But I'm getting there. All right. Good afternoon, everyone. Thank you for joining us at the Goldman Sachs Global Consumer and Retail Conference. My name is Mark Jordan. I'm an analyst here at Goldman Sachs, and it's my pleasure to moderate our fireside chat and introduce to you Valvoline Inc. We have with us today, Lori Flees, CEO and Director, and Kevin Willis, CFO. Lori and Kevin, thank you so much for joining us today.
Thanks for having us.
Thank you.
I think a good place to start might be to provide some background for anyone in the audience who's not familiar with the Valvoline story. Valvoline is a leading provider of automotive services, specializing in quick lube segment, so that's quick and easy stay-in-your-car oil changes, but they also do ancillary services. The platform is nearly 2,500 locations and roughly half of those are franchised. With that, I think a good place to start off might be the nature of demand. If we think about the quick lube market and Valvoline's position in it in particular, there's a couple of secular tailwinds you guys benefit from. A shift towards convenience, of course. I, myself, and everyone here values their time, and what you do is you cut time out of a necessary service for a lot of people, vehicle owners.
That is a tailwind, but then you also have an aging vehicle population and just natural tailwinds from a mix shift to premium oils. If you talk about how that is impacting the quick lube space, the trajectory as you look forward, and I think about the growth of the market.
Yeah, sure. I think you have covered a lot of the key ingredients that are tailwinds for our business, but Valvoline provides a service that is really considered non-discretionary. As people own a vehicle and want to maintain that vehicle, and the value of that vehicle for as long as they can, they need to do preventative maintenance, and that is exactly what we provide. There are a lot of tailwinds that are things that we benefit from. Cars are getting older. When a car gets older, it needs more preventative maintenance. Two, the drive for convenience. I always talk about if you told my teenage self working at Taco Bell that people would pay three times as much to have tacos delivered to their home, I never would believe it.
The drive to trade money for time is growing, and that is exactly what we give our customers back, is time, by making it quick, easy, and trusted. I think the business is still highly fragmented, and while we are the category leader, we have around 6% market share, so so much more upside. Also, our stores are approximate to only 40% of the car park population. So still so much inherent growth to grow our business, but still benefit from the headwinds that you talked about.
Excellent. I think one thing I always think about and frame when talking to people who are new to the story, there is a lot of different outlets someone can go to get an oil change, from dealers to independent repair garages, to tire installers, to the quick lube channel. I think obviously the convenience and quick, easy, and trusted service, some things you highlighted. What else has attracted someone to the quick lube channel and to Valvoline in particular? Because obviously the name brand recognition is very important for people.
Valvoline, the origins are 160 years old. It is denoted for quality. For us, every technician starts with 270 hours of training, and that's regardless of it's a company or a franchise-operated location. We use a SuperPro process and technology which ensures a very consistent process and service delivery every time. An oil change comes with an 18-point safety check, filling tires, checking lights, wipers, filters. These are things that customers come to rely on, and many times customers want eyes on their vehicle before they start a holiday drive or a busy work schedule. What pulls people is really saving time, but also that consistent experience that they trust with one of the biggest assets on their family's balance sheet. 80% of people use a vehicle to get to work. A vehicle is essential to an American household.
Excellent. When I look at the framework for the broader market and just the growth going forward, it lends to me that there's tremendous white space opportunity. I think about the company's stated target of 3,500 locations, your target of reaching, I think it's 2,900 by the end of 2028. If you think about there, I think the cadence you're expecting to open is about 250 stores per year. That implies somewhere in the early 2030s, you're getting to your white space potential. Do you see the opportunity, you mentioned you're only in 40% of the car park now, to continue expanding that white space potential?
I'll take that one. First I'd like to give a bit of context around the 3,500. That number was first mentioned around four years ago. At that time, the company had about 1,750 stores, and so that implied a doubling of the store population over the course of time. Since that time, we've added a significant number of units. We're just under 2,500 right now and moving towards the 3,500 mark. When we talk about the potential for the network, we really think of it as 3,500+. 3,500 is a milestone, but it's not an endpoint, and we're marching towards that milestone with an eye towards continuing to grow. For us, it's all about the profitability and the return on invested capital that is brought from adding a new unit, acquiring an existing unit, and our franchise partners think the same way.
It's not been that long ago that our larger franchise partners signed new development agreements and committed over $1 billion of capital to the store network and their own businesses. These are well-capitalized, very long-term franchise partners who have frankly reaped the benefit of being a part of this brand and a part of the network and want to continue to do so because they see the returns, they see the growth opportunities. Really, we're continuing to be on that journey, and there's still, as you said, a lot of white space. Lori gave you the statistics on that. We just see a ton of opportunity going forward. While I don't want to overplay it or overstate it, there are also some opportunities for, at least potentially, mobile adjacencies.
We're doing some test and learn in that space right now, ways to broaden our scope and our reach of potential customers through a mobile solution. Again, we're not there, but it's something that we're testing right now in a couple of markets.
It's interesting you bring that up because the mobile service, I think, is the ultimate shift to convenience because then they don't have to come to your store, you come to them.
Right.
I think the company acquired is largely the brakes. Are you limited in the services? Because obviously you can do an oil change remote, you can do brakes and whatnot, but how does that work? Does it limit the menu that you can do?
I don't think so. We are in early stages, as Kevin said, but there's a number of maintenance items that we can provide mobily. We have to make sure from a safety and a training and a consistency standpoint, it's the same or better experience than what they're getting in the store. Part of it is making sure that you upfit the vehicle that's coming to do the service with all of the requisite equipment in order to perform that in a very high-quality way.
Excellent. Yeah, it's a very interesting channel. I see a lot of that on YouTube and Instagram of the mobile mechanics, and I'm always interested by that. When we shift about some of the KPIs for the business, historically, car counts have been a big focus. I think more recently, as you're thinking about densifying markets, maybe car counts is less of the focus and you're looking more at the return on capital
Right
or invested capital in those markets. How should we think about that? I guess, just as a framework, what does your mature stores do on average for oil changes per day?
Sure. I'll take that one. Our mature stores across the network are north of 50 cars per day, which is significantly higher than, I would say, the quick lube averages across the entire space. You're right, we're very focused on return on invested capital. When we look at a new unit, whether it's a ground-up unit or a potential acquisition, we run that, and we help our franchise partners run those through very consistent filters to make sure that we're making the best decision from a location perspective, from a cost perspective, and ultimately from a returns perspective. It has to fit that lens before we'll move forward with a new location or an acquisition. That's very important. We've been focusing some on oil change per bay. We're optimizing the mix between 2 and 3-bay stores that we build.
That's part of our overall CapEx optimization approach, and so ensuring that we get that right number of oil changes per bay as a store matures from when we either buy it or build it is also really important. New store adds continue to be a tailwind. We've added a lot of new stores, Breeze being a more recent development in that. These stores are immature, and they climb a maturity curve over the course of four-five years. That maturity curve creates a tailwind for us from a transaction perspective, from a margin perspective, and obviously, it'll grow car counts, but it improves profitability along the way, which is really important. In terms of some of the support for that, we've talked a bit about a national ad fund, which is a new thing for us.
We're still very young in that process, but now that we have achieved that 2,500-ish store footprint, it's efficient to do that. We're moving down that path with company and franchise. Our marketing has become much more sophisticated. It's not one size fits all. It tends to be tailored and targeted. All of these things help support transaction growth across the network. It's the right offer at the right time for the right customer in the right place. That's super important to growing our transaction footprint, both frankly in immature stores as well as our mature stores, which also will continue to grow.
Excellent. That Valvoline's been reminding me that I have some oil changes I need to get done on my vehicle, so I'm going to have to go when I get back home. The next one is customer retention, right? That's an important factor, especially when, as we discussed previously, there's a lot of outlets that one can go to. As we think about the new customer you're acquiring, where are they coming from? How old is the vehicle they're bringing to you? On average, how long do they stay a customer with that same vehicle?
Yeah. I think the point around customer retention is so critical to our model and something that I think we are very proud of. Within our business, over 80% of the customers we see are guests that are returning to have service with us again. When we look at where we get new customers from, it really comes from the broader car park. When you look at where the broader population gets their oil changed today, about 70%-75% of them are still going to a dealer or a general automotive service provider. When we open a new store or when we go out and acquire new customers in existing stores, 70%-75% of them are coming from those channels. We do also take from the quick lube market, but it tends to be less of a factor or a minority of the factor.
When we do acquire a customer, it looks like the average customer that lives in that car park vicinity. The majority of our customers come from within 10 minutes of one of our locations. You can look at the car park in that location, and the customers we acquire look like the population and demographic of the market.
Excellent. Okay, shifting on to some of the ticket drivers you have. We touched upon it previously, but premiumization is just a long-term tailwind, and it is both the shift from conventional to premium, but also within premium from synthetic blend to fully synthetic. Can you talk about where your premium mix is today and what kind of opportunities you see going forward? I think previously you had mentioned the potential somewhere in the near future to come out with a higher premium-
Correct
option. Just the opportunities that exist there to continue driving tickets.
Sure. Today, we have about 80% of our oil changes are what we call premium, and that is a combination of full synthetic and synthetic blend, roughly split equally. The tailwinds that come are from OEMs as they come out with their new vehicles, creating vehicles where they require a full synthetic lubricant. When you look at our penetration of full synthetic, it is higher than what the car park would require. That is because the age of the vehicle is getting such that high mileage vehicles, customers are really trying to take care of those vehicles to maximize or extend the life as much as possible.
When a customer has a vehicle that is getting higher in mileage, even some that are doing it preemptively because they just want to give more TLC and maintain their vehicle at a higher level, they will upgrade from our All-Climate lowest tier oil change, which is still a very high-quality lubricant, to a synthetic blend or to a premium synthetic. When you look at the car park evolution and the number of cars that are being introduced today or sold today that require full synthetic versus the cars that are 20 years old or whatever that are retired, it creates a tailwind into the full synthetic of about 3% every year. Not all of those are coming from conventional because some of those customers had already been trading up.
That is a big tailwind that we are continuing to see and that we will continue to see. As I mentioned, if half of our 80% premium are full synthetic, we still have quite a bit of penetration left to go. Then we are looking at the next horizon of premiumness. Our supplier has come out with a product that they advertise quite heavily during the FIFA World Cup, which is Restore & Protect, which is a premium full synthetic. We have customers who ask for it today, and we know that, again, customers are doing all they can to preserve the value of an asset. They are investing, and it is not that much more of an investment on an annual basis to trade up into a premium full synthetic. That is something that we see on the horizon that we have not fully contemplated in our numbers.
We are currently talking and testing some things to make sure that our teams can present the benefits of it. That is the most important thing, is that we build trust with the consumer by offering them choice, by educating the customers, and then letting them decide what they want to do with their vehicle.
It always strikes me as worth repeating how sticky this behavior is. When somebody goes up to premium, they generally never go back down, even if the car doesn't require it.
Very rarely do they trade back down.
That's usually due to the presentation of it, right? You have a higher mileage vehicle, second-largest asset most families own, so you want to maintain it, and even if the ticket goes up, it's an infrequent purchase, so people will accept the higher prices.
That's right.
Excellent. Another ticket driver is, of course, the non-oil change revenue. For anyone in the audience who's not familiar, Valvoline provides other services, such as changing of batteries, cabin and engine air filters, something of the sort. The attachment rates there have been really great. If we look at your top-performing stores, what are they doing differently from a training or a presentation perspective that's getting that attachment rate so high, and what can we learn from them?
Sure. I think execution consistency is key. Every technician gets the same initial 270 hours of training. The SuperPro process lives in every store. It lives in our point-of-sale system across the entire network. The execution of that process in a very consistent way is what separates out our top stores from stores that maybe aspire to be better. As you look at that, it's definitely about doing a consistent thing every time, performing that 18-point safety check every time, even if you're busy. Showing the guest the part, the cabin air filter, the result of the battery test, the engine air filter, so that they can become educated about the condition of those and then make that educated choice around that. Again, doing that the same way every time.
In a way that's not a sales pitch, but a, "Here's an opportunity to better maintain your vehicle if you want to do so." I think also, another tier is explaining the OEM services. We do offer certain services that the OEM recommends either every certain number of miles or every certain amount of time that passes. It's being able to explain those services to the guest, show them the benefit of those, and also show them exactly and specifically what their OEM recommends and when, so that they can be an educated consumer and make the choice. Those all come into play. It's a very intentional process. I think part of what we do really well is the training, staffing consistency, which is also really important, and product availability. So don't present a service or a product to a guest that you don't actually have in stock.
That's not a good look. Being able to do those things and we often get asked about, well, would you add other additional services? Things that we can do in the context of an oil change, in the context of providing quick, easy, trusted service to the guest that's very consistent, very repeatable, builds a lot of trust. Those are the things that we want to do. It's not about adding services for the sake of adding services. We don't want to do that.
Excellent. The presentation is very real and very tangible. When someone brings out your dirty filter, and you see how dirty it is, it's a very real reason for them to purchase it. I've had that happen.
The reality is the difference between great and okay is, they show you an engineer filter side by side with a clean one.
Yeah.
When they don't show it to you next to a clean one, you're less likely to know how dirty that is.
Right.
Second, they pull a cabin air filter every time. The third one is the retention of our team and their ability to understand what the OEM services are and be able to explain those very easily, but in a non-pressured way to customers. That's the difference between first quartile and average.
Got it. Okay. Switching to acquisitions. Breeze Autocare, big acquisition you did. We're going through the integration phase right now. Can you talk about how many stores have been converted to the Valvoline platform right now, and just how those stores have been performing relative to expectations?
Yeah, Breeze Autocare, while it makes up less than 10% of our stores and our sales, it was the largest acquisition that the company has done in its history. We couldn't be more pleased with the progress that we've made so far. The performance of the Breeze business on all financial metrics has been at or better than what we would have expected. I think when you buy something that's large, you're hoping for the best, but you always assume that something will go awry. At the end of Q3, we talked about the fact that we had converted 12 of the 160 + stores in the portfolio. We really focused on stores that were stranded after the FTC required divestitures, because that allows us to gain SG&A advantage, and that was always part of the plan.
When we look at the performance of those stores relative to what we would have expected, they're actually performing better. I say better on a transaction basis. That's the real piece of it. Ticket, we typically always can do better, and they have been performing very well, but transactions usually the test of how much you want to ramp. As you'll remember, the thesis on the Breeze stores is the value comes by taking their average revenue per sales of $1.1 million up to our average of between $1.7 million or up. Transaction's a big drive to get that. So far so good, but really early days. We have seen some softness in markets that we didn't convert where we've had to raise prices. The elasticity that we're seeing with Breeze is probably a little bit higher than with the Valvoline brands.
I think we've been really pleased on some early delivery of SG&A savings that we had planned. Overall, I think, we couldn't be more pleased with the performance. I would say on the conversions, we've really been trying to figure out what's the difference. We do acquisitions every year, about 30 - 35 new units on the company side come from acquisitions. The difference in the Breeze piece is we did wait a while to start the conversion so we could really engage the team and let them understand and appreciate our culture. I think when we did that, as we've converted stores, we have not had the attrition that we typically see when we close and convert a store right away. I don't know if we'll take that approach to independent one or two store operators.
But for us, the approach we've taken with Breeze has been really positive, so.
Excellent. Yeah, I'm looking forward to see the platform there. I think it's a great opportunity. I think switching gears a little bit, we'll talk about some of the more macro themes. I'm sure it's been a topic of much discussion in your investor meetings today, and I think it's top of mind for people, and definitely very timely. But, the oil supply and pricing environment, can you talk about maybe the state of supply environment right now for finished lubricants? How is supply chains adapting to some of the shortages? Then maybe, at least in my mind, Valvoline sits in a different position than other players because you have such strong relationships with your suppliers. So maybe can you talk about that a little bit as well?
Sure. I think everybody's very aware at this point that just due to the length of the conflict, about 20% of the world's oil supply used to go through the Strait of Hormuz, and it's much less than that today. As we look at how that impacts us, the primary impact that we're seeing is really around Group III base oil. Some of that is due to the fact that there are some Group IIIs manufactured in the Middle East that aren't moving very much. Some, but not much. A lot of it, though, is related to that choke point in getting crude to Asia, primarily South Korea, where a lot of Group III base oil is made. There's also been some trade-offs around things like jet fuel and diesel fuel that have impacted supply as well, just the refiners maximizing their own mix.
All of that said, Group III, just as a reminder, is the primary ingredient for full synthetic motor oil. As we look at that, though, today, nothing has changed from our Q3 earnings call. We do not have any supply constraints today, and we do not see any coming in the near term. You mentioned it, we have a strategic relationship with our supplier. At one point, we were part of the same company. It has been several years since that has been the case, but they are now part of the Aramco family. The fact that they have been in the motor oil production business for so long, lubricant business for so long, means that they have established networks that few in the industry can compare to.
I think a misconception is that because Valvoline Global Operations is part of Aramco, they are obligated to buy all their product from them. That is not true at all. It was not true before the transaction, it is not true now. They are out there finding the best product to do what needs to be done to supply their customers, of which obviously we are a very large one. That does help us. Our scope and our scale, the strategic supplier relationship, all good. We are singularly focused on making sure that every guest gets the product and the service that they need when they come through one of our bays. Nothing has changed around that. The execution at the store level is still at a very high level, and at this point, the supply piece, it is a distraction, I think, for the world, certainly for our market.
We have a lot of confidence that, again, for now and for the near term, we will have security of supply for our customers.
Excellent. As we think about supply constraints, obviously cost and price comes into the question here. Can you talk about the cost increases that you have experienced year to date? I think as we sit here today, maybe it is fair to assume that we might see some cost increases going forward as well. Lori, I think on the last quarter's conference call, you mentioned that even if everything were to change today, and we go back to a pre-conflict sort of environment for supply, the supply chain for Group III would still take a long time to get up and running. How could that impact the cost environment as well?
I will cover the second part and then come back to cost. Let us assume that the strait opened today. That does not mean that immediately we are back in business with full supply chain and costs starting to come down. Given the restart that would have to happen and the length of time to get things through the Strait of Hormuz to the next step in the supply chain cycle, you are looking at four-six months in order for supply to get back into normal bounds. That is assuming that there is not any major infrastructure damage, which there has been to some suppliers outside of our scope or outside of the ones that we work with that will take longer to mediate.
You are looking at four-six months once the strait is fully open for Group III base oils to be back flowing in the way that they were pre-conflict. That will take some time. What have we seen from a cost standpoint? If you take 20% of the global supply out and you further constrain the Group III, there are a few things that have happened. One, people start to look at ways to get other substitutes, not from Korea on Group III. There are several. Re-refined oil is a new one that is growing. You also look to make trades and formulations to trade off Group III with Group II such that demand is lower. At the end of the day, prices rise, and that is exactly what we have seen.
We talked in Q3 about how we had started to see some of the cost increases, and that we expected that the peak to hit us in Q4, the peak that we could see at that time would be 60% higher than pre-conflict. I would say we saw about a quarter, a third of that in Q3, and we started to see that continue to grow. We expect by the time we are finished with Q4, we will see the full 60%. Then we have to think about what is going to come in Q1 as the continued constraints remain. The way that we are looking at it is we have to look at it in two pieces. One is on the company store side, how do we pass or what do we pass through to the consumer?
On the call, we talked about that 60% increase in finished lubricant as it relates to our ticket, because lubricant is a piece of the cost, but not the total. You are looking at a $5 - $7 per oil change cost impact that we have taken already with consumers on the company side. We actually did that earlier than our historical practice has been. Part of that is because since 2022, when I think many who followed us would have said we were late to make pricing changes, we put in some capabilities and some process, and we, I think, are more fully ahead of how do we make pricing changes when we see the opportunity to do so, not just the necessity, but the opportunity.
As we saw costs starting to forecast to be up, we knew what actions we would take, and we took them, and we end up being a little ahead of it. We do not anticipate and have not needed to make any other pricing changes for the quarter. We are evaluating based on where costs might go in Q1 and beyond, what our options would be. So we are, I think, continuing to stay ahead of it, but that is on the company side. On the franchise side, we pass and have had a history of passing costs through, up and down on a penny basis to our franchisees. We had some sort of historical operating practices around, depending on the magnitude of the cost increases or decreases, there was a timing, sort of expectations of when those would pass.
The reality is the costs were moving so much more quickly in Q3 and moving more into Q4 that we had to engage our franchise partners to talk about changing our normal mode of operating. We normally follow the base oil index. There is a disconnect between actual cost and the base oil index based on where the spot market is and where the market overall is. In order to ensure we were passing costs through, again, on a penny basis, we needed to change that practice. So, A, we have been sharing more of the forecast with them so they can incorporate it into their planning for pricing changes and/or any cost investment that they may want to delay. That allows us to shorten that gap or that timeframe.
That is a change in practice that we were in the process of making as we finished our Q3 call, and I think that will serve us very well. It does not mean that the timing will always be lined up day for day. As costs go up, and if they go up faster than we forecasted, there might be a lag, but we have been able to get that time lag shorter with the support of our franchise partners and given them more visibility of what is coming so they can plan for it.
Perfect.
I think what I would add to that is while we will see impact because of that process change that we have been working with our franchise partners on in Q4, that was included in our full-year outlook that we talked about on the Q3 call. We feel good about where we are on a go-forward basis post Q4 in terms of that pass-through. As Lori indicated, there is always going to be the potential for some timing differences just because of process and updating prices in the systems and all of that. But the objective is to get that to be as tight as possible, as quickly as possible.
Excellent. As we approach time here, we have four questions we are asking every company at the conference. They are supposed to be kind of quick hits, yes, no, maybe, same, better, or worse. Feel free to opine if you want, but the first one is on the health of the consumer. As you think about the second half of the year relative to the recent results, do you expect them to do the same, better, or worse? I think maybe calendar year might be better than fiscal year for you guys since you are in the fourth quarter.
Yeah, what I would say is, when we look at the health of the consumer, we would expect it to be the same, maybe slightly worse. Partly we base that on some of the softness we started to see in Q3 with the consumer and our growth, and we saw that continue as we've continued into the fourth quarter. Some of that is, I think, driven by macro concerns. Gas prices are up, miles driven are down. That affects transaction timing, but also people being stretched. So preventative maintenance is something they know they need, but the ability for us to acquire new customers is getting tougher in this environment. Overall, we see a lot of resiliency with our customers, but there is some softness that we're seeing.
So we would say the same, maybe slightly worse as we look forward through the rest of the calendar year.
Excellent. Then pricing. I think I know the answer to that one.
Higher.
Higher.
Yes. Then last one I'll ask you is AI. Do you expect any efficiencies in AI in 2027 versus 2026?
We've had a lot of efficiencies already using AI. We are not an industry that is going to be transformed with AI, but there is efficiency in software development and marketing, and then in just more in the SG&A side. Will it be a step change improvement? No, but we'll continue to get efficiencies using generative AI and just generally.
Excellent. Well, Lori and Kevin, thank you very much. I appreciate it.
Thank you.