Valvoline Inc. (NYSE:VVV) Q1 2024 Earnings Call Transcript
Valvoline Inc. (NYSE:VVV) Q1 2024 Earnings Call Transcript February 6, 2024
Valvoline Inc. misses on earnings expectations. Reported EPS is $0.2404 EPS, expectations were $0.29. 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, everyone, and welcome to the Valvoline's First Quarter 2024 Earnings Conference Call and Webcast. My name is Nadia, and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Elizabeth Russell, Senior Director Investor Relations to begin. Elizabeth, please go ahead.
Elizabeth Russell : Good morning, and welcome to Valvoline's First Quarter Fiscal 2024 Conference Call and Webcast. This morning, Valvoline released results for the first quarter ended December 31, 2023. This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our Investor Relations website at investors.valvoline.com. Please note that these results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission. On this morning's call is 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, nonoperational 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 first 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 first quarter of 2024, we saw growth at the top line across the network with system-wide store sales growing 12.3% to $723 million. Profitability was in line with our expectations with adjusted EBITDA improving 23% to $90 million and adjusted EPS improving 81% to $0.29 per share. We remain on track with our full year guidance. We started the year strong with new store additions, adding 38 for the quarter, half of which were from franchise. This brings our network total to 1,890 stores. From a capital spend standpoint, we continue to focus the majority of our capital towards growth, which we expect will continue to drive a high return on invested capital.
We also made additional progress on our commitment to return a substantial portion of the net proceeds from the sale of global products to shareholders through share repurchases with over $170 million return this quarter. Before Mary covers the details of our first quarter results, I'd like to share the progress we've made on the three pillars of our growth strategy. First, we continue to drive the full potential of our existing business. This quarter, we delivered 7.1% system-wide same-store sales growth, coming from both transaction and ticket growth. We also improved our margins through better labor management. Team retention rates are an important contributor to labor management. And in December, we had our lowest attrition rate since pre-COVID.
Higher retention allows us to minimize recruiting and training costs while also ensuring that our stores are well staffed with team members who have more tenure delivering our best-in-class customer experience and added services. In November, Valvoline Instant Oil Change was named number 11 on the Forbes 2024 Best Customer Service list. I'm proud that our Valvoline and franchise-operated stores have been recognized for the best-in-class customer service they provide to our guests every day alongside companies like Chick-fil-A, who are also known for their great service. On accelerating network growth, as I mentioned, 2024 is off to a great start with 38 store additions. We continue to see a healthy mix of ground-up builds and acquisitions contributing to our growth across the system with 21 ground-up builds and 17 acquisitions this quarter.
We have a robust pipeline and continue to work towards our goal of growing the network to more than 3,500 stores and a focus on accelerating franchise growth within that. And just this week, we celebrated our 1,000th franchise store as quality Automotive Services, or QAS a 20-year franchise partner with us opened a store in Raleigh, North Carolina. We also were recognized recently as a top franchiser in our category and number 27 overall in entrepreneurs Franchise-500. We have the best franchise partners in our category and are thrilled to share this recognition with them. On our third strategic priority, we continue to see favorable contribution in same-store sales from both non-oil-change revenue service penetration and our fleet business.
As part of our separation from the Global Products business, our fleet team has implemented a new CRM system, which will enable continued growth of new fleet customers as well as growth within our existing fleet customers' portfolios. Both the NOC R service penetration and fleet continue to have long runways of opportunity for ongoing improvement. Our team is focused on delivering fiscal year 2024 while also building the capabilities that ensure continued delivery of our long-term growth algorithm. Now I'll turn it over to Mary to walk us through our Q1 financial results.
Mary Meixelsperger : Thanks, Lori. On Slide 5, we'll take a closer look at our top line growth for the quarter. Net sales grew 12.3% to $373 million. System-wide, we saw same-store sales growth 7.1% compared to 11.9% growth for the first quarter of the prior year. You'll recall that in the first quarter of 2023, we benefited from the inflationary price increases that occurred later in fiscal year 2022. That accounts for the majority of the year-over-year deceleration in same-store sales. This quarter, both company and franchise same-store sales grew within our guidance range with 6.1% and 8% growth, respectively. The franchise side saw modestly better growth largely driven by improvements in non-oil change revenue service penetration as franchisees continue to implement many of the best practices that have been proven out in company and franchise stores over the past year.
Transaction growth contributed about 25% to the comp, driven by an increase in the customer base as well as modest contributions from miles driven. As we shared in our last earnings call, we did see some customer softness at the beginning of the quarter. Ticket contributed about 75% of the comp for the quarter. Just over half of the ticket growth came from premiumization and increased non-oil change revenue service penetration with a balance from pricing. As we mentioned in our last call, we increased pricing in early November in about one third of our stores, and we have made further adjustments already in Q2. Next, let's consider some of the other drivers of the financial results. Starting with gross rate, we saw improvement from 35.7% to 36.1% or 40 basis points year-over-year.
You may recall that in the first quarter of fiscal 2023, our gross margin was pressured by increased additive and delivery costs. As Lori mentioned, during the first quarter of this year, we saw labor leverage benefiting gross profit margin as we continue to focus on this as our largest cost of sales driver. We continue to see improvement in SG&A as a percentage of net sales with a 60 basis point decrease over prior year. This was driven by a decrease in costs from rightsizing the stand-alone organization structure and partially offset by an increase in travel. Sequentially, we saw an increase in SG&A rate of approximately 140 basis points, which was expected for the first quarter due to the seasonality of our business including the timing of our annual meetings that occur in the first quarter each year.
As a reminder, our adjusted EBITDA for the first half of the year typically is in the low 40s as a percentage of the full year. Depreciation and amortization increased by $6 million from the prior year quarter due to new stores and store-related IT assets placed in service, causing about 100 basis points of deleverage in gross margin and 100 basis points in leverage in adjusted EBITDA. Overall, adjusted EBITDA margin improved 220 basis points over the prior year. On Slide 7, we'll take an additional look at our profitability metrics. As Lori mentioned, bottom line results were consistent with our expectations with adjusted net income increasing 36% to $38.5 million, driven by an increase in operating income of just under 20%. Net interest expense also declined due to the interest income earned on the investment of the remaining proceeds from the global product sale and was effectively offset by a modest increase in the effective tax rate in the current year.
Adjusted EPS saw growth of over 80% from $0.16 to $0.29 per share. The increase in operating income contributed about 40% of the EPS growth with the balance coming from the reduction in net interest expense and the change in share count due to the substantial share repurchases over the course of the prior year. Turning to Slide 8, we'll look at the balance sheet and cash position. During the first quarter, we returned just over $170 million to shareholders via share repurchases. That leaves $40 million remaining on the current $1.6 billion authorization. We anticipate the completion of the current authorization in the near term. As we have provided before, we anticipate share repurchases being an important part of our capital allocation strategy.
We will continue to evaluate after the completion of the current authorization as we target a two and a half times to three and a half times rating agency adjusted leverage ratio. In the upcoming quarter, we expect to make an offer to repurchase the 2030 notes as required by the asset sale covenant triggered by the sale of the Global Products business. For Q1, cash flow from operating activities was $21.9 million and capital expenditures were $42.3 million resulting in negative free cash flow of $20.4 million, consistent with our expectations. CapEx was up modestly over the prior year and working capital investment increased due to the timing of payments. We continue to have a strong cash position and earned interest income of $8 million during the quarter.
I'll now turn it back over to Lori to wrap up.
Lori Flees : Thanks, Mary. We continue to deliver results consistent with our transition to a high-growth retailer, driven by growth in both our same-store sales and the addition of new stores, and we are making progress across all three of our strategic pillars. As we wrap, I want to thank our team and our franchise partners for their continued hard work to start fiscal year 2024. Now I'll turn it back over to Elizabeth to begin the Q&A.
Elizabeth Russell : Thanks, Lori. [Operator Instructions] With that, please open the line.
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