Valvoline Inc. Q3 FY2025 earnings call

• Delivered strong sales, profit, and store growth for the third quarter. System-wide sales up 10% to $890M, adjusted EBITDA up 12%. • Same-store sales comps 4.9% with contributions from premiumization, net pricing, and NOCR service penetration. • Added 46 new stores in the quarter. • Gross margin rate increased 80 basis points year-over-year due to labor leverage. • SG&A as a percent of sales increased 80 basis points year-over-year but sequentially decreased 80 basis points. • Adjusted EBITDA margin increased 30 basis points to 29.5%. • Breeze transaction pending with potential store divestitures subject to FTC approval. • Continued focus on refranchising and network growth, with 46 new stores added and tracking to midpoint of store addition targets.

System-wide sales increased 10% to $890 million. Adjusted EBITDA increased 12%. Same-store sales comps were 4.9%. Gross margin rate increased 80 basis points year-over-year to 40.5% due to labor leverage. SG&A as a percent of sales increased 80 basis points year-over-year to 18.5% but sequentially decreased 80 basis points. Adjusted EBITDA margin increased 30 basis points to 29.5%. Adjusted EBITDA was $130 million, adjusted net income $61 million, and adjusted EPS $0.47 increased 18%.

• Narrowed same-store sales guidance to 5.8% to 6.4%. • Tightened most ranges across sales and EPS, raised low end of adjusted EBITDA range. • Share repurchases $60M year-to-date paused following Breeze announcement. • Expected SG&A leverage to return in fiscal year 2026.

• Uncertainty in global trade discussions and potential tariff impacts. • Uncertainty around the timing of closing the Breeze transaction and potential store divestitures required for FTC approval. • Weather-related timing impacts on sales volume, as seen in June.

Q: Can you talk about the different scenarios for 4Q same-store sales growth?

A: John Kevin Willis mentioned the quarter had good growth across metrics, April and May performed as expected, June had a slow start possibly due to weather, but July showed good traffic and momentum with tailwinds from CrowdStrike last year.

Q: How should we think about same-store sales planning for next year?

A: John Kevin Willis stated it's too early to comment on fiscal '26, but SG&A growth has moderated and technology investments are mostly done, expecting SG&A leverage to return in 2026.

Q: How to characterize the ramping of immature stores?

A: Lori Flees said new store ramps are consistent with plans at approval, showing very good performance with expected mid- to high mid-teens return on invested capital.

Q: How much of average ticket increase is pure pricing?

A: John Kevin Willis said premiumization and NOCR are larger contributors to ticket, with pricing being a smaller component, and franchisee pricing adjustments impacting comps.

Q: What's the pipeline of store acquisitions like?

A: Lori Flees said there are over 4,000 independent group operators, returns on invested capital for acquisitions are strong, and the Breeze transaction is pending but they continue to pursue growth opportunities.

Q: Structurally, why the gap in Breeze stores' sales?

A: Lori Flees said Breeze stores have less mature stores, different marketing and fleet activities, but the acquisition is expected to provide long-term value.

Q: Magnitude of franchisee pricing differential and consumer pushback?

A: Lori Flees said some franchisees in certain regions have higher pricing due to labor and rent, one large franchisee adjusted pricing, but no major consumer pushback noted.

Q: Labor leverage and go-forward benefits?

A: John Kevin Willis and Lori Flees said labor leverage was from better demand planning, scheduling, and implementation of Workday, with continued benefits from more sophisticated tools.

Q: Long-term comp growth framework?

A: Lori Flees said they continue to evaluate the market, with Kevin's fresh perspective helping to develop a long-term algorithm.

Q: Surprise on Breeze store sales and brand conversion risk?

A: Lori Flees said FTC process is normal, not surprised, and they have experience in brand conversions and integrating acquired teams.

Q: Tech investment benefits beyond labor?

A: John Kevin Willis and Lori Flees said tech investments enable real-time decisions, marketing efficiency, automation, and improved customer experience, with more opportunities ahead.

Q: Gross margin in 4Q?

A: John Kevin Willis expected margins in 4Q to be at or modestly above prior year as reported.

Q: Utilization of remaining Term Loan B?

A: John Kevin Willis said it's for revolver paydown to increase optionality without changing cost of debt.

Q: Premium mix for oil changes?

A: Lori Flees said premium mix is around 80%, driven by car park evolution and OEM recommendations.

Q: Franchise unit growth for '26?

A: Lori Flees said they continue to accelerate the pipeline, with current franchisees contributing 2/3 of 150 units per year and new franchisees back-end loaded, moving towards 150 target.