Valvoline Inc. (VVV) Earnings Call Transcript & Summary

Okay. Good morning, everyone. My name is Mark Jordan. I'm an analyst here at Goldman Sachs. Thank you very much for joining us today at the Goldman Sachs 32nd Annual Global Retailing Conference. It's my pleasure to introduce Valvoline and to moderate our fireside chat. Today, we have with us here, Lori Flees, Chief Executive Officer and Director; and Kevin Willis, Chief Financial Officer. Lori and Kevin, thank you very much for joining us today.

Thanks, Mark.

Thank you, Mark. Great to be here.

I think a good place to start might be to -- because someone in the audience may not be familiar with how the Quick Lube model is different from the auto service that they see at the local garages on the corner, right? And so can you describe how it differentiates from that service? And maybe talk about what's offered at Valvoline Instant Oil Change store? What makes Valvoline stand out? And what the value proposition is for your customers?

Yes, sure. So Valvoline is a leading provider of preventative automotive maintenance. That includes -- a significant amount of that includes an oil change, but not limited to an old change or other preventative maintenance that an OEM manufacturer of the vehicle recommends, whether it be lubricants and/or parts replacement that are -- that keep the vehicle safe to drive, but also maintain the value of the engine and the parts and the overall mobility of the vehicle. So that's where we're focused. Our proposition is to provide our guests quick, easy, trusted service. So quick, meaning less than 15 minutes in and out, which is very different than the broader automotive services business. Easy in that we provide very convenient locations where our customers are doing other business. And easy in that they drive in, stay in their car and then drive off. You don't have to make an appointment. It's literally a convenient in and out service, not dissimilar to going through a drive-thru for Chick-fil-A. And then third, trusted. And where we differentiate on that is that we offer a really great and consistent experience for our customers, which our customers rate us a 4.7 out of 5 stars over 2,100-plus stores. So no matter what location you go with our brand, you get quick, easy, trusted, high-quality experience that people want to come back to. And when we look at what differentiates us, not just within automotive services, but also within our category, we have a brand, Valvoline, which is almost 160 years old that denotes quality. And that really underpins the trust part of our value proposition. But we've also built a process enabled by technology that our stores utilize and that really creates the recipe for the consistent and consistently great experience for our customers. And that's a proprietary set of technology that underpins that process and training for all of our technicians. Then, we keep longitudinal data on every customer in every vehicle that we see, and we use that data. We use that data both to perfect the service and make sure that we have all the supply that we need to do the necessary services on those vehicles. But we also use it to keep in touch with our customer and market and retain as well as use it to know how to acquire the next customers.

Well, I've been getting reminded by Valvoline that I'm overdoing my oil change. So you'll see me come in the bay in the next couple of days here.

Look forward to.

Yes, yes. And I would say, I think the biggest thing that resonates with investors is oil changes are, for most vehicle owners, a very inconvenient scheduled maintenance. But your model introduces convenience to this. On their time, they come in, but as you said, don't leave their vehicle, it's quick, it's easy, it's trusted. The same service at every location. And so it's really winning share in my mind from those garages where you have to call and schedule an appointment and maybe they're not ready for you when you get there and you have to drop your car off or wait in a waiting room, which is maybe not as clean as you might like, right? And so it's really helping the customer and introducing convenience. Okay. And as we think about the broader market for oil change services, there's a couple of different components. But one of the big things is the shift from do-it-yourself to do-it-for-me. There's not many DIYers left, but there's still quite a few that do it for budget reasons or because they're enthusiasts. But over the long term, there is a shift to that do-it-for-me. So can you maybe size those 2 markets? What's left in DIY? And how big is the DIFM market?

Yes, sure. I mean this shift has been happening for a while. And it really is driven by technology. As vehicle technology is getting more complicated, owners are less comfortable and less confident doing that maintenance themselves. And when you are looking at the largest or the second largest asset that you own, you certainly want to make sure that you're confident in doing the services. So the shift has been happening. Now I will say during COVID, when many folks were nervous about waiting in the waiting rooms or what locations they were going to, the do-it-yourself market did grow back, and now it's coming back in line with pre-COVID levels. But when you look across all preventative maintenance, not just oil changes, all preventative maintenance, which is some of the data that we've been able to validate through external sources, about 20% of the total spend on automotive maintenance is done in the DIY channel. But that is going down, and we're now at pre-COVID levels. And really, the shift is around both the technology and the complexity, but also convenience. To actually figure out what your vehicle needs and to actually find a place that you can do it and environmentally take care of the waste and the other things, it is not a convenient thing to do and it takes a lot of time. So A lot of people want to make it quick and easy. And the reality is in our channel and specifically with us, there isn't a better or an easier experience that you're going to have getting that done.

Yes, I've done DIY myself, and it is messy. I got oil all over me. So a good learning experience. So -- okay. So it sounds like Valvoline, over time, continue to benefit from this channel shift in general. But then as we think about Quick Lube, the last stat I saw was still only about 1/4 of the do-it-for-me oil change market. So what's that remaining 75% look like between service operator, maybe dealers, local garages and whatnot?

Yes, it's pretty fascinating. Less than 25% is in the Quick Lube channel, and 75% is still with the dealer, about 35% to 40% of customers go back to the dealer to get that done. Higher percentage of that is in the early years of a vehicle ownership, perhaps because the dealer offers a free oil change, a lot of them offer the first free oil change. Some of them offer more packages or service bundles with the purchase of the vehicle. And so dealers continue to do that. They also get to do the oil changes when somebody comes back for a 100,000 mile checkup or those key intervals where more substantive maintenance is required that is not offered in our channel, for example. But then about 35% to 40% are done in other automotive services providers. So tire installation, break replacement or just a general mechanic or the guy I know down the street. And so that's really where the channel shift is coming from. From the data that we've seen post-COVID, a significant shift has come from the dealer channel. But there's -- when we open a new store, we tend to acquire commensurate with where customers are. So we take a lot from the dealerships, and we take a lot from general automotive. Quick Lube -- other Quick Lube providers are not a place that we actually gain share from. So there's still a lot of opportunity. It's very fragmented. And when you look at Valvoline, we only have 5% market share. Our stores are proximate convenient to about 35-at-most percentage of the population. And so that share of 25% is limited based on convenient locations that customers trust.

That's excellent. You make a good point, right? So that 35% to 40% that's not at the dealers, but in other service channels. It's a great opportunity there because you're convenience, right?

It's not convenience.

Yes, exactly. And so the convenience helps win that customer. Anyone I recommended to go to Valvoline has everyone anywhere else. So maybe I should get paid as a spokesman here for the brand to get a commission.

Appreciate it.

Yes. But I think one question for investors is skipping around a little bit. It's always top of mind is battery electric vehicles and the threat to the business model. I think the concern now is a little -- or actually, it's much less than it was a couple of years ago, right?

Three years ago.

Yes. It used to be a larger topic of discussion. And now it's just kind of, well, maybe it will come back, maybe more of a concern. But as we think about it, can you kind of walk through your approach, your framework to thinking about it longer term and how you expect your addressable market to perhaps evolve over the coming decades?

Yes. So Valvoline has evolved its business as technology has changed. What's interesting is as our customers even have started to shift to hybrid vehicles, we have a higher percentage of the hybrid car parc than we do of the ICE car parc. And what that really is, is that as technology becomes more complicated, again, people are looking for service providers that they trust. Now there has been a slowdown in the enthusiasm around EVs. And a lot of that is infrastructure costs and just the innovation of the technology. There's still many more chapters to unfold. But we know customers are going to move to where the technology is the best. And so we know that the car parc will evolve. We also know that these -- whatever vehicle technology consumers choose, it's not going to come down in price such that they don't want to maintain that vehicle. They're going to want to continue to maintain it. They also are driving more towards convenience. I mean, when I was 16, I won't say how many years that was, I worked at Taco Bell, I never in a million years would have thought people would spend $10 to get tacos delivered. This push for convenience and speed is unlike anything for my generation and several generations, and it's not going to slow down. The expectations are going up. And when you look at the other service providers who have the 75% of the market, they are not offering convenience. Some of them are not as trusted. And when you're talking about an asset that is highly complex, more technology-based, still a significant value that they want to maintain, they're going to want to seek out service providers. And Valvoline has that reputation. We do invest in research and looking at what maintenance requirements EVs will have. And while they won't have lubricant base maintenance, they will have other maintenance requirements. And when you look at our network scale and how convenient we are and will continue to be to customers and the brand and the trust that we create, we will continue to evolve our model to meet the customer in whatever technology choice they have. So we're excited because we're well positioned. And if you look at any industry that has gone through change, the market leader who is investing appropriately, not too far ahead, but not behind, can move with the consumer and maintain their position.

Perfect. Perfect. And then thinking about the consumer oil change intervals generally pretty regular, right, based on miles driven or months that have passed since the last oil change. And as you mentioned, it's a regularly scheduled maintenance for people, its second most valuable asset most people have. So you don't want to skip that oil change or lengthen it. But if we think about periods of economic stress in the past, have there been times where you've seen a temporary increase in that oil change interval? People say, "Well, I'll defer it for a couple of months" or what not. Have you seen that in the past?

Yes. So we've been -- obviously, with the current uncertainty that we've been talking about for at least the past year, we do look back. And so during the financial crisis in 2008 and 2009, and it's a good -- it's a more extreme situation from an economic standpoint. When we look at our customer volume and frequency, one, we were growing in transactions during that time. So while a lot of folks saw a significant decline, that's part of our 18 years of same-store sales includes that period, and we continue to grow. When we look at the intervals of customers, they didn't defer. And part of the thesis around why our business is so resilient is because when you defer, the cost that you could incur would be much higher. And ultimately, you have -- you want to hold on to your vehicle during times like this. So when you're holding on to your vehicle, the maintenance costs that you may incur is much less than the cost of trying to put yourself in a newer or new vehicle. So the trade down is I want to maintain and hold the asset that I have. So I'm going to pay a fraction of a new vehicle cost to maintain it and hold on to that asset longer. At the time of the downturn, so we didn't see any deferral, frequency of service was maintained relative to the car parc recommendations. Now at that time, full synthetic was a very small percentage of the OEM recommendations, whereas now it's very different. So we did see a little bit of trade down in the lubricant type, not significant, but the car parc is so different now where the number of vehicles as the new vehicles are moving into the car parc that require or recommend full synthetic has gotten to be a lot higher. So we just don't see the trade down. And with the life of the vehicle being longer than the total number of miles that a vehicle has on it, they do tend to trade up to maintain that vehicle as it gets more mileage or becomes older.

Perfect. Perfect. That ties in nicely to how -- well, one of the core drivers of your business, and maybe it's one of the more important ones is car counts, right, or cars per day. I know you've been doing some work with your real estate and marketing teams to help improve that. Can you talk about some of the initiatives you're doing with that to try and position the stores in the right place to get the traffic? And then once the stores are up and running, market them appropriately to get the traffic.

Sure. I'll start off on that. Lori may have some things to add. But I would say that both our real estate analytics and the process around that as well as marketing are actually very, very core to who we are and what we do and how we grow, first of all. So those are more platform enabling things that we do today. As we think about that from more specifically on the transaction side, the traffic side, those -- the traffic, first of all, Q3, we were really pleased to see that we had improved traffic year-over-year across our system, the franchise system as well, including mature stores, which can be certainly one of the challenges as the stores mature, but we've been able to drive that transaction growth. And you think about it, the sources of transaction growth, first of all, it's going to be new stores. We continue to add new stores, our franchisees add new stores, and we continue to see good transaction growth from that process as well. Fleet sales has been a tailwind. It's a small part of the business today, but it's growing. And so we would expect to continue to see transaction growth via fleet sales as well. Specific to marketing, some of the things that the team has done, we've moved all of our customer data into the cloud. We're able to be much more specific and targeted around what we do and how we do it. One example of that would be certain times of the day, certain days of the week, stores are more busy or less busy. And so using our marketing technology and the sophistication that we have there to help drive traffic to certain times of the day, certain days of the week, getting an inactive customer to reactivate via that, particularly again on a day or a time that's less busy, is another source. And I would say the technology, and we've talked a lot about technology spend this year. Some of that's been more on the -- a lot of it has been on the SG&A side. But we've also done a lot of what I would call infrastructure technology upgrades to our store base. The point of that is to give our teams their better capabilities around helping to drive volume, cut the time down for a car in a bay, greet a customer earlier in the process, maybe in the parking lot, et cetera, that, again, help drive that transaction growth. And there continues to be share shift. Lori talked about that. And that also continues to be a source of transaction growth for us. Lori, I don't know if you'd add to that, but...