Valvoline Inc.

call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand over to your host, Elizabeth Clevenger of Investor Relations, to begin. Please go ahead.

Thank you. Good morning and welcome to Badland's second quarter fiscal 2025 conference call and webcast. This morning, VAVELIN released results for the second quarter ended March 31st, 2025. This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our Investors Relations website at investors.vavelin.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 Fleece, our President and CEO, and Mary Maxelsberger, our CFO. As shown on slide two, 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. Staffling 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, non-operational, or restructuring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our GAAP to adjusted non-GAAP results and 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. With that, I will turn it over to Lori.

Thanks, Elizabeth, and thank you for joining us today. I'd like to start with a quick look at our second quarter highlights on slide three. Our system-wide sales increased 11% to $826 million, and our same-store sales growth for the quarter was 5.8%. Total net sales increased 11% to $403 million when adjusted for the impact of re-franchising. Adjusted EBITDA increased 6%, also including the impact of re-franchising. Our system-wide store count is now 2,078, up 8% over the prior year. And we announced this morning that Kevin Willis would be joining our team as CFO effective May 19th. Before I provide an update on our strategic priorities, I want to cover a couple of topics that are top of mind given the current market environment. First on slide four, I want to provide our current assessment on tariffs. With what we know today, we expect the impact to be minimal. We put together a cross-functional team more than six months ago to collaborate with our suppliers. Our largest product cost is finished lubricants. which are primarily composed of base oils and additives. It's our understanding that base oils remain exempt from tariffs as of now, and we expect most additives to remain exempt from tariffs as well. The next largest supply category is ancillary products like filters and wipers. We've worked with our suppliers to shift the majority of our supply from China to Vietnam, and we continue to review alternate sources to optimize our flexibility. When we look at our inventory on hand and factor in the 90-day pause on the reciprocal tariffs, we do not expect a significant change in cost for fiscal year 2025. And we continue to look at other areas of spend to evaluate any tariff impact. As it relates to construction materials and equipment for our store additions, we expect a single-digit percentage increase on new store capital costs. As it relates to other costs like store maintenance and technology, we expect a low single digit increase as well. In total, for fiscal year 2025, we expect an operating cost impact of less than $4 million system wide. This includes the impact on franchisees, but excludes any additional mitigating actions. And we estimate the annualized impact to be about 1% to 2% increase to our cost of sales, which we will mitigate through cost reduction efforts, alternative supply strategies, or pricing pass-through to customers. As a result, we feel very well positioned to navigate the changes as they come. The other topic is around the macro uncertainty and state of the consumer. It's important to remember that we are a strong business in a very resilient industry with a lot of growth potential. Our industry has strong fundamentals and resilient long-term demand drivers. Customers are continuing to drive more, keep their vehicles longer and seek convenience. And we have not seen evidence of deferral of service or trade down from our customers. We are well positioned within the industry to provide customers the quick, easy, trusted service necessary to maintain their vehicles. Our powerful brand, superior service experience, strong franchise partnerships, and robust customer data differentiate us from our competitors and position us to meet customers' needs for preventative vehicle maintenance. As we look at the total available market, there is considerable opportunity for growth. considering we currently only have about 5% of the overall market share related to the Do It For Me oil changes. Now let me provide an update on some of our strategic priorities. This quarter, we saw growth in our business across all quartiles of household income and growth in NOCR across all store quartiles. We had healthy transaction growth across our business including for our mature store base. Our marketing sophistication is a key competitive advantage that helps us drive strong demand. We recently completed the transition of our customer and marketing database into the cloud, which will enable us to deliver increased efficiency and personalization of our marketing spend. And we had a great launch of university athletic partnerships in two company markets. of Ohio and Tennessee during March Madness targeted towards new customer acquisition. We also continue to make progress on talent management with rolling 12-month attrition rates remaining low and wage inflation moderating. To enhance capabilities, we successfully implemented the first phase of our HRIS system workday. This new platform enables further development of our labor management capabilities and improves our ability to engage directly with our over 11,000 team members. As we approach the summer drive season, our team is staffed and ready to deliver outstanding customer experience. Given about 80% of the customers we serve are customers we've served before, delivering a consistent and high-quality experience is fundamental to our growth. We are pleased to report that based on over a million surveys in the past 12 months, our customers have increased their rating of Valvoline Instant Oil Change to 4.7 out of five stars. I wanna thank our company and franchise store teams for the work they do every day to deliver best in class service to our guests. On accelerating network growth, this quarter we added another 33 net new store additions, bringing our year to date total to 68. Our pipeline for the year is more back half loaded than we would have liked. However, when we look at stores already in construction and the acquisition pipeline for both company and franchisees, we have confidence in our ability to deliver store additions well within our guidance range. During the quarter, we announced that we would be adding approximately 200 additional stores through the acquisition of Breeze Auto Care. In early April, we received a second request from the FTC. We remain excited about this opportunity, and we continue to work to gain approval to close the transaction. While we do not have complete control over the timeline, we hope we can close the transaction in the second half of fiscal 2025. Before I wrap up my comments on accelerating network growth, I want to give an update on what we're seeing in the markets that we've re-franchised on slide seven. You'll recall during Q4 of last year and Q1 of this year, we completed three re-franchising transactions, which included bringing on a new franchise partner in our Central and West Texas market. These transactions deliver shareholder value when the sum of the transaction price combined with the present value of the future cash flow streams from existing and committed store growth represents a higher overall EBITDA multiple than our current trading. The key factor is delivering on the committed store growth. So I'd like to provide an update on that. While we were just a few months in, we're already seeing the new store pipeline grow from these pre-franchise markets. And we expect to have double digit additions by the end of the year. We also have two new franchise partners that joined the system in the last two years. and have now ramped their pipeline from one store every couple of years to already opening four new stores this year. And their pipeline growth is exciting. I'm pleased with the momentum that we have been able to create with our franchise partners to accelerate network growth. While these re-franchising transactions will create long-term shareholder value, they do create near-term comparison challenges. So Mary will provide additional information on how these transactions impact our financial comparisons as she reviews the results. But before I turn it over to Mary to take us through our financial results in more detail, I'd like to thank her for her dedicated service to Valvoline since the company's IPO in 2016. I want to personally thank her for her leadership and the many ways she supported me as I joined the company and then stepped into the CEO role. While she'll be supporting the transition, we want to take this opportunity to wish her all the best in her much deserved retirement. With that, I'll turn it over to Mary.

Thanks, Lori. It's been an honor and a privilege to be part of the Valvoline team. I'm looking forward to my retirement and I'm grateful to have had the opportunity to work with amazing teammates and franchisees over the past nine years. Let's now turn to take a look at the financial results for the second quarter. Net sales for the quarter increased 4% on a reported basis and 11% when adjusted for the impacts of re-franchising. System-wide same-store sales increased 5.8% and 14% on a two-year stack. For the quarter, approximately one-third of the comp growth came from transactions. Despite the impact of Leap Day and the shift of the Easter holiday during the quarter, which had a combined net 50 basis point headwind for the comp. On the ticket side, premiumization and net pricing were significant contributors. NOCR service penetration was also positive and, as expected, did decelerate as we lapped the training initiatives put in place in late Q1 of last year. Turning to the next slide, we'll take a look at the financial drivers for the quarter. Gross margin rate declined 30 basis points year-over-year to 37.3%. During the quarter, there was deleverage on product cost and store expenses, primarily driven by depreciation from new stores. These items were partly offset by leverage in labor due to top line growth, moderating wage inflation, and continued strong labor management. As we shared at the end of fiscal year 2024, we would expect maturing stores to add about $70 million of additional EBITDA over time. SG&A as a percentage of sales increased 150 basis points to 19.3%. The deleverage is primarily driven by the impact of refranchising, while technology investments account for most of the remainder. Our adjusted EBITDA margin of 25.9% is a 110 basis point decrease over the prior year. On slide 11, we'll take a look at overall profitability. As Laurie mentioned, the re-franchising transactions impact the comparisons to the prior year. Adjusted EBITDA is $104 million, a 6% increase over the prior year on a recast basis. During the quarter, adjusted net income of $44 million increased 3%, taking into account re-franchising. On a GAAP basis, Net income for the quarter is $38 million. Adjusted EPS of $0.34 per share also increased 3% considering the re-franchising impacts. Turning to slide 12, we'll take a look at the balance sheet and cash flow. Net debt increased $44 million during the quarter from additional borrowings on the revolver. We ended the quarter at 3.4 times leverage ratio on a rating agency adjusted basis. Looking at cash flow impact, excluding growth caps, decreased 1% and was also negatively impacted by the re-franchising transactions. Our capital allocation priorities remain the same. First, to fund growth. Second, to stay within our target leverage ratio. And third, to return cash to shareholders via share repurchases. As we mentioned last quarter, Our share repurchases for Q2 were 21 million and brought our year-to-date total to 60 million. Share repurchases have been paused in anticipation of completing Debris' acquisition. I'll now turn it back over to Lori for some closing remarks.

Thanks, Mary. I'm pleased with the performance of our business in Q2. Our resilient and durable business is built to deliver growth despite the macro environment uncertainty. We anticipate the potential tariff increases will have a minimal impact in fiscal 2025, and we will continue to take actions to mitigate, including the flexibility to adjust pricing when needed. With the continued customer demand for our non-discretionary services, we remain confident in the business momentum and our reaffirming guidance. With that, I'll turn it back over to Elizabeth for Q&A.

Thank you, Laurie. Before we start the Q&A, I'd like to remind everyone to limit your question to one and a follow-up so that we can get to everyone on the line. Marie, can you please open the line?

To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your device is unmuted locally. Our first question comes from the line of Mike Harrison of Seaport Research Partners. Please go ahead.

Hi, good morning.

Morning, Mike.

I apologize if I missed this, but can you break out the 5.8% same-store sales between ticket and car count? I know you mentioned that non-auto change revenue was decelerating in terms of the average ticket contribution, and it sounds like there was some day mix headwind to the car count, but roughly how did that break out?

Yeah, Mike, we said that transactions drove about a third of the overall comp and two-thirds were driven by ticket. Transactions were adversely impacted by the net impact of weekday offset by the Easter shift. So the Easter shift Last year we were closed on one Sunday that we were open this year. So the net headwind from the combination of those two things was about 50 basis points to the overall comp, and most of that would have been on transactions. So if you were to adjust transactions for that, we would have been closer to 50-50 in terms of transaction growth versus ticket growth. So it was pretty fairly balanced for the quarter, which we're pleased to see continued growth in transactions.

All right. Thanks for the detail there. And then just in terms of the EBITDA margin decline compared to the prior year, it seems like that's kind of related to what's going on with SG&A costs. And you mentioned the re-franchising impact. on SG&A costs, and I'm just curious, is that an area where you're going to be taking some cost actions at some point in the rest of the year, or is it something that we just need to see you kind of grow into in terms of additional store growth over time? Any thoughts on how we should see that SG&A as a percent of sales trend in the second half and into next year would be very helpful?

Yeah, so when we set guidance for this year, we knew this was going to be a bit of a reset year. The re-franchising transactions combined with some of the technology investments that we've made, we knew that we were going to see some of the leverage in SG&A. My expectation is as we move forward, we'll see that SG&A increase moderate and we'll be lapping the impact of the re-franchising transactions. So I would expect over time, that we should see some more less challenges in relationship to deleverage on the SG&A line. Anything you'd add, Lori?

No, Mike. I think Mary has it exactly right. This year, we talked about being a reset year because of the decrease in the top line and a lot of the cost to support the full network continuing combined with a step up on the technology side, which is not those kind of step-ups aren't ones that we foresee continuing to have to make. And so when we talked about the long-term algorithm, we talked about SG&A growing at a lower percentage than the sales growth. But this year, because of the change on the refranchising impacting the top line, that put pressure. But we don't expect that to continue. We expect to get back towards leveraging our G&A as we continue to accelerate network growth and drive the core business.

And Mike, on your question on cost, we're keenly aware of the need for cost efficiency and cost management. So it's an area that gets a lot of attention internally. As we think about balancing our growth initiatives with the type of investments that we need, Certainly, we've made some big investments on the technology side with our new ERP, our new HRIS system, the re-platforming to the cloud of our marketing database, and continued work that we're doing around some of the re-platforming of the store-level technology as well. But as we think about management of overall costs, it certainly is an area where we're paying a lot of attention to it and really wanting to drive efficiencies. When you implement some of these systems, you're basically implementing them at kind of a minimum viable product level and then being able to start really leveraging your capabilities over time. And I see there being real opportunities for the organization to be able to take advantage of some of the cost efficiencies in labor management as well as in some of the G&A categories to better automation, et cetera, from some of these investments that we've made over time.

All right. Thanks very much.

Thank you. We have a question from Steve Chamesh of RBC Capital Markets. Please go ahead.

Great, thank you for taking the question. Just higher level, there's obviously a lot of hesitation around the state of the consumer right now. So against that backdrop, can you maybe just provide a little perspective on the cadence of comps throughout the quarter and what you guys are seeing quarter to date?

Yeah, Steve, happy to do that. You know, we did see a weaker February that was driven primarily by really challenging weather in certain, mostly company geographies. But other than that, you know, we saw some pretty consistent January and March. And we're pleased with, you know, the continued strength of the business as we come through April here and into the early first week in May.

Yeah, I would just add that, You know, this industry is a very resilient, has very resilient demand because it's non-discretionary. And there are a lot of underlining and positive tailwinds that we get from consumers, you know, driving more miles and that, you know, back to close to pre-COVID levels and growing, keeping their vehicles longer and looking for convenience. So those things all bode very well in terms of the underlining factors that are driving, you know, our business. I would just reiterate, based on my prepared remarks, we continue to not see customers trading down or deferring their service overall. And we look at that by income demographic segment, as well as store performance tiers. And overall, we saw growth across every dimension that we look at. And that was on a transaction basis, as well as an NOCR basis.

Got it. That's very helpful. And then just a follow-up on gross margin. Are you seeing any impact from base oil deflation, any benefit at this point? And maybe just a refresher on how exactly your contracts work and when that would actually flow through the P&L.

Yeah, we've seen some, we saw some modest deleverage in product costs in the quarter. which were impacted to some degree by some of the reductions that we saw in waste oil collection benefits. We also, you know, as we look forward, there's been about a $10 a barrel decline in crude. And we know that over the longer term timeframe, base oils tend to follow crude. As we're looking forward, Steve, we haven't really seen that benefit start coming through. Certainly the indexes haven't adjusted, but we'll continue to monitor it closely with our primary supplier. I'll remind you that we're kind of in that high demand season for lubricants. um so i'm not terribly surprised but you know i'm hopeful that over time we'll see some nice tailwinds from declining product costs and you know all of that again is offset by some of the other uncertainties you know as that you know can reduce reduce broader consumer demand for crude can continue to drive down those product costs whereas You know, if there's any kind of refinery interruptions or turnarounds and those types of things can tighten demand. And so we keep a close eye on it with our supplier, but right now we haven't seen any specifics as it relates to the balance of the year in terms of, and nor have we baked anything in to our guidance for potential future reductions.

I'll just add, Steve, that, you know, 53% roughly of our store base is franchise operators. And based on the contracts that we have with them, we pass that through on a penny adjusted basis when the index comes through. So you have a few things that counter any base oil impact or tailwind that we might get in margin one. We pass it through to the franchisees. Two, waste oil tends to move up and down as base oil index changes. So there are a lot of things that will negate having the tailwind, but obviously we'll look and continue to work with our supplier to lower our product cost.

Got it. Thanks very much, and best wishes, Mary.

Thank you.

We have a question from Simon Goodman of Morgan Stanley. Please go ahead.

Hey, good morning, everyone, and congratulations, Mary. My first question, I heard comments, you know, quarter to date sounded fine. If we take the run rate that you did in the second quarter and then add back 50 basis points, is that like holding everything else constant, which I realize there's a lot of assumption in there, that should be, you know, the baseline run rate going forward for comps through the second half of the year?

You know, Simeon, there's other things that come into play. Certainly, you know, lapping last year's numbers, both from a transaction and a ticket perspective, come into play. You know, we're lapping some of the initiatives on ticket for NFCR, although we're still seeing positive NFCR penetration. We're lapping some weaker transaction numbers from last year, which are helping our customers We also are entering into summer drive season and certainly expect strong growth from a summer drive season perspective and always working on marketing initiatives that will help us to drive higher levels of new customer acquisition as well as existing customer retention. So I would certainly say that you could think of that as certainly being part of a range, but our expectations of guidance for same-store sales for the full year in that 5% to 7% range still hold.

Okay. And my follow-up, the franchise store comp being a bit ahead of the company-owned, we've seen spreads like this before, so it may just be seasonal location. Can you just talk about simplistically, I guess on paper, you can argue that you should franchise more. And then are, should the rate of re-franchising this year puts that spread even a little bit higher? You know, what should we expect with that spread and how do we read it? Like, how should we look at it?

Yeah, it's a good question, Simeon. What I would say is year over year comparisons always, you know, have a play, but when we look at the comparison and what really drove the difference between the two is it was net pricing. And when we look at our franchise-based system by system, they have done pricing changes at different times. And so we just see that that is the biggest difference driver between the two comps is the number of system changes, pricing changes that have happened on the franchise side that have not fully left a full year. You know, going back to the last question you have, that does have an impact on the go forward. Some of those will last, some of them will not. Our franchisees have full pricing authority for their businesses. You know, we can do benchmarking in the marketplace broadly with dealers and other competitors, and we provide that information to them, but they decide when those pricing actions need to get taken. I'll also just remind you that some of our franchisees are in different geographic areas. And so as they have labor, other inflationary pressures, they may pass that through more quickly than we might see in the central part of the U.S. where most of our company stores operate.

Okay. Thanks, Lori. Good luck.

Thank you. We have a question from Max Raquelenko. of G.D. Cowan. Please go ahead.

Great. Thanks a lot, and congrats on the nice quarter. Can you guys first discuss the pricing environment that you're seeing and whether peers are starting to move their price points around? And then bigger picture, how do you think the competitive environment could evolve if the backdrop were to soften?

Yeah, on the pricing environment, We're not actually seeing any significant changes from the competition, you know, and I say that very broadly by looking at the way dealers are competing, the way auto repair shops or tire centers who also do oil changes, our pricing, as well as like the retail auto service centers and quick loops. What we would say is there's, You know, we do look at pricing and we are watching to see if given the tariff related environment, if there are folks that are changing their pricing, we're not seeing it pervasive, but it is a very fragmented marketplace. And so it's something that you do have to watch and look at in detail by region, but we're not seeing significant pricing changes. We have seen over the past year some competitive spots where they have caught up to the market, but I don't think they're going beyond or significantly outpacing the market from a pricing increase perspective. As it relates to the competitive environment, I'll continue to say that we don't see any significant changes in terms of the competitive landscape. Again, it's very fragmented. So it's difficult to see anything meaningful happening across the entire market, but we're not really seeing anything significantly different. We do expect that marketing spend overall for the industry will increase as we move into summer drive. You know, just looking at Google search, you know, the number of searches for oil change near me goes up at this time of year, and therefore it's got a great return on investment for not just us but others. to spend in marketing in that way. But when we step back, we know that we're going to continue to win share and grow transactions across geographies and even in our mature stores, which we've done.

Got it.

I appreciate all the color.

I'll go ahead. Go ahead. Okay, so the next question, just curious, did the pricing component of Ticket accelerate in 2Q? And if so, what do you attribute that to?

I missed that question. Can you, I missed the start of that question. Sorry, can you repeat it?

Oh, did the pricing component of Ticket accelerate in 2Q? And if it did, what do you attribute that to?

The pricing component of Ticket overall was strong. I don't think it was accelerated relative to past performance. It was largely consistent. And when we look at the contributors in Q2, I think Mary covered this. Premium mix, premiumization, and net pricing were the two main contributors, contributing roughly equally to the ticket overall, but NOCR was also a positive contribution. And I think the biggest change as it relates to ticket from Q2 relative to Q1 is on the company side, we lapped the NOCR initiatives, which were such a huge contributor to our same store, not huge, but a significant contributor to our same store sales comp over the last four quarters. it's still positive. It's just not at the same magnitude as it has been.

Got it. Thanks a lot. And best regards.

We have a question from Steven Zagoni of Citi. Please go ahead.

Hi, this is Ariana Warden for Steven Zagoni. Thank you for taking our question. The first question is, what can we expect with the drivers of same-store sales growth in the second half between ticket and transaction?

I just, you're a little muffled. Let me just clarify. I think your question was, what do we see the drivers for future growth in the company as it relates to a balance between ticket and transaction? Is that right?

Yeah, same-store sales growth in the second half.

Oh, in the second half, yeah. Okay, thanks for clarifying. I'll ask Mary to comment, but as we've been saying throughout the year, we see a really nice balance between transaction and ticket for the entire year, more so than what we've been in the past as we've lapped a number of initiatives from pricing as well as NOCR growth. So I think as you look forward to the back half of the year, we continue to expect a balance between transaction growth and ticket growth. I'll just restate, you know, when we look at Q2 performance, we saw growth in transactions across our store quartile, even in our mature stores. We're continuing to grow vehicle serve per day. And that's exactly what we're trying to do, is we're trying to grow the number of transactions we have in our existing stores, ramp up new stores, while continuing to give great service, which will drive that ticket component as well.

Got it. Thank you. And then my follow-up is can you talk a bit more about gross margin performance in the second quarter and how it performed versus your own expectations? And if your full year view on gross margin being flattish year over year has changed at all?

Yeah, gross margin overall was pretty much in line with our expectations. You know, if you look at the impact of new store depreciation, gross margin would have actually been up 10 basis points if you exclude the impact of new store depreciation. So we had talked about margin over the year being relatively flat year over year in our last quarter's call and when we set guidance originally. So we did see overall a little bit of deleverage in the quarter, but it was pretty much consistent with what we expected.

Thank you.

Thank you. We have a question from David Ballinger of Mizuho. Please go ahead.

Hey, good morning. Thanks for the question, and Mary, thanks for all your help over the years. First one, just another crack on the SG&A side. Are there any areas of the business where you're seeing OPEX overages are running hotter than your internal plan. And then should we expect you to leverage SG&A as you go into fiscal 2026?

So we are not seeing any hot areas of SG&A overages relative to how we plan the year. You know, I think we're doing a good job of managing SG&A relative to what our expectations for the year were when we set guidance. So I think the answer to your first question is no, nothing happening. That's a surprise there. And again, the biggest challenges we've been faced with in that deleverage has been the re-franchising as well as the technology investments. On the technology side, you know, we went from legacy systems that had been in place and fully depreciated and amortized to both the implementation costs as well as the operating costs for new systems on new platforms that were significantly higher. So we see a one-time step up related to those investments that we've made on the technology side. As it relates to moving forward, we'll provide guidance at the appropriate time, but I think Laurie mentioned earlier in this call that we do expect SG&A growth to moderate and to be below where we see sales growth going forward. So we would expect that we'll see some leverage in SG&A moving forward in the new fiscal year.

Very good. Got it. Thanks for that. And then just a follow-up on an earlier one, but it was still a little unclear. How do lower oil prices impact your gross margins? And can you talk about the amount and timing of any impact that you might see?

Yeah, so, you know, again, lubricants, you know, generally trail. The pricing for lubricants generally trail, and specifically base oils and additives that go into the makeup of lubricants generally trail the broader market for crude. So, you know, over time, they're very poorly correlated. So over time, as you see, changes include either up or down. If those changes stay in place for a protracted period of time, you generally will see the cost of lubricants either go up or down over the longer-term timeframe. So that's what we have seen and experienced in the business. Where we are right now is we certainly short-term have seen declines Those have not flowed through to the index, base oil index prices yet, nor has our supplier communicated that they're seeing significant opportunities moving forward for lower costs. But we still believe that if crude stays at this depressed level over time, that we should see some tailwinds.

And those aren't necessarily passed on to consumers, right? You would hold your pricing firm, or is that a lever you could play if we do get more promotional in any way?

Yeah, we haven't. I don't think across the industry you've seen people lower their posted prices. You can make decisions around reinvesting some of that to drive more growth. Um, but, uh, posted prices haven't really come down as, uh, base oil or crude prices vary in the same way though, when we've always talked about when the, when the base oil prices go up, you know, we have to pass that through to franchisees, which is an offset. Um, and we look to pass that through to consumers, but typically it's not the reverse. When the base oil prices come down, you don't see people clawing back their pricing. And we haven't had a history of doing that either and wouldn't plan to do so.

The other thing I would remind you of, David, is our largest component of our cost of goods sold is our labor costs as well as our store expenses. So product costs are a lesser component of the total cost of goods sold. It does have an impact, you know, both up and down in terms of margins, but it certainly, you know, we spend a lot of time looking at, you know, the larger aspects of our overall cost of goods sold in terms of managing our margins. Yeah.

Very helpful commentary. Thanks again, Mary.

We have a question from Kate McShane of Goldman Sachs. Please go ahead.

Good morning, this is Mark Jordan on for Kate, thank you for taking our question. It sounds like non oil change revenue continues to be a tail end here, but you know, maybe in the near term, it will be less so as we lap last year's initiatives. So, you know, can you remind us what your penetration is right now with non oil change and how that varies by quartile?

I'll start and then I'll ask Mary. We actually don't share the details on penetration rate. What I can say is that our penetration rate has been growing across our non-old change revenue services and it did increase this last quarter as well. When we look at, you know, what services increased in penetration, the visual elements of our non-old change revenue services are the ones that have been increasing. and continue to tick up, those are the things that we can physically show the customer, how the performance of those items are doing, windshield wipers, blades, battery, air filters, cabin air filters, et cetera. That's the biggest component. And the reason it's the biggest component is also because it's the things that the customer needs more regularly. As miles driven go up, the need for those or the frequency of those also increases with miles driven. So we continue to grow our penetration. We look at it both from an income demographic as well as from a store performance demographic. And on an income demographic, in stores with lower income demographics, there is some difference, but we continue to increase penetration even in those. And that's really, we attribute that to operating excellence of our process. and just making sure that we can communicate, you know, what is needed and show the customer. So when our team follows the process, that process sells those services on its own. We don't have to do a heavy sales approach. You just need to show the customer the performance of the items.

Yeah, and I think importantly, Lori, you know, we're seeing growth in core non-all change revenue impacted ticket across every quartile. So even though We do have differences in performance by quartile. There's growth across all quartiles, which we'd really like to see.

And we've seen an increase in penetration for low-income household demographic stores, pretty consistent with the high income. And part of that is educating our team on the importance of these items and not underselling them to consumers in those areas. because it does drive safety for our customers. So really just educating our team on why these are important and ensuring that they have the right stock and they can do them quickly, driving convenience and ease for our customers, those things actually really matter.

You know, Laurie, you mentioned earlier as well that one of the big differences in, you know, having lower turnover and the right talent in the right places is We actually, with the right talent that's well-trained, we see higher NLCR penetration, which is driven by that training and that education of the customer on the services being provided. So you mentioned earlier we're really well-positioned going into the summer drive season with talent. We're feeling really good about the position where we are right now. Agreed.

Perfect. Thank you for that. And then, you know, I guess it sounds like you're not seeing any changes in customer behavior, which is good to hear. You know, but if we think about the potential for, you know, maybe a softer macro at some point, would you expect to see some degree of deferral with oil change intervals maybe extending out a month or two or another thousand miles? And would you expect to see, you know, certain of these attachment rates for some non-oil change services come under pressure?

You know, before I came to Valvoline, that would have been my assumption. But part of what you have to understand how the customer's thinking about it is as the price of a new vehicle or changing their vehicle is increasing. So the worry about what the outlay would be for upgrading their vehicle and or repairing their vehicle if they didn't maintain it. The price of those things is actually, I think, created the demand or the realization for most of the customers. I'm not saying that everybody will defer, but for most customers, they will continue to maintain the vehicle they have to lower their overall sort of outlay of cash. So, you know, as customers are driving more, and as they're keeping their vehicles longer, I think some of the macro uncertainty and tariff implications create more uncertainty around large repair bills and or car vehicle replacement or upgrades that actually create the resiliency in our industry. So I would say it feels like they're more resistant to defer or trade down although I know that's not going to be the case for 100% of customers. When we look at the customers that we serve, we don't see it, and we continue to watch for it.

Perfect. Thank you very much.

We have a question from Thomas Wendler of Stevens. Please go ahead.

Hey, good morning, everyone. Maybe just one more from me. As we think about the development agreements you have, how should we be thinking of the pace of new locations there? I think you noted, you know, 20 new stores and 25, then you've kind of talked around the franchisee going from one to four new locations a year. Just any code around that.

Yeah. And the reason why we gave the update is because we always, expected that when we re-franchise a market or when there is a franchisee change in ownership, it does take time to build momentum. And so as we're just a few months in, we're already seeing that momentum change in a very positive way. And I don't want to say that three or four stores is enough for us to declare victory, but it is coming very quickly, the opportunities in the marketplace to grow and put more stores on, just given our stores only covered 35% of the population, we're seeing that momentum accelerate. And when we laid out our overall strategy to accelerate network growth, which included re-franchising and changing out franchise ownership with franchisees that had more opportunity in their market, but we're not investing appropriately against that opportunity. We knew that it would take us a couple of years to get those in place, and then the momentum would start to build, and that's exactly what we're seeing. While this year the delivery in the first half is lower than what might have been expected, we look at the construction that's underway and the pipeline of acquisitions We feel very strong for guidance, and we still feel very good about the momentum we have to get to our 250 new units per year by FY27. So, you know, I think the development agreements help. We have carrots and sticks in those agreements, and they've been serving us well. And we continue to ask our franchise partners what we can do to support them and their growth.

Perfect. I appreciate the cover.

We have a question from Chris O'Cole of Stiefel. Please go ahead.

Thanks. Good morning, guys. Lori, I had a question about the Breeze Auto Care system. Can you talk a little bit about the level of investment needed to integrate that system? And I'm thinking about rebranding technology investments. Just curious what you discovered during your due diligence.

Yeah, thanks for the question on Breeze. I was wondering if anyone was going to ask, because it's a pretty exciting opportunity for us to grow our network at a considerable clip with just one transaction. And we continue to be very excited about Breeze. It's a well-run business that complements us from a geographic perspective. Our main focus right now is to work with the FTC to close the transactions And obviously we look forward to providing more updates once we can get to that point. I think as we do our diligence, we look at every location and we look at it as if we were running it like we run our current network and how much upside we would expect to drive with our brand, with our marketing sophistication, our fleet sales activity. You know, there are always our implementation costs, but I think the platforms we've been investing in that Mary talked about earlier, our ERP system, our HRIS system, even moving the marketing data into the cloud, which allows us to integrate data in more quickly, more seamlessly, all of those things will drive a more efficient integration over time. But obviously, our main focus is to work with the FTC closely so that we can close the transaction. And then I'll be excited when that day comes and we can talk more about the forward-looking plans that we have for the combined business.

Okay. Thank you.

We have a question from Justin Kleber of Baird. Please go ahead.

Good morning. Thanks, everyone, for taking the questions. I'm curious if you gave any thought to tightening the comp outlook like you did last year after 2Q. It doesn't sound to me like the business is getting any more volatile, but the implied back half guide is pretty wide, and it looks like it would include something below 4% at the low end. I assume you're not planning the business at that level, but I guess just trying to understand what the biggest swing factors are in your view as it relates to the second half comp. Is it more about transactions or is it more about ticket?

Yeah, good question. We didn't narrow our guidance. I think it was important for us to reaffirm our guidance. And you'll remember the first half of the year typically contributes 40 to 45% of our year from a profit standpoint. And, you know, 55 to 60% of it come during the dried season, which is Q3, Q4. So I think given how much we have ahead of us, I think we just didn't feel that now was the right time to narrow guidance. I will say that we feel very confident on all elements of our guidance. So I think we feel very good that the momentum of our business is on track and we expect to deliver within the guidance on every element. Mary, would you have anything to add to that?

No, I think it's a good summary, Laurie.

Yeah, okay. Thanks for that. And just a modeling question as we think about the third quarter, and it sounds like you're going to have an Easter shift headwind. I don't know if there's any other offsetting day mix impacts, but just how are you thinking about or how should we think about the headwind to the comp from Easter moving into fiscal 3Q this year?

Yeah, sure. You know, we had a little bit of a benefit in Q2 from Easter where we were closed on a Sunday last year. This year we were closed on a Sunday in April. The benefit that we saw in the month of March, excuse me, in the quarter related to that was about 80 basis points, which offset the 130 basis points from weekday. So that was a net 50 basis point headwinds in second quarter. So, you know, we'll see a little bit, you know, that reverse headwind on the Easter shift in the third quarter. But overall, you know, we've got that pretty well factored into our guidance and expectations when we plan the quarter.

All right. Thanks so much.

We have a question from Peter Keith of Piper Sandler. Please go ahead.

Hey, thanks. Good morning, everyone. On the re-franchising, I don't think it was quantified, but is there a way that you could give us the lost sales and EBITDA in the quarter from the re-franchising and what those numbers will then look like for Q3 so we can make sure we get our model set appropriately?

Yeah, so in the press release that we issued this morning, we included a chart that shows both revenue and adjusted EBITDA recast for last year as if the re-franchising had occurred and had been in place last year and, of course, for the current year as we reported it. So you can actually see that the impact on revenues and EBITDA kind of detailed out there. And, you know, for the quarter, we had an impact. EBITDA recast for the re-franchising was up 6%. And other than that, you know, I think that that chart that's in the press release should be able to help you with that modeling question.

Okay, thank you for that. We are swimming in a lot of earnings this morning, so I'll take a closer look once the call concludes. What about on the EBITDA margin decline, including the re-franchising for the rest of the year and all the various puts and takes? Is this the low watermark for year-on-year EBITDA margin decline, and perhaps there's continued decline, but just not to the tune of what we saw in Q2?

Yeah, you know, I think if you just look at your modeling relative to, you know, the guidance that we provided, you should be able to see, you know, the overall impact. You know, we reiterated our guidance at the $450 to $470 million of EBITDA, and we've reiterated our net revenue guidance as well in the $1.67 to $1.73 billion range. So I just think, you know, if you look at that on a quarterly basis and do your math, you should be able to see that play out. I would expect that the e-leverage and SG&A will moderate in the back half of the year. So helping you with that math a little bit, I think that we should see some improvement in EBITDA margins in the back half of the year.

Okay. Thank you very much.

We have a question from David Lance of Wells Fargo. Please go ahead.

Hey, good morning, and thanks for taking my questions. Can you talk about the cadence of new store openings in the second half of the year? And if demand proves choppier than expected on the back of tariffs, would you contemplate pushing any of those openings to 26?

Yeah, good question. As I mentioned, we did 33 new store additions for the quarter and we're at 68 for the year. It's a little slower start than what we had in FY24, I think largely just given the timing of M&A closings. But when we look at our, like what units are in construction, meaning they're already broke ground, they're already moving forward, And all the work we've done in the past 18 months around permitting support to work with cities to make sure, you know, as we get trades done and they have to be approved before we can move forward. I think we feel pretty strong about the timing of those construction openings. Obviously, they can always move, you know, a week or two around. But in general, we feel good about those. And then when you look at the acquisition pipeline, both for us and for franchisees, in terms of those that are already under LOI or were actively negotiating the final details on, when we add all of those up with some wiggle room, as we always would have, we feel pretty comfortable in our guide of 160 to 185 for the year. And that will be well within that range. I don't think we mentioned it. We did have a couple of closures on the franchise side, and that's pretty unusual to have two and a quarter, but these related to lease expiries, and we typically have them from lease expiries or store relocations. It's very rare given the profitability of our stores across the network, but we did have two this quarter, which we factored into the numbers I shared.

Got it. That's helpful. And then on gross margin, it seems like expectations are still flat for the year, but is there anything we should keep in mind in Q3 and Q4 as we're modeling outside of the compares?

You know, just the fact that we're going into summer drive season just kind of naturally, you know, with higher sales expectation will help us with a little bit of leverage there on the margin side. If you look at the cadence of, you know, margin rates over the four quarters over the last few years, you know, typically the back half of the year has stronger margin rates than the front half of the year, and we certainly expect that again this year.

Got it. Thank you.

We currently have no further questions, so I will hand back to Laurie Flees for closing remarks.

Thank you. Appreciate all the great questions today. I wanted to take a minute on behalf of the entire Valvoline team to extend a heartfelt thanks to Mary once again for her exceptional partnership and leadership on the Valvoline team. We certainly would not be the company we are today without having had Mary's expertise and just thoughtful leadership on the team. Additionally, we're thrilled to welcome Kevin, who brings deep financial expertise and will undoubtedly hit the ground running with our teams, given his past experience with Valvoline. We delivered a very strong quarter in line with our expectations. That's why we're reinforcing or reconfirming our guidance. And we feel good about the momentum of the business. With our differentiated service model, we are really in good shape to continue driving market share gains and delivering strong, profitable growth. So appreciate the time that you've all spent today with us.

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