Valvoline Inc. Price & Performance (VVV)

Badland assumes no obligation to update any forward looking statements unless required by law. In this presentation, and in our remarks, 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 GAAP to adjusted to non GAAP results and a discussion of management's use of non GAAP and key business measures. Included in the presentation of Dendrix.

The information provided is used by our management and may not be comparable to similar measures used by other companies. With that, I will turn it over to Lori. Thanks, Elizabeth.

And thank you all for joining us today. Let's start with a look at our highlights on Slide 3. We delivered financial results substantially in line with our expectations for the quarter. Our system wide store sales grew 14 percent $8.20,000,000 dollars And our same store sales growth for the quarter was 8%. Net sales increased 11% to $4.14,000,000 dollars and adjusted EBITDA increased 14% to $103,000,000 We had a good quarter of new store additions delivering 35 net new stores across the network. In addition, we closed our recently announced refranchising effort in Central And West Texas transferring 39 stores to a new franchise partner. This refranchising transaction along with the 2 we completed in give us great momentum to develop these markets significantly faster than we otherwise would have while delivering long term value to shareholders. Now let's turn to an update on our strategic priorities. We remain focused on 3 priorities: driving full potential in existing business, accelerating network growth and targeting customer and service expansion. Actions across these 3 areas will enable us to deliver strong financial growth and best in class returns. The highlight of this past quarter was our 2 annual meetings where we brought together our company operations team and our franchise partners.

These events are a time for us to celebrate the progress we've made, align our focus and provide training that can be taken back to the stores. The theme for both meetings this year was elevate. As we look to elevate our performance in all aspects of the business. At our company meeting, which we call our family reunion, we hosted our service center managers from across The United States and Canada. With our field operations management, and key support team members. We recognize team members who have twenty or more years with the company, we celebrated our first company store to surpass $5,000,000 in annual sales, and we recognized the stores and markets with the highest customer satisfaction scores and the highest employee retention. The most impactful training sessions were focused on customer experience, and employee engagement, key drivers of successful business performance and growth. [indiscernible] On customer experience, we continue to focus on how to educate our guests on the services their vehicles require. Without making a heavy sales push. Our session called BoomTown was focused on behaviors opportunities, ownership and mindset. To grow the ticket in the right way. The training needs to be memorable and fun.

So the information can make its way back into our stores. Our investment in this training has a huge payback as seen by the increase in our non oil change services growth. In non oil change revenue was again a significant contributor to ticket growth, and we see a continued runway as our teams focus on improving the presentation of these services to educate guests. On employee engagement, we provided our store managers the tools to attract, [indiscernible] and develop their teams. And ultimately retain them. We have seen our retention rates improve significantly post COVID, With the trailing twelve month retention once again, decreasing as we close the Our effective training which starts with a two seventy hour program for all technicians, helps employees feel confident in delivering our services to guests. And we also see stronger performance in vehicles served per day and non oil change revenue service penetration in the stores, At our annual franchise workshop, we were joined by partners representing over 90% of our franchise stores. Including all of the partners who've recently joined our network. The engagement of our franchise community has never been higher. A significant focus of our time with franchisees around development, as we work towards our target of a 3500 plus store network.

With the development commitments that all of our large franchisees have made, we were focused on how to continue to build a robust pipeline. We spent time on our real estate analytics tools and how they could be further leveraged to assess new build locations. And we discussed how to convert the pipeline of acquisition targets. Our business development team has been successful engaging with nearly 4000 independent quick lube operators, to identify attractive acquisition targets.

Those targets span both company and franchise geographies. So our focus was on how to transfer and convert the opportunities within the franchise territories. But before we move on to look at our financials, I'd like to congratulate our franchise team on the recent recognitions our brand received from both entrepreneur and franchise [indiscernible] We were recognized as the leading automotive services retailer and number 24 overall on the Entrepreneur Franchise 500 list for 2025. This recognition is a testament to the quality of our operating model, and our franchise partners. Getting to spend time with our teams was a great way to kick off I'd like to thank our team members and franchise partners for their work to start this fiscal year strong. The talent and capabilities of both our franchisees and team members truly differentiates our brand and provides a meaningful competitive advantage for Valvoline. Now I'll turn it over to Mary to look at our financial results. Thanks, Laurie. On Slide 5, let's take a look at the top line performance for For the net sales grew to $4.14,000,000 an 11% increase over the prior year. System wide same store sales grew 815.2% on a two year stack.

With company stores up 8.2% and franchise stores up 7.8%. As a reminder, we have updated our approach to determining same store sales beginning in The amounts shown on the slide represent the updated approach for both the current quarter and the prior year's comparison. We are pleased to see a return to a more balanced contribution from ticket and transaction this quarter. With transaction growth contributing nearly 50% of the comp. We saw modest benefit in the quarter from weather that impacted the September, in the Southeast pushing some volume into Non oil change revenue service to the ticket component of same store sales. Next quarter, we will lap the start of non oil change revenue initiatives and some pricing actions, As a result, we expect to see some deceleration in the same store sales comp that will remain for the balance of the year. In addition, in the we will be comping up against the benefit we saw from Leap Day in the prior year. Turning to the next slide, we'll take a look at the financial drivers for the quarter. [indiscernible] Gross margin rate increased 80 basis points year over year to 36.9%. Increased depreciation expense primarily from new stores, offset these benefits by about 30 basis points.

SG and A as a percentage of sales increased 40 basis points to 19.6% year over year. As we mentioned in we are continuing to invest in technology, which is the main driver of the deleverage in SG and A for the quarter. The timing of the annual meetings and the typical seasonality of sales drove the sequential change. Our adjusted EBITDA margin of 24.8% is a 60 basis point improvement over prior year. On Slide 7, we'll take a look at overall profitability. During the quarter, adjusted net income increased 9% to 42,000,000 driven by adjusted operating income growth of 14%. This was partially offset by higher net interest expense of $4,000,000 As you may recall, the remaining proceeds from the global product sale that were used to On a GAAP basis, 14% to $103,000,000 largely from top line growth and improvements in gross profit. Partially offset by additional SG and A over the prior year. We saw modest impacts from the three refranchising from refranchising in the remainder of the year given the early December closing of the most recent transaction. Adjusted EPS increased 10% to $0.32 per share, primarily from the growth in earnings, partially offset by the increase in net interest expense.

Turning to Slide eight, we'll look at the balance sheet and cash position. We ended the quarter with just over $1,000,000,000 of net debt with a leverage ratio of 3.3 times on a rating agency adjusted basis. Cash flows from operating activities were $41,000,000 an increase of $20,000,000 over the prior year. Free cash flow was negative 12,000,000 an improvement of $8,000,000 over the prior year driven by an improvement in cash from operations, Share repurchase totaled $39,000,000 for the quarter. As we look at the remainder of the year, we remain confident in our guidance with full year same store sales comp of 5% to [indiscernible] net store additions of 160 to 185 units, and adjusted EBITDA of $450,000,000 to $470,000,000 Consistent with prior years, we expect to see 40% to 45% of adjusted EBITDA in the front half of the year with 55% to 60% coming in the back half to the seasonality of the business. I will now turn it back to Laurie for some closing remarks. I'm pleased with our results for the first quarter. The fundamentals of our business remain strong. Allowing us to consistently deliver compelling growth as we demonstrate the attractiveness of our customer value proposition and the robustness of our business model.

Accelerating network growth enables us to drive market share gains and capture the benefits of scale. Completing the three refranchising transactions and seeing the momentum that our new franchise partners are adding, We are confident that we're on track to achieve our new store growth goals. [indiscernible] We're well positioned to deliver strong and durable growth in fiscal year twenty twenty five and I'm happy with our start of the year. With that, I'll turn it back over to Elizabeth.

Thanks, Laurie. Before we start the Q and A, I want to remind everyone to limit your question to one and a follow-up. We can get to everyone on the line. With that, can the operator please open the line. We have a question from Steve Chmench of RBC Capital Markets. Wanted to start off on same store sales. So So you guys have made clear that your compares on pricing and on oil change revenue are going to be a little bit tougher as we move into 2Q. Just any initial thoughts on what you're seeing quarter to date and how you expect the quarter to [indiscernible] Yes, Steve. Thanks for the question. We've continued to see good momentum at the beginning of the quarter, although it's been a little choppy because some of the weather that we've seen, but consistent with Our history when we see difficult weather in one week, we typically get that volume back in the following week.

And the month of January with some of the choppiness and weather, especially down in the South, We've seen good recovery subsequent to the weather and encouragingly, we're continuing to see strong transaction growth consistent with what we saw in the first quarter as well. As we're moving into the quarter. You're right, we are lapping some key initiatives pricing and non oil change. Initiatives that we started in the second quarter of last year. So we expect to see some deceleration there. And then the other key thing I would call out for Q2 is the impact of Leap Day. We expect the impact of LEAPT Day to have a negative 120 basis point impact on our comp for the quarter. So it's a pretty big impact for the quarter for LEAPT Day. The year less so, the full year impact is more like 30 basis points. But we are running up against that leap day headwind as well for the second quarter.

And Steve, I'll just comment on NOCR. While we're lapping a bunch of initiatives, we We doubled down in our family reunion to talk about process. Value proposition is about quick easy trusted and we've got the technology to pull all of the information on a customer's vehicle when they pull up to the bay. And that allows us, our team members to know what what added services are required on the vehicle. And so as you think about since we started talking about NOCR, we did a lot of work focused on making sure we had machines and working order to do the services and supplies particularly on the visuals for any vehicle that will come into our And we shifted to focus on training and process excellence. And I'd just say that while we're lapping sort of an oversized contribution in the comp, We still expect to have positive contribution from NOCR service penetration. For some time to come. And we look at that by saying, what is the cars or customers that are coming into our store on average, what do we think their mileage gains will be and what services will be required versus the services we deliver.

And there's is a very good opportunity there for us to continue to manage and it comes down to process execution and training. And so again, I think Mary's comments are right. It'll lessen in the comp, but it still will be a positive contribution as we've been talking about for the last couple of years.

Okay. That's great. Thank you. And maybe just a quick follow-up here on gross margin, Mary. You guys have previously talked about gross margin being in the ballpark of of flat for the year, obviously a really strong start to 1Q, up 80 basis points. Again, know that pricing and non oil change revenue contribution should be less, which should come out of that. But just any changes to how you're thinking about gross margin flowing through The full year?

Encouraged by the first quarter results, but as Laurie mentioned in her remarks, it is pretty consistent with our expectations. So we saw good margin performance but we do expect to see some deleverage impact from the refranchising transactions that we announced last year. And we certainly are continuing to work on benefits from both scale and efficiency. But overall, our guidance for the year is unchanged.

Okay. That's great. Thank you.

We have a question from Simeon Gut of Morgan Stanley. Please go ahead.

Hello, good morning. I'm going to ask my one follow-up on just an annoying spot. First, it was a good quarter. I wanted to ask, the word substantially in line was used in the transcript and in the press release curious what what was substantial, what either missed or what was better? And then the follow-up is on the prior question around guidance range for the rest of the year. Were you always expecting we knew it would be above the range or the high end Are you saying the business is still running strong and we're not flowing upside through because it performed consistent with our expectations or you're being more conservative especially given that trends are continuing in the second quarter so far? Just thinking about upside to it like underlying run rate versus conservative business. Thanks.

So on your first question, Simeon, in terms of substantially in line, I mean, I think it was substantially in line. It's not no performance is ever perfect in terms of meeting There as you said, there's things that are slightly above and slightly below, but overall, we were we were very substantially in line with our expectations for the quarter. In terms of your second comment on the guide range for the balance of the year, we still have a lot of the year to go.

We are cautiously optimistic based on the on the good performance we saw in Q1. We're really pleased that we've seen transaction growth tick up to a more balanced level. And continue here into the early parts of Q2 and I would tell you that I certainly think that we have some upside side opportunity toward the top end of our range. Guidance range. And we're going to continue to focus on managing the business to be able to deliver really great outcomes for the year. But as we sit right now, we're still very comfortable with the guidance range that we provided last quarter.

I think some of Simeon, some of the difference maybe between could be around the transaction and the timing of the transaction for the last refranchising. I'm not sure Overall, the assumptions made in for Q1 may have been consistent with what we were expecting. So I think that maybe drove some of the consensus being lower than where we were expecting. But other than that, I think Mary's comments are spot on around we're substantially in line and there's always going to be pluses and minuses, but we're really pleased with where we started Thanks, Laurie. Thanks, Mary. We have a question from Chris O'Cull from Stifel. Please go ahead.

Morning, everyone. For taking the questions. Laurie, I know the company has been working on ways to reduce the investment outlay for new units. Can you provide an update on the amount of cost you expect to take out of the build out? Or What you're targeting for the investment outlay? And then I had a follow-up.

Sure. It's a great question and one that we spent some time with our board last week. We have always talked we started this process a year ago, give or take, and we went through a process to redesign our prototype, which hadn't been done in quite some time. We looked at the size of the building. We looked at the structural elements that add cost and make us different than other competitors. Who have touted lower capital costs and really value engineered the building. We also value engineered every piece of equipment Some of the equipment changes were already flowing through Some of the builds that will happen this week, that's actually those are hundreds of thousands of savings with every change, but it could be 5,000, 10,000 by element and those add up to really attractive savings. And they don't take away from the a team member experience and efficiency and they certainly don't take away from the customer experience. They're just recontracting with suppliers to get the best rates on the equipment that we need to serve our guests. On the prototype builds, we are we are just getting the bids back from contractors. We have some franchisees who've already gotten bids back and very encouraged.

Obviously, We haven't gone we're going to construct [indiscernible] final build costs at the end because they're is plus or minuses with our contractors as they start to build. But we've always said we think 10% to 20% is certainly reasonable. And I think the other thing we're looking at, we've we've been very open about is really looking at right sizing the number of bays to the market and going through an exercise of do we need to build a three bay or will a or will two, two bays serve the market better drive more share and higher return? So we've gone to more of a It won't impact a lot of what we have in place to open this year, but I think in future years, you'll see the mix shifts between three bay and two bay will also bring our average new unit build cost down. Now the way that we've done it is we keep flexibility to add a bay.

Both in the way we design all of the electrical and plumbing as well as the pit design and everything. So we can actually add a third base should we need it and not spend the capital today, but spend it when we need it. Which actually does drive our capital cost down. And we factor in future build into the overall NPV calculation that we're expecting. And so feel really good about our our new store returns My follow-up is, are there opportunities to reduce the time it takes for a new store to reach maturity? I believe it's now three to five years. Can you shorten that in order to improve the return as well?

Definitely is something we've spent some time on in the last couple of years as we've opened up new builds at a higher rate. Think part of what we're doing is it depends by the market. So if a market has already got a good presence with the Valvoline brand, We tend to see the first year ramp be a little higher and the ramp to maturity a little shorter. But as we try to extend our footprint into markets that we have less presence, which by the way there's fantastic returns in those markets. We have to balance the right marketing spend pre opening and then in opening to build the car count more quickly. So that's always when we look at every location, we look at marketing spend for the area and marketing spend for the new unit. And we try to adjust to try to bring those maturities the maturity faster. I think if you look over time, the maturity has shortened, but we still it still varies by location and that's why we we talk about it from a three to five year perspective.

Okay. Thanks, Chris.

We have a question from Steven Decone from Citi. Please go ahead.

Great.

Good morning. Thanks very much for taking my question. Question. I was hoping, Laurie, you could talk a bit more about that improved transaction performance What do you think is driving that? Are you seeing some changes in the competitive landscape? Just anything to to chime in there? And then I'm going to follow-up on Simeon's question. Just in the context of same store sales. You had some prior commentary on the last call that you potentially have a quarter below the comp range given the strength that you've seen here in the first quarter and that's carried in to 2Q, is it fair to say that's kind of off the table that you should should pretty much be in the range for the remainder of the year?

Sure. I'll cover the first one. I'll let Mary cover the same store sales range for the rest of the year. I think when we look at performance in Q1, we were pretty clear on last quarter's guide or discussion that we knew we would have some increased transaction flow from the push out given the two hurricanes that happened and hit most of the Southeast region. More outsized on the franchise, but still hitting some of our company stores. So we knew that transactions would be quite strong in October. We also had as you may recall a year ago, we talked about softness in the starting last financial year just given some marketing agency changes. So we knew going into [indiscernible] When we look at the rest of the quarter, we still had very good transaction growth. And really, the most of that comes from the compounding effect of growing our customer base. So as we acquire new customers into our location, when we serve them well and we are our customer satisfaction scores are 200 basis points higher year over year than they have been. And when that happens, our retention rate stays strong and we are building on the base.

So the biggest contributor to transaction growth is our active customer base growing year over year. Obviously, we know how much new stores contribute as well. But I would say there's nothing competitive wise that is creating an outsized impact. These are just the core fundamentals of our business. In fact, I'd just say that there's not really been any change in what we're seeing from a competitive standpoint apart from the typical pullback that starts after the busy drive season. So we feel really good about our performance, really good about our ability to acquire new customers and retain the customers we've served. Mary, do you want to comment on the number?

On your question on same store sales and range, there's always the risk of a significant weather event happening at the end of a quarter that can shift volume. Between quarters. In January, we actually [indiscernible] early in the second week of the month and that shifted a lot of volume into the third week of the month. But those types of timing things can happen. During the quarter. Do I think that it's a probability or a likelihood? No, I don't. But I think there's always a remote possibility that those those types of events could happen. We feel good about our guidance for the full year.

We had a strong start to the first quarter and we've continued to see good momentum in the early part of the second quarter. I did mention that we're lapping some pricing and non oil change. Initiatives that we started in the second quarter of last year That will cause some deceleration. And then again, weekday will have a significant year over year impact on Q2, well in excess of 100 basis points. So those are really kind of the highlights in terms of same store sales.

Okay. Thanks for all the detail. The brief follow-up I had was just on gross margin. I know someone asked earlier, but On the last call, you had talked about some risk with some of your I guess you'd say people you're selling waste oil to adjusting their pricing. Has anything changed in that scenario? It sounds like your gross margin expectation are the same, but just help us understand if anything is coming in a little bit better or worse than Nothing has really changed We've worked hard to be able to minimize the impact of from the waste oil collection challenges, but typical with what we've seen this historically, when the revenue from waste oil collection goes down, it typically is correlated with the underlying product costs declining as well.

And you might have noticed in my comments, I said we saw some modest benefits in margin for the Q1 from lower product cost. And so so we did not see and did not expect to see the lower waste more of that in Q2. But again, I do believe that we'll see, correlation with some modestly lower product cost as well. And I don't expect it to have significant impact on us for the year.

Okay. Thanks for that detail.

We have a question from Justin Kleber from Baird. Please go ahead. Justin, your line is now open.

Hey, good morning, everyone. Sorry about that. Thanks for taking the question. So first one, just guidance 14% EBITDA growth here in 1Q The midpoint of the full year guide implies sub-two percent over the balance of the year. It seems like a fairly big change even if we take into account the greater headwind from refranchising. So can you maybe unpack what's changing It doesn't sound like waste oil dynamics are a major headwind here. So is the pacing of your [indiscernible] approach to guidance? So Justin, thanks for the question. I don't think you can discount the impacts that refranchising will have for the balance of the year. [indiscernible] from a Q1 perspective, we saw some modest impacts from refranchise but we didn't close on the largest of the three transactions until early to of the quarter. And so we had the benefit of those 39 stores in our quarterly results for most of the quarter. If I were to take out and show the quarter on a pro form a basis for refranchising, I would remove an additional $12,000,000 of revenue and an additional $3,000,000 of EBITDA.

For the quarter. And I'd have to do a similar kind of pro form a adjustment for last year's first quarter taking out the refranchised stores would have reduced revenue by about $24,000,000 and EBITDA by about $5,000,000 for the first quarter of last year. And so I think when you look at the balance of the year on a pro form a basis, for refranchising, you would expect to see sales and EBITDA growth numbers that are very consistent with our trend. Longer term, but I think that the year over year compare with those stores in last year and out of the current year is going to cause that EBITDA growth to be substantially lower on our on a reported basis. We'll make sure that we call it out for you all to we did say last quarter that full year impact Last year was about $100,000,000 in sales and about $25,000,000 in earnings. So I think if you put that kind of $25,000,000 in earnings back in, you get back to a more normalized EBITDA growth level and that's the primary driver of the deceleration in the growth rate.

Okay.

That's very helpful, Mary. Thanks for framing the refranchising impacts. And my follow-up just related to the tailwind from premiumization. If I looked at your latest FDD, it shows your premium oil mix is about 80%. Curious how much higher you think that penetration can realistically go? And then also just if you could share any insights on maybe how that 80% breaks down between only synthetic versus some sort of synthetic blend?

Yes, I think the point is when we reported in the FTD, we include both Max Life, which is our synthetic blend and our full synthetic. And so as we're seeing and we've been looking at consumer behavior, we're seeing continued trade up from conventional to both [indiscernible] product as well as the full synthetic and we see trade up from Max Life into full synthetic. And that continues to be a very positive tailwind for us that will continue Some of that is driven there's really two key drivers. The biggest one is that the car park as it evolves, there are more vehicles coming into that four to six year window when we start to see an oversized percentage of the car park that are requiring or recommending full synthetic. And so that's an easy education for the customers. But the other factor that's contributing is the age of the vehicle. Which I think has clicked over twelve years now. And when we get to older vehicles with high mileage, high mileage being over 100,000 miles, we tend to educate the customers around how to take care of their vehicle so that it can stay on the road for even longer.

And that creates a trade up environment even for customers that we have that we have seen for years. So both of those things, we've always talked about it being 100% to 150 basis points. Of comp tailwind for many years to come. I think that still remains to be true.

All right. Thanks so much. The insights and best of luck.

Thank you.

We have a question from David Ballinger of Mizuho.

Please go ahead.

Thank you all and good morning. I might as well go back to our Q2 comments just on the detail again. Maybe if we take a a bigger step back here, right, It seems like the Q2 comp is mainly impacted by the ticket comparison, the leap day shift. So if you x out all that, it still seems like the transaction piece of the business is running pretty strong quarter to date. Is Is that all correct? And then second part of this is, you mentioned some of the transaction flow being pushed out from the hurricanes, some of the other weather So is that all in the system now we should look at potentially post Q2 back half of the year getting to more of a more normalized transaction growth level?

So on the first part of your question, David, in terms of the Q2 comp, If I understand your question, correctly, From a comp deceleration perspective, we certainly expect to see continued transaction growth We certainly will see offset to that transaction growth from Leap Day. And lapping leap day. So it won't be we'll once we get here through the February, we're going to see some offset of the transactions because we had the extra day in the quarter last year. And that will affect transactions more significantly than it will affect [indiscernible] see some relative consistency over the quarter timeframe. So, I'm not sure if that answers the first part of your question in terms of The deceleration of the comp and the impact of that deceleration on transactions?

No, that's fair enough, but it's not like you've seen that change on the transact?

Transaction growth side as you entered Q2 being absent these Other pieces of the business is these one time like shifts. Just the underlying growth rate on the transaction side has not changed materially.

No, we continue to see strong see good good performance in terms of the transaction contribution to the overall comp.

And I think also still balanced. So again, while we're going to lap some of the ticket items, we're still having growth on the ticket side. So I think what I think you're your question is right in that one, we're seeing continued good transaction growth as we're getting as we're into Q2. And we're continuing to see good ticket growth, although slightly slower than what we would have seen in the past twelve months because of some of the lapping activity on NOCR improvement as well as some pricing actions.

And then your second part of your question on the Go ahead. Go ahead, David.

No, go ahead.

Sorry for cutting you off. Go ahead.

I was just going to say on the second part of your question in terms transaction growth for the balance of the year, We are comping up against weaker transaction growth in the back half of last year. So when we get to the back half of the year, my expectation would be we'll continue to see some good balanced balance between transactions and ticket in the back half, especially given that we're going to be comping up against some some weaker numbers from fiscal twenty twenty four.

Understood. That's very helpful. Then just to shift over changing gears onto the buybacks.

You've repurchased almost $40,000,000 this quarter Valvoline.

It's really towards the low end of your full year guide. So how should we think about buybacks over the balance of the year? And what would allow you to potentially go to the high end of the range or even above? Is there anything you need to see in the marketplace or just how are you thinking about that change over the balance of the year?

Sure. So you'll see that When we issue our 10 Q that subsequent to the end of the quarter, we did some additional buyback as well. We did about $20,000,000 of additional buyback since the end of Q1. So the fiscal year to date we're more in the $60,000,000 in terms of total buybacks. And we've looked opportunistically we saw weakness in the share price after our last quarter call and we were taking advantage of that. We think that there's significant undervaluation of the business in the marketplace and we thought it was made a lot of good sense for us to accelerate some of that buyback to take advantage of that.

Perfect. Thank you.

We have a question from Peter Keith of Piper Sandler. Please go ahead. This is Alexia Morgan on for Peter Keith. Thanks for taking your question. My first question would be on the promotional environment. We've heard from our checks that it's or the promotions have come down a bit or promotions have moderated recently. Can you talk about what you saw there in Q1, just as it related [indiscernible] And then how you're thinking about promotions in Q2?

Sure. I think we're not seeing any significant change on the competitive standpoint from a promotion standpoint. We feel really good about our performance I think in the last couple of quarters, we talked about some episodic activity from competitors outside of our Quick Glue [indiscernible] And it's been pretty transitory in nature and not had a material impact on our business.

Now that's whether we think about discounting in the category or discounting by folks in our category. And I think as we step back and reflect, we have a very high quality brand and that really really attracts customers for trial. And then we have a best in class customer experience once they're there which enables us to continue to capture share of the do it for me market and outperform the market overall. So again, we're not seeing any outside outside competitor actions, promotional or mark And we're really pleased on how our marketing team is driving really good return on ad spend.

Great.

Thank you. And then my follow-up, is just more on unit growth. Specifically on the franchise side. Are you still on track to for your longer term target 150 franchise opens a year by 2027? Or how you're thinking about the bridge to that? Yeah. As I Yes. As I've mentioned in my remarks, We have really strong engagement from our franchise partners. In The U. S, we have about 40 partners. And at our workshop, we had the most engagement and focus on development. All of our large franchisees and many of the smaller ones have committed to upsize development agreements and our pipeline for new units is very strong. So the momentum of both the existing partners that we've been working with as well as the new partners we've welcomed to the network, it really has increased our confidence in our new unit growth goals. Overall, we stated we wanted to get to two fifty new units by fiscal twenty twenty seven with 100 give or take 100 coming from company and 150 coming from franchise. And I think the momentum that our franchisees have as well as some of the things we're we're doing to support them give us a lot of confidence we're on track.

To hit those goals. Thank you.

We have a question from Thomas Wendler of Stephens. Please go ahead.

Hey, good morning, everyone. I just wanted to touch on the waste oil one more time.

It sounds like that didn't really float through or become an issue with the margins this quarter, but I think there was a mention maybe it impacting 2Q. So maybe if you could touch on that. And then just maybe your thoughts on how the company could be impacted if we see increasing prices.

Yes, good questions. In terms of waste oil, for Q2 and beyond, our expectation is that there'll be a very, very little impact because we think that the any reduction in the waste oil recoveries will be offset by lower product costs. And so, we're we're really expecting it to have a negligible impact in the balance of the year.

As it relates to rising oil prices, it typically would take a while for any kind of increases in crude oil to pass through into the base oil markets, and those base oil markets impacting the cost of our lubricant products That also has an impact by the inventory that's in the system that has to flow through as well. So rising crude prices at this point in the year would likely not have a really significant impact to us until the back half of the year. And we would, of course, be looking at opportunities for us to off any increases through any efficiencies And then we always would have the opportunity to potentially look at our pricing and pass through pricing as well. Our expectation is that any increases would impact competitors in the same way that it would impact and the markets always behaved pretty rationally when it comes to passenger cost increases from a pricing perspective. So I wouldn't expect it to have a significant impact on our results for the year if we did see some increases.

All right. I appreciate the color. Thank you.

We have a question from Brett Jordan of Jefferies. Please go ahead.

Hey, good morning, guys.

Could you talk about seasonality of the non oil change business? Obviously, you think batteries and wipers would benefit from the winter weather we've been having, but could you sort of talk about the mix there and what the weather impact has been?

Yes. And that's a great question. When you look at our services, there are very there are a few things that are highly seasonal. Wipers, obviously, we have an outsized Demand for those as we get into wet weather seasons in the spring and also in the fall. Battery definitely impacts in the winter. We've seen a significant uptake in battery and our battery and our battery penetration, which we would expect in the summer Our air conditioning recharge services obviously, is when that starts to become into play. But most of the services that we have It's really driven by the miles driven of the vehicle. So tire rotations every 5,000 miles, When we look at air filters and cabin air filters and the things that drive most of the non oil change revenue because they're highly recurring. Most of those have limited seasonality.

Okay. And then Mike, you talked about the independent quick lube operators as sort of [indiscernible] I guess [indiscernible] [indiscernible] What are the valuation trends there? Are they sort of looking at businesses seeing a lot of franchise quick lube additions in the market making them inclined to sell or how do you what's the average multiple for those independents?

Well, the multiple definitely varies. Based on the quality of the asset and the real estate location. But we're not seeing I think post COVID when when employment and the turnover of people was really high and so supply chain was more challenging had a lot of independent operators just putting their hands up saying, okay, this is too difficult. I don't have all the support in place. So we went through a period of time when there may have been more interest But I don't I think we're gone back to a normal course and people just getting to an age and or a point in their career where they are not transitioning the business down to the next generation and they're looking to exit. So I don't think there's any significant changes that are driving more or less of the independent operators in terms of them wanting to transition. I do think that when we come into a market and we start to build some of the independents that impacts them and then they express more interest because they see slowly taking business away from them and adding business from dealers And that sometimes will precipitate a raising of a hand And if the location is additive, then we're very interested.

I don't think there's any significant changes in that dynamic. Other than it's still incredibly fragmented. There are still 4,000 independent quick lube operators out there, not all of them do we want to own. But if it's in the right real estate location that's complementary to our network, We have a playbook. We know how to do that, whether it's a onesie twosie owner or something of more scale. It is a great return on invested capital. It has a faster path to maturity because you're buying a business that's already existing. And you're building upon it. So we love those. Obviously, we're selective when we buy them.

Great. Thank you.

We have a question from David Lance of Wells Fargo.

Hey, good morning and thanks for taking my questions. So SG and A company operated store grew high single digits in Q1, but considering the franchising activity and the recently closed acquisition, Curious how you're thinking about these trends throughout the balance of the year?

Yes.

So we talked last quarter, David, about there we expected to see some deleverage in SG and A, partially due to refranchising, but really driven by some of the investments that we are making in technology. So we've really since we sold the products business are focusing on systems that are retail focused that can help us to support the continued growth and scaling of the business over time. So we've replaced our ERP system. We're in the process of replacing our HRIS system. Both with systems that are really, have the ability to help us from a pure play retail perspective to drive growth in the business. So, I do expect to see some modest deleverage in SG and A over time. Over the remainder of the year. And it's primarily being driven by our technology investments. The only other thing I did want to add for some clarity in terms of some of questions we've had about the cadence of earnings and what we're what our expectations are for the balance of the year is In my comments, I did say that we expect the first half of this fiscal year to be produced 40% to 45% of our overall earnings.

And because of the refranchising impact, I do expect that to be the towards the top of that range in the front half. Relative to the 55% to 60% in the back half. So I just wanted to provide some clarity in terms of the cadence of earnings as well.

Got it. That's really helpful. Do you have another question, David? Can you just [indiscernible] Yes, just one more.

Can you talk about fleet performance in the quarter and any additional color you can provide around account wins as well? [indiscernible] Fleet continues to be a great business. Our investments in both team and capabilities that our fleet managers look for is is really paying off as the growth continues to outpace our consumer transaction growth. The business our service proposition is very attractive to fleets and some success growing the account base but continue to focus on increasing penetration and ensuring as we grow our network of stores the fleet customers that we're already serving know that we can handle more of their portfolio as their geographies as their geographies span ours. I think we have a significant market opportunity to continue to drive same store sales coming from fleet. That's some of the transactional growth. That we've been driving and expect to continue to drive. And at our franchise workshop, we did have some discussion with franchisees around how we could partner and support them. We're actually helping all of our large franchisees as it as it relates to administrative support, in terms of billing with the franchisees, but also some regional sales support Just taking the tools and programs that have been very successful in company markets and ensuring that our franchisees get the benefit of those Got it.

Thanks so much.

We currently have no further questions. So I will hand back to Elizabeth Clevenger for closing remarks. Thank you all for joining us today. This concludes our call.