Valvoline Inc. 2026 Q3 Earnings Call

Good morning, welcome to Valvoline's third quarter fiscal 2026 conference call and webcast. This morning, Valvoline released results for the third quarter ended June 30th, 2026. This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our investor relations website at investors.valvoline.com. Please note that these results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission. On this morning's call is Lori Flees, our President and CEO, Kevin Willis, our CFO. As shown in the accompanying presentation, any of our remarks today that are not statements of historical fact 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, in our remarks, we will be discussing our results on an adjusted non-GAAP basis unless otherwise noted. A reconciliation of our GAAP to adjusted non-GAAP results, a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix. With that, I will turn it over to Lori.

Thanks, Elizabeth, thank you all for joining us this morning. We delivered another good quarter with sales and profit growth in line with our expectations. The team continues to manage the business effectively through the changing supply and macro environment. Our results demonstrate the strength, resilience, and growth in our business. On the top line, system-wide store sales increased 19%, crossing the $1 billion mark for the first time in a quarter. System-wide same-store sales grew 8%. Across the system, we saw growth in both transactions and ticket, with ticket contributing more than three-quarters of the comp. All three components of ticket, net pricing, premiumization, and NOCR service penetration contributed. Net price was the largest contributor, given the pricing actions that were taken. Similar to last quarter, franchise was above the system average. For the quarter, EBITDA grew faster than sales, with SG&A leverage improving.

Before Kevin talks through the financials, I want to spend a moment on the operating environment as it relates to supply. The closure of the Strait of Hormuz has disrupted the global oil supply chain and specific to our category, has constrained the supply of Group III base oil, a key component of full synthetic lubricants. We expect this industry-wide supply constraint to persist over the medium term and beyond the initial reopening of the strait. We are in a differentiated position. Our scale, combined with the strategic relationship we have with our supplier, gives us reliable access to product. Absent a significant change in the environment, we do not have supply concerns today, and we do not anticipate any in the near term. That said, constrained supply across the market has elevated finished lubricant costs.

We saw costs begin to rise in the third quarter. They continued to increase as we moved into the fourth quarter. Based on the current forecasts, we expect finished lubricant costs could be approximately 60% above where they were in March. While that sounds significant, let me clarify that means we expect a total increase of approximately $5-$7 per oil change, depending on the lubricant type, relative to the March period. Our teams are actively managing this cost dynamic through consumer pricing and operational discipline. Both company and franchisees have taken pricing actions in the third quarter. While we wait for the strait to fully reopen, we are managing through the current environment effectively with both the short and long term in mind. On the customer front, we feel good about the overall health of the business.

Across the system, we saw transaction growth in the quarter. Broadly no signs of trade down or deferral of services. That said, we did see pockets of pressure in June, with more moderate growth among lower income households and some softness in NOCR penetration, similar to what we typically see in the summer drive season. Overall, our customer has remained resilient. We continue to see steady demand for the non-discretionary services we provide. We are watching consumer behavior closely across the network. We continue to invest in strengthening our brand and attracting new customers. As the summer drive season got underway, we launched a new marketing campaign, The Ride Wrangler. This fresh platform reinforces Valvoline as a trusted preventative maintenance partner. Anchored by the tagline "Change wisely," the campaign increases brand relevance and consumer engagement while highlighting the quick, easy, trusted service we offer.

It can be seen and heard across our full marketing mix, from national advertising to local marketing, giving us broad reach as we invite more drivers to change wisely and choose Valvoline. A quick update on Breeze. The overall performance of the Breeze business continues to be at or above expectations. The overall deal thesis and return expectations we shared at the December investor update remain intact. As of Q3, we have converted 12 stores to the Valvoline Instant Oil Change brand. While it's still early, the performance of the converted stores is slightly ahead of expectations. Turning to network growth, we added 47 net new stores in the quarter, bringing our overall network to 2,456 stores. We continue to have a strong pipeline for both company and franchise additions. In summary, we delivered a good quarter.

I'm proud of our team's strong execution as we navigate a challenging macro backdrop. We remain focused on delivering quick, easy, trusted service to our guests while creating value for our shareholders. The actions we're taking to mitigate the current environment are strengthening profitability across the system, enhancing free cash flow generation, and positioning Valvoline for sustainable long-term growth. With that, I'll turn the call over to Kevin to provide more detail on our Q3 financial performance and rest of year guidance.

Thanks, Lori, and good morning, everyone. A summary of our financial results is included in the presentation. Let's talk through the highlights. We delivered top-line growth in line with our expectations with net sales of $545 million, a 24% increase over the prior year. This growth reflects a combination of continued momentum in our core business and the contribution from Breeze, which performed in line with our expectations. A gross margin rate of 40% decreased 50 basis points year-over-year. We saw favorability in product costs this quarter offset by higher other service delivery costs, including the impact of new store depreciation. Excluding the impact of depreciation, the gross margin rate would have improved by 10 basis points. As Lori mentioned, we continue to see finished lubricant costs increase. Our focus remains on protecting gross profit dollars while maintaining reliable supply across the system.

The product cost favorability we realized in the quarter reflects pricing actions taken slightly ahead of the impact of finished lubricant cost increases. We have taken additional pricing actions as lubricant costs have continued to increase. It's also important to recognize that finished lubricant costs are currently increasing at a faster rate than movements in the base oil index would suggest. While the index remains a useful market reference point, supplier costs today reflect broader industry conditions, including tight Group III base oil supply, inventory replenishment, and other factors across the supply chain. As a result, the index is understating the cost pressure the industry is seeing in the market today. SG&A, as a percent of net sales, decreased 90 basis points year-over-year to 17%, from a combination of increased transactions from the summer drive season and continued cost discipline across the business.

We remain focused on improving operating leverage while continuing to support the growth of the business and navigating the macro environment. EBITDA increased 25% to $162 million, with margin expanding 30 basis points to 29.8%, while EPS increased 21% to $0.57 per share. We had planned for about 100 basis points of EBITDA margin compression for the full year and now expect closer to half that amount. Year-to-date, operating cash flows improved $105 million to $285 million, and free cash flow was $112 million, an increase of approximately $93 million over last year. We used a portion of that cash to pay down debt in the June quarter, reflecting our continued focus on strengthening the balance sheet. Our leverage ratio now stands at 2.8 times on a net debt to adjusted EBITDA basis, a sequential decline of approximately 10%.

We remain focused on bringing leverage back within our target range and restarting share repurchases. We also completed a repricing of our Term Loan B during the quarter, which will improve our annual cash interest expense by approximately $1.8 million based on the current balance. We delivered a strong quarter reflecting disciplined execution, profitable growth, EBITDA margin expansion, and improved free cash flow. Let's turn to our outlook for the remainder of the year, which includes our expectations for the fourth quarter. First, we are raising our full-year system-wide same-store sales expectations to a range of 7.5%-8%. This increase reflects the pricing measures we've taken so far. We are narrowing our adjusted EBITDA and EPS ranges to $550 million-$560 million and $1.70-$1.75 per share, respectively. While the macro and supply environment remains dynamic, the fundamentals of our business have not changed.

Preventive maintenance is a non-discretionary service. Our customer has remained resilient, and our team continues to execute well. We are confident in the durability of our model and our ability to deliver profitable growth and long-term value for our shareholders, even as we navigate near-term cost pressure. I'll now turn it back over to Lori to wrap up.