Valvoline Inc. (VVV) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining the Valvoline's Second Quarter 2025 Earnings Conference Call and Webcast. My name is Mary, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Elizabeth Clevinger of Investor Relations to begin. Please go ahead.

Thank you. Good morning, and welcome to Valvoline's Second Quarter Fiscal 2025 Conference Call and Webcast. This morning, Valvoline released results for the second quarter ended March 31, 2025. 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 Mary Meixelsperger, our CFO. As shown on Slide 2, 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. Non-GAAP results are adjusted for key items, which are unusual, nonoperational or restructuring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our 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. 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 for joining us today. I'd like to start with a quick look at our second quarter highlights on Slide 3. Our system-wide sales increased 11% to $826 million, and our same-store sales growth for the quarter was 5.8%. Total net sales increased 11% to $403 million, when adjusted for the impact of refranchising. Adjusted EBITDA increased 6%, also including the impact of refranchising. Our system-wide store count is now 2,078, up 8% over the prior year. And we announced this morning that Kevin Willis would be joining our team as CFO, effective May 19. Before I provide an update on our strategic priorities, I want to cover a couple of topics that are top of mind given the current market environment. First, on Slide 4, I want to provide our current assessment on tariffs. With what we know today, we expect the impact to be minimal. We put together a cross-functional team more than 6 months ago to collaborate with our suppliers. Our largest product cost is finished lubricants, which are primarily composed of base oils and additives. It's our understanding that base oils remain exempt from tariffs as of now, and we expect most additives to remain exempt from tariffs as well. The next largest supply category is ancillary products like filters and wipers. We've worked with our suppliers to shift the majority of our supply from China to Vietnam, and we continue to review alternate sources to optimize our flexibility. When we look at our inventory on hand and factor in the 90-day pause on the reciprocal tariffs, we do not expect a significant change in cost for fiscal year 2025. And we continue to look at other areas of spend to evaluate any tariff impact. As it relates to construction materials and equipment for our store additions, we expect a single-digit percentage increase on new store capital cost. As it relates to other costs like store maintenance and technology, we expect a low single-digit increase as well. In total, for fiscal year 2025, we expect an operating cost impact of less than $4 million system-wide. This includes the impact on franchisees, but excludes any additional mitigating actions. And we estimate the annualized impact to be about 1% to 2% increase to our cost of sales, which we will mitigate through cost reduction efforts, alternative supply strategies or pricing pass-through to customers. As a result, we feel very well positioned to navigate the changes as they come. The other topic is around the macro uncertainty and state of the consumer. It's important to remember that we are a strong business in a very resilient industry with a lot of growth potential. Our industry has strong fundamentals and resilient long-term demand drivers. Customers are continuing to drive more, keep their vehicles longer and seek convenience. And we have not seen evidence of deferral of service or trade down from our customers. We are well positioned within the industry to provide customers the quick, easy, trusted service necessary to maintain their vehicles. Our powerful brand, superior service experience, strong franchise partnerships and robust customer data differentiate us from our competitors and position us to meet customers' needs for preventative vehicle maintenance. As we look at the total available market, there is considerable opportunity for growth, considering we currently only have about 5% of the overall market share related to the do-it-for-me oil changes. Now let me provide an update on some of our strategic priorities. This quarter, we saw growth in our business across all quartiles of household income and growth in NOCR across all store quartiles. We had healthy transaction growth across our business, including for our mature store base. Our marketing sophistication is a key competitive advantage that helps us drive strong demand. We recently completed the transition of our customer and marketing database into the cloud, which will enable us to deliver increased efficiency and personalization of our marketing spend. And we had a great launch of university athletic partnerships in 2 company markets of Ohio and Tennessee during March Madness targeted towards new customer acquisition. We also continue to make progress on talent management with rolling 12-month attrition rates remaining low and wage inflation moderating. To enhance capabilities, we successfully implemented the first phase of our HRIS system, Workday. This new platform enables further development of our labor management capabilities and improves our ability to engage directly with our over 11,000 team members. As we approach the summer drive season, our team is staffed and ready to deliver outstanding customer experience. Given about 80% of the customers we serve are customers we've served before, delivering a consistent and high-quality experience is fundamental to our growth. We are pleased to report that based on over 1 million surveys in the past 12 months, our customers have increased their rating of Valvoline Instant Oil Change to 4.7 out of 5 stars. I want to thank our company and franchise store teams for the work they do every day to deliver best-in-class service to our guests. On accelerating network growth, this quarter, we added another 33 net new store additions, bringing our year-to-date total to 68. Our pipeline for the year is more back half loaded than we would have liked. However, when we look at stores already in construction and the acquisition pipeline for both company and franchisees, we have confidence in our ability to deliver store additions well within our guidance range. During the quarter, we announced that we would be adding approximately 200 additional stores through the acquisition of Breeze Autocare. In early April, we received a second request from the FTC. We remain excited about this opportunity, and we continue to work to gain approval to close the transaction. While we do not have complete control over the time line, we hope we can close the transaction in the second half of fiscal 2025. Before I wrap up my comments on accelerating network growth, I want to give an update on what we're seeing in the markets that we refranchised on Slide 7. You'll recall during Q4 of last year and Q1 of this year, we completed 3 refranchising transactions, which included bringing on a new franchise partner in our Central and West Texas market. These transactions deliver shareholder value when the sum of the transaction price, combined with the present value of the future cash flow streams from existing and committed store growth represents a higher overall EBITDA multiple than our current trading. The key factor is delivering on the committed store growth. So I'd like to provide an update on that. While we are just a few months in, we're already seeing the new store pipeline grow from these 3 franchise markets. And we expect to have double-digit additions by the end of the year. We also have 2 new franchise partners that joined the system in the last 2 years and have now ramped their pipeline from 1 store every couple of years to already opening 4 new stores this year, and their pipeline growth is exciting. I'm pleased with the momentum that we have been able to create with our franchise partners to accelerate network growth. While these 3 franchising transactions will create long-term shareholder value, they do create near-term comparison challenges. So Mary will provide additional information on how these transactions impact our financial comparisons as she reviews the results. But before I turn it over to Mary to take us through our financial results in more detail, I'd like to thank her for her dedicated service to Valvoline since the company's IPO in 2016. I want to personally thank her for her leadership in the many ways she supported me as I joined the company and then stepped into the CEO role. While she'll be supporting the transition, we want to take this opportunity to wish her all the best in her much deserved retirement. With that, I'll turn it over to Mary.

Thanks, Lori. It's been an honor and a privilege to be part of the Valvoline team. I'm looking forward to my retirement, and I'm grateful to have had the opportunity to work with amazing teammates and franchisees over the past 9 years. Let's now turn to take a look at the financial results for the second quarter. Net sales for the quarter increased 4% on a reported basis and 11% when adjusted for the impacts of refranchising. System-wide same-store sales increased 5.8% and 14% on a 2-year stack. For the quarter, approximately 1/3 of the comp growth came from transactions despite the impact of leap day and the shift of the Easter holiday during the quarter, which had a combined net 50 basis point headwind for the comp. On the ticket side, premiumization and net pricing were significant contributors. NOCR service penetration was also positive and as expected, did decelerate as we lap the training initiatives put in place in late Q1 of last year. Turning to the next slide. We'll take a look at the financial drivers for the quarter. Gross margin rate declined 30 basis points year-over-year to 37.3%. During the quarter, there was deleverage on product cost and store expenses, primarily driven by depreciation from new stores. These items were partly offset by leverage in labor due to top line growth, moderating wage inflation and continued strong labor management. As we shared at the end of fiscal year 2024, we would expect maturing stores to add about $70 million of additional EBITDA over time. SG&A as a percentage of sales increased 150 basis points to 19.3%. The deleverage was primarily driven by the impact of refranchising, while technology investments account for most of the remainder. Our adjusted EBITDA margin of 25.9% is a 110 basis point decrease over the prior year. On Slide 11, we'll take a look at overall profitability. As Lori mentioned, the refranchising transactions impact the comparisons to the prior year. Adjusted EBITDA is $104 million, a 6% increase over the prior year on a recast basis. During the quarter, adjusted net income of $44 million increased 3%, taking into account refranchising. On a GAAP basis, net income for the quarter is $38 million. Adjusted EPS of $0.34 per share also increased 3% considering the refranchising impacts. Turning to Slide 12. We'll take a look at the balance sheet and cash flow. Net debt increased $44 million during the quarter from additional borrowings on the revolver. We ended the quarter at 3.4x leverage ratio on a rating agency adjusted basis. Looking at cash flow impact, excluding growth CapEx, decreased 1% and was also negatively impacted by the refranchising transactions. Our capital allocation priorities remain the same: first, to fund growth; second, to stay within our target leverage ratio; and third, to return cash to shareholders via share repurchases. As we mentioned last quarter, our share repurchases for Q2 were $21 million and brought our year-to-date total to $60 million. Share repurchases have been paused in anticipation of completing the Breeze acquisition. I'll now turn it back over to Lori for some closing remarks.

Thanks, Mary. I'm pleased with the performance of our business in Q2. Our resilient and durable business is built to deliver growth despite the macro environment uncertainty. We anticipate the potential tariff increases will have a minimal impact in fiscal 2025, and we will continue to take actions to mitigate, including the flexibility to adjust pricing when needed. With the continued customer demand for our nondiscretionary services, we remain confident in the business momentum and are reaffirming guidance. With that, I'll turn it back over to Elizabeth for Q&A.

Thank you, Lori. Mary, can you please open the line?

[Operator Instructions] Our first question comes from the line of Mike Harrison of Seaport Research Partners.

I apologize if I missed this, but can you break out the 5.8% same-store sales between ticket and car count? I know you mentioned that non-oil change revenue was decelerating in terms of the average ticket contribution, and it sounds like there was some day mix headwind to the car count. But roughly, how did that break out?

Mike, we said that transactions drove about 1/3 of the overall comp and 2/3 were driven by ticket. Transactions were adversely impacted by the net impact of leap day, offset by the Easter shift. So the Easter shift last year, we were closed on Sunday that we were open this year. So the net headwind from the combination of those 2 things was about 50 basis points to the overall comp and most of that would have been on transactions. So if you were to adjust transactions for that, we would have been closer to 50-50 in terms of transaction growth versus ticket growth. So it was pretty fairly balanced for the quarter, which we're pleased to see continued growth in transactions.

All right. And then just in terms of the EBITDA margin decline compared to the prior year, it seems like that's kind of related to what's going on with SG&A costs. And you mentioned the refranchising impact on SG&A costs. And I'm just curious, is that an area where you're going to be taking some cost actions at some point in the rest of the year? Or is it something that we just need to see you kind of grow into in terms of additional store growth over time? Any thoughts on how we should see that SG&A as a percent of sales trend in the second half and into next year would be very helpful.

Yes. So when we set guidance for this year, we knew this was going to be a bit of a reset year. The refranchising transactions, combined with some of the technology investments that we've made, we knew that we were going to see some deleverage in SG&A. My expectation is as we move forward, we'll see that SG&A increase moderate, and we'll be lapping the impact of the refranchising transactions. So I would expect over time that we should see some more -- less challenges in relationship to deleverage on the SG&A line. Anything you'd add, Lori?

No. Mike, I think Mary has it exactly right. This year, we talked about being a reset year because of the decrease in the top line, and a lot of the cost to support the full network continuing combined with a step-up on the technology side, which is not -- those kind of step-ups are ones that we foresee continuing to have to make. And so when we talked about the long-term algorithm, we talked about SG&A growing at a lower percentage than the sales growth. But this year, because of the change on the refranchising impacting in the top line, that put pressure. But we don't expect that to continue. We expect to get back towards leveraging our G&A as we continue to accelerate network growth and drive the core business.

And Mike, on your question on cost, we're keenly aware of the need for cost efficiency and cost management. So it's an area that gets a lot of attention internally as we think about balancing our growth initiatives with the type of investments that we need. Certainly, we've made some big investments on the technology side with our new ERP, our new HRIS system, the replatforming to the cloud of our marketing database and continued work that we're doing around some of the replatforming of the store level technology as well. But as we think about the management of overall cost, it certainly is an area where we're paying a lot of attention to it and really wanting to drive efficiencies. When you implement some of these systems, you're basically implementing them at kind of a minimum viable product level and then being able to start really leveraging their capabilities over time. And I see there being real opportunities for the organization to be able to take advantage of some of the cost efficiencies in labor management as well as in some of the G&A categories to better automation, et cetera, from some of these investments that we've made over time.

We have a question from Steven Shemesh of RBC Capital Markets.

Just higher level, there's obviously a lot of hesitation around the state of the consumer right now. So against that backdrop, can you maybe just provide a little perspective on the cadence of comps throughout the quarter and what you guys are seeing quarter-to-date?

Yes, Steven, happy to do that. We did see a weaker February that we -- was driven primarily by really challenging weather in certain -- mostly company geographies. But other than that, we saw some pretty consistent January and March. And we're pleased with the continued strength of the business as we come through April here and into the early first week in May.

Yes. I would just add that this industry is a very resilient -- has very resilient demand because it's nondiscretionary, and there are a lot of underlining and positive tailwinds that we get from consumers driving more miles and that back to -- close to pre-COVID levels and growing, keeping their vehicles longer and looking for convenience. So those things all bode very well in terms of the underlying factors that are driving our business. I would just reiterate based on my prepared remarks, we continue to not see customers trading down or deferring their service overall. And we look at that by income demographic segment as well as store performance tiers. And overall, we saw growth across every dimension that we look at, and that was on a transaction basis as well as on an NOCR basis.

Got it. That's very helpful. And then just a follow-up on gross margin. Are you seeing any impact from base oil deflation, any benefit at this point? And maybe just a refresher on how exactly your contracts work and when that would actually flow through the P&L?

Yes. We've seen some -- we saw some modest deleverage in product costs in the quarter, which were impacted to some degree by some of the reductions that we saw in waste oil collection benefits. We also -- as we look forward, there's been about a $10 a barrel decline in crude. And we know that over the longer-term time frame, base oils tend to follow crude. As we're looking forward, Steve, we haven't really seen that benefit starts coming through. Certainly, the indexes haven't adjusted, but we'll continue to monitor it closely with our primary supplier. I'll remind you that we're kind of in the high demand season for lubricants. So I'm not terribly surprised, but I'm hopeful that over time, you'll see some nice tailwinds from declining product costs. And all of that, again, is offset by some of the other uncertainties that reduced broader consumer demand for crude can continue to drive down those product costs, whereas if there's any kind of refinery interruptions or turnarounds and those types of things can tighten demand. And so we keep a close eye on it with our supplier. But right now, we haven't seen any specifics as it relates to the balance of the year in terms of -- and nor have we baked anything into our guidance for potential future reductions.

I'll just add, Steve, that 53% roughly of our store base is franchise operators. And based on the contracts that we have with them, we pass that through on a penny adjusted basis when the index comes through. So you have a few things that counter any base oil impact or tailwind that we might get in margin. One, to pass it through to the franchisees. Two, waste oil tends to move up and down as base oil index changes. So there are a lot of things that will negate having a tailwind, but obviously, we'll look and continue to work with our supplier to lower our product cost.

We have a question from Simeon Gutman of Morgan Stanley.

My first question, I heard the comments quarter-to-date sounded fine. If we take the run rate that you did in the second quarter and then add back 50 basis points, is that like holding everything else constant, which I realize there's a lot of assumption in there. That should be the baseline run rate going forward for comps through the second half of the year?

Simeon, there's other things that come into play. It certainly lapping last year's numbers, both from a transaction and a ticket perspective come into play. We're lapping some of the initiatives on ticket for NFCR, although we're still seeing positive NFCR penetration. We're lapping some weaker transaction numbers from last year, which are helping our -- we also are entering into summer drive season, and we certainly expect strong growth from a summer drive season perspective and always working on marketing initiatives that will help us to drive higher levels of new customer acquisition as well as existing customer retention. So I would certainly say that you could think of that as certainly being part of a range, but our expectations, our guidance for same-store sales for the full year in that 5% to 7% range still hold.

Okay. And my follow-up, the franchise store comp being a bit ahead of the company-owned, we've seen spreads like this before. So it may just be seasonal location. Can you just talk about simplistically, I guess, on paper, you can argue that you should franchise more. And then should the rate of refranchising this year push that spread even a little bit higher, what should we expect with that spread? And how do we read it? Like how should we look at it?

Yes, it's a good question, Simeon. What I would say is year-over-year comparisons always have a play. But when we look at the comparison and what really drove the difference between the 2 is it was net pricing. And when we look at our franchise base system by system, they have done pricing changes at different times. And so we just see that, that is the biggest difference driver between the 2 comps is the number of system changes, pricing changes that have happened on the franchise side that have not fully lapped a full year. So going back to the last question you have, that does have an impact on the go forward. Some of those will lap, some of them will not. Our franchisees have full pricing authority for their businesses. We can do benchmarking in the marketplace broadly with dealers and other competitors, and we provide that information to them, but they decide when those pricing actions need to get taken. I'll also just remind you that some of our franchisees are in different geographic areas. And so as they have labor or other inflationary pressures, they may pass that through more quickly than we might see in the central part of the U.S. where most of our company stores operate.

We have a question from Maksim Rakhlenko of TD Cowen.

Can you guys first discuss the pricing environment that you're seeing and whether peers are starting to move their price points around? And then bigger picture, how do you think the competitive environment could evolve if the backdrop were to soften?

Yes. On the pricing environment, we're not actually seeing any significant changes from the competition. And I say that very broadly, looking at the way dealers are competing, the way auto repair shops or tire centers who also do oil changes are pricing as well as like the retail auto service centers and quick lubes. What we would say is there's -- we do look at pricing and we are watching to see if given the tariff-related environment, if there are folks that are changing their pricing, we're not seeing it pervasive, but it is a very fragmented marketplace. And so it's something that you do have to watch and look at in detail by region. But we're not seeing significant pricing changes. We do -- we have seen over the past year some competitive spots where they have caught up to the market, but I don't think they're going beyond or significantly outpacing the market from a pricing increase perspective. As it relates to the competitive environment, I'll continue to say that we don't see any significant changes in terms of the competitive landscape. Again, it's very fragmented. So it's difficult to see anything meaningful happening across the entire market, but we're not really seeing anything significantly different. We do expect that marketing spend overall for the industry will increase as we move into summer drive. Just looking at Google Search, the number of searches for Oil Change near Me goes up at this time of year. And therefore, it's got a great return on investment for not just us but others to spend in marketing in that way. But when we step back, we know that we're going to continue to win share and grow transactions across geographies and even in our mature stores, which we've done.

Okay. So next question, just curious, did the pricing component of ticket accelerate in 2Q? And if so, what do you attribute that to?

I missed that question. Can you -- I missed the start of that question. Sorry, can you repeat it?

Did the pricing component of ticket accelerate in 2Q? And if it did, what do you attribute that to?

The pricing component of ticket overall was strong. I don't think it was accelerated relative to past performance. It was largely consistent. And when we look at the contributors in Q2, I think Mary covered this, premium mix -- premiumization and net pricing were the 2 main contributors contributing roughly equally to the ticket overall, but NOCR was also a positive contribution. And I think the biggest change as it relates to ticket from Q2 relative to Q1 is on the company side, we lapped the NOCR initiatives, which were such a huge contributor to our -- not huge, but a significant contributor to our same-store sales comp over the last 4 quarters. It's still positive. It's just not at the same magnitude as it has been.

We have a question from Steven Zaccone of Citi.

This is [indiscernible] on for Steven Zaccone. The first question is, what can we expect with the drivers of same-store sales growth in the second half between ticket and transaction?

I just -- you're a little muffled. Let me just clarify. I think your question was what do we see the drivers for future growth in the company as it relates to a balance between ticket and transaction. Is that right?

Yes, same-store sales growth in the second half.

Growth in the second half, yes. Okay. Thanks for clarifying. I'll ask Mary to comment. But as we've been saying throughout the year, we see a really nice balance between transaction and ticket for the entire year, more so than what we've been in the past as we've lapped a number of initiatives from pricing as well as NOCR growth. So I think as you look forward to the back half of the year, we continue to expect a balance between transaction growth and ticket growth. I'll just restate when we look at Q2 performance, we saw growth in transactions across our store quartile, even in our mature stores. We're continuing to grow vehicle served per day. And that's exactly what we're trying to do is we're trying to grow the number of transactions we have in our existing stores, ramp up new stores while continuing to give great service, which will drive that ticket component as well.

Got it. And then my follow-up is, can you talk a bit more about gross margin performance in the second quarter and how it performed versus your own expectations? And if your full year view on gross margin being flattish year-over-year has changed at all?

Yes. Gross margin overall was pretty much in line with our expectations. If you look at the impact of new store depreciation, our gross margin would have actually been up 10 basis points if you exclude the impact of new store depreciation. So we had talked about margin over the year being relatively flat year-over-year in our last quarter's call and then when we set guidance originally. So we did see overall a little bit of deleverage in the quarter, but it was pretty much consistent with what we expected.

We have a question from David Bellinger of Mizuho.

Mary, thanks for all your help over the years. First one, just another crack on the SG&A side. Are there any areas of the business where you're seeing OpEx overages or running hotter than your internal plan? And then should we expect you to leverage SG&A as you go into fiscal 2026?

So we are not seeing any hot areas of SG&A overages relative to how we plan the year. I think we're doing a good job of managing SG&A relative to what our expectations for the year were when we set guidance. So I think the answer to your first question is no, nothing happening that's a surprise there. And again, the biggest challenges we've been faced with in that deleverage has been the refranchising as well as the technology investments. On the technology side, we went from legacy systems that have been in place and fully depreciated and amortized to both the implementation costs as well as the operating costs for new systems on new platforms that were significantly higher. So we see a onetime step-up related to those investments that we've made on the technology side. As it relates to moving forward, we'll provide guidance at the appropriate time. But I think Lori mentioned earlier in this call that we do expect SG&A growth to moderate and to be below where we see sales growth going forward. So we would expect that we'll see some leverage in SG&A moving forward in the new fiscal year.

Got it. And then just a follow-up on an earlier one, but it was still a little unclear. So how do lower oil prices impact your gross margins? And can you talk about the amount and timing of any impact that you might see?

Yes. So again, lubricants generally trail -- the pricing for lubricants generally trail or -- and specifically base oils and additives that go into the makeup of lubricants generally trail the broader market for crude. So over time, they're very poorly correlated. So over time, as you see changes in crude either up or down, if those changes stay in place for a protracted period of time, you generally will see the cost of lubricants either go up or down over the longer-term time frame. So that's what we have seen and experienced in the business. Where we are right now is we certainly short term, have seen declines in crude. Those have not flowed through to the index -- base oil index prices yet nor has our supplier communicated that they're seeing significant opportunities moving forward for lower costs, but we still believe that if crude stays at this depressed level over time that we should see some tailwinds.

And those aren't necessarily passed on to consumers. So you would hold your pricing firm? Or is that a lever you could play if we do get more promotional in any way?

Yes. We haven't -- I don't think across the industry, you've seen people lower their posted prices. You can make decisions around reinvesting some of that to drive more growth, but posted prices haven't really come down as base oil or crude prices vary. In the same way, though, when we've always talked about when the base oil prices go up, we have to pass that through to franchisees, which is an offset, and we look to pass that through to consumers. But typically, it's not the reverse. When the base oil prices come down, you don't see people clawing back the pricing. And we haven't had a history of doing that either and wouldn't plan to do so.

The other thing I would remind you of, David, is our largest component of our cost of goods sold is our labor costs as well as our store expenses. So product costs are a lesser component of the total cost of goods sold. So it does have an impact both up and down in terms of margins, but it's certainly -- we spent a lot of time looking at the larger aspects of our overall cost of goods sold in terms of managing our margins.

We have a question from Kate McShane of Goldman Sachs.

This is Mark Jordan on for Kate. It sounds like non-oil tranche revenue continues to be a tailwind here, but maybe in the near term, it will be less so as we lap last year's initiatives. So can you remind us what your penetration is right now with non-oil change and how that varies by quartile?

I'll start and then I'll ask Mary. We actually don't share the details on penetration rate. What I can say is that our penetration rate has been growing across our non-oil change revenue services, and it did increase this last quarter as well. When we look at what services increase in penetration, the visual elements of our non-oil change revenue services are the ones that have been increasing and continue to tick up. Those are the things that we can physically show the customer how the performance of those items are doing, windchill wipers, blades, battery, air filters, cabin air filters, et cetera. That's the biggest component. And the reason it's the biggest component is also because it's the things that the customer needs more regularly. As miles driven go up, the need for those or the frequency of those also increases with miles driven. So we continue to grow our penetration. We look at it both from an income demographic as well as from a store performance demographic. And on an income demographic, in stores with lower income demographics, there is some difference, but we continue to increase penetration even in those. And that's really -- we attribute that to operating excellence of our process and just making sure that we can communicate what is needed and show the customer. So when our team follows the process, that process sells those services on its own. We don't have to do a heavy sales approach. We just need to show the customer the performance of the items.

Yes. And I think importantly, Lori, we're seeing growth in core non-oil change revenue impacted ticket across every quartile. So even though we do have differences in performance by quartile, there's growth across all quartiles, which we really like to see.

And we've seen an increase in penetration for low-income household demographic stores, pretty consistent with the high income. And part of that is educating our team on the importance of these items and not underselling them to consumers in those areas because it does drive safety for our customers. So really just educating our team on why these are important and ensuring that they have the right stock and they can do them quickly, driving convenience and ease for our customers, those things actually really matter.

Lori, you mentioned earlier as well that one of the big differences in having lower turnover and the right talent in the right places is we actually -- with the right talent that's well trained, we see higher NOCR penetration, which is driven by that training and the education of the customer on the services being provided. So you mentioned earlier, we're really well positioned going into the summer drive season with talent. We're feeling really good about the position where we are right now.

Perfect. And then I guess it sounds like you're not seeing any changes in customer behavior, which is good to hear. But if we think about the potential for maybe a softer macro at some point, would you expect to see some degree of deferral with oil change intervals maybe extending out a month or 2 or another 1,000 miles? And would you expect to see certain of these attachment rates for some non-oil change services come under pressure?

Before I came to Valvoline, that would have been my assumption. But part of what you have to understand how the customer is thinking about it is as the price of a new vehicle or changing their vehicle is increasing. So the worry about what the outlay would be for upgrading their vehicle and/or repairing their vehicle if they didn't maintain it. The price of those things is actually, I think, created the demand or the realization for most of the customers. I'm not saying that everybody will defer, but for most customers, they will continue to maintain the vehicle they have to lower their overall sort of outlay of cash. So as customers are driving more and as they're keeping their vehicles longer, I think some of the macro uncertainty and tariff implications create more uncertainty around large repair bills and/or car vehicle replacement or upgrades that actually create the resiliency in our industry. So I would say it feels like they're more resistant to defer a trade down, although I know that's not going to be the case for 100% of customers. When we look at the customers that we serve, we don't see it, and we continue to watch for it.

We have a question from Thomas Wendler of Stephens.

Maybe just one more from me. As we think about the development agreements you have, how should we be thinking of the pace of new locations there? I think you noted 20 new stores in '25, and then you kind of talked around a franchisee going from 1 to 4 new locations a year. Just any color on that?

Yes. The reason why we gave the update is because we always expected that when we refranchise a market or when there is a franchisee change in ownership, it does take time to build momentum. And so as we're just a few months in, we're already seeing that momentum change in a very positive way. And I don't want to say that 3 or 4 stores is enough for us to declare victory, but it is coming very quickly. The opportunities in the marketplace to grow and put more stores on just given our stores only cover 35% of the population, we're seeing that momentum accelerate. And when we laid out our overall strategy to accelerate network growth, which included refranchising and changing out franchise ownership with franchisees that have more opportunity in their market, but we're not investing appropriately against that opportunity. We knew that we would -- it would take us a couple of years to get those in place and then the momentum would start to build, and that's exactly what we're seeing. While this year, the delivery in the first half is lower than what might have been expected, we look at the construction that's underway and the pipeline of acquisitions, we feel very strong for guidance, and we feel -- we still feel very good about the momentum we have to get to our 250 new units per year by FY '27. So I think the development agreements help. We have carrots and sticks in those agreements, and they've been serving us well. And we continue to ask our franchise partners what we can do to support them and their growth.

We have a question from Chris O'Cull of Stifel.

Lori, I had a question about the Breeze Autocare system. Can you talk a little bit about the level of investment needed to integrate that system? And I'm thinking about rebranding technology investments. But just curious what you discovered during your due diligence.

Yes. Thanks for the question on Breeze. I was wondering if anyone was going to ask because it's a pretty exciting opportunity for us to grow our network at a considerable clip with just one transaction. And we continue to be very excited about Breeze. It's a well-run business that complements us from a geographic perspective. Our main focus right now is to work with the FTC to close the transaction. And obviously, we look forward to providing more updates once we can get to that point. I think as we do our diligence, we look at every location, and we look at it as if we were running it like we run our current network and how much upside we would expect to drive with our brand, with our marketing sophistication, our fleet sales activity. There always are implementation costs, but I think the platforms we've been investing in that Mary talked about earlier, our ERP system, our HIS system, even moving the marketing data into the cloud, which allows us to integrate data in more quickly, more seamlessly, all of those things will drive a more efficient integration over time. But obviously, our main focus is to work with the FTC closely so that we can close the transaction. And then I'll be excited when that day comes and we can talk more about the forward-looking plans that we have for the combined business.

We have a question from Justin Kleber of Baird.

Curious if you gave any thought to tightening the comp outlook like you did last year after 2Q. It doesn't sound to me like the business is getting any more volatile, but the implied back half guide is pretty wide, and it looks like it would include something below 4% at the low end. I assume you're not planning the business at that level, but I guess just trying to understand what the biggest swing factors are in your view as it relates to the second half comp? Is it more about transactions? Or is it more about ticket?

Yes, good question. We didn't narrow our guidance. I think it was important for us to reaffirm our guidance. As you'll remember, the first half of the year typically contributes 40% to 45% of our year from a profit standpoint and 55% to 60% of it come during the dry season, which is Q3, Q4. So I think given how much we have ahead of us, I think we just didn't feel that now is the right time to narrow guidance. I will say that we feel very confident on all elements of our guidance. So I think we feel very good that the momentum of our business is on track, and we expect to deliver within the guidance on every element. Mary, would you have anything to add to that?

No, I think it's a good summary, Lori.

Got it. Okay. And then just a modeling question as we think about the third quarter, and it sounds like you're going to have an Easter shift headwind. I don't know if there's any other offsetting day mix impacts, but just how are you thinking about or how should we think about the headwind to the comp from Easter moving into fiscal 3Q this year?

Yes, sure. We had a little bit of a benefit in Q2 from the Easter where we were closed on a Sunday last year. This year, we were closed on a Sunday in April. The benefit that we saw in the month of March -- excuse me, in the quarter related to that was about 80 basis points, which offset the 130 basis points from weekday. So that was a net 50 basis point headwind in the second quarter. So we'll see a little bit that reverse headwind on the Easter shift in the third quarter. But overall, we've got that pretty well factored into our guidance and expectations when we planned the quarter.

We have a question from Peter Keith of Piper Sandler.

On the refranchising, I don't think it was quantified, but is there a way that you could give us the lost sales and EBITDA in the quarter from the refranchising? And what those numbers will then look like for Q3, so we can make sure we get our models set appropriately.

Yes. So in the press release that we issued this morning, we included a chart that shows both revenue and adjusted EBITDA recast for last year as if the refranchising had occurred and has been in place last year and of course, for the current year as we reported it. So you can actually see that the impact on revenues and EBITDA kind of detailed out there. And for the quarter, we had an impact -- EBITDA recast for the refranchising was up 6%. And other than that, I think that, that chart that's in the press release should be able to help you with that modeling question.

Okay. We are swimming in a lot of earnings this morning. So I'll take a closer look once the call concludes. What about on the EBITDA margin decline, including refranchising for the rest of the year and all the various puts and takes, is this the low watermark for year-on-year EBITDA margin decline and perhaps there's continued decline, but just not to the 2 and what we saw in Q2?

Yes. I think if you just look at your modeling relative to the guidance that we provided, you should be able to see the overall impact. We've reiterated our guidance at the $450 million to $470 million. And we've reiterated our net revenue guidance as well in the $1.67 billion to $1.73 billion range. So I just think if you look at that on a quarterly basis and do your math, we should be able to see that play out. I would expect that the deleverage in SG&A will moderate in the back half of the year. So helping me with that math a little bit, I think that we should see some improvement in EBITDA margins in the back half of the year.

We have a question from David Lantz of Wells Fargo.

Can you talk about the cadence of new store openings in the second half of the year? And if demand proves choppier than expected on the back of tariffs, would you contemplate pushing any of those openings to '26?

Yes, good question. As I mentioned, we did 33 new store additions for the quarter, and we're at 68 for the year. It's a little slower start than what we had in FY '24, I think, largely just given the timing of M&A closings. But when we look at our -- like what units are in construction, meaning they already broke ground, they're already moving forward, and all the work we've done in the past 18 months around permitting support to work with cities to make sure as we get trades done and they have to be approved before we can move forward, I think we feel pretty strong about the timing of those construction openings. Obviously, they can always move a week or 2 around. But in general, we feel good about those. And then when you look at the acquisition pipeline, both for us and for franchisees in terms of those that are already under LOI or we're actively negotiating the final details on, when we add all of those up with some wiggle room as we always would have, we feel pretty comfortable in our guide of $160 million to $185 million for the year. and that we'll be well within that range. I don't think we mentioned it. We did have a couple of closures on the franchise side, and that's pretty unusual to have 2 in a quarter, but these related to lease expiries. And we typically have them for lease expiries or store relocations. It's very rare given the profitability of our stores across the network, but we did have 2 this quarter, which we factored into the numbers I shared.

Got it. That's helpful. And then on gross margin, it seems like expectations are still flat for the year. But is there anything we should keep in mind in Q3 and Q4 as we're modeling outside of the compares?

Just the fact that we're going into summer drive season, just kind of naturally with higher sales expectation will help us with a little bit of leverage there on the margin side. If you look at the cadence of margin rates over the 4 quarters over the last few years, typically, the back half of the year has stronger margin rates in the front half of the year, and we certainly expect that again this year.

We currently have no further questions. So I will hand back to Lori Flees for closing remarks.

Thank you. Appreciate all the great questions today. I wanted to take a minute on behalf of the entire Valvoline team to extend a heartfelt thanks to Mary once again for her exceptional partnership and leadership on the Valvoline team. We certainly would not be the company we are today without having had Mary's expertise and just thoughtful leadership on the team. Additionally, we're thrilled to welcome Kevin, who brings deep financial expertise and will undoubtedly hit the ground running with our teams given his past experience with Valvoline. We delivered a very strong quarter in line with our expectations. That's why we're reinforcing or reconfirming our guidance, and we feel good about the momentum of the business. With our differentiated service model, we are really in good shape to continue driving market share gains and delivering strong profitable growth. So I appreciate the time that you've all spent today with us.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.