Hello, everyone, and welcome to the Valvoline's First Quarter 2024 Earnings Conference Call and Webcast. My name is Nadia, and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Elizabeth Russell, Senior Director Investor Relations to begin. Elizabeth, please go ahead.

Good morning, and welcome to Valvoline's First Quarter Fiscal 2024 Conference Call and Webcast. This morning, Valvoline released results for the first quarter ended December 31, 2023. This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our Investor Relations website at investors.valvoline.com. Please note that these results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission. On this morning's call is Lori Flees, our CEO and President; and Mary Meixelsperger, our CFO. As shown on Slide 2, any of our remarks today that are not statements of historical fact are forward-looking statements. These forward-looking statements are based on current assumptions as of the date of this presentation, and are subject to certain risks and uncertainties that may cause actual results to differ materially from such statements. Valvoline assumes no obligation to update any forward-looking statements unless required by law. In this presentation and in our remarks, we will be discussing our results on an adjusted non-GAAP basis, unless otherwise noted. Non-GAAP results are adjusted for key items, which are unusual, nonoperational or restructuring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our adjusted non-GAAP results to amounts reported under GAAP in a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix. The information provided is used by our management and may not be comparable to similar measures used by other companies. As a reminder, the Retail Services business represents the company's continuing operations, and the former Global Products segment is classified as discontinued operations for the purposes of GAAP reporting. Today, Lori will begin with a look at the key highlights from our first quarter, and Mary will then cover our financial results. With that, I will turn it over to Lori.

Thanks, Elizabeth, and thank you all for joining us today. For the first quarter of 2024, we saw growth at the top line across the network with system-wide store sales growing 12.3% to $723 million. Profitability was in line with our expectations with adjusted EBITDA improving 23% to $90 million and adjusted EPS improving 81% to $0.29 per share. We remain on track with our full year guidance. We started the year strong with new store additions, adding 38 for the quarter, half of which were from franchise. This brings our network total to 1,890 stores. From a capital spend standpoint, we continue to focus the majority of our capital towards growth, which we expect will continue to drive a high return on invested capital. We also made additional progress on our commitment to return a substantial portion of the net proceeds from the sale of global products to shareholders through share repurchases with over $170 million return this quarter. Before Mary covers the details of our first quarter results, I'd like to share the progress we've made on the three pillars of our growth strategy. First, we continue to drive the full potential of our existing business. This quarter, we delivered 7.1% system-wide same-store sales growth, coming from both transaction and ticket growth. We also improved our margins through better labor management. Team retention rates are an important contributor to labor management. And in December, we had our lowest attrition rate since pre-COVID. Higher retention allows us to minimize recruiting and training costs while also ensuring that our stores are well staffed with team members who have more tenure delivering our best-in-class customer experience and added services. In November, Valvoline Instant Oil Change was named number 11 on the Forbes 2024 Best Customer Service list. I'm proud that our…

Thanks, Lori. On Slide 5, we'll take a closer look at our top line growth for the quarter. Net sales grew 12.3% to $373 million. System-wide, we saw same-store sales growth 7.1% compared to 11.9% growth for the first quarter of the prior year. You'll recall that in the first quarter of 2023, we benefited from the inflationary price increases that occurred later in fiscal year 2022. That accounts for the majority of the year-over-year deceleration in same-store sales. This quarter, both company and franchise same-store sales grew within our guidance range with 6.1% and 8% growth, respectively. The franchise side saw modestly better growth largely driven by improvements in non-oil change revenue service penetration as franchisees continue to implement many of the best practices that have been proven out in company and franchise stores over the past year. Transaction growth contributed about 25% to the comp, driven by an increase in the customer base as well as modest contributions from miles driven. As we shared in our last earnings call, we did see some customer softness at the beginning of the quarter. Ticket contributed about 75% of the comp for the quarter. Just over half of the ticket growth came from premiumization and increased non-oil change revenue service penetration with a balance from pricing. As we mentioned in our last call, we increased pricing in early November in about one third of our stores, and we have made further adjustments already in Q2. Next, let's consider some of the other drivers of the financial results. Starting with gross rate, we saw improvement from 35.7% to 36.1% or 40 basis points year-over-year. You may recall that in the first quarter of fiscal 2023, our gross margin was pressured by increased additive and delivery costs. As Lori mentioned, during the first…

Thanks, Mary. We continue to deliver results consistent with our transition to a high-growth retailer, driven by growth in both our same-store sales and the addition of new stores, and we are making progress across all three of our strategic pillars. As we wrap, I want to thank our team and our franchise partners for their continued hard work to start fiscal year 2024. Now I'll turn it back over to Elizabeth to begin the Q&A.

Thanks, Lori. [Operator Instructions] With that, please open the line.

Thank you. [Operator Instructions] Our first question today goes to Steven Zaccone of Citi. Steven, please go ahead. Your line is open.

Great. Good morning. Thanks very much for taking my question. Our first question was on the ticket versus transaction performance in the quarter. Could you just elaborate a little bit more how your outlook for the year has changed versus when you spoke to us in November, I think it was more 50-50? So just curious there. And then along those same lines, you had a comment about adjusting pricing in the second quarter. Could you just elaborate on that also?

Sure, Steve. I'll start with ticket. We did see in the quarter about 25% of the comp come from transactions. And we do expect longer term to see a more balanced contribution from transactions versus ticket. The first quarter was impacted by a day mix change that caused just under 100 basis points of impact on the transaction side. So, if you exclude that day mix impact, we would have been more like one third coming from transactions and two third coming from ticket. Long term, we still expect to see a more balanced approach from transactions and ticket, but we are continuing to benefit from some pricing changes, just under half of the ticket portion of our comp store sales growth came from pricing with just over half coming from premiumization and non-oil change revenue service penetration improvements. So, I would tell you that I think longer term, I'm still expecting to see more of a balance short term in the quarter, we did see a little bit of a heavier tilt toward ticket for the quarter as it relates to the second part of your question.

Yes, I'll just comment. First, I think when we talked about this year, we said there would long term or earlier -- last quarter, we said long term, we would be getting a balance between transaction in fiscal '24, would see an overweight on the ticket side, given a number of initiatives that we've been working. Just recall, focus on optimizing discounting, which improves the net price and also just continued work on NOCR and then the tailwind for premium mix. As it relates to pricing, Steven, we continue to benchmark our pricing, and we have multiple pricing tests. And I think our actions are very consistent with what we've been talking about in the last few quarters, which is we look at our pricing by store, by region based on the competitive dynamics as well as just based on the acquisitions that we may have done in stores, and we continually adjust our pricing to get to our target rates. When I say target rates, we have a target pricing list that we're trying to optimize all stores to for all three tiers of our oil change services, and we continue to make changes there. Recently, we've been benchmarking or added services. And there are a couple of services where we did not take inflationary increases last year because they weren't coming through the supply, and we have recently benchmarked relative to others and made some adjustments across all our stores. So those are things that we continue to do. We will continue to do it. And -- we have -- our long-term and current year guidance is between 6% and 9% same-store sales. And we see both this year ticket being a very good part of that. In future years, we expect ticket to contribute roughly half and pricing to be a big component of that.

Okay. That's all-helpful detail. Just a brief follow-up then if we stick with same-store sales. Is there anything to be mindful of from a performance in the second quarter relative to the overall year? I know the 1-year, it's a little bit tougher. And then we've heard about some choppy trends across retail in terms of weather, but anything you can say on second quarter performance relative to the full year would be helpful.

Yes, Steven. We've certainly seen some choppiness in January and the start of the second quarter. primarily weather related. I think you're aware that we saw some pretty significant arctic cold across the country in January that really lasted for a couple of weeks. Typically, our business is nondiscretionary. And so when we see those kind of weather impacts to our business, we typically see pent-up demand that occurs after that weather pattern clears. And in fact, that's what we're experiencing now. with some of the weather-related weakness we saw earlier in the month of January, we've seen that bounce back nicely. So I would tell you that there haven't really been any surprises for us in terms of where sales are trending, and we're feeling good about the guidance that we've provided for the full year.

Okay, great. Thanks so much for the detail.

Thank you. The next question goes to Simeon Gutman of Morgan Stanley. Simeon, please go ahead. Your line is open.

Great. Hey guys, this is Michael Kessler on for Simeon. Thanks for taking our questions. Maybe first on unit growth, it was pretty solid in Q1 on both both sides, company and franchise. So just curious, visibility for the rest of the year in the pipeline and then any updates we've talked to take in the past about some of the actions you've taken to further improve visibility in the pipeline on the franchisee side. Both with existing franchisees and also sourcing new ones. So I just have an update on how that's going?

Sure. Thanks, Michael. We did, as I mentioned, have a really strong start to 2024 with 38 total new additions and an even split between franchise and company. The Q4 typically tends -- at least on the acquisition side, tends to be a strong quarter would every calendar quarter 1, but calendar Q4 is typically strong as acquisitions tend to try to close out, particularly on the franchise side, where their calendar and fiscal aligned to the end of the year. So we did expect these. These were in the pipeline. We had full visibility of them. and it was a really strong start. You should expect we're very much feel great about the guidance we've given of $140 million to $170 million for the year, of which $55 million to $70 million will come from our franchise partners. That should, unlike last year be more balanced throughout the year, although Q2 January through March, given the weather you can have a seasonally lower number of new builds or new adds in the quarter. But we expect that to be pretty balanced, and we feel really good about the guidance rates that we've provided. Now you mentioned just broadly, we have then very clear in our acceleration of the network to get over 3,500 units, we're going to really increase the number of new units coming on the franchise side. We've been very clear that we're working to get to [ 150 million ] units per year by 2027. And we continue to make progress against that. Now that comes from both the existing franchise partners we have and our conversations with them have been very positive. And we continue to look for ways that we can support them with more detailed retail analytics, some real estate support, business development, pipeline generation from an M&A perspective, etc. And so we feel really good about the ramp that we will get from our existing partners. And then the second part is about recruiting, again, just a handful of more scale franchise partners to develop some white space regions or to help transition existing franchise players who are at points in their career where they want to cash out on the significant wealth that's been created through the franchise that they've built with us and bring in new partners who want to develop the areas that those businesses sit in. Now we did expect that was going to take time. One is you've got to line up the transition timing as well as the white space timing with those conversations. But the conversations continue and progress. And again, we feel very good about the progress that we're making.

Great. Thank you. Maybe just a follow-up on capital allocation and shareholder returns. I know Q2 will be a big one there with the repurchase of the notes plus the buyback. I'm sure you're probably thinking through what may happen after that. But given I think where leverage is today, which is pretty healthy in the range or maybe at the lower end of the range that you've outlined is like -- I guess I'm curious kind of the range of options that are on the table, including maybe even re-levering up to accelerate returns once you exhaust the buyback? Or is this more conservative, just kind of see how it plays out, just kind of what are the decision factors as you approach that post Q2?

Yes, Michael, I'd start just in terms of our target leverage ratio, which is an adjusted leverage ratio based on how rating agencies or S&P, in particular, measures, our leverage. And just for everyone's information, if you forgot the rating agency adjusts for both operating leases, as well as employee benefit plan obligations. So when you make those adjustments, the sum of the outstanding liabilities related to those operating leases and pensions is about $400 million, which is about a full turn of leverage. We actually are just slightly above the high end of our targeted leverage range. So our first capital allocation priority will be to get us within that range that we've targeted and then we'll look at using the balance sheet as well as our operating cash flows to provide further returns to shareholders. My expectation is it will take us a little bit of time short term here in the next couple of quarters to get that range -- that target leverage range back into below the high end of our expectations and then -- of what we're targeting. And from there on, I would expect that we would, again, be focused on capital allocation to return cash to shareholders via share repurchases once we're back within that targeted leverage ratio.

All right, thanks, guys

Thank you. The next question goes to Daniel Imbro of Stephens Inc. Daniel, please go ahead. Your line is open.

Yeah. Hey, good morning, everybody. Thanks for taking our questions. Maybe want to start on gross margins. We saw a little bit of a larger step down maybe 4Q to 1Q on the gross margin side that we have seasonally in the past, especially with the easy comparison last year. Can you just talk through maybe the drivers of gross margin like labor? And how you're thinking about that line item for the rest of the year as comps maybe improved with using clears?

Yes, absolutely, Daniel. I will tell you, we saw year-over-year gross margin leverage of about 40 basis points. And if you take out the depreciation impact actually saw 140 basis points of leverage before the impact of higher levels of depreciation. And that's certainly one of the things that impacted margins sequentially from Q4 to Q1 as well, as the depreciation impact. We're pleased with the labor leverage we saw in the quarter. We saw some very meaningful labor leverage that was offset modestly by some operating expense deleverage. That's really timing related in the quarter. It is a seasonally low quarter from a sales perspective. And we also have done a better balancing, if you would, of managing our maintenance expenses throughout the year. We also, with new stores opening, saw some deleverage from those new stores as well. So there was no surprise for us in terms of how we managed, I would say, for the balance of the year. We will likely continue to see leverage at the margin line, although I wouldn't expect to see as much labor leverage as we saw in the first quarter necessarily.

Yes, Daniel, I'll just add. Q1, we have to manage our labor, and there's always a step down as folks transition from the summer jobs back into college. And then as our volume starts to drop, we have to manage that labor pretty extensively. So when you see the difference Q4 to Q1, some of that is literally just the leverage of the cars coming through the stores and how we balance labor. But the year-over-year compare from a margin perspective was really strong, and our teams have made a lot of progress since last year, we would have talked about the fact that we were focused on labor management and optimization and better scheduling, as you'll recall from previous earnings calls. And really, a lot of the improvement year-over-year is a testament to that, although some of those low-hanging fruit improvements happened in Q2. So the year-over-year compare from a labor management won't be quite as strong because you'll have started to see some of the labor impact hitting in Q2. So this is the last cycle. Though we still have opportunity, and we continue to manage the labor line, which is our largest cost of sales item. And the biggest thing we're proud of is that our attrition rates are so low. As I mentioned, we've got the lowest attrition rate ending the quarter that we've had since pre-COVID, which is really a testament to the work our team has been doing across the recruiting side and setting expectations and how we attract talent to also how we onboard and train the talent to ensure that we can keep the technicians that we're training in the stores for longer. And those things are the things that we're really proud about. And then our central ops team that we put in place has really been driving with operations, some of the tools that have enabled them to manage that so effectively.

Understood. I appreciate all the color. And then maybe a follow-up on the comp growth outlook. So you said there was 100 basis points of a negative impact from the calendar in the fiscal first quarter. That will improve I guess, can you remind us how winter weather historically should impact non-oil-change revenue? Would you see a higher service battery attachment here in the second quarter where that becomes more of a positive tailwind for the ticket growth? Just trying to think about what are the impacts as you see that pent-up demand come back into the stores. Thanks.

Yes. Great question, Daniel. Battery sales typically tip up when you get cold when the cold weather really sets in. Normally, we see that in December. In December, it was fairly muted because it was a milder December this year for the majority of our regions. But in January, we definitely have -- I think, all of retail was impacted by pretty broad-based arctic cold coming in and making people not wanting to go out and schools being closed, et cetera. That's actually created, we can see, some of that pent-up battery demand pushing into January and February, as they get back in their cars and realize that their battery needs to be replaced. So we are -- we do see those seasonal things. Battery is a small piece of our overall ticket as an average, but we do see those things and as we would have expected with the colder weather.

Understood. Thanks for the color and best of luck.

Thank you. And the next question goes to Kate McShane of Goldman Sachs. Kate, please go ahead. Your line is open.

Hi, good morning. Thanks for taking our question. We wanted to ask about your initiative on reducing costs of the new builds and where you are, I guess, in that process? And how we should think about unit economics going forward as a result of this initiative.

Thanks, Kate. As we mentioned in our last earnings, we've been both working internally on the design of our stores and taking out elements of the design that add costs, but don't add value. Some of those things will take time to cycle through. We're in the process now of reviewing some of the opportunities with our franchise partners and getting and doing some compares around build costs and site costs that they've had. So what I would say is we still believe there's opportunity, things that we can implement. We are implementing things to reduce the cost of converting an acquisition store to a Valvoline store, as an example. Some of those things will start to show in our capital cost for new builds, but the -- sorry, the capital cost for conversions for new units. But the new builds will take us time to implement, and we'll share more when we have locked that down and can definitively share the difference or the delta that should be expected. But we -- there's opportunity and the teams are working to work with the contractors as well as the permitting companies and the landlords to line everything up so we can capture it.

And in terms of unit economics, Kate, with the current construction costs, we continue to see mid-teens returns substantially higher than our weighted average cost of capital and still feel really good about the relative unit economics of the ground up for new builds that we're doing from a company perspective as well, we're continuing to see growth in new builds from our franchise partners as well. So any benefit we receive from lower overall capital cost will simply help us to increase that return even further.

Thank you. The next question goes to Bret Jordan of Jefferies. Bret, please go ahead. Your line is open.

Hey, good morning. Could you give us any updates on the non-oil-change offerings? What's been particularly successful or what you see sort of adding to that product list?

Sure. On the non-oil-change revenue, really the performance year-over-year is about having a more tenured team in the store that knows how to sell the product and just getting more consistent on how that service is presented and performed. So we continue to see gains as we focus on training, making sure the equipment to do the service is updated in the store and is available to be used. Supply chain, we have had supply chain issues, as you know, over the past several years post-COVID and just getting our supply chain back in line. So we have the right air filters for all the vehicles that we serve, the right cabin air filters, et cetera. And then process execution, so making sure that the team is trained and understands why the service is necessary. And when we quartile our stores, we know we have opportunity. The top quartile stores perform 50% better from a non-oil-change revenue ticket contribution roughly double or roughly 50% better. And so part of it is how do you do the training and the tools and rise up the back end of our store base to perform like the top quartile. Now the car park is aging, which is a tailwind given many of our OEM recommended services become more relevant with the mileage of the vehicle going up. So really, what we see is visuals, so things like wiper blades, cabin air filters, air filters. Those are the things, where visually we can show the customer that they need to be replaced, that's just basic process execution in supply chain. And that's where we see a lot of improvement. When it comes to OEM services, it's about the tenure of the team, and it's about the equipment in the store. And those are the…

Okay. Great. And then on regional performance, was there any dispersion to note and I guess, maybe a spread between softer regions versus stronger regions in the comp?

Yes. No. This is something that we do look at, obviously, weather can this time of the year can slide volume, car volume around based on regional weather patterns. But in general, we don't see any significant differences across the U.S. and Canada in terms of performance. We also -- we look for demographic demographics around a store, we look for customer patterns, and we see things really staying fairly consistent with the exception of when weather may push or slide out customers from coming in from 1 week to the next. But other than that, no significant or material differences.

[Operator Instructions] And our next question goes to David Lantz of Wells Fargo. David, please go ahead. Your line is open.

Hey, good morning, guys. Thanks for taking my question. So I was just curious if you could walk through the building blocks to the 6% to 9% system-wide comp outlook inside some of the expected benefits from non-oil change revenues and premiumization?

Yes In the building blocks from a same-store sales perspective. We saw -- from a ticket perspective, we saw the benefits from premiumization and non-oil change revenue, as I had mentioned, we also saw benefit from price. And then on the transaction side, we certainly benefited from expansion of our customer base as well as a nice benefit from miles driven, although a lesser benefit than what we saw in the expansion of the customer base then we saw that just under 100 basis point impact of unfavorable impact from the day mix on the transaction side. So again, on ticket, it was premiumization, non-oil-change revenue penetration improvements and then pricing, which includes some improvements in discounting that we saw for the quarter. in addition to price increases that we took as well. And of course, all of those are across the system from a system-wide same-store sales benefit.

Sorry, David, sorry. I was just going to add, as you think about the guidance that we've provided in the 6% to 9% for the year, we've said that that's going to be more skewed towards ticket, but more balanced than what we saw in the last year. And as you think about that, we have premiumization, which has been consistently driving between 100 and 150 basis points. We have NOCR, which has been driving 100 to 150 basis points. And then you've got pricing adding to the ticket inclusive of any optimization of discounting, and then you've got the transaction increase, so when you look at all those variables, you can see why ticket will be a slightly higher contributor in this year. But overall, really feel strong about the 6% to 9% system-wide same-store sales growth.

Got it. Okay. That's helpful. And then you mentioned that the fleet business contributed to comps in the quarter. Was just curious if you could give a few more specifics around there in terms of top line performance versus the chain average and any account wins that you had in the quarter?

Sure. We don't -- we haven't been reporting fleet out specifically on a quarter-to-quarter basis. I can say that we continue to see great opportunity in the -- our fleet business is growing both on the ticket side as well as on the vehicle served per day side faster than our overall business. So it's definitely contributing to both nano change revenue growth, the premium mix as well as the transaction growth from a same-store sales perspective.

Thank you. The next question goes to Jim Chartier of Monness Crespi Hardt. Jim, please go ahead. Line is open.

Good morning. Thanks for taking my question. First, the day mix pressure in first quarter, is that going to be positive to second quarter, or is that more spread out across the year?

No, it will reverse to positive in the second quarter. We'll see a benefit from DMC in Q2.

Okay. Great. And then you mentioned the implementation of the new CRM system, can you just help us understand what the incremental capabilities of the system are and then where you see the biggest opportunities in terms of driving transactions and margins?

So I'll cover I think your question on CRM is specific to fleet, but your margin and transaction, was that also specific to fleet or more broad.

I guess it was on the new CRM system -- so CRM on the fleet.

Okay. So from a CRM system, as we separated from global products, we used to share a CRM system with them, and we use it for many different aspects of our business. One, all of our business development work in contact with potential new franchisees as well as independents. We use that system, and so they also converted. But on the fleet side, we have an inside sales team that is constantly outreaching. We have marketing that goes out when customers can come directly or we can approach customers that we get, and it allows them to be very efficient. So from an inside sales standpoint, that system. And I think there are some new capabilities relative to the old system we had because it's been more built for our use. And so I think it will create more efficiency in our inside sales team, which allows us to sign up and follow up with existing -- sign up new fleet accounts and follow up with existing fleet accounts more efficiently and keep track of all of those. And as our fleet customer base grows. You can imagine how important a CRM system is as we do account management as well as following up on all leads for new fleet accounts. So it's really -- it will make our team more efficient and allow them to do more sales and more account management more efficiently.

Okay. And then with transactions becoming a bigger part of the comp going forward, it kind of implies an acceleration in growth in transactions. What do you see as the biggest drivers to accelerate the transaction growth?

So I think on a same store -- on an overall perspective, obviously, as we grow the network that's going to drive transaction growth. But on a same-store sales perspective, really, the things that we're doing around marketing optimization and really leaning into best practice from a high-growth retail perspective, not just looking at what's done in our category, but what's being done in high-growth retail more broadly. And using some of those tactics will drive customers. Two is fleet, we expect fleet to continue to be a contributor to transaction growth in the...

And the other piece, Lori, is really just continued benefit from miles driven. We'll continue to see lesser but continuing benefit as we see miles driven continue to increase.

Yes. And the last one, I think, to add is around the speed of service. So we continue to look at our process and the technology that we use in stores to make our process and our best-in-class customer experience easier and faster to deliver, and we know that if we can take a minute out of that service time, it's more cars that can go through the days during peak periods. And so that, we believe, will continue to be provide us a tailwind on transactions going forward. So it's all 4 of those things, Jim, that will drive the transaction side.

Thank you. We have no further questions. I will now hand back to Elizabeth for any closing comments.

Thank you all for your time today and for your thoughtful questions. We look forward to our ongoing discussions. This concludes our call for today.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.