Valvoline Inc. (VVV) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to Valvoline's Third Quarter 2026 Earnings Conference Call. I will now hand the conference over to Elizabeth Clevinger, Investor Relations. Elizabeth, please go ahead.

Thank you. Good morning, and welcome to Valvoline's Third Quarter Fiscal 2026 Conference Call and Webcast. This morning, Valvoline released results for the third quarter ended June 30, 2026. 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 President and CEO; and Kevin Willis, our CFO. As shown in the accompanying presentation, any of our remarks today that are not statements of historical facts 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. A reconciliation of our GAAP to adjusted non-GAAP results and a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix. With that, I will turn it over to Lori.

Thanks, Elizabeth, and thank you all for joining us this morning. We delivered another good quarter with sales and profit growth in line with our expectations. The team continues to manage the business effectively through the changing supply and macro environment. Our results demonstrate the strength, resilience and growth in our business. On the top line, system-wide store sales increased 19%, crossing the $1 billion mark for the first time in a quarter. System-wide same-store sales grew 8%. Across the system, we saw growth in both transactions and ticket, with ticket contributing more than 3/4 of the comp. All 3 components of ticket, net pricing, premiumization and NOCR service penetration contributed. Net price was the largest contributor, given the pricing actions that were taken. Similar to last quarter, franchise was above the system average. For the quarter, EBITDA grew faster than sales with SG&A leverage improving. Before Kevin talks through the financials, I want to spend a moment on the operating environment as it relates to supply. The closure of the Strait of Hormuz has disrupted the global oil supply chain. And specific to our category has constrained the supply of Group III base oil, a key component of full synthetic lubricants. We expect this industry-wide supply constraint to persist over the medium term and beyond the initial reopening of the Strait. However, we are in a differentiated position. Our scale, combined with the strategic relationship we have with our supplier, gives us reliable access to product. Absent a significant change in the environment, we do not have supply concerns today, and we do not anticipate any in the near term. That said, constrained supply across the market has elevated finished lubricant costs. We saw costs begin to rise in the third quarter, and they continued to increase as we moved into the fourth quarter. Based on the current forecast, we expect finished lubricant costs could be approximately 60% above where they were in March. While that sounds significant let me clarify that means we expect a total increase of approximately $5 to $7 per oil change depending on the lubricant type relative to the March period. Our teams are actively managing this cost dynamic through consumer pricing and operational discipline. Both company and franchisees have taken pricing actions in the third quarter. While we wait for the Strait to fully reopen, we are managing through the current environment effectively with both the short and long term in mind. On the customer front, we feel good about the overall health of the business. Across the system, we saw transaction growth in the quarter and broadly no signs of trade down or deferral of services. That said, we did see pockets of pressure in June with more moderate growth among lower-income households and some softness in NOCR penetration, similar to what we typically see in the summer drive season. Overall, our customer has remained resilient and we continue to see steady demand for the nondiscretionary services we provide, but we are watching consumer behavior closely across the network. And we continue to invest in strengthening our brand and attracting new customers. As the summer dry season got underway, we launched a new marketing campaign, The Ride Wrangler. This fresh platform reinforces Valvoline as a trusted preventative maintenance partner. Anchored by the tagline Change Wisely, the campaign increases brand relevance and consumer engagement while highlighting the quick easy trusted service we offer. It can be seen and heard across our full marketing mix from national advertising to local marketing, giving us broad reach as we invite more drivers to change wisely and choose Valvoline. A quick update on Breeze. The overall performance of the Breeze business continues to be at or above expectations and the overall deal thesis and return expectations we shared at the December investor update remain intact. As of Q3, we have converted 12 stores to the Valvoline Instant Oil Change brand. And while it's still early, the performance of the converted stores is slightly ahead of expectations. Turning to network growth. We added 47 net new stores in the quarter, bringing our overall network to 2,456 stores. We continue to have a strong pipeline for both company and franchise additions. In summary, we delivered a good quarter. I'm proud of our team's strong execution as we navigate a challenging macro backdrop. We remain focused on delivering Quick Easy trusted service to our guests while creating value for our shareholders. The actions we're taking to mitigate the current environment are strengthening profitability across the system, enhancing free cash flow generation and positioning Valvoline for sustainable long-term growth. With that, I'll turn the call over to Kevin to provide more detail on our Q3 financial performance and rest of your guidance.

Thanks, Lori, and good morning, everyone. A summary of our financial results is included in the presentation. Let's talk through the highlights. We delivered top line growth in line with our expectations with net sales of $545 million, a 24% increase over the prior year. This growth reflects a combination of continued momentum in our core business and the contribution from Breeze, which performed in line with our expectations. The gross margin rate of 40% decreased 50 basis points year-over-year. We saw favorability in product costs this quarter offset by higher other service delivery costs, including the impact of new store depreciation. Excluding the impact of depreciation, the gross margin rate would have improved by 10 basis points. As Lori mentioned, we continue to see finished lubricant costs increase. Our focus remains on protecting gross profit dollars while maintaining reliable supply across the system. The product cost favorability we realized in the quarter reflects pricing actions taken slightly ahead of the impact of finished lubricant cost increases, and we have taken additional pricing actions as lubricant costs have continued to increase. It's also important to recognize that finished lubricant costs are currently increasing at a faster rate than movements in the base oil index would suggest. While the index remains a useful market reference point, supplier costs today reflect broader industry conditions, including tight Group III base oil supply, inventory replenishment and other factors across the supply chain. As a result, the index is understating the cost pressure the industry is seeing in the market today. SG&A as a percent of net sales decreased 90 basis points year-over-year to 17% from a combination of increased transactions from the summer drive season and continued cost discipline across the business. We remain focused on improving operating leverage while continuing to support the growth of the business and navigating the macro environment. EBITDA increased 25% to $162 million with margin expanding 30 basis points to 29.8%, while EPS increased 21% to $0.57 per share. We had planned for about 100 basis points of EBITDA margin compression for the full year and now expect closer to half that amount. Year-to-date, operating cash flows improved $105 million to $285 million, and free cash flow was $112 million, an increase of approximately $93 million over last year. We used a portion of that cash to pay down debt in the June quarter, reflecting our continued focus on strengthening the balance sheet. Our leverage ratio now stands at 2.8x on a net debt to adjusted EBITDA basis, a sequential decline of approximately 10%. We remain focused on bringing leverage back within our target range and restarting share repurchases. We also completed a repricing of our Term Loan B during the quarter, which will improve our annual cash interest expense by approximately $1.8 million based on the current balance. We delivered a strong quarter, reflecting disciplined execution, profitable growth, EBITDA margin expansion and improved free cash flow. Let's turn to our outlook for the remainder of the year, which includes our expectations for the fourth quarter. First, we are raising our full year system-wide same-store sales expectations to a range of 7.5% to 8%. This increase reflects the pricing measures we've taken so far. We are narrowing our adjusted EBITDA and EPS ranges to $550 million to $560 million and $1.70 to $1.75 per share, respectively. While the macro and supply environment remains dynamic, the fundamentals of our business have not changed. Preventive maintenance is a nondiscretionary service our customer has remained resilient, and our team continues to execute well. We are confident in the durability of our model and our ability to deliver profitable growth and long-term value for our shareholders even as we navigate near-term cost pressure. I'll now turn it back over to Lori to wrap up.

Thanks, Kevin. To wrap up, we delivered a strong quarter and proud of how our team continues to manage the business effectively through a changing supply and macro environment. We remain confident in the resilience of our business model and the durability of customer demand. I want to thank our team members and franchisees. Their dedication and execution are what enables us to keep delivering V-class service to our guests quarter after quarter. As we look forward to the end of the year, we're also celebrating 2 important milestones. This year marks the 40th anniversary of Valvoline being in the retail services business and the 10th anniversary of becoming a stand-alone publicly traded company. Over the past decade alone, we've grown our network from just over 1,000 stores to nearly 2,500, a testament to the strength of our model, the long-term value we've built for our shareholders and the passion of our people and franchisees. I'll now turn it back over to Elizabeth Clevinger to begin Q&A.

[Operator Instructions] With that, the operator can please open the line.

[Operator Instructions] Your first question comes from the line of Mark Jordan with Goldman Sachs.

Congrats on another great quarter here. to start, can we just dig into the full year guidance a, little bit? I think it implies 4Q comp trends are roughly similar to 3Q, maybe a little bit better there. But the EBITDA margins are in the 25% range and understanding there's some seasonality in 4Q, but what are the big drivers of the sequentially softer margins there?

Mark, this is Kevin. Thanks for the question. I would say that we're really pleased with how the team has executed year-to-date and continues to execute in Q4 as I think we can all appreciate the macro remains very dynamic. That said, the fundamentals of the business haven't changed. We're very pleased with where we are. As we look at Q4, really the math is all around what we have baked into the full year guide around product cost increases, us covering those with price that we started taking in the June quarter and continued into this quarter as well. And it's really about our focus on protecting gross profit dollars and the impact of that is, as you correctly calculated at the midpoint of the range, that would imply 300 to 400 basis points of margin compression in the September quarter, and that would be really all product cost related impacts. We don't really see any other significant impacts to the business. As we look at SG&A year-over-year, we would expect to gain some leverage on the SG&A front as we have been doing throughout the course of the year. we're managing costs very well when it comes to that. So it really comes down to what Lori mentioned. As much as 60% finished lubricant costs increase $5 to $7 per oil change and making sure that we do what we need to do to cover that in the quarter. So that's what's driving the margin.

Excellent. And then just as one follow-up. Can you talk about the SG&A leverage in 3Q? It looks like the largest benefit maybe came from the other G&A expenses. Can you break down what's included in that bucket? And maybe how we should think about it in 4Q.

Yes. Just as a reminder, Q3 tends to be our strongest quarter every year. We drive more transactions. It's the peak of the summer drive season. And so -- that does tend to help us on the leverage front. The team did a really nice job from an execution perspective around SG&A. We've been really focused on that. Since we got through and past making the SG&A investments that we needed to make in the business and really, it's just -- it's been a concerted effort to manage our overall cost profile across the board, and the team has done a really nice job with that.

Your next question comes from the line of Steven Zaccone with Citi.

This is Ariana on for Steven Zaccone. My first question is, can you provide more detail on the extent to which pricing actions can continue to offset these increases without negatively impacting customer traffic.

Yes. Thanks for the question. Overall, when we look at, at least on the product cost side, there's 2 things that we do. One is we try to time pricing increases on the company store side as well as the franchise product cost pass-through to offset those increases. We always do pricing elasticity work to know exactly what we expect consumers to do. Now -- but we're not doing this in a vacuum. The entire industry is facing the same product cost -- product constraints that I talked about and the commensurate product inflation that comes with constrained supply. So we're not doing that in a vacuum. And as you look at the $5 to $7 number that I talked about on a base ticket of $115 on average or higher for some of our franchisees. That's actually a very small percentage of increase. And given our customers come back to us twice a year on an annual basis, it's not a significant out-of-pocket costs when you compare that to foregoing maintenance and the potential risk that you take for bigger repairs. So obviously, we look at that and we watch consumer sentiment, and we watch consumer return rates. So -- and we use -- and we watch consumer discount usage, all of those things factor into it as we look at passing price on to consumers.

And my follow-up is despite raising the [indiscernible] for same-store sales by 250 basis points, the top end of the total revenue remains the same. So I guess what specific revenue offsets are preventing a corresponding increase in the net revenue?

Yes. What I would point out is we actually did raise the midpoint of the full year sales guide from $2 billion, $2.1 billion to $2.05 billion to $2.1 billion. So effectively, it's a $25 million increase in the midpoint. Again, we're very focused on providing an update that we feel confident and comfortable with based upon what we know is happening in the broader marketplace with the macro and with our own business. And while we feel really, really good about the things we can control inside the business, the macro environment does remain dynamic. And so we did raise the midpoint, but we wanted to put numbers out there that we feel very comfortable with.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

This is Skylar Tennant on for Simeon Gutman. I guess with some of the margin compression previously talked about. How temporary do you think that is? And do you think it can be fully resolved by Q1?

Sure. It's a great question. I want to just reaffirm that as product costs remain elevated given constrained supply base, we feel really good about the supply position that we're in. We have an advantaged position given our scale and size, not just on a location basis but on a network basis. And the constraint is being felt across the system. When the Strait reopens, it will take some time for product to flow through to the next stream of lubricant manufacturing steps. And so we do expect that the elevated costs will persist for some time. our understanding and working with the supplier is 4 to 6 months at a minimum once the Strait is fully reopened. Now obviously, we have a supplier that has a very strong network of supply and they've already been working with alternate sources, et cetera. But for cost to come down, you'd need the supply chain to be back fully inventoried and we know that, that will take some time just given how long the Strait has been closed and some of the damage that's happened within the overall network.

Okay. Great. And then I guess on the cost increases, how much more pressure would you expect to flow through the P&L into the near term and future quarters?

Yes. We've we projected what we know today. And I think it will depend on really the macro, how things play out in the straight, how things play out in the broader supply chain. But we have factored in everything that we know to date in terms of cost increases and related pricing action that we need to take. And we'll continue to do that as the situation unfolds. But we've taken action around what we know today.

Your next question comes from the line of David Bellinger from Mizuho.

Just another clarification on the gross margin line. So you had about 6 percentage points of ticket or more in this quarter. It doesn't seem like that the product cost hit the gross margin line in Q3. So is this more of a timing issue where the higher cost will land in the Q4 period? And why is there such a lag between the cost increase versus the price increase to the consumers? Is there a way you can tighten that?

It's a good question. I would say that we were proactive around pricing in the June quarter. And intentionally so, as we were being informed of a lot of cost increase that was coming. And the timing of that can be difficult to get perfectly right, especially the timing between when we actually see the cost flow and when we take price. But we've tried to be proactive on the price side to protect those gross profit dollars. And we were successful in doing that in the June quarter. I would say, as we're in Q4, we face some of those same challenges around the timing of pricing and seeing the cost flow through. And I think in normal times, there is much better alignment around that because it's a more systematized process, whereas right now, we're in an incredibly dynamic environment with a lot of things going on and a lot of changes happening. And we're just trying to be as proactive as we can, given where we are right now.

Got it. Got it. And then my follow-up, just on the implied guidance for Q4. The system-wide same-store sales number is about 8% to 10% implied there. You also talked about some of these pockets of pressure in June. So can you tell us a little more about how sales have recovered. Are you seeing more transaction growth? Or is that incremental uplift? Is that mainly from more pricing?

Yes, it's a good question. I think we expect the fundamentals of the business to remain intact from a transaction growth, from a premiumization and NOCR. And that we do see the difference really being around price, both in terms of what company store pass-through on pricing is, but also what our franchisees do. I think that was a piece that was hard for us to forecast last quarter is how quickly our franchisees would take price at the time. At the time we had the call that last quarter, we didn't -- we hadn't had a pass-through yet with the franchisee base because of where the indexes and costs were. So some of that is real time and dynamic as Kevin talked out. But you're right in terms of the applied guidance, it's around 8% to 10% with the difference being around what is assumed on the price side.

Your next question comes from the line of John Babcock with Barclays.

Just the first one, what are your partners telling you about the supply and demand in the base oil market. And also, I don't know what they've said around like the Strait of Hormuz, but I'm just kind of curious, have they -- did the loosening that occurred in May or June, did that help at all?

So in terms of the supply-demand dynamic, obviously, still remains challenged. There's very little product going through the Strait. Lori talked about the supply chain taking 4 to 6 months to start to normalize, and that's very real. A lot of base oil is made in Asia, specifically South Korea. And it's been challenging for those companies to get crude oil so that they can do what they need to do to make base oil that eventually will make its way back here and be converted into finished lubricant. Group III base oil, which is the primary ingredient for full synthetic, has been the most challenged and continues to be. Group II less so, but also challenged, partly because of refiners managing their own mix. But this is -- and this is industry-wide. That is not a Valvoline phenomenon. Where we are right now, though, with our supplier arrangement, we do feel that we are advantaged on an overall basis and continue to work very, very closely with them to ensure that we remain supplied. If you don't mind repeating the second question, I didn't catch it.

Yes. I mean the second half of the question was really just around the Strait of Hormuz because it opened up a little bit. And I'm just kind of curious if that ended up helping the market or if that was a relatively nonevent.

I think for -- as it relates to Group III that was, at least from our understanding, pretty limited relief -- limited to little relief. And part of that is when you look at other uses for Group III, it also goes into jet fuel. And obviously, summer season is high peak travel season. So the demand for Group III base oils is high, and that constraint is what's driving the price of that up, which then drives the cost of our finished lubricant up. So I would say there was a little bit of loosening in a few ships that came through in May, but I don't think broadly that was much relief.

Got you. That's helpful. And then I guess just a quick follow-on here. I'm just kind of curious, are your suppliers preparing for any contingency plans? And what are those plans?

Yes. I don't want to speak for our suppliers, obviously. But what I would say is we work with a company that used to be part of our company and they have always been very forward-looking on reformulating product to meet the requirements of the product and the quality standards. And as there is -- whether it was tariffs on other products and/or now this lubricant base oil III constraint, they are very forward-looking at reformulating using new sources of Phase II group as well as others. So I would just say our suppliers in the business of creating lubricant, not just for us but for others. And they do everything they can to keep their customers, including us, which -- we are one of their largest customers in stock so that we can continue to serve our guests. So I think I'll just harken back to what Kevin said in that we are strategically advantaged given our relationship with our supplier.

Your next question comes from the line of Thomas Wendler with Stephens Inc.

Apologies if I missed this, but could you -- apologies if I missed this, but could you give us a breakdown of the traffic and ticket in 3Q? And then you had mentioned additional pricing actions being taken this quarter. Can you maybe help us gauge the price increases taken in 4Q?

Yes. So as I mentioned in the remarks, our same-store sales was very strong across the quarter, both for franchising company. Ticket drove about 3/4 of the comp and transaction was the remainder. Ticket was slightly more of a contributor in Q3 versus Q2. But I think Q2 was 2/3 and this quarter was 3/4. So not significantly different. And that was because of the net pricing contribution that we got within the quarter, both on the franchise and the company side. It was offset by slightly less growth in NOCR penetration, which we typically see in the summer drive season. So those were the dynamics for Q3.

Perfect. And then understanding this is probably a ways out. But once base oil costs move lower, should we be expecting prices to move down or maybe some gross margin expansion?