Valvoline Inc. (NYSE:VVV) Q2 2023 Earnings Call Transcript

Valvoline Inc. (NYSE:VVV) Q2 2023 Earnings Call Transcript May 10, 2023

Valvoline Inc. beats earnings expectations. Reported EPS is $7.15, expectations were $0.28.

Operator: Good morning, ladies and gentlemen, welcome to today’s Valvoline Second Quarter 2023 Earnings Conference Call and Webcast. My name is [Jaqueta]. I will be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to your host, Elizabeth Russell. Elizabeth, please go ahead.

Elizabeth Russell: Thanks, Jaqueta. Good morning, and welcome to Valvoline’s Second Quarter Fiscal 2023 Conference Call and Webcast. This morning at approximately 7 AM Eastern Time, Valvoline released results for the second quarter ended March 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 Sam Mitchell, our CEO; Lori Flees, our President of Retail Services; and Mary Meixelsperger, our CFO. As shown on Slide 2, any of our remarks today that are not statements of historical facts 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, non-operational 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, 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. 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. On Slide 3, you’ll see the agenda for today’s call. We’ll begin by discussing the closing of the sale of Global Products that we announced March first along with an update on the return of proceeds planned. We will then talk about our second-quarter highlights, share operational insights and end with a review of our second-quarter results. Now I’d like to turn the call over to Sam.

Sam Mitchell: Thanks, Elizabeth, and thank you all for joining us today. As we announced on March 1, the sale of the Global Products business is now complete. Our teams have done an excellent job completing the transaction while remaining focused on delivering a strong Q2. Total cash purchase price for the sale was $2.65 billion, with approximately $2.38 billion of net proceeds after taxes and other transaction expenses. In Q4, we announced the Board has authorized a $1.6 billion share repurchase. Through April, we have returned $336 million through open-market share repurchases this fiscal year with just over $200 million of that coming from the current authorization. After thoughtful consideration, Management and our Board of Directors concluded that a modified Dutch auction tender would allow us to most efficiently and expeditiously return the sale proceeds to our shareholders.

We expect to proceed with a tender offer of up to $1 billion, subject to market conditions. We are excited to focus on driving growth and increasing value of the new Valvoline. The new Valvoline is a pure-play automotive retail business that is high-growth, high-margin and with a high-return on invested capital. The new Valvoline is primed to deliver long-term value to our shareholders through our best-in-class retail platform. We are focused on growing system-wide store sales, increasing units through both company-operated and franchised additions and evolving the service portfolio over time. This algorithm has a long runway to take us into the future. Turning to Slide 8. Let’s take a look at some key highlights from the quarter. The top-line growth continues to be strong with almost $660 million in system-wide store-sales for the quarter, which is an increase of 18.5% compared to prior year.

For same-store sales, we continue to see consistent growth across our network with an overall growth of 13.5%. As we expected, we saw improved profit performance in Q2 with a 25.5% increase in adjusted EBITDA over prior year, and a 19% increase over Q1. This comes on adjusted revenue growth of 19% over prior year and 4% over Q1. Additionally, we continue to be on track for unit additions with 19 company-operated and 16 franchise locations added this quarter, bringing our total store count to 1,781. Slide 9 provides a look at our growth over recent years. We have seen substantial growth across key metrics including store count, same-store sales growth, system-wide sales and EBITDA. We continue to see resiliency and strength in the demand for the quick, easy and trusted preventive maintenance service we provide to our customers.

We have a great track record of growth and that will continue in fiscal year 2023. Now I will turn it over to Lori to look at more details of our Q2 results and share some operational insights.

Lori Flees: Thanks, Sam. As Sam said, consumer demand is strong for our quick, easy, trusted service. Our VIOC customer base has nearly doubled over the last five years, growing at a 12% compound annual growth rate. This is driven in-part by additional units, but a significant component is from the growth of our same stores. In Q2, our system-wide same-store sales growth was 13.5%. Our same-store sales growth is consistent across company-operated and franchise locations. This balanced growth is a direct result of the partnerships we have with our franchisees and the strength of our SuperPro process, which enables a consistent delivery of a high-quality customer experience. We’re pleased with the drivers of Q2 same-store sales.

Approximately 30% of the Q2 same-store sales increase was driven by transactions. On ticket, we’re continuing to see the benefit of lapping prior pricing actions taken during fiscal year 2022 and we remain confident in our ongoing pricing power. We continuously monitor pricing and take actions to optimize it across geographies. Additionally, our non-oil change service penetration continues to improve and drive further ticket growth. With the continued customer-base growth, our ongoing pricing power, and the tailwind from premiumization, and non-oil change revenue service penetration, we remain confident in both our fiscal ’23 and long-term same-store sales growth target. Turning to Slide 12. As expected, we saw EBITDA margin improvement, both sequentially and year-over-year.

The sequential quarter-over-quarter improvement in EBITDA margins of 330 basis points was driven by increased volume and improved cost leverage with higher utilization of our stores and lower G&A expense. The year-over-year improvement in EBITDA margins of 130 basis points demonstrates the recovery of our margins through the pricing actions taken in the last 12 months, as well as continued transaction growth. Our stores are well staffed to gear up for the summer drive season and we continue to anticipate a full-year EBITDA margin of 25.5% to 26.5%. Our EBITDA performance is underpinned by the growth of our mature stores as shown on Page 13. We continue to see solid leverage and growth in our mature store group. Since fiscal year 2019, our most mature stores have continued to grow top-line at a 10.1% compound annual growth rate, while delivering an even higher EBITDA CAGR of 11.5%.

The top-line growth of the mature stores has similar drivers as our overall performance with growth in transactions, pricing, and non-oil change revenue penetration. Our continued growth along with a focus on ongoing operational efficiencies will enable us to continue to drive leverage and improve our mature store EBITDA. Let’s take a look at the impact of our new stores on Slide 14. New stores are an important part of our long-term growth algorithm. Today, only 35% of vehicle owners live within 10 minutes of a Valvoline service center. New units enable us to broaden access to our proposition. Typically, our ground-up stores ramp to the revenue of a mature store performance in years three through five. Recently our new-store ramps have outperformed early expectations in both speed and size of the ramp.

New acquisition stores typically have a faster ramp to maturity, but the size of the ramp is generally less than that of a ground-up. As all our new units mature, we expect to see at least $70 million of incremental EBITDA. While we continue to focus on ways to improve returns by driving down investment costs and improving performance, the strength of the consumer demand along with our highly predictive real-estate modeling gives us confidence in our ability to drive return on invested capital through new franchise and company units. Now I will turn it over to Mary to discuss our Q2 financial results.

Mary Meixelsperger: Thank you, Lori. The sale of Global Products is an important milestone for Valvoline. As Sam shared, Valvoline is now solely a retail automotive services business focused on preventative maintenance with nearly 1,800 stores across the U.S. and Canada. Accordingly, as of April 28, our GICS classification code has been updated to the automotive retail industry within the consumer discretionary sector. We will no longer be within the chemicals commodity sector. In addition to the change in industry classification, I want to highlight a few of the large financial impacts recorded during the quarter as a result of the transaction. The sale of Global Products generated $2.38 billion of net proceeds after taxes and other transaction expenses.

We also recognized an after-tax book gain of $1.2 billion. With the proceeds of the sale of Global Products business in hand, our cash position is very strong with a cash-and-cash equivalents balance of $2.3 billion at the end of the quarter. Additionally, the proceeds received from the sale are being invested in liquid assets. Our investment philosophy for the proceeds is safety and liquidity first, then yield. Through March 31, we have earned $8.3 million of interest income related to the investment of the sale proceeds. With the tender offer, we anticipate to return up to $1 billion of the after-tax proceeds from the sale in addition to the $336 million already returned through share repurchases through April 30. Another $300 million to $400 million of the proceeds will be used for the tax payment related to the gain on sale followed by an additional $600 million for debt repayment.

Our Q2 results are summarized on Slide 17. Adjusted EBITDA improved 25.5% to just over $87 million for the quarter. This is in line with our historical first-half results. Gross profit improvements were driven by increased transactions and higher average ticket from pricing actions and non-oil change service penetration as well as unit growth. SG&A investments increased by $4.8 million from the prior year, primarily related to investments in advertising, process improvements and talent to support our future growth. While SG&A dollars increased modestly, we saw improved SG&A leverage driven by the increased sales volume. Now, I will turn it back over to Sam.

Sam Mitchell: Thanks, Mary. We are pleased with our Q2 results and remain on track for a strong fiscal ’23 performance. Completion of the sale of Global Products was an important milestone for Valvoline. As we have said, we plan to continue returning proceeds to shareholders and expect to initiate a tender offer for up to $1 billion of our common stock. Our team is doing tremendous work and we are excited to focus on the new Valvoline, as we continue to drive value for our shareholders. Now I’ll turn the call back to Elizabeth to open the line for Q&A.

Elizabeth Russell: Thanks, Sam. Before we start the Q&A, I want to remind everyone to limit your to one and a follow up, so we can get to everyone on the line. With that, Jaqueta, please open the line.

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Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Simeon Gutman with Morgan Stanley. You may proceed.

Operator: Thank you. The next question comes from the line of Steven Zaccone with Citi. You may proceed.

Operator: Thank you. The next question comes from the line of Mike Harrison with Seaport Research Partners. You may proceed.

Operator: Thank you. Your next question comes from the line of Laurence Alexander with Jefferies. You may proceed.

Operator: Thank you. The final question comes from the line of Jason English with Goldman Sachs. You may proceed.

Operator: Thank you. There are no additional questions waiting at this time. So I would now like to pass the conference back over to the management team for any additional or closing remarks.

Sam Mitchell: All right. Well, thank you all for joining us today. We’re excited to move forward with the new Valvoline following the close of the sale of Global Products business, and with our plans to return the proceeds to shareholders through a tender offer in place, we are focused on driving growth and high returns on capital as a pure-play automotive retail business. I’d like to thank our store team members and franchise partners for all the work they do to drive our business. We appreciate your time today. Thank you.

Operator: That concludes today’s conference call. Thank you for your participation, you may now disconnect your line.