Valvoline Inc. (VVV) Earnings

Management highlights

• Same-store sales were super strong at 8.2%, with outperformance across the board. Ticket and transaction growth contributed. • Breeze integration progressing well, delivered SG&A synergies earlier than planned, found Breeze talent for open roles, delivered procurement savings early. Focus on store operational stability and talent retention. • Breeze team managed store operating expenses well in Q2. • First half performance of company and franchise good, Breeze ahead of expectations. • Expect operating leverage in second half, but labor leverage muted due to last year's big wins and Breeze's margin impact. • New unit openings weighted to back half, pipeline healthy on company and franchise side, unit economics show mid to high teens IRR.

Guidance

• Same-store sales growth range raised meaningfully. • Full-year revenue range unchanged, but trending above midpoint, with room based on current business forecast. • EBITDA range increased, partly due to Breeze performing better than expected. • Cautious on second half due to Middle East conflict uncertainties. • Expect operating leverage in second half but labor leverage muted by Breeze and last year's base.

Segment performance

Same-store sales growth was 8.2%. About two-thirds of this came from ticket, with net pricing, premiumization and NOCR penetration all positive. Transaction side growth was good across the network. Franchisee pricing changes were modest overall. Customer demand for preventive maintenance is resilient. Different geographies and systems had various factors driving transaction growth, like California lapping wildfires and new stores contributing.

Risks & headwinds

• Lubricant shortages risk due to Middle East conflict, especially affecting base oil threes. Supply is adequate currently, but depends on conflict duration. Closely working with supplier to mitigate risk.

Analyst Q&A

• Q: Talk about Breeze milestones, integration.

  A: Integration progressing well, delivered SG&A synergies earlier, used Breeze talent, found procurement savings early, focus on store stability and talent retention, Breeze team controlled operating expenses in Q2.

• Q: Market share and demand deferral.

  A: Grew share across business, even excluding Breeze, strong growth in system. Deferral unlikely as preventive maintenance demand resilient, miles driven change takes long time.

• Q: Oil pricing impact on cost of goods.

  A: Q3 saw base oil index increase, implemented price increases to cover costs, lubricant as 20 - 25% of COGS, waste oil partial offset.

• Q: Same-source sales trends and 3Q momentum.

  A: Q2 had puts and takes by month, Q3 early shows no change in behavior, April good, first half strong, still cautious on back half due to Middle East.

• Q: Competitive landscape impact.

  A: Industry fragmented, no material change expected in near term, confident in business model, customer proposition, etc.

• Q: Lubricant shortages risk.

  A: Lubricants blended from base oils, Middle East conflict may impact base oil threes, but current supply adequate, depends on conflict duration, working with supplier.

• Q: Guidance details.

  A: Comp range raised, revenue range unchanged, EBITDA range increased due to Breeze performing better, cautious on back half, expect operating leverage in second half but affected by Breeze and base.

• Q: Cost inflation, pricing, and future pricing.

  A: Company took pricing in Q3, franchisees in transition, likely more ticket contribution in back half due to math.

• Q: Same store performance vs franchisee vs company owned.

  A: Overall 8.2% same store sales, franchise stores outperformed company primarily by transaction growth, different factors driving transaction growth.

• Q: Fleet performance.

  A: Fleet continues to perform consistently, less than 10% of system-wide sales but growing rapidly, last large franchise system moved fleet business to managed sales group.

• Q: Second half gross margin expectations.

  A: Expect gross margin to improve in second half due to seasonality, labor leverage limited by Breeze and last year's base, Breeze is margin headwind but less than expected.

• Q: Breeze EBITDA dilution.

  A: Originally expected ~100 basis points dilution, Q2 less than that, full year less than 100 basis points.

• Q: SG&A leverage in second half.

  A: Advertising as % of sales fairly consistent, rest of SG&A expected to have leverage in back half due to busier period and efficiency efforts.

• Q: New unit openings and economics.

  A: New units weighted to back half, pipeline healthy, unit economics show mid to high teens IRR, focus on reducing capital for new units.

• Q: Non-oil change revenue mix.

  A: NOCR was good contributor, consistent at around 25% of ticket.

• Q: Oil price impact on margin.

  A: Potential margin recapture if lubricant costs decline as list price hasn't been lowered historically.

• Q: Breeze service rollout.

  A: In process of looking at menu expansion, working on equipment and training for potential upsides factored into Breeze growth expectation