Good evening, everyone. We're going to get started here with, I think, the last session of the day. Valvoline here. Pleasure to have you guys with us today. Thanks for coming. Valvoline, for those of you that are not familiar, they are a leading automotive services platform. They offer oil changes as well as other preventative maintenance services. About 2,100 locations today. A little over half are franchised. With us today is President and CEO Lori Flees. Lori joined the company a little over three years ago. Been CEO since October of 2023. And we're fortunate to also have Kevin Willis, who is the company's new CFO. I think you've been on the job for, what, less than a month?
This is me too.
Hopefully, everyone took it easy on you today and remaining so. This is going to be an open Q&A. If anybody wants to ask a question, you can send one through the iPad, and I'll work it into the discussion. Lori, just start with you. Maybe a higher-level question. Just any observations since you've been in the CEO role for the last two years? What's special about the business? Why do you think the business wins in the marketplace?
Yeah. Thanks for having us, Mark. You know, I've been in the company for three years, and I can tell you I'm just as excited about the opportunities for growth now that I was when I joined. You know, there are three reasons that drive this. First, our industry is incredibly resilient with a lot of positive tailwinds that we can take advantage of, whether it be miles driven increasing, complexity of vehicle increasing, age of the vehicle increasing—all of those bode well for ticket and transaction. Also the shift to convenience from the consumer standpoint, which our channel is relatively low penetration. 20-25 of oil changes that are done for customers are done in our channel. A lot of upside in a very resilient market.
Valvoline also has built some amazing capabilities that I think give us the privilege and the opportunity to overdeliver relative to the industry. Our brand is almost 160 years old. It denotes quality. That is a great entry point. It is the capabilities that make our relationships with customers sticky. Our customer experience is the best in the industry, with customers rating it 4.7 stars out of 5 across our 2,078 stores. That is surveying over a million customers over the past 12 months. We also have amassed a great data set on our customers, but also on our real estate. Why does that matter? Our marketing is fueled by the customer data that we have.
It allows us to not just keep in touch with customers to ensure that they come back to our stores when they need service, but also it allows us to optimize our marketing spend. On the real estate side, we have been building real estate analytics capability, which gives us the opportunity and the ability to pick the best locations that drive the best return. Those things take time to build. It takes scale to build. We certainly take advantage of them. The third is we have only 5% market share. I commented earlier today, I look forward to when I can say 6%. On our base, we are growing very quickly, but still only 5% market share. Our stores cover only 35% at max of the population of the car park.
That is assuming that we are perfectly matched in capacity to the car park, which is not the case. A lot of white space opportunities and a group of very strong and loyal franchise partners who have been with us on average between 20 and 25 years who have upped their commitment and are driving more growth in our business, which means higher return on invested capital while we grow the network in an accelerated fashion. There is so much to be excited about in terms of the potential for growth and shareholder return.
A lot to dig in there. First, Kevin, maybe just turn it over to you. Your background, what attracted you to this role, and then what are some of the identifiable opportunities you see from a value creation perspective?
Certainly. I think probably most people know, but I spent the vast majority of my career at Ashland, which was the parent company of Valvoline for many, many years. Ashland took Valvoline public in 2016, spun it out in 2017. I have known this company for a really, really long time and have admired it as it has generated very consistent and predictable growth over the course of many years. I would say the opportunity in front of us is to do the same for many years to come. That is a huge attraction for me to be part of a very exciting growth business. It is a great business, but also just as importantly, it is a great team and a great culture. I have known that for many, many years.
The time that I spent as part of this process to join the company and the scant two and a half weeks I've been here as an employee has only reaffirmed all of that. I'll echo some of the things Lori said. We're in a space with very small market share. To our credit, this company has grown leaps and bounds since it was spun out of Ashland, which was certainly the intent at the time. As I look at the future, what's been developed internally around tools and technology and team is second to none in the industry and should help us create a platform that is much, much larger and much, much more profitable than where we are today. By the way, the profitability of the platform today is quite high.
ROIC, top-line growth, bottom-line growth, overall margin, it's really hard to argue with the metrics and where the team has taken this company. Frankly, we're at a point now from a critical mass perspective to be able to only make that better over the course of time.
Lori, you mentioned the market share, 5%, maybe approaching 6% today. How does that compare in these markets where you have density, and how does that inform your view of what the ultimate kind of opportunity set for the number of locations you might have over time looks like?
Yeah. In our more mature markets, ones we've been in for a long time, we're approaching 20% market share in those markets. When you have an average of 5% across the entire U.S., as an example, and you have some markets that are approaching 20%, you know there's a significant amount of upside. It's part of the reason why we focus on infilling markets where there is, you know, we don't have enough presence because the return when you infill a market is pretty high. You get to maturity faster on a new unit, and the margin is better because you're leveraging the marketing dollars in that market more efficiently.
Want to talk about network growth, a key pillar of the story you have laid out, what I think some might have considered aggressive or ambitious goals, going from 150 new units to about 250 by 2027, with a big focus on accelerating franchise component of that. Just how are you tracking towards those goals? What does the pipeline look like today, and how does that break down between company and franchise locations?
Yeah. When we laid out those goals, it was in Q4 of 2022, and we were growing between 40 and 50 units, new units on the franchise side, and we were around 60-65 on the company side. We felt that, again, because of our density and because market coverage was low, there was a lot of opportunity. We stated a goal that we could see a path to 3,500 plus units. In order to do that in a reasonable amount of time, we needed to increase or accelerate the new unit ramp. We were on pace on the company side to get to 100 by this year. We're definitely on pace for that. It was about accelerating the franchise growth from about 50 a year to 150 a year. We knew that ramp would come slowly and accelerate over time.
That certainly is the case, and we're ramping up relatively quickly. This year, we'll add between 160 and 185 new units between company at 100 and franchise the balance. The reality is, is the pipeline couldn't be stronger. That's been really exciting, but you've got to do it in a paced way. On the franchise side, we've always talked about two-thirds of the 150 coming from our existing franchise partners. That's where a lot of the growth that you'll see coming through this year has come from. Really, what's been exciting is the number of new partners we've added to the system, and that contributing roughly another 1/3.
You wouldn't be seeing this demand from your franchise partners if it wasn't for the unit economics of the store. Maybe just talk about the investment outlay, how a store opens up, the ramp, the maturity, and ultimately, what type of cash-on-cash return profile do these units generate for your franchise partners?
Yeah. So when we have a new unit that comes out, it typically matures between three and five years. Now, if it's an acquisition or if it's an infill market with good presence, it'll be closer to the low end of the range. If it's a market that has less presence and it's a ground-up that we're really building demand from zero, it'll be to the higher end of that range. We have been accelerating the first year through a bunch of initiatives around early marketing in an area, and that's proved really successful. The reality is, is when you step back, whether it's an acquired store or a ground-up, we look at a 30% cash-on-cash return, which from an IRR modeling on a ground lease is mid-teens, mid to higher teens. And so really attractive investment for either company to make or our franchise partners to make.
Refranchising. You have done a few transactions here over the past 12 months. The rationale behind that, how do you decide what territories to refranchise? It is more than just what you sell the store for, right? Maybe outline kind of the longer-term value creation opportunity with refranchising, how you think about that.
Yeah. I think the first important thing is to step back and say, we looked at how much more potential there was in our network and how we would get there. When we looked at markets that were already being developed by franchisees versus company, and we looked at how much development opportunity there was on company and what our capacity was from a quality of real estate and construction build-out, as well as being able to develop and deploy the team, we knew that there was more white space development opportunity than company was going to be able to do on its own. We really did want to focus on ramping up franchise partners, both existing and new, one, because of the territories they already had, but also territories that were not being developed fast enough or within the keeping of the demand from the consumer.
We were quite open that we wanted to recruit new franchisees. We did not need a lot of them. We just wanted a handful. I think we were pleasantly surprised at the number of parties that were interested. Now, when you think about refranchising stores, it is a math equation in terms of driving shareholder value from it. First of all, you have these company stores that are well-performing. When you go and buy independents, we know there is upside when we take over an independent by quite a big amount. When you have a company that is already operated by Valvoline, with the Valvoline branded, all the assets and technology, the upside in performance is relatively limited.
You're asking a party, another party, to spend on the high end of the range of what things are trading at, trading in the market, not us trading in terms of share price multiple. When you look at where you expect them to pay, they're paying at the high end, and you're also asking them to develop the market. The way that the math works out for them is the development has to create the return because they're paying a premium for the asset that they're buying to start. The return for them is all driven by the upside in a development agreement, which is exclusive rights to develop the territory.
Now, for us, the way the math works is there's a purchase price that we get at the transaction, then there's a development agreement, which also they pay for, and it sets up how many units that they're going to develop over time. Some will say, you do that math and you say, okay, that generates a return for shareholders based on the price that they're willing to pay and the number of units they're going to develop. What if they don't develop them? You're losing money because you're basically selling an asset at a discount for your valuation. How do you ensure that you get the return? That's where the incentive changes that we put in place a couple of years ago come into play.
We actually have a piece of the incentive that we offer our franchisees, which is around having a development agreement and having it be in good standing. What does that mean? The higher they commit to development over a five-year period of time, the higher incentive they get. What does that mean in terms of incentive? It is a discount on the product cost that we sell them. It affects all of the gallons of lubricant that they buy. When you have a development agreement and you space out exactly what units they have to have open over a period of time and you tie it to the incentive, there is real carrot and stick to stay on track for that. Meaning if in a quarter they do not hit their numbers, you pull away that lubricant incentive, which is meaningful for, well, EBITDA performance. The incentives are in line.
They're only going to commit to that which they really believe they can do because they take too much money off the table if they don't deliver. Yet they don't want to undercommit and leave money on the table. It creates the right tension, and it ensures that we preserve the value of the deal. We'll either get the value from the new stores that are opened, or we'll take the value from the incentive. Net net, we are protecting the value that's created for shareholders. It's part of the reason why in Q3 we talked about the development that had happened in the three transactions because our partners are ahead. These are meaningful incentives that they don't want to leave on the table, and therefore they're trying to get ahead of those, which makes our math even better. We're really excited about refranchising.
That's a great opening.
At least the ones that we've done. We don't have a lot more to do. We don't have any plans, just to be clear, for more refranchising. They came together quite quickly, which was where the surprise was.
Breeze Acquisition announced in February, 200 locations. Rationale, opportunity, confidence in closing the deal because you have received a second FTC request.
Yeah. I mean, this is an acquisition we were very excited about. In our space, there are very few operators that operate 100 units or more and do so in a high-quality way that will actually come on the market, in our view. Oil Changers was one of those. It actually traded hands between private equity partners more than three years ago. We knew that given the timing of the fund that Greenbrier had investing in this business, we knew that it was going to be trading within a certain 12-month period. It came a little earlier than we thought, but the decision around when to sell an asset and a private equity firm is not something we're an expert on, but we were happy to take part of.
The reality is, again, 200 units that are highly complementary with our network means there's a lot of synergistic value that you can get. You're looking at a private equity-owned asset that does not build the capabilities that I talked about at the beginning from a marketing, from a real estate analytics perspective, from a fleet sales perspective. These are things that they were not going to invest in to the extent that we have and scaled. There is a lot of upside in those units. In many locations, there is not a lot of open greenfield space to develop. Northern California is fairly built out. The way that you can drive share gains in that area is to start with an acquisition and then build those stores up from a volume standpoint. Super excited about the opportunity.
We're a little surprised by the second request, given we have 5% market share. The reality is, now that we've talked to the FTC, I think we have a better perspective. There's not a lot of deals that hit an HSR review for this industry. Relatively new, there was, with the change of administration, some changes in staffing. They also changed the HSR requirements such that a lot of companies put in HSR approval requests right around the time that we did. There was a peak demand, a trough in staffing, a new industry to look at. The reality is, it is the FTC's responsibility to ensure that competition is preserved in the market and consumers are not harmed. A lot of their questions are because they don't know the space and we need to educate them.
Still super excited, but our focus is to get through that FTC second review process.
Good to hear. Let's talk about same-store sales. I think the business has compounded close to 10% over the last decade. Break down kind of the drivers between transactions, share gain, cars served per day, some of the structural drivers of average ticket. I will throw one more in there, just the difference between the guidance this year of 5%-7%, and you've had this long-term algo out in the market for a few years of 6%-9%. Maybe explain the delta between the long-term algo and the guidance for this year.
Yeah. There's a lot in there. You'll have to keep me honest to make sure I cover it all. First, I'll start. When we set the long-term algorithm of 6%-9% same-store sales growth, it was in Q4 of 2022. So we're almost three years in. The economic cycle that we're in looks very different than it did back then. At the time we set it, we had delivered 11% same-store sales in that year. In the following year, it was a little over 9%. Pretty high. When you look at the mix of transaction contribution and ticket contribution, it was largely ticket-driven because there was a lot of inflationary price and cost increases that, from an industry standpoint, not just us, but the industry was passing through to the consumer.
We expected that that was going to continue for a period, but that that would start to come down to more normal inflationary levels. I think as we looked at the guide of 5%-7%, you're looking at more normal inflationary levels. I think we were hesitant to try to put in tariffs at the time. There was a lot of talk around tariff increases and what that would mean to pricing. At the time, we know a lot more around tariffs, and the impacts will be pretty minimal for us. I think part of it is when you look at the go-forward for this year, we expect to be much more balanced between transaction and ticket. When you look at transaction growth, we have maturing stores that contribute to the transaction growth.
We have fleet sales and a number of marketing initiatives that drive transaction growth. Those remain the same as what we would have talked about three years ago. There is still a lot of upside from a transaction growth perspective. On the ticket, there are three primary drivers. Again, one of those I think has changed. The others have not changed. Premium mix is a major tailwind for the industry. As new cars start to cycle into the car park, the number of them that require full synthetic lubricant is higher, and that has a higher ticket price, and therefore we benefit from that. Second would be non-oil change revenue services, which have been a really big tailwind for us, but it is one we have been working on. It has not just been given to us.
This is around making sure that every customer that comes in knows the services that are recommended for their vehicle. We've got both the equipment, trained staff, and the inventory to deliver them. A lot of the work we've done there is, I think, low-hanging fruit, but there's still more upside when you look at the cars that actually come into our stores, what services they need, and what percentage we actually do. There's still a lot of upside there, and we're looking at various investments, whether it be training, technology, equipment, things like that to unlock those. The third is net pricing. That's a combination of our posted price, but also the discounting.
We've done a lot of work from a marketing personalization, and I think transitioning our marketing data into the cloud will allow us more efficient personalization of discounting to our active customer base. It also will allow us to do things to make sure that existing customers aren't getting new customer discounts and things like that. It also allows us to make sure our operators are not misusing discounts in the stores. A number of those things. There will be price inflation. We have been making price changes. While it hasn't been as significant of a contributor to the comp, it was in the last quarter one of the more significant contributors to our same-store sales comp from the ticket standpoint, and it will continue to be. We look at pricing on a regional basis. We look at it. We benchmark it relative to competition.
We do A/B pricing tests all the time. We're looking at elasticity, and we're looking for trade-down that it might create. If you create too much of a delta between MaxLife or our mid-grade synthetic and full synthetic, you could have a 10 basis point trade-down to MaxLife. We look at all of those on a detailed basis before we make any changes to pricing, but it'll continue to be a contributor to the comp.
I think you covered it all there.
It was a lot.
You mentioned economic cycle, though, so I do want to ask, are you seeing any behavioral changes today amongst your different consumer cohorts, maybe by income quartile?
Yeah. You know, while I think it is well understood that there's a lot of uncertainty in consumer confidence, while there are indications it may be rebounding, have definitely declined over the past several months. As it relates to our consumer, I think the trade-down is on buying a new car or upgrading a new car. For us, people are wanting to maintain the vehicles that they have for longer. We do not see them trading down in terms of the type of lubricant they're using or the number of services they're adding. We see them, the interval is staying relatively constant, and the percentage of non-oil change revenue services is going up.
People are wanting to spend more to maintain the asset they have, and the trade-down is they're not trading up into a new vehicle, whether it's a newer vehicle or a brand new vehicle. I think that's perhaps more of the trade-down from a full industry perspective, but we don't see trade-down or deferral from our customers.
That's good to hear. I want to pivot to margins and specifically SG&A. The SG&A has ramped here the last few quarters. Maybe explain what investments you're making, what the cadence of that spend looks like here over the balance of the year, and then just the productivity benefits or the cost efficiencies that you expect to realize from this investment spend.
Yeah. We have increased our spending on technology. It was something that we talked about. It was something that's going to drive margin accretion over time. In our long-term algorithm, we talked about really driving margin expansion, moving from 26% to 29%. That still very much is the plan, and that'll happen over time. We do have to invest in technology. Some of that was technology to separate our products business and create, take end-of-life ERP and HRIS systems and put them on new retail-specific platforms, which will give us opportunities for more efficiency. When you look at the spend, that started in Q3 and Q4 of last year, so we'll start to lap it. When you look at spending in the first half of the year, about a third of the increase in SG&A came from those technology investments.
Some of that was new licensing costs from a new ERP and HRIS systems. Some of that was cloud computing costs and amortization of cloud computing costs. Some of it was just changing to create less hardware in our stores and move to more cloud-enabled systems. Those will have benefits over time. That was all factored into the algorithm when we talked about margin expansion, and we would still expect to see that. We do not have those kind of step-up plans contemplated to continue. We knew that there would be a step-up in this year. Unfortunately, that came when we also sold revenue from our refranchising efforts. When you look at the percentage of SG&A, it had the double whammy effect on that.
That's right. Is it reasonable to assume you get back to leveraging SG&A on this growth, low double-digit growth rate next year?
Absolutely. We do not anticipate and never did over the five years that we would need to grow SG&A at the same rate of sales. I mean, that would be a lot of SG&A spend growth. Although this year we knew, given the refranchising, year-over-year growth would be muted, and we knew we needed to replace ERP and HRIS that were going end-of-life. Those things sort of came at the same time, which created the reset year. As we move forward and we start to lap some of those increases and we lap the refranchising, we fully expect to be back on the algorithm we talked about, which is growing profit faster than sales.
That's good to hear. Question from the audience back on the NOCR. Just the attach rate of non-oil change services, how variable that is across the chain, how much more additional room do you have to take that attach rate higher?
Yeah. What's great is we've been quartiling the stores since I got here, and there has been sort of a three to four X difference between our low quartile stores and our high quartile stores. What's interesting is our highest quartile stores are typically the highest for OCPD. It's not like they have more time to do the services. They're just good at everything. It also isn't tied to demographic information. Really, it's around operational execution, but there is sort of a three X. If you could get everybody to your top quartile, it would be quite a massive improvement. Do we think, I mean, retail is retail. You'll never get everybody to 100% performance. You'll always have differences. The great thing is our top quartile stores have also improved. They keep resetting the bar to what's possible, and the lower end keeps improving.
There's still significant upside.
Okay. We have another question here around just how you're positioning the business for evolving vehicle maintenance needs and the increased proliferation of either hybrids or fully electric vehicles.
Sure. I mean, if you asked me three years ago, I would have thought we would be further along in the journey of the market to EV. Certainly, with the administration change and some of the incentives around EV purchases likely going away, it has definitely slowed the car park evolution. The way we look at it is consumers are always going to go to the best technology choices for the dollars that they want to spend. We know that the car park will evolve at some point. We think it'll push out beyond five to ten years, but we still think there'll be evolution. What isn't going to change is the customer's desire to continue to maintain a vehicle or an asset unless the assets become significantly less costly. People are going to want to maintain the asset's life for as long as they can.
They're going to want to do maintenance. Two, they are not going to want to do it in an inconvenient way. They're still going to want to do it in a quick, easy way with someone that they trust. Third, I think it's very difficult to see how the dealer channel, even with new EV OEMs, are going to be able to change their model to do it in as convenient a way as what we do at Valvoline. For us, it's not about whether, it's about when, and it's about how we evolve our menu to serve the needs of the technology that the consumers choose.
All right. We'll wrap it there. Please join me in thanking the Valvoline team.
Thank you.
Thank you.