Valvoline Inc. (NYSE:VVV) Q4 2023 Earnings Call Transcript

Valvoline Inc. (NYSE:VVV) Q4 2023 Earnings Call Transcript November 9, 2023

Valvoline Inc. misses on earnings expectations. Reported EPS is $0.39 EPS, expectations were $0.41.

Operator: Hello, everyone, and welcome to the Valvoline 4Q 2023 Earnings Conference Call and Webcast. My name is Emily and I’ll be coordinating your call today. [Operator Instructions] I will now turn the call over to our host, Elizabeth Russell. Please go ahead, Elizabeth.

Elizabeth Russell: Thanks. Good morning and welcome to Valvoline’s fourth quarter fiscal 2023 conference call and webcast. This morning at approximately 7:00 AM Eastern Time, Valvoline released results for the fiscal year and fourth quarter ended September 30, 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-K with the Securities and Exchange Commission. On this morning’s call is Lori Flees, our President and CEO; 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 reports. On slide 3, you’ll see the agenda for today’s call. We’ll begin by discussing our best-in-class retail services platform and proven formula for growth. We will then look at a review of our financial results and guidance. Now I’d like to turn the call over to Lori.

Lori Flees: Thanks Elizabeth and great to be with you all today. Fiscal 2023 was a transformational year for Valvoline as it was our first year as a peer play retail business. In addition to delivering the expected results for the year, we completed the sale of Global Products and made substantial progress on our promise to return the sale proceeds to shareholders with $1.5 billion in share repurchases this year. With both a strong results track record and a clear strategy, our retail services platform is well positioned for long-term growth. Valvoline is the quick easy trusted leader in automotive preventive maintenance and also is a best-in-class retail services provider. We have a proven track record of growth. Fiscal year 2023 marked our 17th consecutive year of positive same-store sales with system-wide sales growing to $2.8 billion.

Our network of 1852 stores is over 50% franchised. And Valvoline has been named the top franchisor in our category by both entrepreneur and franchise times. We also have a proven track record of strong profit and returns with mid-teens IRR and EBITDA margin growing to 26.3% for the year. As we’ve laid out previously, Valvoline offers a best-in-class value proposition to investors based on growth, brand and performance. With a 150-year-old brand and a scaled platform of over 1,850 locations Valvoline is a proven leader that has created significant revenue and EBITDA growth in recent years through store additions, same-store sales growth and accretive M&A. The market we serve is large and nondiscretionary with an estimated $470 million do-it-for-me oil changes performed annually in the United States.

While we’ve delivered an 18% compound annual growth rate in our system-wide sales since the IPO, Valvoline still has significant opportunity to build upon our estimated 5% market share. We have confidence in our ability to grow to 3,500-plus stores while lowering our capital requirements through accelerated franchise growth. Our model of quick easy trusted service will allow us to continue winning market share and generate attractive returns and significant cash flows in the years to come. This creates an incredible value proposition for investors. Slide 8 shows our key metric performance over recent years, demonstrating our strong history of financial performance including fiscal year 2023. With 137 stores added in 2023, including 51 franchise stores, our total store count is now 1,852.

System-wide sales grew to about $2.8 billion in 2023, an impressive 18% compound annual growth rate from our IPO in 2016. System-wide same-store sales also saw strong and consistent growth across the network with 11.9% growth for both company and franchise systems in 2023. And from a profit perspective, adjusted EBITDA grew 20% to $380 million in fiscal 2023 resulting in a 32% compound annual growth rate since 2020. Turning to Slide 9. You can see our full year FY 2023 results along with our FY 2023 guidance and long-term guidance we provided last year. Valvoline delivered strong growth across all metrics. Not only did we deliver against our fiscal 2023 guidance, our performance was aligned with our long-term algorithm across all metrics as well.

In addition to strong sales and store growth, our EBITDA growth outpaced the top line sales growth, capturing leverage across the business and improving margins to 26.3% for the year. For FY 2023 we saw 62% growth in adjusted EPS to $1.18, which was significantly impacted for the year by items related to the sale of Global Products, including share count reductions due to share repurchases and interest income from the investment of the net proceeds. Mary will discuss the FY 2024 guidance in more detail in a moment, but we do anticipate fiscal year 2024 results to fall within our long-term algorithm guidance as well. Turning to Slide 11, we have a simple but highly effective formula for delivering long-term value to our shareholders. I first shared our three-pillar strategy last year which includes; one driving the full potential of our existing business; two, accelerating network growth; and three, expanding services to meet the needs of an evolving customer race and car park.

This proven formula will drive higher revenue, strong margins, free cash flow, and attractive return on invested capital. Let’s take a look at each of those in more detail starting with the potential in the core business. As you can see on Slide 12, we have seen significant operational improvements in recent years. Our marketing sophistication continues to be a standout in the automotive services industry. We continue to build brand awareness and optimize the cost to acquire new customers. Our quick easy trusted service consistently delivers a strong customer experience and drives customer retention. Our average ticket continues to increase, demonstrating our pricing power as well as strong execution of nano-change revenue service penetration and premiumization.

As we see costs increase notably in product and labor, we take pricing actions which we have already done in FY 2024. We do this with confidence in our pricing power as we continue to look for, but not see trade downs or service deferrals at this time. Our growth in customers and ticket drive four-wall profitability improvement. This can be seen in our mature store performance and we anticipate an additional $70 million of EBITDA as current non-mature stores mature. Next, let’s look at an update on new units. As I mentioned earlier, we finished the year with a strong delivery of store additions, bringing our new store additions for the year to 137. After a challenging Q3, our franchise partners delivered 26 total units in Q4. We mentioned in Q3 that we expected some of the delayed units in Q3 to push into Q4 or Q1.

But our franchise partners were able to deliver most of the delayed units in Q4. We also had a record number of new builds for the year for both company and franchise systems with 47 and 24 units respectively, with nearly 50% of the new units being new builds. This demonstrates that our franchisees see the value in continuing to take advantage of both M&A and ground-up opportunities. While we expect the challenges we saw in Q3 and construction permitting continue, our company and franchise teams are finding new ways of partnering to improve processes across the development cycle. For example in fiscal 2023, Valvoline formed a development council, which includes our corporate real estate and developing franchise partners across the system. Our development council is highly engaged and focused on pipeline execution strategies capital reduction plans and reinvestments into the business.

As we turn to Slide 14, I’m proud of our progress towards accelerating network growth. Both our team and our franchise partners recognize a significant opportunity we have to expand our store footprint. Auto Care remains a growing highly fragmented market with significant white space for expansion. As we set out in FY 2022, we see potential to grow our retail system to over 3500 units. We continue to target 250 units new units per year by 2027 with 150 coming from franchise. We see multiple levers to fuel new growth, including partnering with our existing franchisees, adding new franchise partners which we continue to pursue and opportunistic M&A. We anticipate taking a step towards that goal with a projected 140 to 170 total unit additions for fiscal ’24 with 55 to 70 coming from additional franchise units, largely from our existing partners.

On slide 15, we turn to the third pillar of our strategy, customer and service expansion. Today, I’d like to highlight our progress in the fleet business and non-oil-change revenue service penetration. Currently, fleet is less than 10% of our total system-wide business and continues to grow at a faster rate than the consumer business. In fiscal ’23, the fleet business saw 25% sales growth, as we added over 3,000 new accounts and increased our business within existing accounts. The fleet business ticket averages about 20% higher than the average consumer ticket based on company store performance. This is largely driven by the fleet owners taking advantage of the non-oil change services we offer in order to maintain their important business assets.

For fleet customers, our proposition is compelling. The quick easy trusted service is not only convenient, but it helps fleet owners keep their vehicles safe and on the road. We’re excited about the progress of the business and the growth potential it offers. Now, let’s take a look at non-oil change revenue across the system. The growth in the fleet service business is certainly a contributor to our improvements in non-oil-change revenue service penetration. But we’re also seeing that improvement within our consumer base. The system-wide non-oil change revenue has grown consistently with an increase of $1.93 this year, our largest dollar increase in four years. For company stores, about half of this was driven by service penetration, which was enabled by an increase in training and new tools deployed to increase the consistency of our presentation of these services, as well as ensuring a quick easy trust of delivery.

Now, I’ll turn it over to Mary to discuss our financial results.

Mary Meixelsperger: Thanks, Lori. Let’s start with a look at our revenue growth. We saw significant sales growth for both Q4 and fiscal ’23. For the quarter, sales grew 16.3% to $390 million and for the year, we saw growth of almost 17% to $1.4 billion. System-wide same-store sales grew 10% for the quarter, with approximately two-thirds driven by ticket and one-third from transaction growth. For the year, system-wide same-store sales grew 11.9% with approximately 70% driven by ticket. Ticket growth in the quarter and the year was largely driven by pricing, but we also saw meaningful contributions from non-oil change revenue service penetration and premiumization. On the transaction side, growth in customers was the largest contributor.

The convenient and trusted service we are providing to our customers continues to drive the strong customer retention. On slide 18, we have a look at margin performance. Year-over-year for the quarter, EBITDA margin increased 190 basis points to 28%, driven primarily by improved labor efficiencies along with lubricant cost declines that were largely offset by waste oil headwinds. Sequentially, margin rate decreased 130 basis points, which is largely driven by seasonally higher benefits expense within the labor line. As Lori mentioned for the fiscal year, we saw EBITDA growth of 20% outpacing the 17% top line growth. EBITDA margin improved as well increasing 50 basis points to 26.3% largely driven by SG&A leverage. Turning to slide 19, you’ll see additional financial results for the quarter and the year.

Adjusted EBITDA improved 24.8% to $109 million for the quarter, and 20% to $380 million for the year. We also saw strong growth in adjusted EPS with $0.39 for the quarter an 86% improvement over the prior year and $1.18 for the year, an increase of 62%. And both driven by stronger operating results higher interest income and share repurchase activity. Turning to slide 20. We have an updated look at the balance sheet and cash position. We continue to make progress on our commitment to return a substantial amount of the proceeds of the global product sale to shareholders. In fiscal 2023 we returned $1.5 billion to shareholders. During the month of October, we repurchased an additional 2.8 million shares leaving $124 million on the current $1.6 billion authorization as of October 31.

We continue to have a strong cash position and still anticipate the completion of the current authorization in the coming months. Our target leverage ratio remains 2.5 times to 3.5 times EBITDA on a rating agency adjusted basis which translates to 1.5 times to 2.5 times from a non-rating agency adjusted basis. Cash flows from operating activity increased $219 million over the prior year to $353 million. As we mentioned earlier in the year, this includes favorable changes in net working capital due to the onetime benefit of the growth in payables as a result of the new supply agreement with Global Products. This quarter, we once again saw favorable interest income from the investments of the net proceeds from the sale of Global Products earning $11 million for the quarter and bringing the total to $44 million for the year.

On slide 21, we have our guidance for fiscal year 2024. As Lori mentioned, we expect fiscal year 2024 to be an on-algorithm year. Top line revenues are expected to grow to $1.6 billion to $1.7 billion driven by expected same-store sales growth of 6% to 9%, and store additions of 140 to 170 with 55 to 70 stores from franchisees. From a profit perspective, we expect EBITDA to grow to $420 million to $460 million. As a reminder, with seasonality around customer driving patterns and the timing of our annual company meetings, we expect just over 40% of EBITDA to come in the first half of the year with the balance coming in the back half. Capital expenditures are expected to be $185 million to $215 million, which includes amounts for additional new company store growth, increased maintenance and technology costs.

We expect adjusted EPS to be $1.40 to $1.65. Now, I’ll turn it back over to Lori to wrap-up.

Lori Flees: Thanks, Mary. I want to thank our talented team of over 10,000 and our strong franchise partners for the hard work that delivered these results in fiscal year 2023. We continue to deliver best-in-class performance relative to high-growth retail peers. We’re focused on creating shareholder value with our long-term algorithm of driving the full potential of our core business, accelerating network growth with a focus on franchise and innovating to meet the needs of an evolving car park. Now I’ll turn it back over to Elizabeth to begin the Q&A session.

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

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from the line of Daniel Imbro with Stephens Inc. Please go ahead, Daniel. Your line is open.

Daniel Imbro: Yes. Hey, good morning, everybody. Thanks for taking our questions.

Lori Flees: Good morning, Daniel.

Mary Meixelsperger: Good morning, Daniel.

Daniel Imbro: Starting on the unit growth side – from unit growth side, obviously franchise openings caught up a bit. How do you feel about the pipeline in cadence for 2024? And maybe how are the conversations going with potential new franchisees and the refranchising discussion you guys talked about last quarter?

Lori Flees: Great question, Daniel. We were really pleased with the progress in Q4. Obviously, Q1 was a surprise in a disappointment based on the pushouts we saw. But given some very quick actions that we took to support our franchisees and helping them put stores up and get them running given supply chain and permitting challenges we felt really good about where we landed in Q4 as did our franchise partners. And we had an opportunity two weeks ago to actually meet with our franchise partners. We have an annual workshop with them. And in that we had a development council where we had our real estate construction leadership and the leaders of the developing franchise partners all come together and talk about FY 2024 and beyond.

And I would say there is significant excitement about the opportunities in the market both on the M&A side and on the new build side. I mean this market is still very fragmented. And while Valvoline as a brand is the market leader in this space we only have 5% market share, which means that there’s incredible white space to develop our footprint. And so in working with the franchise partners as we’ve stated we have a goal of getting to 250 new units per year developed by 2027 and 150 of those coming from our franchise partners. Now within the 150 about two-thirds will come from our existing partners. So that meeting that we had two weeks ago was really reinforcing on both sides about how we’ll work together to get to that. And so we feel good about the pipeline our franchisees we have franchisees asking for some expansion of their territories.

We have active development agreement updates underway and so we feel really strong about the guide that we have laid out for FY 2024 of 140 to 170 new units with 55 to 70 coming from franchise. And we expect the franchise piece to continue to build year-over-year from our existing players as a big component of that 150 total target.

Mary Meixelsperger: And Lori I would just comment that the comparison that you made in your earlier comments was really against Q3 where we only saw one franchise unit and so we felt really good about where Q4 came in with 26 new franchise units. I would also say, we’ve seen progress in speaking with potential new franchisees. We really only want a handful of those that are capable of really driving meaningful growth. We’ve seen the addition of a couple of smaller new franchisees and are making good progress in discussions with other franchisees as well as making some progress in talking with new franchisees on the refranchising side. So we’re making good progress. Nothing specific to report on this call but progress has been made on all fronts.

Daniel Imbro: Great. Mary and for a follow-up. Maybe just one on the guidance. It feels like a very algo type guide in line with historical ranges. Can you maybe talk about what kind of comp momentum you’re carrying into this year? And what puts and takes we get you to the high or low end from here of the comp guide? And then to clarify on EPS does that exclude any buyback activity this year? I didn’t see any clarifier in the release? Thanks.

Mary Meixelsperger: Sure. Well on the second part of your question on EPS, the EPS guide includes the completion of the $1.6 billion authorization but doesn’t include any additional share repurchase authorizations that we might do over and beyond the $1.6 billion. On the first part of your question, I feel really confident about the guide for the New Year. We’re seeing good performance coming into the first quarter. And we’re well positioned both in terms of the operating side of the business. I’m especially excited about the fact that our SG&A growth continues to be in just mid- to high single-digits while we’re seeing sales in growth in the mid-teens and we’re going to continue to see nice margin leverage coming from the delta between that sales growth and the slower growth on the SG&A side. So good confidence in guidance Lori, I don’t know if there’s anything you’d like to add to that.

Lori Flees: No. I would add the same. I think the teams are really energized around opportunities to both grow cars in our existing stores and drive ticket and our franchise partners. And we and the company operating side both feel like we’re going into FY 2024 with really strong momentum.

Mary Meixelsperger: I would also add we saw some very modest leverage from lubricant costs in the fourth quarter, while it was about 10 basis points from a sequential quarter perspective, a benefit from lower lubricant costs overall, which is the product costs net of the waste oil sales. And so I think going forward into the New Year, we’re well positioned. We take – we watch the cost carefully both on product and our largest cost in our cost of goods sold is our labor costs. And we’ve already taken some price increases to begin fiscal year 2024 but we’ll continue to watch that carefully as the year moves on if we see any necessary adjustments within the cost areas that might require some additional pricing increase. And we feel pretty good about our pricing power and ability to make those adjustments.

Daniel Imbro: All right. I leave it there. Thanks so much for the color and best of luck.

Mary Meixelsperger: Thank you.

Operator: Our next question comes from Steven Zaccone with Citi. Please go ahead Steven. Your line is open.

Steven Zaccone: Thanks. Good morning, everyone. Thank you very much for taking my question. I wanted to follow-up on the prior question around same-store sales. I was curious on the cadence of the year. How you’re thinking about that relative to the full year guidance you gave? And then, within that, how should we think about the mixture of ticket versus transaction? Do you think you’re at a point of pricing stabilizing in the industry?

Lori Flees: Great question, Steven, I think as we looked at Q4, we — and as we move into FY 2024, we felt we finished very strong at 10% same-store sales growth. As expected, September was slightly lower than the rest of the quarter, because we lapped a pricing increase that we did year-over-year. But I think, overall, we delivered the quarter as we would expect. Now as we moved into the New Year, at the October — the start of October was a little soft, but that was relative to a very strong compare year-over-year. And as we move through October, we saw the momentum year-over-year start to increase and we feel really good about where our guide is and getting — having a six- to nine-year percent same-store sales across the board, across the business for the year.

So I think the guidance is very good. There’s always — we’re working to hit as high in the guidance, as we can and that comes from initiatives that we have around continuing to focus on non-oil-change revenue presentation. We have some marketing optimization to drive new customer acquisition at a lower cap rate. And then we have a bunch of initiatives around the fleet to get higher penetration of existing accounts. And as those things start to come then obviously the same-store sales growth will be stronger. But we feel really good about where we’re coming into the year and how the teams have gone after the business so far.

Steven Zaccone: Okay. And then, just on the — just to clarify, I should ask, it more clearly. Just in terms of the cadence and also first half, second half or do you think, could the first half, be a bit above that range? Or you would just [Indiscernible] on the significant transaction?