Valvoline Inc. (VVV) Earnings Call Transcript & Summary

At the hour. I think we can go ahead and get started. Thanks, everyone, for joining us this morning. I think I have met most of you in the room but I am Daniel Imbro, hardlines and automotive analyst at Stephens, for guys I haven't met. Really pleased to be joined this morning with Valvoline, from the company, we have Lori Flees, new CEO. So congrats on your new role and Mary Meixelsperger, CFO. So thank you guys for joining us.

Great to be here.

First time on the Stephens' Conference. I guess, Lori, before we get into more detail Q&A, and this will be a fireside, so please I'll kick it off, but ask questions as we go as they come up.

Can you spend a few minutes providing some background. Maybe the transformation Valvoline has undergone in the last 12 months. It's a very different story now than it was a year or 1.5 years ago. And then maybe what is the stand-alone Valvoline today? And how should we think about the company?

Sure. I mean, Valvoline is a 150-year-old brand that is known for trust and quality. But over the last 12 months, we've been working through a separation of the product where we sold our Global Products division, which was a little less than half of the business, and we became a pure-play retail services provider. We provide preventive maintenance. It is a very fragmented, growing, nondiscretionary consumer purchase. The TAM is significant, and we are the market leader. We are the market leader in terms of transactions, in terms of revenue, yet we only have 5% market share, so still a lot of potential. But in building and separating that business, we did that this past year while delivering incredible performance. So we had our 17th year of same-store sales growth of 11.9%. And while doing that, we also improved our EBITDA by 20% to 26.3% EBITDA margin. So it's really been a transformative year and now we're excited to be focused on retail.

Got it. And obviously, as you take over the CEO seat, maybe can you give a little background on your history, where you come to the company from, what you bring and maybe what excites you most as you've had a few months in the seat now?

Sure. I started my career at General Motors. I did a stint in technology at Intel and then was a consultant where I spent time in oil and gas on the downstream, specialty chemical and retail fuel side. And then I spent 8 years at Walmart doing a variety of technology innovation, running operations, running pharmacy and optical and then had an opportunity to come to Valvoline to run retail. What really excites me about Valvoline is one, as I mentioned, we're the leader, but we have 5% market share. And our stores only cover 30% to 35% of the population within the radius that we would typically see customers travel to our stores. And so there's just tremendous upside for growth. And the complexity but also blessing we have of having part of that growth of the company, but part of it be franchise partners that have been with us for 25 years or more is just an incredible opportunity and the consistency of service that we deliver day in and day out, whether it's company franchise, new or mature store is a real blessing. So that's what gets me excited about being at Valvoline is the growth potential.

Great. And then Mary, again to start. Lori talked about the transformation, you guys underwent, but is that fully behind us, can you just remind investors maybe what is still left from the transaction? I think there's some debt to pay down in kind of the capital structure side, just what's still remaining from the transaction? And are we ready to clean the slate and kind of move forward?

Well, a couple of things. First, you mentioned the debt side. We did trip covenant with our 2030 bonds where if 100% of the -- majority of the proceeds weren't reinvested in the company. We are required to pay off those bonds within a year of the date of the transaction. Now the good news is interest rates that we're earning are nicely higher than interest rates that we're paying on those 2030 bonds. And so we're seeing some nice arbitrage and we've elected not to pay down those bonds until they're required to be paid down subject to market conditions. But the other area that we're still seeing work on is we still have some transition services agreements and reverse transition services agreements between the 2 companies. We're still sharing some systems between the 2 companies and we're getting very close to having those systems separated and expect with the new calendar year, that we'll start seeing some of those changes. And we have a total of 18 months from the transaction date to complete the transition services agreements, but I expect most of them will be completed and rolled off well before then.

Perfect. Maybe thinking about just going the demand side of the company. As I think about the quick-lube industry, and you mentioned you have 5% share. The biggest driver should be miles driven, which I feel like is pretty stable and just utilization. I guess when I think about what do you differentiate yourselves with to get that customer into Valvoline? And how do you grow that 5% share over time by leaning into that strength?

Yes, sure. You have to really look at new versus returning customers. 80% of the customers who come into our stores are actually repeat customers. And what drives them into the store is 80% about the service that they received. And we consistently earn a 4.6 star rating from our customers because we provide a quick easy trusted service every time in every location, every day. So that's about 80% of it and 20% is that we optimize marketing to remind the customer when they need their maintenance done. And that's very similar to when your dentist tells you it's 6 months and you need to get your teeth cleaned. Oftentimes, you know that, but need to be reminded. And so those 2 things working together create a really strong retention rate of customers, but it's really the service that brings them back. And then on the new customer side, one, our brand, our brand is very trusted and well known at 150-plus years. But also the real estate team that we have really does a great job analyzing new site locations and making sure that those sites are going to be able to be easy and quick for the customers to get in and get out. And so those 2 things really drive sort of a huge part of new customer growth. But then also, our marketing team is a standout in the industry and that we are able to really do a great job of acquiring new customers. Not just acquiring new customers for a new store, but also acquiring new customers into an existing store, whether that store is mature or maturing. And using tactics that most retailers use around performance marketing and search term acquisition, et cetera, to know exactly what terms to buy and what locations and for how much to create a really attractive customer acquisition costs and return on ad spend. So it really depends on the 2, but we -- it's more the fundamentals of retail that drive our business rather than the automotive dynamics.

And can you talk about -- as customers get in the stores, the technology you guys have invested in at least that to me -- I guess can you talk about the tech investments, the interface the customer sees? And how different is that from other players in the quick-lube center?

Sure. I mean the biggest investment we've made that really we are the only ones in our category doing it, we call it a SuperPro technology. And it is a guided surface experience but it's also a guided employee experience. And what it does is it walks the employee through the service experience and takes them through step-by-step and enables the customer on the screen to see the same steps that the technician is talking them through. That has been an investment that we made nearly 15, 20 years ago, and we continue to iterate on that process. We also have worked to put tools in the customer hands, whether it's the initial stages of our app or MWEB pages, mobile web pages, which allow the customer to see what wait times will be and where our locations will be. Those are just the very early stages of customer technology that we want to build on. But the most important technology is the technology that ensures a consistent and quick experience. and complete experience, which is proprietary and best-in-class in the industry.

When I -- to go back to the topic, you mentioned kind of the marketing, getting customers back in a common theme this week, I think it's going to be the state of the consumer. And I'm curious, are you guys seeing any deferrals or extended service times between customers coming back? Is there a lower response to that advertising? How would you, based on your data judge or characterize the state of that consumer you're seeing?

I mean, we look at this all the time. And part of it is given the state of the consumer right now, just in retail in general, it's something to always be watching for. We are not seeing trade down or deferrals at this time yet. And we're not seeing any softness in any of our marketing programs. So the resiliency of the customer just, for us, proves that this is really a nondiscretionary purchase. And I think as customers with the inflationary rates and the cost of new vehicles, et cetera, they're wanting to hold on to those vehicles for longer. And when you're a customer and the average vehicle age has grown by 10 months in the last year, they want to keep that vehicle in service and operating at its best capacity possible, and you have to maintain it to do that. So I think there is a trade down from buying a new vehicle to maintaining the vehicle that you have. But there isn't a trade down in the services that we offer, and we're not seeing that yet.

Perfect. Right. I'll keep going. What about as we think about the other side of your business. You guys have been growing that non-oil-change, NOCR or non-oil-change revenue. What kind of services do you offer? Can you help those newer to the story think about what that is? And how do you think about how to expand that over time? What new services make sense and we'll go from there.

Yes. So I would classify the non-oil-change revenue in 3 buckets. First is parts replacement. So air filter, cabin air filter, wiper blades, batteries, those are things that as the vehicle gets used or over many seasons, those things need to be replaced. Second is safety, tire inflation, tire rotation, light bulbs, those are things that the owner needs to maintain to ensure their safety while driving the vehicle. And the third is fluid replacement, which includes oil change, but also includes air conditioning recharges, which is obviously important in the summer, but also all of the OEM recommended services like transmission flush and differentials and things that are required as the vehicle ages. Many of the OEMs put these services in a 50 or 60-mile tune up or 100,000 mile service maintenance. Those are things that the customers can do with Valvoline, both cheaper and faster, more conveniently. And so we've had really great success in building out those services. For us, the growth in non-oil-change revenue has come by putting those services into our SuperPro process and making sure that the way they're presented is consistent every time with every customer who needs it. I think we continue to evaluate and incubate new service offerings, whether it be for ICE vehicles, hybrids or EVs. And our core promise to the customer and what stands behind our brand is it has to be quick easy and trusted. If we can't do it in a quick, easy and trusted way for the consumer, then we want to be careful because we could damage the core business and the proposition that we have, which is driving amazing growth and high margin to chase incremental growth that would ultimately be detrimental.

And Lori, what you mentioned about the services being needed is a really important part of the SuperPro process. So our technicians are not compensated based on upselling additional services, their focus is on providing the service to the customer when the vehicle needs it based on the OEM recommendations. So that SuperPro system we talked about is integrated with the OEM for that specific VIN knowing when that service is recommended. And we won't recommend a service to the customer unless that service is something that the OEM is recommending that, that vehicle receive at that time. And that's a big part of our how we build trust with our customers.

And then it ties into a little bit in what the OEMs are, who do you guys view as the competition for this service work? Is it truly the dealer channel who I think has a big proportion of the oil change volume in the country? Is it the aftermarket? I'm just curious where is the incremental share going to come from as you look out in the future?

When you break down where people get preventive maintenance at about 40% still come from a dealer. And part of that is the trust piece. The other -- another 40% come from other automotive aftermarket players like tire and repair centers, and then about 20% is actually by quick-lube operators or competitors, whether independent or chains like Valvoline Instant Oil Change. And so when we look -- I mean, given you only have 5 -- we only have 5% of the market, there's a lot of opportunity to drive share from all of those channels. And we're getting really smart using our data, our customer data and our marketing data on knowing what type of customer, what type of vehicle, what type of vehicle age is best for us to target based on the ability to win them for the first visit and our ability to retain them. And so we're getting our return on marketing spend is increasing because we're getting smart and we're using that data to our advantage.

Perfect. Maybe just thinking through the shifts in the industry and over the intermediate term, there's a shift towards synthetic that's probably good ticket longer term, there's this debate around electric. I mean, how do you, when you look out the next few years, you guys have given the 6% to 9% organic growth range. How do you think about these different secular shifts? Are those net good guys, net headwinds? And then how does that help for your kind of growth or is that long-term range?

I'll add. Maybe, Mary, you can chime in as well. When you look at this 3 to 5 years, EVs will not have an impact. The percentage of the car park is very small. And again, there is still a lot of demand that we can capture irregardless of what happens with electrification of the car park. But when you look at other tailwinds besides the ones that we will create for ourselves, premium mix is obviously a tailwind as cars become more sophisticated and require synthetic oil, that actually is a positive tailwind for us on the ticket side.

And on the margin side.

And on the margin side. And so I think that has a bigger impact relative to the 2 that you mentioned, Mary, anything to add?

Yes. Premiumization is going to continue to be an important part of our comp store sales growth. We've seen a tailwind from premiumization really has been part of the comp store sales growth algorithm over the past 17 years as synthetic use. We still have not reached 50% penetration yet for synthetics. So we still have a lot of penetration yet to go. We see that penetration increase pretty consistently on an annual basis. It helps us -- gives us confidence in some of our ticket growth as part of that overall same-store sales growth algorithm. So, and as I mentioned -- piped in with Lori, it's not only -- full synthetic is not only our highest ticket price point in the stores, it's also the highest margin return in terms of the transaction when we perform it.

Perfect. Maybe shifting gears a little bit. A big part of the Valvoline story now is unit growth as an independent company. You guys have said 7% to 10% annual unit growth, doubling your stores over time. I guess, first, can you talk about how are you funding that? Is it just out of free cash flow? And then what are the unit economics or hurdle rates that you require or look for in a new location?

Sure. So I'll start with the latter part. We typically target a minimum of mid-teens return, which is substantially better than our high single-digit weighted average cost of capital. And we've been able to more than maintain that return even in the face of some inflation that we've faced in construction costs over the past couple of years, really due to better store performance coming out of the ground. We talked -- Lori talked a little bit about some of the real estate modeling that we do that helps make certain that we're well located. That real estate modeling uses a significant number of statistical variables that is incredibly highly predictive of how of a location is going to perform. And so when we're investing in new locations, I view it as a relatively low risk because of the highly predictive nature of the real estate model that we're using. And that's something that we're able to provide to our franchisees as well in terms of real estate modeling. On the first part of your question, refresh my memory again.

Just how you guys are funding the growth and the possibilities?

Oh, funding the growth. Yes, so historically, we've funded the company growth from free cash flow. We are trying some new things, looking at use of build-to-suit potentially use of sale leaseback to help us drive lower overall capital spend and higher return on invested capital. And so those are some of the things you'll probably hear more from us about this year.

And I think the other thing to get to the 3,500, we're assuming our franchise growth triples on a new unit basis, annually to 150 units. And that actually drives amazing return on capital invested, but also will accelerate the network growth over the next coming years.

And how do you decide, M&A has been a part of the growth for a long time? What is the decision of build versus buy? Do you have a preference? Or is it -- how do you make that decision internally?

I think if there is an operator in the right location that is willing to sell at the right price, that obviously is very attractive because you come into an income stream and then we know what we can do to grow it. But there are oftentimes where new retail development is happening, where there is not an existing location to buy. And then those, what we find as new builds can -- in the right locations, new builds will actually deliver a better return than when an acquisition will drive because the matured volume is much higher, even though it may take longer. It takes up to 4 to 5 years to get to a mature rate, whereas an acquired store will have a lower peak, but we'll get there more quickly. That being said, we also have to look at the market dynamics. So if you're in a market that's highly penetrated with independents, adding more capacity of preventive maintenance centers is not always a good thing. You can still share and we do, and we're very successful but it does take longer to build a brand-new store when it's very highly saturated. So we look at the market dynamics. If you look at Detroit, for example, the number of quick-lube centers to the population is the highest that you'll see across North America, and that's because the population in Michigan has changed dramatically over the last decade, versus if you look in an area like Arizona, it's very lowly penetrated or even parts of California where there actually needs to be more service providers. That area is underserved. And so when you have underserved areas where you have land to develop, a new build is going to give you most attractive return long term. But if you're in a very saturated area, you immediately, your bias is to do M&A but location, location, location, just like in all retail location is key.

We use that same real estate analytics on M&A that we use on new builds as well.

And then maybe how are sellers in this environment given all the crosscurrents defensive market, maybe a softer macro, I guess, are you seeing any more sellers coming to market? And then who do you typically bid against in these processes? Who is the other buyers?

I think when it comes to M&A, what we've seen is since COVID, there is much more appetite to sell, and it's really around timing for the independent owner because the drive for talent, the market dynamics and interest rates make it very difficult for independent operators who are only operating a couple of stores to operate. And so we found over the last 3 years a lot more discussions that are happening. And who we compete with is all of the players in our space are looking to grow sites. And so we do have a great brand, and we do market to a little under 4,000 independent quick-lube operators every year, twice a year. And we have a business development team that keeps in touch with them. Even talk shop with them and gets to know them. And that gives us an advantage where we've built a relationship because oftentimes, they want their people to go to a company that's going to take care of them. And so on the M&A side, everyone in our space is trying to grow. It's a very fragmented market. And so we see a number of competitors. On the new development side, what we find is there are developers who are looking for premium retailers to build out a space. And there, it's us relative to a Chick-fil-A or a quick-serve restaurant, Cane's or whatever the quick serve that's trying to build in that area. And so it tends to be less about us versus other quick-lube providers. And it's us relative to a car wash or a quick-serve restaurant or another retail option.

And Lori, I would add on the M&A side that one of the other benefits that we have is there's multiple ways that an independent can enter our system. They can enter as a franchisee, they can enter as an express care operator or we can acquire their stores directly. And so that gives us more flexibility to work with those potential additions to our system than just a direct M&A transaction.

And I think it's important, many people may not understand when you're an express care operator, you get to use the Valvoline product and the Valvoline brand, but you don't have to use the systems, you don't have to have the look and feel of the building and you can offer other services beyond the menu that Valvoline Instant Oil Change will outline. And so there's a lot more freedom, but you can get the benefit of the brand and a lot of the consulting and services support that we provide express care operators. When you move to being a Valvoline Instant Oil Change or a Great Canadian Oil Change franchisee, you get all of that, but you have to live by certain brand standards and menu and you have to use the service, and it has to be the SuperPro process and you have to live up to the brand requirements. And some operators don't want to do that. They want to have flexibility. And then, obviously, they want to exit. So when we have our business development team out in the market, the reason why we can justify doing that across 4,000 independents because we have a menu of ways that they could interact with us. And that gives us a very return on investment for those resources.

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And I'll repeat the question quickly. Just how do you think -- the question was how do you think about the market growth for oil in the U.S.?

Yes. So the market overall really is driven by miles driven, where we're seeing low single-digit growth. So from an overall perspective, it's a relatively slow growth in overall marketplace. The opportunity that we have in terms of our 5% share of the more than, almost $470 million do it for me oil changes that are being done in that market today, is expanding that market share, both through unit growth as well as expanding the capabilities within our core existing over 1,850 stores. So we think that we've got a proven approach to growing substantially faster than what the base TAM is growing.

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And the question was just pricing differences on comparable services between you guys and either the dealer or other tire installers?

Yes. So first of all, we benchmark both our oil change pricing as well as our OEM provided services across not just quick-lube operators but also other chains -- other providers. As it relates to oil change, I think what you find is a discounted oil change at the other channels tends to be equivalent on -- very close on the conventional side. And many of those other providers, whether it's a tire installer or a dealer uses that as a way to bring customers in so they can sell them their core business services or sell them another vehicle. And so it tends to be, our pricing tends to be -- our discounted pricing tends to be about the same for any customer that is in the channel for conventional. I think then beyond that quick-lube operators all have very consistent pricing for synthetic and [ make a ] blend, the synthetic blend. And what you find is many of the other providers they don't post their pricing. Dealers tend to be higher, on the higher mix and models for full synthetic. And then many of the other players, they don't offer multiple tiers and/or they don't really disclose or advertise their pricing on the oil changes. As it relates to other value-added services, we pride ourselves in that our OEM recommended services are between 25% and 40% less than dealer pricing. And again, most of the tire installers don't do those services or when they do, they don't advertise their pricing. And when you look at our pricing on those other services relative to our peers, most of our peers do not provide those services. And so it is an extension that we do in order to provide our customers quick, easy trusted service across a broader mix of preventive maintenance services. So I would say core oil change, a lot of consistency, value-added services, not only are we easier and more convenient but we're lower cost.

And those price difference have they changed at all like from past quarters?

No. I mean we benchmark twice a year to make sure that our pricing is in line and relative to the experience we provide. We've been expecting to see more erratic discounting in the environment, but we're -- we see pockets but not anything pervasive even regionally not pervasive. So I think that's driven more based on labor. So the labor environment has been particularly tricky. The other channels are using more skilled certified mechanics. And we do not require that level of certification. In fact, we train our people with no automotive experience to provide the services that we provide. And I think because of that, you're not seeing as much discounting happening to bring customers in because they have a challenge of serving or they have had a challenge of serving over the last 18 -- 12 to 24 months.

And maybe follow-up on that labor side, Lori, just mentioned it, but the advantage of not needing a full service tech. I think you talked about going into summer is the best labor position you guys have been in years to meet that demand. I guess, how does that -- you just guided fiscal '24, this is your fiscal 4Q -- ever. How do you feel about your labor setup or ability to meet demand over the next 12 months? Or are you adequately staffed? Are you still searching for labor? And are we seeing wage pressure slow at all?

So right now, we're -- we just measured our October attrition rates, and we had the lowest attrition rate for our business in the last 24 months. And so we're really seeing less turnover in our stores. Now some of that is the environment across retail. There's a lot less movement. I think everybody is seeing attrition rates, but ours have come down significantly in this last year. And we attribute it to some initiatives we started last year, which were around how we onboard and now we're starting to look at how we train. Because we have collected data around when do people leave and then use exit interviews to confirm why they left and then have used that to change our onboarding process and also our recruiting process. Are we setting the right expectations for what the job is. And isn't to how do we onboard and how do we train them in the first 7 to 14 days. Once we get associate to stay 180 days, the attrition rate drops. So we can get them to stay 6 months, they typically stay unless they're in a life change situation.

Got it. And then maybe to go back to unit growth. Last quarter, franchise growth picked up nicely. I think that was a nice positive surprise. Can you talk about what drove that improved trajectory and how you feel about that going into 2024?

So first, it wasn't a surprise, Daniel.

For us it was.

I think we tried to explain in Q3. Q3 was a surprise with only one net new. And some of the dynamics we saw is that, again, in FY '23, 50% of our franchise units, roughly 50% were new builds, that's new construction projects. And for many of our franchisees, they aren't in the business of doing new construction. This is relatively new for them. And so managing the supply chain issues around things like electrical boxes and bay doors and things that you need to actually open the store as well as working through the permitting challenges, which are very unique municipality by municipality. Those were things that they didn't want help on, they didn't feel they need help on until they needed help on. And so as soon as we started seeing some of the issues in Q3, we put in place more specific support and engagement in our Development Council specific to pipeline execution. And that then talking about whether or not we create an order for bay doors that everybody can order off of, but we've got a stable, that's held in supply for all of Valvoline network or a national permitting company that when you're in a municipality and you need help through a permitting process. You can engage a service provider that's local and understands how that municipality works. So those are things that we were able to quickly put in place and the reason why we were able to deliver largely most of the units that we're supposed to deliver in Q3 and Q4, they all came in Q4 for the most part.

And then stepping back, can you just talk about the franchise growth momentum? I mean, you guys have been talking about adding new franchisees for a little bit. How is that conversation going?

Yes. So we've made last year when we rolled out our growth algorithm, and we talked about our aspiration to get to 3,500-plus stores, we set plan in place to get to 150 new units on the franchise side per year by fiscal 2027. Now to clarify, 2/3 of those, we think, are going to come from our existing franchisees and having just spent a week in Austin with them, we feel really good about that. And we're working through both territory agreements and development agreements and we've put in place new incentives. And so we feel very good about that piece of the growth. The other piece or 1/3 will come from the recruitment of new franchisees. And that is a new effort for Valvoline. Other than the business development process we already have going out, we're looking to find a handful of more scaled franchise partners, and that is a new effort for us. So we've started that over the last 6 to 9 months and have had increasing conversations with individuals, family offices as well as financial sponsors who are very interested in becoming franchisees of Valvoline. Each -- when you're only looking to do 2, 3, 4, 5, what you find is that what they require is unique. And so we're in the process of discovery, and I think we'll have more to report. But now what I'd say is there's a lot of interest and really trying to do the matchmaking of the right partner for us, who's looking at the service standards that we require, the development that we would be interested in doing. Whether they want existing stores or they want greenfield, in what location with what support. All of those things will take us time, but the interest is very strong.

What are some of the reasons that [indiscernible] go to dealers? Or are they going with sort of competitive shops?

This question around tech retention and why people have left historically?

To be honest, it was a mix. Sometimes it was that we didn't let them know what the experience was going to be like. We also had a lot of -- we also typically had a lot of folks seasonally that go work in landscaping. And this year, we had less sleep to go do landscaping. And so there are other -- it's not -- they're not going to be certified technicians and they're not going to competitors. They're going to other retailers, maybe where they can be a store manager that might be in a faster track or they have -- they get more hours. We did have a lot of folks where they would come in. They wanted to work full time and we weren't giving them full-time hours and so they could go and get full-time hours at another retailer. We've changed that. So there's a lot of things that we saw that we've changed. We also had some challenges with our training. I mean if you've ever been into one of our service centers, that oil change experience has a lot of components to it and it's very fast paced. I mean it's done in a team environment. And the training, we did it all be it -- with COVID we went all to virtual training. And when you do the virtual training and then you get them on the floor, it can be very stressful and overwhelming. And without the right market training support and store manager support, we have people who felt like they couldn't be successful and they opted out quickly. So those are all the things that you get into when you start to see the stats of when they leave, was when their training was done and they were staffed to be in the role without any help, we saw a big drop off in people not turning up because they weren't ready to be in the role. And so there are just a lot of changes that we've made in the last year, and I think that's contributed greatly to improve retention rates.

I know you said these are not going to be huge impact in the next 3 to 5 years, but are there any dynamics that you could call out in the markets where they can be even more penetrative like California?

Yes. So one, we say it's very penetrative, but that doesn't mean we don't think it's coming. And we've been investing in pilots. So we've done 3 pilots in our company-operated areas, 1 in Indianapolis, Dallas and Atlanta. And really, we did that because we wanted to both train our technicians on how to serve an EV in our stores with the services that we could already currently provide. And we do that with new makes and models that require a different set of service provisions where the air filter might be located in a different location. We've got to train our team in order to be able to provide the services we provide when a new vehicle maker model is introduced and even though they won't see that model very frequently. So that was one of the things we were testing for, which went very well. Our team was very excited to be able to serve EVs. Second was about interacting with EV customers to understand what they understood about vehicle maintenance or not. And just like with ICE vehicles, most consumers do not know what maintenance the cars require. They really need to be educated and told. And so that helps us think through how we will market, how we make brand services, and we're starting to learn what services are required. By looking at what -- for example, one of the OEMs is providing a lot of Tesla maintenance service and they've reported on that. So just learning what's being done in the space allows us to understand what services we might provide. Now there are some DMAs in California, not surprising if you look at Sunnyvale or Palo Alto, the penetration rate of EVs, particularly Tesla because its highest volume EV in the U.S. right now. It's a much higher penetration. And we're looking at whether or not we should be doing something in those geographies and what that might look like. So more to come on that.

Great. And then Mary, maybe we'll shift to the financial side a little bit. You, guys, have given a long-term financial framework, kind of 26% to 29% EBITDA margins. I guess what are the biggest puts and takes that would in a couple of years, be at the high end -- that would make us be at the high end of that range? Or inversely on the low end of that range, if things go against you guys, how do you view that margin expansion opportunity?

Sure. Shorter term, the opportunity really is around fixed cost leverage. As we see nice double-digit total sales growth, we should be able to leverage our fixed costs, both store fixed costs and our gross margin line and SG&A cost to see some nice modest EBITDA margin growth. Longer term, the bigger opportunity really becomes with the mix of company stores and franchise stores. Franchise stores, we make 3x margin rate that we do on company stores. And so as we see that mix toward franchise stores grow faster from a business mix perspective, we'll see that margin rate opportunity grow toward the higher end of that range.

And I think investors still have legacy learnings about the oil impacts kind of commodity impacts on the business. Can you just remind investors in this forum maybe how they should think about movements in base oil prices through the new Valvoline model?

So we tried to provide some additional guidance on in our last earnings call. So if you think about lubricant costs, the biggest component of lubricant costs are base oils, and with the dollar increase in base oil costs, that translates to about a $0.50 increase in the cost for an oil change. And so that means that we would need to adjust pricing by $0.50 in order to be dollar [ hole ], not rate [ hole ], but dollar [ hole ] in terms of that transaction. And so that's just trying to give you some sensitivity as we're looking at that the commodity cost in terms of the lubricant costs for the services we're providing. Now the lubricant costs are our second largest cost to cost of sales. Labor cost is still substantially the largest component of our cost of goods sold. So there's significant opportunities for us in better managing labor costs in the -- some of the efficiencies that Lori has talked about in the past on the labor cost side where we have real opportunities.

And then maybe just related to that, as we think about, Lori, you talked about the idea of centralizing operations, decentralizing costs. Those are not long-term kind of targets you've given. But I'm curious when you look at the business, where operationally, do you see that opportunity to centralize, what kind of processes?

Yes. So some of it is in the guidance, just to be clear, but I think there's more opportunity. So when you think about centralizing costs, we have a labor scheduling team now that's centrally reporting into our central ops team. In the past, every store manager would set their own schedule. Our POS system would make -- would look at the past 3-month trend and the look-forward trend, and it would give it a forecast for a number of hours that were required for the store manager within a schedule. And then it would be up to reporting to make sure that they were over scheduling and then reporting after the fact to look at overtime hours. We've been putting in a lot more reporting down to the area manager role and putting in new tools so that this first past schedule will be done for the store manager. And that then takes out a lot of the variation and the mismanagement that can come with a new store manager or perhaps a lazy store manager, which in a fleet of stores are going to have them. And so that's been the focus this last year. We've got a lot of leverage. But then there's more leverage in using technology to take work out of the process, either to make the process more simple or shorter. And by doing that, you can serve more cars with the same labor that you had, which creates that efficiency. Our central ops team is the one that manages that customer experience process and works with tech to enable any changes. And so that's a big part of the focus going forward. There are some pilots we currently have underway that right now is taking 30 seconds out of the oil change, which then leads to a half a car more just during peak times of upside that can be captured. And so we continue to test those out while we are looking at bigger change and bigger efficiency plays using technology. That's on the labor side. There's a whole bunch of expenses in running stores. And an example, there's a lot of low-hanging fruit that we've been capturing and we'll continue to capture. One was that we're opening a lot of stores and every store has a bunch of things that have to be ordered to get it started from gloves and uniforms and tools and the specific wipes we have. And we were ordering those as a one-off basis. And now we have a team that orders them in bulk and creates what we call a store in the box that gets sent to every new store, whether it's company or franchise, with those items in it. And that way, we get economies of scale in the buy, and then we can make it easier for the store manager to take those items. They're actually stacked in the box to make it easier to then inventory in the store. So that's a big -- that was a big lift that happened and benefited this past year. But also, our business has traditionally been maintenance break fix, meaning when something is broken, you order the parts, you redo it. We've been analyzing the data of all our service maintenance requests and getting after and using that same kind of scale buying in the same way. Whether it's in a region, looking at HVACs and negotiating with an HVAC provider to actually proactively do maintenance on ones that we know or do or it's even as simple as we have the doors, the bay doors that go up and down with every service, there are springs that wear out. And so we would order the springs on an ad hoc basis, which means the doors wouldn't go up or down until you can get the springs in. Well, instead, we just ordered 100,000 springs and we put them in regional locations and on the trucks such that the doors can be fixed immediately, and we get a lower cost for every spring. We also went reengineered the spring and said, well, the spec spring is not giving us enough duration. So how do we reengineer the spring, in order to have less maintenance calls, which lowers our maintenance cost in terms of the technician time, it also reduces the cost of the springs that you end up using and the downtime of the bay door. So it's just taking the data and almost like an industrial engineering, just knocking out the low-hanging fruit is what we've been focused on and we'll continue to focus on.

Great. Well, we have, as always, run over time. So guys, I appreciate you guys joining us. Thanks for being here.

We're happy to be here. Thank you.

Thank you.

Thank you.