Valvoline Inc. (NYSE:VVV) Q2 2024 Earnings Call Transcript May 8, 2024
Valvoline Inc. beats earnings expectations. Reported EPS is $7.11, expectations were $0.36. VVV isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Valvoline’s 2Q 2024 Earnings Conference Call and Webcast. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I’d now like to hand over to, Elizabeth Russell, the floor is yours. Please go ahead.
Elizabeth Russell: Thank you. Good morning, and welcome to Valvoline’s Second Quarter Fiscal 2024 Conference Call and Webcast. This morning, Valvoline released results for the first quarter ended March 31, 2024. 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 Lori Flees, our CEO and President; and Mary Meixelsperger, our CFO. As shown on Slide 2, any of our remarks today that are not statements of historical fact are forward-looking statements. These forward-looking statements are based on current assumptions as of the date of this presentation, and are subject to certain risks and uncertainties that may cause actual results to differ materially from such statements.
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 in 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.
Today, Lori will begin with a look at the key highlights from our second quarter, and Mary will then cover our financial results. With that, I will turn it over to Lori.
Lori Flees: Thanks, Elizabeth, and thank you all for joining us today. For the second quarter of 2024, we saw growth at the top line across the network with system-wide store sales growing over 13% to $746 million. Profitability was strong, with adjusted EBITDA improving 21% to $105 million and adjusted EPS improving over 60% to $0.37 per share. We added 38 net new stores to the network this quarter with 14 coming from franchise. This brings our year-to-date additions to 76 in total with 33 from franchise. Also this quarter we purchased approximately 1 million shares returning just over $40 million to shareholders through share repurchases. This completes the $1.6 billion share repurchase authorization well ahead of the 18-month commitment we made at the time we closed the sale of the Global Products business.
Before Mary covers the details of the quarterly results, I’d like to share some additional insights on how these results fit into our strategy. We continue to focus on driving the full potential of the existing business. One of the key metrics to this strategic pillar is same-store sales growth. As I mentioned, this quarter we saw a 7.7% system-wide same-store sales growth. NAV will change revenue was the largest contributor to this growth across the system mostly driven by increased service penetration. The team’s focused on employee retention and best practice sharing continues to improve how we educate our guests on the additional services their vehicles need. The automotive manufacturer recommended services saw the highest improvement in service penetration in Q2, which is a testament to the training and tenure we built across our stores.
On the transaction side, after a choppy start to January, due to weather events across the country, we’ve recouped the volume in February and ended the quarter with modest improvement. Year-to-date, we have performed over 13.7 million services for customers system-wide. The other part of driving full potential is managing our cost to improve profitability. We’re pleased with our Q2 performance in this regard. Specifically, strong labor management created significant benefit in the second quarter in our company store operations which exceeded our expectations. Our ability to manage scheduling, especially during the weather events that happened in the quarter continues to improve. We also saw a benefit from improved supply chain costs and store expenses for company stores this quarter.
As we enter the back half of the year, we typically see significant labor leverage due to the increase in volume during the summer drive season. While we’ll continue to use the labor management tools that have benefited us year-to-date, we do not expect to have as strong of a year-over-year improvement in labor efficiency for the remaining half of the year. Now I’d like to touch quickly on accelerating network growth. We’re really pleased with the 38 net store additions this quarter. It brings our total network to 1,928 stores, an 8% growth over the prior year. We continue to see a balanced mix of ground-up builds and acquisitions. On the franchise side half of the net additions this quarter were ground-ups. As we look at our pipeline for the remainder of the year, we’re on track to have the store additions in line with our original guidance of 140 to 170 total additions with 55 to 70 coming from franchise.
Now I’ll turn it over to Mary, to walk us through our Q2 financial results.
Mary Meixelsperger: Thanks, Lori. On Slide 5 we’ll take a closer look at our top line growth for the quarter. Adjusted net sales grew to $389 million a 13% increase over prior year. System-wide same-store sales grew 7.7% over prior year and 21.2% on a two-year stack basis. The growth for the quarter continues to be consistent and balanced between company and franchise was 7.4% and 8% respectively this quarter. Ticket growth contributed just over 70% to the comp. As Lori shared, increased non-oil-change revenue was the largest driver of ticket growth with the balance coming from net pricing and premiumization. Transaction growth contributed about 30% to the comp. This includes a contribution of just over 1% to the overall comp mix, coming from the net impact of Leap Day the Easter holiday shift and day mix.
Slide 6 has a look at other drivers of the financial results. First, let’s look at our gross margin rate. We saw expansion from 36.8% to 37.6%, an 80 basis point improvement year-over-year. This was largely driven by leverage at the labor line coming from the improvements, as Lori discussed earlier. Sequentially, we saw a 150 basis point expansion. This was driven by labor improvements and lower supply chain costs. SG&A as a percentage of net sales, decreased modestly over prior year, while we saw a 140 basis point sequential decline. Top line growth drove additional leverage, while we also saw benefit sequentially from lower travel and meeting costs from the company meetings which are held in the first quarter each year. Depreciation and amortization increased by $5 million year-over-year, causing about 50 basis points of deleverage in the gross margin rate.
Overall, adjusted EBITDA margin improved 170 basis points over the prior year and 280 basis points sequentially. For the back half of the year, we expect to capture the SG&A leverage that comes with the seasonality of our business. However, we expect the gross margin labor leverage to moderate. On Slide 7, we’ll take a look at our profitability metrics. For Q2, adjusted net income increased 20% to $48.3 million, driven by sales growth and margin rate improvement which was partially offset by increased investments in SG&A. Sequentially adjusted net income grew 25%, largely driven by improvements in gross margin and lower SG&A as we just discussed. Adjusted EPS grew 61% from $0.23 to $0.37 per share. The increase in operating income contributed about half of the EPS growth.
The balance of the change came from lower net interest expense and the reduction in average share count of about 42 million shares, compared to the prior year. Turning to Slide 8, we’ll look at the balance sheet and cash position. During the quarter we returned just over $40 million to shareholders via share repurchases. As Lori mentioned earlier, that completes the $1.6 billion authorization. In March, we also announced a tender offer to repurchase the $600 million of 2030 senior notes. That tender offer was completed following the end of the quarter with final settlement made in April utilizing cash and cash equivalents and borrowings under the revolving line of credit. In Q2, we earned interest income of $4.6 million on the remaining invested net proceeds from the sale of the Global Products business.
This is not expected to recur in the back half of the year now that the debt tender offer is complete. This fulfills the remaining commitments we made regarding the uses of the proceeds, from the sale of the Global Products business. Turning to the cash flow statement, year-to-date cash flows from operating activities were $92.1 million, a decline of $81 million over the prior year. As a reminder, the establishment of the supply agreement with Valvoline Global Operations in the prior year drove a one-time benefit which represents most of this decline. Additionally, the implementation of our new ERP system during the quarter, delayed billings to our franchise partners creating a short-term increase in accounts receivable that we expect will normalize in the back half of the year.
As we noted in our press release, we expect to report a material weakness related to the ERP system implementation that went live on January 1. We have implemented enhanced manual controls intended to ensure the financial statements for Q2 are accurate. A plan to remediate is already underway, and we expect this to be completed by fiscal year-end. Turning to slide 9. We’ll take a look at our guidance for fiscal year 2024, which we are narrowing from our original outlook. With half the year complete, substantially in line with our expectations, we believe it is appropriate to narrow our guidance. For same-store sales growth, we expect 6% to 8% for the year, with net revenue of $1.6 billion to $1.65 billion. For adjusted EBITDA, we are narrowing the range to $430 million to $455 million.
Finally, for adjusted EPS, the updated range is $1.45 to $1.65 per share. I’ll now turn it back over to Lori to wrap up.
Lori Flees: Thanks, Mary. We delivered strong profit growth for the quarter, added 38 new stores and completed the $1.6 billion share repurchase authorization. I’d like to take a minute to thank our team and our franchise partners for their continued hard work in the first half of fiscal 2024. I also want to give a special shout out to the team in Ottawa, Tennessee. I’ve recently spent time working and training alongside that team, so I could officially achieve my topside certification. Now, I’ll turn the call back over to Elizabeth to begin Q&A.
Elizabeth Russell: Thanks, Lori. Before we start the Q&A, I want to remind everyone to limit your questions 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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