regions, we saw really good performance out of our Brake and Alignment categories. And that really helped to support the topline and us to really deliver the expectation on the topline, at least the external expectation. Our internal was that with the right weather setup that would've been a normal weather setup, tires in the Northeast would have come to life more than they did, and that would have allowed us, as we talked about, an even higher topline.

Okay. So if there was a category in the December quarter that you've sort of felt less strong, it was tires related to weather? Brian D’Ambrosia: Yes. That's right.

Okay. Great. Thank you.

Thank you.

Our next question comes from the line of Brian Nagel with Oppenheimer, please proceed with your question.

Hi. Good morning.

Good morning Brian.

I apologize, my question is a bit of a follow-up in short-term in nature, but just to understand better. Just in response to Brett's question a moment ago, you talked about the monthly cadence through the fiscal third quarter than into the fourth-quarter January. The slowdown, going from what was high-single-digit, if not double-digits to 1%. Is that weather or is there some other factor at play? And then to look at the [Indiscernible] recognizing not giving guidance for the balance of fiscal year, but how should we think about the puts and takes with regard to sales over the next several weeks or a couple of months, whatever?

Yeah. I'll take that. And obviously, Brian, you can add on. But the -- I would say that looking at the December, we were going to get some more difficult comp. And now we definitely staffed, and we had an expectation for the tire category that we would have had a very strong quarter, very strong December. The good news is we're still able to deliver a very strong service comp coming out of December. Now, when you look at the January, we're competing with stimulus dollars in the first couple of weeks, but when you look at the two-year comp, it's one of our strongest two-year comps a one on three. And then last but not least, I want to bring to your attention that the team did this all without us really doing any promotional activities. So when I look at the 9% growth in gross profit on our tire category, we really, really stuck to the position of a look, we're going to staff our stores. We are going to develop a very strong retail service organization, and we're going to be just be very rational as a competitor in the marketplace. So that we can manage the demand for the long term.

Okay, got it. And then as a follow-up, I guess then maybe we're going to take a step, still with regard to sales but stepping back. [Indiscernible] everyone we're talking to, the environment is very, very fluid out there. But as you look at just the underlying demand trends within your stores, clearly, you have made significant progress in improving your operations. So that's helping you to connect better with your consumers. Everybody's question is, how do you view this and we call like this tailwind as the economy has started to move away from the COVID crisis and people have [Indiscernible] miles driven starting to take up again? Is that still a tailwind for your business and to what extent and how long should that last?

I don't know exactly the timing, but I'll take. I absolutely view that as our tailwind in our business. So what we're doing in the third quarter is really, I would say, we started in the second quarter, really starting to talk about the investments in our people. We talked about staffing, scheduling, training, and we're getting ready for I would say the tailwinds in the industry for the service categories. It's not just tires, brakes, but it's as people get back on the road, the failure that we have to -- it's going to be more, it's going to be broader than just tires and brakes and oil change. It's going to be under hood, check engine light. These are all things that we're bringing to the marketplace, new categories that we're going to really emphasize on. What that takes though is making sure that we have a qualified service organization to be able to satisfy -- take care of the cars in the markets that we serve. Yes, we're actually building an organization, really what we see as a significant tailwind to this industry.

Got it. Appreciate. Thank you.

Thank you.

Thank you. Our next question comes from the line of Rick Nelson with Stephens Inc. Please proceed with your question.

Like to follow-up on a tech payroll gross margin headwind. How long you think those stepped-up period of leaving that spend that's going to be needed? And as we think about gross margin for next year, do you think tech payroll is a bigger percent of sales in fiscal '23?

Good morning, Rick. I would say that anything I'd tell you it's like a limiter on the investment. I will hire right now all qualified technicians and I'll find a position for them in our stores. So I would say the investment thesis and the focus on driving service categories and making sure that we're ready to be able to take care of the customers that are going to need us, that's going to be something that we're going to continue to focus on. Now, we do have a plan by store, it's -- but remember, as we drive the service categories, it's a higher-margin business. We've talked about a 70 margin compared to a tire category that does 40 margin. So we do believe these investments are going to be accretive on the margin side, as well as on the top-line.

Great. Good to hear. Curious also where you're able to pass through the way [Indiscernible] because we look at your sales categories. Where is it the easiest and maybe where does things tick here?

That's a great question, Rick. And we -- I'll divide it in two different categories. First and foremost, tires, being the -- most of the cost increases on tires, we actually flowed through. We're a rational competitor, we do the necessary price scrape so that we stay competitive in the marketplace. When our -- in this industry, the suppliers generally pass along national price increases, cost increases, so everybody acts very normal. The good news here is we actually grew 9% gross profit on our tire category. We're staying very rational to our competitors. I like the position that the industry is in and I like our position in the industry. Now on the part side and the service side. The investment parts are a very small part of the repair order. It's -- most of it is actually in our technician play. When you look at our costs and the gross profit associated with it and the way we manage that with this local labor rates, staying competitive in the marketplace. As the industry is investing in technicians, it generally invests in a higher labor rate and it's an offset. So two very different strategies inside of our buildings but both of which it seems like right now we're able to pass along the cost to our customers.

Thanks for the color, Mike. Much-appreciated. Good luck.

Thank you, Rick.

Our next question comes from the line of David Bellinger with Wolfe Research. Please proceed with your question.

Thanks for taking my question. Just another one --

Good morning.

-- further contextualize that. Good morning. Just another one to further contextualize that the January comp trends, have you seen some type of stabilization in recent weeks? I know there are a number of companies out there talking about slower late December, early January which is the spread of the new variant. But have you seen anything change in recent weeks or is this more of a continuation with lapping stimulus, the child tax credit, disbursements running out. Just any comment you could make on what you're seeing in the later stages of January. Brian D’Ambrosia: Yeah, I think that the dynamic that you just laid out is kind of true for us as well. We saw a tough six weeks in general with the COVID related absences that being a service model, as Mike said in his prepared remarks. Our labor really is our product and to have that in-store or to not have that in-store because of COVID related absences really puts pressure on our top line. So we thought that the comp trends that we were able to deliver and the team was able to deliver despite that challenge and despite some of the stimulus that you mentioned, really was a great outcome and great effort by the team. But as we move further from the December stimulus and we move to lower and lower cases with Omicron each day, that obviously abates that disruption. It allows those more supportive, longer-term trends related to VM vehicle miles traveled and cars aging out to really come through. And the good news is we've got the labor in place to kind of pivot from holding down the fort during the challenging period and really going in playing offense and executing our in-store model. As those challenges become more minimal.

Thanks, Brian. That's very helpful. And then just my follow-up here on the sequential improvement in the overtime hours. So now, as you step back, how much overtime is still in the system today? And what's the time frame to reaching call it a more normalized low level of OT and potentially better flow-through to operating margins?

Yeah. I'll take that, David. The opportunity that we have with overtime is really developing a service organization. I can't keep working people 60 hours to 70 hours a week and think that they're going to stay with me. So the opportunity is honestly that we have more normal work weeks for our teammates. We're developing a service organization in every store, but it really gives us the opportunity to flex when the demand actually hits. And that's where I am really looking forward to actually spending over time talking about the investments in overtime if that's it comes to life because what we're doing is really investing in the growth. And we have an organization that's ready and prepared for it rather than being just a normal way of doing business. We have a long way to go. Still, I'm very happy with the 24% reduction. I'm very happy with the retention improvement and the turnover improvement that we're seeing in our organization. The last thing I want to do is train our technicians for our competitors. So I like the work that the team is doing. I do believe that it's setting us up for a strong Q4 and a great 2023 as things normalize. And that's what I'm hoping for everyone. But that is just good retail. Just making sure that we are best-in-class service providers, making sure that we have a team ready to go, and they're willing to flex up, and they want to take that overtime when there's a lot of demand.

Thank you, both. Appreciate it.

Thank you. Brian D’Ambrosia: Thanks, David.

Thank you. Our next question comes from the line of Scott Stember with C.L. King & Associates. Please proceed with your question.

Good morning, guys. And thanks for taking my questions.

Good morning, Scott.

Could you guys maybe let us know how much the Tire segment underperformed due to weather? Just trying to get a sense of where Tire sales could have been, and the impact onto the bottom-line. Brian D’Ambrosia: Yes. Scott, I'll take it. This is Brian, morning. Not going to quantify it. I think that if you look at the industry trends, particularly in the Northeast, you can see the impact year-over-year in units. So we were in line with the industry, which the industry being pressured as it related to Northeast weather dynamics. What we're happy about though as we continue to grow our average selling price and our average gross profit per tire as we really lean on and optimize our tire category management tool. So that's been important for us to help manage that dynamic. But I don't think we are disappointed at all in our units relative to the industry.

Okay. Got it. And then my follow-up. With good year-and-a-half years to two years into the store reformations and a lot of these new programs going into place. With all this data and all this evidence, is there any way to talk about how those stores on balance over time have performed versus the stores that have not gone through some of these bigger changes? Brian D’Ambrosia: Yes. I mean, I think we've said historically that it's been 500 basis points of out-performance on the top line. I can't say -- there's a lot of things pushing and pulling at these stores. They really are. Remember, they're individual stores affected by all the things we talked about today, staffing levels, weather dynamics, and COVID waves. So I mean, there's a lot of I think undercurrents that prevent maybe the overall trends from coming all the way through. But because of that, we've not really talked about it anymore in our prepared remarks, but it's been 500 basis points through the last time that we disclosed that.

Got it. Thanks again.

Thank you. Brian D’Ambrosia: Thank you.

Thank you. Our next question comes from the line of Stephanie Moore with Truist Securities. Please proceed with your question.

Hi. Good morning.

Good morning. Brian D’Ambrosia: Good morning, Steph.

I just want to follow-up on a prior comment you made, Mike. And I think it's clear noting the strategy to expand further into service categories, but I think you did call out expanding further with even under-the-hood services. So maybe if you just want to follow-up on that comment or expound on the area where you would consider to further expand just your offerings within service.

No. It's a great question. So yes, just so I can be clear, we, Monro in the past has been very focused on -- I mean, we started off as the exhaust, but now we've migrated to heavy tire, we've talked about the mix between tire and service, heavy tire heavy break, oil change. But when you look at a complete car care, check engine light is a big category that I would say has -- we still have a significant opportunity to improve and that is under hood, where you have the sensors, whether it's O2, and the whole engine management category that's so significant in our industry. One of the things that comes to life is the check engine light, and we are going to continue to build out our organization. And that's really important, you have to have the technicians to be able to properly diagnose check engine light. And that's what we're focused on. It's not just tires and brakes. I mean, we're still going to do a great job doing that. But as our customers come in, there's going to be a check engine light, they're going to need to make sure that we don't let that car come off that lift without making sure that we resolved that check engine light at the same time. And I would say it's a big opportunity for our organization. And I would say it's a category that we've significantly under performed.

Got it. That's helpful. And then my second question, on M&A, can you maybe discuss your current pipeline, any kind of dollar color you can give of what you have lined up here, what competition you're seeing from an M&A standpoint, given the consolidation trends? Any M&A color would be helpful. Thank you. Brian D’Ambrosia: Yes, I will take that, Stephanie. So obviously, we've talked about the 47 stores that we've completed already, $70 million in annualized sales. So healthy rate of acquisition growth already this year through three quarters. And we continue to see a lot of opportunities for some very value enhancing acquisitions. We have 10 plus NDA sign, which is consistent with what we've had and we feel like we're in a really good position to be able to execute on some of those in order to get our -- and continue our acquisition growth strategy. We've got a strong balance sheet. We're generating a lot of cash. And we know that our acquisition growth is a great opportunity to really enhance shareholder value. We remain focused on it. It's a key pillar of our growth strategy. And I'm sure we'll have more to talk about that on future quarters.

Great. Well, thank you so much.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. Broderick for final comments.

Thank you for joining us today. This is an exciting time to be part of Monro. We have a strong foundation to build upon to create long-term value for all our stakeholders. I look forward to keeping you updated on our progress. Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.