Valvoline Inc. Aktie

Thanks, everyone. I'm pleased to be joined this afternoon by Kevin Willis, who is Valvoline's CFO. We had you on stage right a year ago, right around today. You were just with the -- just joined the company. So it's been a year now.

Just kicking things off for people that are newer in the room, can you talk about the Valvoline story? Can you provide some higher-level background as Valvoline today does look quite different from the company that some may have remembered from a few years ago?

Sure, sure. Well, today, Valvoline is a pure-play automotive services company operating in the retail space, which is very different than how the business grew up. We've been in the Quick Lube business for 40 years. This is our 40th anniversary this year. And we operate a scaled network of over 2,400 company-owned and franchise stores across North America. We're the largest player in the Quick Lube space, doing north of 30 million services per year. We have executed 19 consecutive years of same-store sales growth, and we have a very clear and simple strategy. We want to drive the full potential of our core business. We want to continue to grow and scale our network, and we want to innovate to meet the evolving needs of our customers and the car park.

That's who we are. That's what we are. It's what we do every day to drive value for our customers, our employees, our franchise partners and our shareholders.

And within that, how do you think about the moats that sort of separate your business from other close-in peers as well as the broader DIFM oil change market?

Sure, sure. And there are several, and they all work hand in glove together to create a very sustainable and profitable business. First and foremost is, I would say, scale. But even with our scale, we today only represent about 6% market share of the total do-it-for-me oil change space with that 30 million-plus oil changes per year that we do. So it's a very fragmented market, which we think gives us competitive advantage because of our scaled network as well as our systems and training and processes that we execute across that network, both company-owned and franchise every day. We have a very strong network of franchise partners. The average franchise partner has been in the system for over 25 years, and we have several that have been in for over 35 years.

Our employee base, our leadership team from the store manager through our Vice President of Operations, over 95% of our operations leadership team grew up in the business. They've been promoted from within. So we have a very tenured and experienced team. Very proud of that, but it also helps create competitive advantage for us. As you look at our franchise partners, not only have they been long tenured, they continue to invest.

At our last investor update in December, we put some context around that. Our franchise partners have committed $1 billion of capital to grow their part of the business over the course of the next 5 years, which is -- I think it speaks to number one, the quality of the business; and number two, their confidence in their ability to generate very strong returns on those investments.

We also generate a very exceptional customer experience. That's partly due to our tenured team. It's also due to our SuperPro process, the 270 hours of training that we give to every technician that we hire, both company and franchise. And the result of that is NPS scores that are north of 80%, 4.7 star Google ratings with over 1 million reviews. So it's a very compelling story.

Yes. And we'll be going back and forth a little bit. But going back to your Analyst Day, you guys did update your growth algorithm. So can you just walk us through how we should think about the business, comps, store growth as well as margin expansion?

Sure, sure. So what we've committed to over the medium term, which is, let's call it, now through 2028 or really it's up to 2028 would be comp growth of 3% to 5%. We've been higher than that as our most recent quarter was a little north of 8%. I'll get back to that in just a moment. But 3% to 5% comp growth, approximately 7% store growth. Those 2 things in combination should generate top line of 9% to 11%, which should translate into EBITDA growth of low to mid-teens, EPS growth mid- to high teens and an EBITDA margin expansion of 100 to 200 basis points over the course of the medium term.

That margin expansion coming from multiple areas. So it helps actually derisk the story. We've gotten labor leverage in our stores, but there's still room to improve that. Overall store expenses outside of labor, we're continuing to focus on those. As the stores continue to mature, there will be a natural tailwind to margin as those stores really won't incur -- they'll incur some variable costs, but they won't really incur fixed cost. So as we tend to grow those stores, the AUM of those stores, we'll continue to see margin expansion there.

And so all of these things kind of in combination give us a lot of confidence in the numbers that we put out. And that was part of the point. We wanted to be very confident in the commitments that we made, and that's how we think of them. We think of them as financial commitments that we need to deliver on or exceed over the course of the next several years.

So with that, you -- sorry, touched on this a little bit, but you've gotten off to a really strong start. 1Q was great. 2Q was even better, as you've mentioned, an 8-plus comp. What's sort of driving that? How much of that is market share growth and sort of transactions versus AURs because you are seeing nice growth on both sides?

Yes. So in Q2, about 1/3 of the 8.2% comp was transaction growth, and that's across the system. It's across vintages. So mature stores continue to grow. Obviously, newer stores continue to ramp our immature stores, both in the company and the franchise side. 2/3 of that growth year-over-year was ticket. Net price contributed, premiumization contributed. And that's partly due to the evolving car park. More cars require premium lubricants. It's going to be a natural tailwind for us for some time to come. And year-over-year NOCR growth also contributed. So all 3 components of ticket that we talk about were contributors and transaction growth was good across the -- very healthy.

And so with that, what are you seeing from a customer health perspective? Are you seeing any pickups in deferrals, usage of coupons, anything else? And then just tie that sort of how you're thinking about 3Q?

Sure. The customer base has been incredibly stable. Customer activity has been what I would call very normal. And we've not really seen any change. We've not seen trade downs. We've not seen deferrals. Day interval has been very consistent for really the past couple of years. It really hasn't changed much. If anything, it's maybe a tiny bit lower now than it was 2 years ago. Miles driven between oil changes have not extended. They've been very consistent as well. As we look at the quartiles, we kind of quartile our customer base based on household income, we haven't really seen any changes across that customer base. It's just been very, very normal.

Couponing, we also look at that our discounting across the customer base. That's also been very consistent to even down a little bit, partly due to increased marketing efforts that we've made. We're getting more sophisticated in terms of how we market. Several years ago, it tended to be more of a blanket coupon approach or a percentage off approach. We now are very targeted in the way we do marketing. We have a lot of information about our customers. Almost 85% of the customers we see, we've seen before. And so we know what it takes to motivate them for that next visit, and it's not one size fits all. Some need more, some need less, some need none. They just need to be reminded. And we know this about our customer base.

And so with that, it's obviously been a few weeks now, but it sounded like 3Q got off to a nice start. To your point, the consumer has held in. We'll talk about some of the pricing dynamics in a little bit. But anything else that we should consider as we think about 3Q and potential risks or opportunities?

Sure. We talked about April a little bit on the call because we had finished April by the time we did the call. April was a good month, very consistent with what we saw in the March quarter in general. And again, same story around customer behavior, really no change at all. And we just finished May. And while we haven't -- we don't have full financials, I can say that May was very much like April, which was very much like the March quarter, et cetera. We're not really seeing any kind of change in customer behavior. It's been very consistent.

And so one of the topics that we've been speaking a lot with investors about is just we've seen rise in base oil prices. Obviously, those have gone up significantly really since sort of in the March time window. Can you just talk about base oil math and sort of help level set how we should think about how much pricing you need to take in order to offset some of the increases. This was obviously something we saw in '22. So if you could just remind us on how to think about that.

Yes. A little bit of context around that. Obviously, the finished lubricant product is important to us. It's what we deliver as part of the service. Today, if you think about our cost of goods sold, all products that we deliver as part of the service are about 20% to 25% of COGS. The largest single item would be labor, then product and then the remaining store expenses that would make up the cost of goods sold bucket.

And so while cost pressure from a lubricant perspective matters in the context of all the services that we provide in the context of an average ticket that's north of $100, an increase of $1, $2, $3 per gallon in lubricant cost doesn't really have as much impact on our cost structure as one might expect. It's just not as big an impact for us. From a pricing perspective, we tend to have about 30 days' notice before we will see a cost increase. It allows us time to analyze our market from a company store perspective and make decisions around what kind of pricing actions we want and need to take to recover that increased cost.

And that's what we've been doing. We feel very comfortable that we have taken enough pricing action to cover all known product cost increases that we have experienced or will experience -- and we also obviously provide that information to our franchise partners. They're independent price setters. They decide what they want to do. And then just to kind of put a bow around that, when decisions are made from a company or a franchise perspective, because we have a common point-of-sale system across the entire network, we actually make those pricing changes centrally with our master data team so we can do it efficiently and effectively and accurately from a centralized perspective. And we do the same thing for our franchise partners when they make those decisions.

Right. Yes. So you're able to do it quickly and [indiscernible]. And so what are you seeing in the indices today? Where is the base oil index today compared to a few months ago? And sort of how can we track some of those moves?

So we started seeing the indexes move up in the March time frame. We didn't have any cost increases in the March quarter, but we did start to see the indices move up. That's continued as the Iran conflict has continued to linger. And based on -- again, based on what we know today, we have baked all of that in from a pricing perspective to maintain margin dollars. Where the indices go is not something that we can predict.

I think it's safe to say that the longer the conflict lingers, especially with likely higher demand for summer drive season, we're likely to see higher prices continue. But impossible to predict. What we have to commit to is our ability and our commitment to take the right action to protect our margins on a dollar basis and also to be as transparent as we can about what's happening in the world.

And so you guys took price quite quickly. Some of your franchise did as well. But can you talk about the franchise side sort of has everyone taken price? Where does that stand today?

So I would say most of our franchise partners have adjusted price to varying degrees. Again, part of it in terms of how much and at what tier because we offer conventional, we offer MaxLife and we offer full synthetic. All of these tiers are not created equally. So geography matters. Oil change mix matters in terms of a market or a territory. And each franchise partner, and we do the same thing from a company perspective, has to evaluate literally on a market-by-market basis, where is the appropriate place to take that price and how much across those 3 service tiers. And that's what we do, and that's what our franchise partners do as well. And we can see that based upon the decisions they make in terms of how they change pricing based on which tier they change and by how much.

And so bring that back to 3Q comps. Is it sort of low to mid-singles is how we should think about the lift to ticket? Or what's a good way of sort of contextualizing?

Well, I think we'll clearly see tailwind on the ticket side from a comp perspective because of the pricing action that's been implemented and initiated. I think, though, as a reminder, I want to be balanced about this, there's a percentage of that ticket comp that is there to recover lost margin dollars or otherwise lost margin dollars because of the cost increases that we've seen. If you go back to the 2022 time frame, we had a lot of inflation, both in base oil and in general. The company took a lot of pricing actions during that time frame. The comp was north of 10% there for a period of time. But again, a lot of that was to recover cost, not necessarily impacting the bottom line from a margin perspective.

What I will say is that when we take price, when the franchise partners take price, posted price never comes down. And so while we're protecting margin dollars today, down the road, there is certainly some potential for margin expansion if we see product costs start to come back down, we would not naturally reduce prices. That's not something we've done historically.

And something that you mentioned is that you took enough price to offset the increase on a dollar basis. Obviously, that's a little bit of a margin drag. I think you talked about 20% to 25% of your COGS are input costs. So how should we think about the potential margin hit that you may see from all your pricing actions?

So I mean the easiest way to think about it probably is our ticket is north of $100, but let's just peg it at $100. If we have to raise price on average across the system, $3 to cover that cost, that's the hit, basically. That's the way the math would play out is you would kind of take that as against your gross profit number and say, okay, gross profit dollars are going to stay the same. Sales are going to be $103. And so divide one number by another and you get the hit. It's fairly modest on an overall basis. I would say.

And it's also important to remember that we continue to do all those other things we talked about to improve margin on an overall basis. This is EBITDA margin. We're continuing to push on SG&A leverage. We're continuing to push on store expenses on getting more efficient in a number of ways. We've gotten a lot of progress from the labor work that we've done, but there's still more to come there. So there are going to be puts and takes in the overall gross profit margin percentage line because of all the things that we have in flight today.

And we'll touch on some of those. But just last one on some of these dynamics. Can you talk about your supply chain? Can you speak to sourcing? Obviously, one of the conversations that investors are having is just around any potential shortages. We talked about the pricing side, but as far as having the actual inventory. So if you could just walk us through where the products come from, how your supply chain works and whether there is risk or not shortages down the road?

Sure, sure. Well, we obviously have a strategic supply arrangement with Valvoline Global Operations, who up until 3.5 years ago was we were all one company. And now that business is owned by Saudi Aramco. And that strategic partnership is strong and ongoing. They provide essentially all of our lubricants today. And that supply chain is a combination of direct supply where it makes sense for them to do so, third-party distributor otherwise, and that's both for company and franchise operations.

Again, we have the largest Quick Lube network in North America. We do 30 million-plus oil changes per year. We are a very large customer. And I think it's also important to note that we also share a brand. And that brand is very, very important both to us and Aramco and the Valvoline Global operations to protect and grow. We're both investing in that brand. And so I can't say that there's no supply risk. The longer this conflict drags on, the more risk there is in general from a macro perspective, our business aside or included. But I feel really good. We feel really good about where we are today. And for the foreseeable future, we do not see supply risk in our network.

That's certainly great. And with that, I think we probably should pivot to Breeze. I think it was December 1 of last year. When you closed on the long-awaited Breeze acquisition, it sounds like integration is maybe a little bit ahead of schedule. It seems like the stores are doing well. Just can you provide an update on where you are in the integration process and sort of the time lines that we should all think about?

Sure. So things are going well. Due to the FTC process, we didn't get as much of an opportunity to really dig down into the business and the team before we closed. I mean, we did our due diligence upfront. But typically, in one of these transactions, you sort of start integration planning the day after you announced the transaction. We weren't able to do that fully. We were doing it on our side, but we couldn't interact. So once we closed the deal on December 1, very focused on day 1 stability. And day 1 stability really runs about a month. And you make sure that all the parts are working the way they need to, information is flowing, that people are connected the way they need to be in the box and all that. That went very, very well.

I think one of the pleasant surprises that we had is culturally, not only at the senior leadership level because we had spent time with the senior leaders, but as we got down into the organization, both from an operations and a support function perspective, the culture within the Breeze organization mirrored up very, very nicely with the Valvoline culture. I've done a lot of integrations in my life, and cultural disparity is the hardest thing to overcome, and we don't have that problem here, which is great.

I think another positive is we buy 30 to 40 stores per year. We convert them, we integrate them into the system. We've been doing that for a long time. Our franchise partners have as well. And while this is a really big chunk to swallow, which is why it takes time to integrate and convert, these stores look a whole lot like the stores that we would buy. Many of them are better than the stores we would buy potentially, but there's a lot of potential there. And so we have first integrated the management team, which has gone very, very well. We've actually integrated some of the lower-level support function folks as well.

All that's moving along the way we would expect it to. And we're now -- we didn't -- we hadn't converted any stores as of the end of the March quarter. I think we said on the call, we had converted some. We've continued down that path to convert stores to the Valvoline brand, and that's gone and is going well. We're going to continue down that path. But it will be probably a couple of year journey or so to get that done. It's still early days. We've been really pleased with the integration and the conversion process and progress so far. It's gone well. And obviously, the business is performing well, which we're happy about.

We talked about that in the March quarter call. A bit above expectations for the March quarter, really for two reasons. Number one, the team is executing really well at the store level, and we're seeing that flow through the numbers. And number two, we've been able to pull forward some SG&A synergies. Those SG&A synergies were on the list. We just got them earlier than we expected to. And so that's helped us from a performance perspective thus far this fiscal year.

And when we closed the deal, we talked about this at our investor update, we expected about 100 basis points of margin compression across the system because of Breeze, bringing in 162 immature stores, you tend to get margin compression. And it wasn't nearly 100 basis points in quarter 1. We'll see how the rest of the year plays out, but so far, so good on that front.

And can you remind us how we should think about unit economics once you do begin to convert those stores, both the revenue as well as on the cost side.

Sure, sure. So obviously, the margin profile is lighter because they are what we would classify as immature stores. Breeze today generates $1 million to $1.1 million of AUV. Our average across the system is $1.8 million. The value proposition is moving these stores up the maturity curve so that they look a lot like the average Valvoline store does today.

Now it takes a few years to get there. Typically, a ground-up store, if we build one, the first year revenue would be about that $1 million to $1.1 million, and then it ramps to the $1.8 million over the next, call it, 4 years-ish. When we buy a store and convert it, it depends on how many cars the store is doing at the time we buy it and convert it, but it's a 3-, 4-year journey to actually ramp those stores to maturity as well. But they very consistently do that.

A lot of that confidence that we have and the ability to do that is really on the front-end analysis, very sophisticated retail analytics and diagnostics that give us a very high level of confidence in terms of how many cars per day a location will support. And we did all that work around the Breeze stores before we did the transaction. So we have a point of view about what those stores can do from a potential perspective. And we fully expect that, that plays out just like it would with the stores we buy ordinary [indiscernible].

So when you provided the updates around your expectations for the Breeze numbers, obviously, it was right after the acquisition was closed, you can spend the time -- much time with that team. Do you see potentially more opportunities than what you originally thought when you combine that with early wins? Or is it just too early to tell?

I think it's too early to tell. I think we need to get a little further down the path on the conversions because as part of the conversions, obviously, you're converting to the brand, which will give you more recognition, you're converting the POS system and the related SuperPro process, you're training the team. So you're enabling the unit to do better, but it does take time for that to play out. And then we can -- I think we can have another conversation about that down the road a little bit. But we're encouraged by what we see so far.

Yes. And so with that, let's talk about your long-term store TAM as well as your path to getting there. You obviously plan on continuing to accelerate store growth over the next couple of years. So talk about what you think the white space opportunity is and just sort of the pace of store growth that you want to see.

Sure. So as I said, we have about 6% market share today. Our 2,400 or so stores are within about a 10-minute drive of around 40% of the car park. We have a stated objective to get to 3,500 units. As we talked about in our investor update, we expect to be north of 2,900 units by fiscal '28. And so growing from there into that 3,500. The idea and part of this is around mentioned it around the franchise partners have signed up for new development agreements. They're investing $1 billion of capital. That's, call it, 650 stores, north of $1 billion of capital. And that's going to help us hit those numbers over the course of the next few years.

So we did about 170 stores last year. The guide this year, including taking Breeze off to the side would imply 170 to 200 stores, which we fully expect to achieve outside of the Breeze 162. And ultimately, we have a stated objective to get our franchise partners ahead of company store adds. So ideally, we're at 250 per year with about 150 coming from the franchise side and about 100 coming from the company side. And that would be our objective going forward.

And so you touched on your franchise base. Obviously, they've been partners with you guys for quite a long time now. Can you just provide any more color on sort of the complexion of your franchise base sort of institutional capital versus other types of capital? And then just how are conversations going as you're looking to add more partners into the system?

Sure. So today, we have between 40 and 50 franchise partners in the system in total. It is a fairly concentrated franchise partner mix, though. Those -- the top 6 to 8 franchise partners make up 70% to 80% of the store base. And so they're good-sized businesses in and of themselves. And they are a mix of what I would call the long-term franchise partners who have continued to grow their system over the course of time and a couple of fairly new entrants that have invested in existing franchise partners and committed to grow that business. And these are private equity firms. We currently have 3 of those in the system, 2 that are investing heavily, is very new. And so they believe in the model. They understand the return proposition that the model brings, and they are investing to grow those systems in a pretty aggressive way, which is why we partner with them.

As we look to the future, we have a lot of inbound interest from a franchise partner perspective. It's great because it allows us to be picky and to really be thoughtful about bringing partners into the mix that, number one, share our passion for the business; number two, can sign up for the growth algorithm that they need to sign up for to continue to grow the network and mature the network that they may acquire. And you just really commit to the overall business model, the overall service proposition, the customer experience that we expect. So it's not just signing up with capital, it's signing up across the board to really continue to grow the brand and the business in the right way.

And so I just want to pivot back to the acquisition. One of the things that you guys did is you paused the buyback. You levered up the company a little bit to acquire Breeze. You are now starting to delever. Can you just talk about where you are on that journey? When do you expect to get back to sort of the high end of your target? And then once you do get back, how quickly can we see buybacks start to ramp?

Yes, it's a great question. I'll start kind of high level. Capital allocation policy has not changed. We'll continue to invest in buying and building and converting stores because we continue to generate very, very strong returns, mid- to high-teen IRR, 30% cash-on-cash returns at maturity. That's true for us and our franchise partners. So we'll continue to invest.

As we get down to the target leverage, it would be our expectation that secondary use of cash is going to be returning to the buyback space. It's a core part of our capital allocation strategy. And yes, we did elevate our leverage a bit when we closed on the deal transaction. In the March quarter, so heading into the March quarter, we were at 3.3 turns of leverage on a net debt-to-EBITDA basis. Coming out of the March quarter, we were at 3.1. So we took 20 basis points off, which is actually pretty solid in a quarter. If you were to extrapolate that, and I'm not committing to it, but if we can extrapolate that, that would imply that within about 3 quarters, we're back into the buyback opportunity.

State the obvious. Personally, I feel like our valuation is a very, very strong buy. I do put my money where my mouth is, I buy shares, that's public. And -- but it's -- I believe in the story, I believe in the potential, not only for growth, but improved profitability and also strong, strong free cash flow growth over the course of the next few years. The algorithm around all of that, I think, is incredibly compelling. And frankly, I'd love for the company to be in the market today, but we have to do the right thing in the right way in terms of what we've committed to doing.

Sure. So it sounds like once you get to the high end, sort of you'll look to get potentially quite aggressive. And so something that you touched on a few times, and I think it's very much underappreciated, but it's your SuperPro system. I actually think it's one of the biggest moats that you have around the business. So can you just provide more color sort of how does that set you apart? And how is that something that you're able to easily leverage when you do acquire companies?

Sure. Well, so as I said, we have a single point-of-sale system across every store in the U.S., company and franchise. And that system, which is enabled by the SuperPro process helps guide our technicians through the process when a customer comes into the bay. And it also helps educate the customer about what their manufacturer recommends that they do at certain intervals, whether it's time or miles or some combination of those 2 things. And that process allows us to be very consistent in the service that we deliver, whether you go to store A or store B, whether it's a company store or a franchise store, it makes no difference. The process and the delivery should be exactly the same.

Along with that, the 270 hours of training that we supply to our technicians is very critical. It helps them learn and understand not only what the process is, but actually how to execute the process well and how to execute it each time in a very consistent way. And so just for a little bit of -- just a little bit of a primer. When a customer comes in the bay, if we've seen them before, the system will prompt the technician to ask the customer if they would like the same oil that we used last time. The vast majority of the time, the answer is yes. If they're a new customer, I haven't seen them before, haven't seen the car before, the technician knows to say, this is what the manufacturer recommends that we put in your car. Is that what you would like for us to do based on what the SuperPro process would say. And usually, the answer is yes.

We then go through the process with what we call the visuals. Those are things that we show the customer, we show the guest and let them decide if they would like to take advantage of a new engine air filter, a cabin air filter. So we show them a new one, we show them their existing one. based upon what they see, they'll make a choice. That's part of the process.

We then can turn to the OEM recommended services that we offer and provide. And at that point, we literally turn the screen to the customer and show them here is what the manufacturer recommends you do, whether it's a radiator flush or a transmission fluid change, a differential fluid change, what have you. And we show the customer what's recommended. We have CARFAX data integrated into our point-of-sale system. So we not only know what we've done to the car, we know what others have done to the car. if, in fact, it has been taken to an outlet that uses CARFAX. And so we can provide a more complete picture to the customer in a very informative and educational way. It's not about the sales pitch. It's really about informing and educating and letting the customer decide what they want.

Now if they choose to take advantage of a service that's recommended, that's great. We'll perform that in the store, and they'll be on their way. If they choose not to, we know that the service was offered. We know that the service was declined at that time. And so we will, at the appropriate time, provide a reminder to that customer that, hey, we know that your vehicle is due to have this done. We'd recommend that you come in and do that. And usually, there's a coupon or a discount attached to that.

Yes. I think that's a great way to end this. Thanks a lot. Appreciate it.

Thank you. It's great to see you.

All right. Well, thank you again for being here at the, I think, last presentation of the day. grateful to have you here. I'm Craig Kennison from Baird Research, and we're introducing Valvoline today. Valvoline is the leading provider of fast oil changes and other services through about 2,400 locations, about half of which are owned and the other half are owned through franchises.

I noted recently that as a franchise, it was listed as the #1 automotive franchise by Entrepreneur Magazine, which is a high mark for the company. It's also a best idea at Baird. This is an idea we've highlighted as one of our favorite ideas. So we're glad all of you are here to hear the story. And Kevin is going to walk through some slides. And from there, we will take your questions and also engage in a fireside chat.

So Kevin Willis, the CFO.

Thanks, Craig. Great to be here today. I will just briefly walk you through a few slides. These with the exception of one, were all used at our investor update back in December of last year. But for folks in the room who may not be as familiar with the company, this will give you just a little bit of an idea of who we are, and then we'll delve a little more deeply as we get into the fireside and the Q&A.

So we are the category leader. We're the largest Quick Lube chain in North America with over 2,400 units. We have differentiated capabilities, which do help us drive margin and growth. We generate a lot of cash. We reinvest a lot of that cash in the business. Unit economics for us are very strong, both on the company-owned side as well as on the franchise side. And so we continue to invest in new units through acquisition and through ground-up builds. Our franchise partners are doing the same. Last year, we added around 170 units. And again, unit economics tend to run in the mid- to high-teen IRR and at maturity, our stores on the company and the franchise side tend to generate around 30% cash-on-cash return.

So it's a compelling investment opportunity. It's a very fragmented market that we live in. We have approximately 6% share. There are about 470 million -- 470 million do-it-for-me oil changes done each year. We have 6% share in that. Total Quick Lube space has around 30% share, 25% to 30%. So there's a lot of white space for us. Today, our 2,400 stores are within about 10 minutes of around 40% of the car park. So again, a lot of white space, and we have significant growth plans to continue to grow our footprint to continue to optimize the business that we have in the current footprint as well as to adjust to the changing needs of the car park and very importantly, our customer base.

We have a compelling brand. The business has been around for 40 years as a Quick Lube business. The Valvoline brand has been around for 160 years. So recognized as really the first motor oil brand in the world. We have built a scale network, 2,400 stores, as we indicated at our investor update back in December, we plan to ramp that to north of 2,900 stores by 2028, driving towards our next level, which is 3,500 units across the U.S. and Canada. Our teams are very tenured. Our leadership tends to come from first day in the bay. And you look at our leadership structure across the system, people who are store managers were technicians, people who are area managers were store managers. Market managers were area managers. That's the way we have grown the business over the course of time.

The business has been very sticky from a leadership perspective. We have 2 Vice Presidents of Operations, one runs the East, one runs the West. Both of them started in the Bay north of 30 years ago. So it's a very dedicated team, very tenured team. We also have a very committed group of franchise partners. The average franchise partner has been with the system for over 25 years. Our 2 or 3 largest have been with the system for over 30 years. We have about, call it, 6 to 8 franchise partners that make up roughly 70% to 80% of our franchise store base. Total franchise partners number just north of 40.

This is all about the customer experience as well as the employee experience. We have a process we call SuperPro. This is what guides our store team in terms of serving our guests the same way and in a great way every day. The result of that is evidenced in NPS scores that are north of 80%, Google Star ratings of 4.7 on over 1 million reviews within Google. I've already talked about this. Our strategy is really simple. It's 3 pillars. We want to drive the full potential of our core business. We want to continue to deliver sustainable, that means profitable and high-return network growth, and we want to innovate. We want to meet the customer where they are, provide what they need when they need it and how they need it. And so we want to continue to do these things in the context of creating long-term shareholder value, high returns for our shareholders as well as for our franchise partners, which will keep them investing in the business as they have been doing.

We recently did our second quarter, March quarter earnings call, we updated our outlook for the full year. Raising the comp system-wide same-store sales growth. We didn't change our system-wide store additions. We expect to be in the range on that. Net revenues, we did not change. Adjusted EBITDA, we increased the range on the top end of the range as well, also increasing EPS. CapEx expectations have not changed. If you look back at our investor update, we set what we call financial commitments, and we take that word commitment very seriously. The comp in the near term, medium term, 3% to 5% comp growth, 9% to 11% total top line growth, low to mid-teens EBITDA growth, mid- to high teens EPS growth, increasing margins by 100 to 200 basis points and we'll drive that through a number of levers. It's not hope. Hope is not a strategy. We have a plan around that.

Also, we plan to increase free cash flow quite significantly over the medium term, get back to target leverage. We're making good progress on that and generate top quartile shareholder returns. It's pretty simple. It's not easy, but it's a pretty simple story to tell.

So with that, we'll get started on the Q&A and the fireside.

Yes. Thank you, Kevin. And please feel free to ask a question. You can send a question to me on the iPad as well. Let's start with the comp. I mean it's a difficult consumer environment. This audience has been listening to a lot of different messages around the consumer today. What drives your traffic? And then also, what drives your ability to deliver a positive comp in almost any environment?

So we're fortunate to have delivered 19 consecutive years of same-store sales growth. So even during the economic downturn of 2008, '09, even during COVID, we were able to deliver both ticket and transaction growth during those periods. As you look at the business, I think we view what we do, preventive maintenance as a largely nondiscretionary service.

People want to maintain their vehicle. It's -- for most, it's either the largest or the second largest asset that they own. And maintaining that vehicle is something that's important to most of our customer base. Providing world-class service each and every time a customer enters the bay is also important. You look at our customer base, nearly 85% of the customers that we serve, we have served before. And it gets back to those NPS scores. It gets back to the Google ratings.

But it's really driven by the quick, easy, trusted experience that we provide to our customers every day, whether they're a first-time visitor or whether they've been with us for many, many years. And that is done very, very consistently, both at company and franchise stores. We have a common point-of-sale system that helps lead our associates through the process when a customer enters the bay to provide them with the most information, the most up-to-date information and the best information possible so that they can make decisions about the services that we do for their vehicle. And another piece of that is as part of that, there's -- it's a no pressure type environment.

And again, the customer experience, the employee experience is very consistent, whether across franchise or company stores, driven by our SuperPro process. We provide 270 hours of training to every technician, and that's also done on the franchise side of the house and again, providing a very positive quality, consistent experience across the board.

How do fuel costs impact that consumer decision? We're all listening to headlines today about gas prices being high and what's the impact for you?

Sure, sure. I think to a degree, we're kind of in uncharted territory when it comes to that. But having said that, as we look back in history, we've seen little to no impact in consumer behavior in terms of miles driven. COVID was a little different on the miles driven part, drain intervals, et cetera. People still want to maintain that asset. And so they tend to continue to do that.

As I look back to June of 2022, that was when we last saw national average gasoline prices north of $4 per gallon. There were a lot of other inflationary issues at the time as well. I mean, overall inflation was quite high. We didn't see a change in consumer behavior then. And thus far, during this Iran conflict, we've also not seen a change in consumer behavior now. Our consumers are acting as they have been acting prior to the conflict. We talked about it on the earnings call a little bit. We saw no change in April. We just finished May. And as we look at consumer behavior for May, it was just like April, which was just like the March quarter, which was just like the December quarter. Our consumer base is acting as it has in the past. We've seen no trade downs. We have seen premium mix has actually improved.

NOCR penetration, non-oil change revenue penetration has continued to be strong. As we look at the comp in the March quarter, about 30% of the comp was transaction. We saw transaction growth across the system. About 70% was around ticket. Ticket contribution came from all 3 areas for us, which is net price, premiumization as well as non-oil change revenue services. I will say, I think it's important to note, premiumization is one of those things that it's a natural tailwind for us as the car park evolves. More and more cars that are coming into our space require a more premium lubricant. And so we'll naturally see premiumization penetration increase over the course of time as older cars age out, newer cars come into the car park. But to be clear, we have not seen any change in consumer behavior. Miles driven remain consistent. drain intervals remain consistent. Customer behavior remains very consistent for us.

And if we could dig into the ticket side, just a little more on the premiumization trend. If you model this out and looking at the population changes in vehicles, how durable a driver is that synthetic oil driver?

Yes. I think it has a lot of runway. The way we define premium oil changes internally and the way we talk about it externally includes really 2 levels of service. We offer a good, better, best. A lot of folks in the space just offer conventional and synthetic. We have an offering in the middle called MaxLife, which is a semisynthetic that consumers can choose to use and many do. About 80% of the oil changes we do today are either MaxLife or full synthetic. And of that, call it, 80%, a bit north of half of those are full synthetic.

So as you think about cars coming into the car park, almost everything that's entering the car park today is going to require a full synthetic lubricant. And as a result of that, we see a fair bit of runway in the full synthetic side of the house. It will likely come from the MaxLife piece, which is a semi synthetic, but it still makes the mix more premium and adds more margin as our customer base moves to the full synthetic side of the equation.

And thinking about price, one of your inputs is oil. And so how does the increase in the cost of oil play in terms of your cost structure and then your ability to price for it?

Sure. And we have -- we've talked about it on the earnings call. We have seen cost increases come through. And we and our franchise partners are proactively moving on price to cover those cost increases. I think one of the misconceptions is that lubricant cost is a much bigger driver of our cost of goods sold than it actually is. If you look at -- across our network, average ticket is, let's call it, around $110 per oil change. And of that, you look at the lubricant piece of the cost of goods sold, we're generating, let's call it, round numbers, a 40% gross profit margin on that. Round numbers, the lubricant piece is 20% to 25% of COGS.

Labor is actually the largest piece of COGS for us. And so as lubricant costs have increased, we have changed pricing as have our franchise partners. But these are single-digit percentages in terms of price changes that need to be made. And depending on where oil goes and where the cost of base oil goes, which is the primary input to our lubricant, we'll adjust pricing as necessary. I think there are a couple of other aspects to this. Unlike a trip to the grocery store, which happens once a week or multiple times per week for some folks, people tend to get their oil change, their car serviced a couple of times per year.

And when you compare the cost of preventive maintenance to the cost of a significant repair or to the cost of upgrading your vehicle to a new or newer vehicle, given what those costs have done, getting preventive maintenance is pretty compelling. I think another piece of the equation is a lot of our customer base tends to be more habitual in terms of how they act. So if I'm going on a road trip, I want somebody to lay eyes on my car. And not only do we provide the preventive maintenance, we do an 18-point safety inspection. We check your headlights, your tail lights, your turn signals, all those things that could cause you issues if they're not working properly. And people like that peace of mind. And so again, a certain part of our customer base really relies on more timing or more of an habitual approach as opposed to the light came on and I need to do something about that.

There have been some recent headlines surrounding the supply of oil and whether that could be a problem in your channel. What's the update there?

Sure. Really no change from the earnings call. I think the language we used was we don't see an issue for the foreseeable future. And I know that may be kind of a nebulous comment, but let me put a little bit of perspective around it. Our primary supplier for lubricant is a very strategic supplier. We used to, in fact, be part of the same company, and that company is now part of Saudi Aramco. And lots of resources. We are a very strategic and important customer for them. We're the largest player in the quick lube space in North America.

And I think as you look at the potential for that, I think there's a large standard deviation between kind of the smallest and the largest in terms of how that supply chain will ultimately work out. But we also share a brand. So not only are we Valvoline in an oil change, but it's also Valvoline global operations. And brand, especially for a 160-year-old brand is a very, very important thing. And we're working together to protect that, I would say, and to strengthen the brand. And so there's a lot of -- it's a very symbiotic relationship in a lot of ways. And it's a relationship that I don't think really exists in any other part of the Quick Lube space today.

So 2,400 stores, give or take, with clear plans to grow that every single year. Talk about the franchise side of that and the kind of commitments you have already in place.

Sure. As we talked about on the investor update, very recently, the last 12 to 18 months, all of our large franchise partners and some of the smaller ones have signed up for new development agreements. We talked about it at the investor update. I believe -- and I'm doing this from memory, so you may need to check me, but I think they've signed up for approximately 650 units over the course of the next 5 years. Those units are also tied to incentives that our franchise partners receive as they continue to comply with their commitments. And those incentives are tied to every gallon of lubricant that they buy. It's not just incremental to the units that they've committed to add. It's really across their individual network.

So they're incentivized to meet these commitments and earn those incentives, and we want them to earn those incentives. And so to the extent we might have a franchise partner that's not up to date, and we measure this quarterly, we want to work with them and help them to figure out what kind of roadblocks they're facing, what kind of things we can do to help them be more successful because we want to pay them those incentives to grow that network.

And I think today, about 50% of your stores are franchised. What is the optimal mix? And how do you get to that level?

Yes. The question comes up a lot. I think as you look at the business in terms of when and how it was formed and how it's grown up, that was probably something that if you were going to commit to an optimal mix, you probably would have done it a long time ago before we got to where we are today. And so we don't think of it that way. We think of it more in terms of how do we want the future to unfold. And ultimately, what we've committed to is getting to a new store addition per year of about 250 stores.

And we'd like to see about 150 of those come from franchise partners and about 100 of those come from company-owned stores, either acquisitions or new builds, same on the franchise side. And we're making progress on that. It takes a while to get to where we need to be. Those development agreements are really critical to that. That's a lot of what gets us to where we need to be on that mix. But over the course of time, what we would expect is that the franchise side would commit more than on the company side.

You're about 6 or 7 months into the acquisition of Breeze. Talk about the strategy behind that decision and some of the synergies that you're pursuing today.

Sure. So in any given year, ex Breeze, we will buy 30 to 40 Quick Lubes that we convert to Valvoline locations. We run our playbook against these stores. We evaluate them in our very sophisticated real estate modeling tool and system, which has the history of every store we own and have opened in it. And so we can predict with a pretty high degree of certainty at maturity, what these stores will do from an AUV perspective. And that's actually quite accurate typically as we see stores ramp to maturity. Breeze is really like 5 years of that all at once.

So as we looked at those stores, we were able to evaluate every location and get an idea about what they would do over the course of time. If you look at the Breeze stores that we acquired, they run about $1 million to $1.1 million of AUV, which is pretty typical for a new ground up for us. And typically, it will take, call it, 3 to 5 years to get a ground-up store, can be 3 to 4 or even 5 years for an acquired store, depending on where it starts to get to maturity. But the idea is we run that playbook and over the course of time, those stores go from $1 million, $1.1 million to our system-wide AUV average, which is $1.7 million to $1.8 million per store. That's where the value proposition is created. Now that's done through a combination of really implementing our playbook and what does that mean?

Well, first of all, it's branding, which is very important because we have a very old and very trusted brand. Second part is our point-of-sale system, combined with the 270 hours of technician training that we do. This is what helps our team in the bays actually lead themselves and the customer through the process. The other piece of this equation is the marketing playbook that we execute. Most stores that we acquire spend very little to even nothing on marketing and advertising. And we have a very sophisticated approach to that, that we implement and execute against. And so all these things in combination tends to drive that AUV over the course of, again, 3 to 5 years depending on where a store starts.

As you look at the Breeze stores, they fit that profile perfectly. The stores that we acquired are pretty much all in locations that we liked. We evaluated those locations and confirmed that prior to doing the deal. And we saw the opportunity to actually build that base from where it is to kind of a system-wide average of 1.7 to 1.8. So that's really the value proposition over the course of time is to execute the playbook and ultimately reap the rewards that, that tends to provide. And that's what we're focused on doing. I think it helps that the Breeze culture is very well aligned with the Valvoline culture. You don't always find that. When we do small acquisitions, it's oftentimes a very different culture. I mean these are lifestyle businesses, they're mom-and-pops, and they operate very differently. Breeze stores operate much more like a Valvoline instant oil change than not. They just haven't had the benefit of the playbook. They haven't had the benefit of the brand. They haven't had the benefit of the investment that we can make in the team and the technology to actually grow those stores to their potential. And so that's really the play.

Would you say there was a misunderstanding at the time the deal was announced? Or did the market react in a way that you didn't expect?

So I think the market reacted in a fairly neutral manner when the deal was originally announced, which for most M&A deals, that's actually a positive thing based on my experience anyway. I think where ambiguity entered into the system was with the HSR second request. That was a very long drawn-out process. There had never been anything like that in the Quick Lube space that had happened before. I mean it resulted in us having to divest 45 of the 207 stores that we thought we were getting, 202 stores, I guess. And so that was a long drawn out exhaustive process.

And typically, in an M&A context, when you strike a deal with a seller to buy an asset to buy a business, the 2 companies start working kind of hand in glove day 1 after the acquisition is announced to figure out kind of what transitions look like, et cetera. Because of the FTC process, we really weren't able to have much interaction until it was concluded. And then we jumped in and we closed the deal and really started down the day 1 part first. We want to make sure we got that right and then into that initial transition of integrating the 2 management teams, which we did. And now we're in the conversion phase of the process, converting the oil changers, Breeze stores to Valvoline instant oil changes. We didn't do any of those in the March quarter, but we have started converting the stores as of this quarter.

Most of your customer base would be consumers, but talk about the fleet opportunity that you have as well?

Fleet still represents less than 10% of our system-wide sales today, growing very rapidly. I think if you look at the last few years, the fleet top line growth CAGR is around 17%. So it's growing at a very healthy rate. Average ticket is higher than on the consumer side, typically because of more non-oil change revenue services that we tend to do with fleet. There's also more premium mix because the age of the fleet vehicles tends to be less and they require more premium lubricant.

So all those things tend to lead towards a higher ticket. We have a very system-wide approach to the fleet business that we employ. We have a dedicated team that looks after fleet, both for company and for much of our franchise business as well. And so it's definitely an area of opportunity for us that we see plenty of continued growth runway going into the future. And just as an aside, we also see that as a really nice growth opportunity for the Breeze acquired stores as well. Their fleet business is probably where ours was maybe 10 years ago in terms of penetration and et cetera. So we've already started working with the Oil Changers team to take advantage of what we can do around fleet at this point.

And I'm sure this topic comes up from time to time, but with the change in the vehicle population, including more EVs, electric vehicles, what are the implications for Valvoline? And how are you going to configure the portfolio to evolve with it?

Sure. We are continuing to invest resources and better understanding not just the electric vehicles, but the overall maintenance requirements and needs of the electric vehicles. We've done focus groups to help us understand what electric vehicle owners think and feel about maintaining their vehicles. That's evolved over the course of time. I think initially, people had a misunderstanding that these vehicles do require maintenance. And I think in the end, what we want to be prepared to do when the time comes, and this is a ways down the road.

I mean it's probably been pushed out at least 5 years from where it was a couple of years ago and perhaps more. We want to be prepared to leverage our scope, our scale, our network and our team to provide appropriate services at the appropriate time. Today, there's not enough critical mass for us to invest in that. So what we continue to do is invest in a small internal team around continuing to understand, continuing to pay attention, continuing to keep both us as a leadership team as well as our Board updated on what the space is doing, where it's headed and how we can play in all of that.

My guess is we have about 30 to 60 seconds left, but maybe just talk about the balance sheet and the opportunity to get back into share repurchase mode.

Sure. Happy to do so. We were really pleased with the March quarter. We were at 3.3 turns of leverage. We calculate that net debt to EBITDA. During the quarter, we took that down 20 basis points. Our leverage target is 1.5 to 2.5x EBITDA, which we plan to get to via a combination of EBITDA growth, which we've historically done at a pretty rapid clip as well as reducing absolute debt along the way.

During the investor update, we committed to an 18- to 24-month time line to get there. Really pleased with the progress. Shaving off 20 basis points at a quarter is pretty strong. And if we can continue at a clip like that, we'll be back in share repurchase mode much, much sooner than that. And we've said multiple times, we want to get back into share repurchase mode as quickly as possible. The share price is -- it's a screaming buy in our opinion right now. And much of the team has put their money where their mouth is. So you're truly included on that front. And we just think there's a disconnect.

There's a dislocation in what people believe the business and the business model to be versus what it is. and nondiscretionary services tend to be just that. And so we see a very healthy and bright future for this business going forward, and I couldn't be more excited to be a part of it.

We are right there with you. Thank you so much, Kevin.

Thank you. Appreciate the time.

Ladies and gentlemen, thank you for joining us, and welcome to Valvoline's Second Quarter 2026 Earnings Conference Call and Webcast.

[Operator Instructions]

I will now hand the conference over to Elizabeth Clevinger, Investor Relations at Valvoline. Please go ahead.

Thank you. Good morning, and welcome to Valvoline's Second Quarter Fiscal 2026 Conference Call and Webcast. This morning, raveling released results for the second quarter ended March 31, 2026. This presentation should be viewed in conjunction with that earnings release. A copy of which is available on our Investor Relations website at investors.valvoline.com.

Please note that these results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission. On this morning's call is Lori Flees, our President and CEO; and Kevin Willis, our CFO.

As shown in the accompanying presentation, any of our remarks today that are not statements of historical facts are forward-looking statements. These forward-looking statements are based on current assumptions as of the date of this presentation and are subject to certain risks and uncertainties that may cause actual results to differ materially from such statements. Valvoline assumes no obligation to update any forward-looking statements unless required by law. In this presentation and in our remarks, we will be discussing our results on an adjusted non-GAAP basis, unless otherwise noted. A reconciliation of our GAAP to adjusted non-GAAP results and a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix.

With that, I'll turn it over to Lori.

Thanks, Elizabeth, and thank you all for joining us this morning. We delivered strong second quarter results that reflect consistent execution across our business. Our results included robust top line growth EBITDA margin expansion and improved cash flow generation. On the top line, performance was strong across the system.

Systemwide store sales increased nearly 20% and net sales grew 25%. System-wide same-store sales outperformed our expectations and grew 8.2% and 14% on a 2-year stack. Ticket drove about 2/3 of the comp with net price, premiumization and NOCR service penetration all contributing. Transactions also grew across the network. Moving to profit. We improved SG&A leverage in the quarter, resulting in our EBITDA growing faster than sales. Kevin will cover those details.

We remain confident in our proven business model, resilient customer demand and execution track record. Preventive maintenance is a nondiscretionary purchase and Valvoline makes it quick easy and trusted for every guest. We have not seen any signs of trade down or deferrals, and we expect to see this continued resilience. Despite the increases in crude oil prices, we did not see a material increase on product costs during the second quarter. As we enter the third quarter, however, we have started to see costs increase, and we anticipate this will continue depending on the length of the Middle East conflict.

We're working closely with our suppliers to ensure we mitigate any supply constraints and both company and some franchisees have taken pricing actions, which we expect will mitigate the cost increases on a dollar basis. We continue to make steady progress integrating Breeze Auto Care into our platform. The financial contributions from Breeze were better than expected for the quarter. Driven largely by improved execution related to store level expenses and early delivery of G&A synergies specific to payroll and procurement. We continue to approach integration deliberately. Prioritizing operational stability and capturing learnings to support long-term value creation.

Turning to network growth. We added 31 new stores for the quarter with 20 coming from franchise and 11 on the company side. We did have 2 closures and 4 transfers from franchise to company in the quarter. We finished the quarter with a total store count of 2,409. The timing of the new store additions continues to weigh towards the back half of the year, especially on the franchise side. Overall, our development pipeline for both company and franchise remains healthy, and we expect to deliver new store growth within our full year guidance.

Q2 was another strong quarter for Valvoline. We're executing our playbook to deliver meaningful growth at both the top and the bottom line. Our business model continues to demonstrate resiliency and scalability. We're pleased with the momentum of the business, and we're updating our guidance for the full year to reflect that. Before I wrap up, I want to take a moment to recognize a couple of achievements that reflect the values of our company and the strength of our team and our franchise partners. We are very proud to have been named one of America's most trustworthy companies by Newsweek. We strive to provide a quick, easy and trusted service to our guests, and this recognition speaks directly to the trust our customers place in us every day.

I'm also pleased to share that 97% of all Valvoline Instant Oil Change locations were named a CARFAX top-rated service center for 2025. Across our network, our service center teams deliver a V-class service every day with care, consistency and pride. It's rewarding to see that dedication being recognized by the customers we serve.

With that, I'll turn the call over to Kevin to provide more details on our financial performance and updated guidance.

Thanks, Lori, and good morning, everyone. A summary of our financial results is included on Slides 5 and 6. Let's take a look at the highlights. We delivered strong top line growth with net sales of $504 million, a 25% increase over the prior year with a balanced contribution from the core business and the inclusion of Breeze Auto Care for the full quarter. The gross margin rate of 37.1% and decreased 20 basis points year-over-year with leverage and product costs, offset by an increase in other service delivery costs, including the impact of new store depreciation. Excluding the impact of depreciation, the gross margin rate would have improved by 40 basis points. Also, as Lori indicated, Breeze performed better than expected in the quarter.

SG&A as a percent of sales decreased 70 basis points year-over-year to 18% with the substantial planned investments largely behind us, we will continue to focus on cost efficiencies and operating leverage while still supporting the business. As a result, EBITDA increased 28% and to $134 million with margin expanding 60 basis points to 26.5%. And EPS increased 21% to $0.41 per share which includes $0.06 per share of impact from interest expense. Year-to-date, operating cash flows improved to $160 million and free cash flow was $45 million, an increase of approximately $57 million over last year. We're making good progress on leverage reduction. Net debt to adjusted EBITDA was down 20 basis points sequentially to 3.1x. We remain focused on getting to our target leverage as quickly as possible so we can resume our share repurchase program. We had a strong quarter and are delivering on our commitments for sales and profit growth, EBITDA margin expansion and improved free cash flow.

Now let's look at our expectations for the remainder of the year. We enter the back half of the year with strong momentum. On Slide 7, you'll see our updated guidance, which includes raising same-store sales, EBITDA and EPS outlook for the full year. To provide more color on the outlook, we are seeing increased costs in the third quarter, and we expect that to continue. The severity and duration of those will be impacted by the length of the Middle East conflict. As Lori mentioned, both company and some franchisees have taken pricing actions already, which should mitigate the impact. I'll also remind you that product cost changes in either direction are passed through to the franchisees based on moves in the base oil index. Also, the Breeze Auto Care contribution was stronger than we expected. While integration remains in its early stages, we're encouraged by the initial performance.

The updated outlook reflects the momentum and execution we've seen in the first half of the year, which has continued into April and confidence in our ability to deliver on our financial commitments.

I'll now turn it back over to Lori to wrap up.

Thanks, Kevin. We delivered another strong quarter. I have to thank our team members and our franchise partners for the work that they're doing to deliver these results. Our performance for the first half of the year gives us confidence in our strategy and our team's ability to execute. Therefore, while we're mindful of an ever-changing macro environment, we're updating our full year guidance. The fundamentals of our business model are strong, and we have confidence in the resiliency of customer demand. As a result, we expect to continue to deliver strong profitable growth.

I'll turn it back over to Elizabeth now to begin the Q&A.

[Operator Instructions]

Your first question is from David Bellinger with Mizuho.

Very nice results here. Maybe we could start on the top line, same-store sales super strong, above 8%. Can you tell us where the outperformance came in the quarter, whether a company or franchise or geographical? And then as you went through the quarter, did you see any pockets of the country or any indications of demand softening, maybe where spending on gas makes up a higher proportion of discretionary spend. I mean have you seen anything like that as you move through the quarter and so far into early May?

Thanks, David. Yes, we had really strong same-store sales growth at 8.2%. And as I mentioned, it did exceed our expectations. About 2/3 of that came from ticket with actually all things contributing healthy amounts on the ticket side, net pricing was good, premiumization and then OCR penetration all positive. There were some pricing moves that happened in the quarter for our franchisees and that was not expected, some of that tied to the forward-looking cost increases on lubricants. So some of that would have been higher than what we would have expected.

And then on the transaction side, which made up the remainder really good growth across the network. So when we look across all the metrics, all geographies there's always puts and takes, but some of that is given where lapping is happening. So for example, California, transaction growth was really strong because we were lapping some California wildfires. Some of the other systems had more new stores contributing to the transaction growth. Some of those things we know, just the outperformance sort of happened across the board, with really the only notable thing being some of the pricing changes on the franchisee, which were modest overall. So really good on that.

In terms of demand, we continue to look for trade down and deferrals, and we do not see it the customer demand for preventive maintenance is very resilient. So we're not seeing that happen. If you look at history, going back to COVID, gas prices can have an impact on miles driven, but it takes a long time to change consumers' day-to-day behavior. And so we don't see any impacts of that, and we don't expect them. Now if the Middle East conflict were incredibly protracted, then we may see a little bit. But even in COVID, where miles driven was down considerably there's a habitual nature of preventative maintenance, particularly around key driving patterns. So we're not expecting to have any significant impact.

Very thorough. And then just a follow-up on the oil pricing and the impact on your cost of goods. Is there a way to quantify the expected impact you're looking for in Q3 and Q4? And understanding there's a bit of a lag until your price increases catch up to that. How should we think about the offsets and particularly gross margin rate? Is that something you could hold as you move pricing throughout the system and onto the consumer at some point?

Sure. I'll address that. So first, as Lori indicated, we didn't see any cost pressure in Q2. As we've moved into Q3, base oil indexes have moved and we're starting to the impact of that in product cost. As a reminder, we tend to have about a month or so worth of inventory on hand. So we'll take a little bit of time for that to flow through on a complete basis, but we do expect it to flow through. And we also expect some of the cost increases to continue.

To mitigate that, we have implemented price increases to cover those cost increases on a dollar basis. Most of our franchise partners have done the same or in the process of doing the same. So we feel like we will fully cover any cost impacts. In terms of overall margin recovery, we would expect that the margin rate to be modestly impacted based upon the cost that's rolling through. But to put it in perspective, for us, first of all, we passed through on pretty much a dollar-for-dollar basis, increased cost to our franchise partners for the product that we sell them. So that's more than half of the volume that we would purchase in a year.

Second part is you look at lubricant or overall product as a percent of COGS, it's 20%, 25% and the lubricant is by far the largest piece of that. Rule of thumb for us is if base oil goes up $1 a gallon, we need to raise price $0.50 to $0.60 per oil change to cover that. So it's not a huge impact given that we and the franchise partners are north of $100 per ticket today. And so again, it's not a huge impact, but it is something that we have to be proactive about and we are being proactive with it to make sure that we do maintain dollar profit.

The last piece of that will be waste oil we do get paid for waste oil. Typically, we see waste oil move more or less in line with crude. There can be a lag. We didn't see any movement in waste oil we have seen very modest movement in waste oil that we sell so far in Q3, but that is a partial offset to any kind of cost increase that we see around base oil.

Your next question is from Simeon Gutman with Morgan Stanley.

I wanted to ask about Breeze for a second. Can you talk about milestones, integration, anything good or anything less than good.

Thanks, Simeon. Yes, our integration efforts are progressing well. We're pleased with the performance of Breeze as both Kevin and I talked about in our prepared remarks, we delivered some of the SG&A synergies earlier than planned. So as we brought and integrated our corporate support teams, we were expecting to have a good fit between the teams, and we had some open roles, which we were able to not fill with outside hires and instead use the Breeze talent. So those were some of the things that we had hoped but hadn't exactly planned for. And then the team has worked really hard across all the procurement contracts to look for opportunities. Those are things that when we did the planning, we did not have the detail and the team has worked really quickly to deliver some procurement savings earlier than what we would have expected. So all of those are really great.

Our focus -- we're still only 4, 5 months into this process, which we know will be a multiyear integration effort. And our focus really is on operational stability of the stores, making sure that we retain the talent in the stores, particularly as the FTC required some divestitures in and around the stores we maintained. So that's been a big focus of our team, making sure that we get out and talk about our plans for the business and for the people in that business, so they get excited about staying on with Valvoline.

And then we've completely integrated and aligned all the support teams and the management team members making sure that our financial reporting line cadence that we have eyes on and more detailed understanding of their business. So I think it's -- the integration effort is going very well, and the business is performing very well. The Breeze team did a nice job managing store operating expenses in this quarter and delivered well against their plan.

And a follow-up on the demand and maybe the macro. It looks like your spread versus at least one of the public peers that we can track, widen. Can you talk about market share in the quarter? And then if demand slows because of price of oil, that's just deferral, right? I mean that's a business that just has to come back unless miles driven takes a step down. But I would assume you're looking at this backdrop is more temporal than structural.

Yes. When you look at market share, Simeon, to your first question, we definitely grew share across our business. Even when you take the impact of Breeze out of the numbers, which obviously was a share capture we still had really strong growth across our system, not just in same-store sales, but also the new store contribution. So 25% growth overall with a healthy mix coming from the business that we had, not including Breeze just shows you the power of our proposition and our real estate placement and execution. So feel really good about that.

In terms of deferral, you're exactly right. Miles driven and more timing interval as I always like to remind people, when you're going to take a long car drive, people want peace of mind. And given the complexity of the vehicles today, they want somebody with eyes on, hands on their vehicle just to do safety checks. And in our proposition of quick easy trusted it's also thorough. We do a comprehensive safety check. And oftentimes, people will go ahead and get their oil changed at the same time even if they're not exactly due because they're timing it with a road trip with their family or a significant drive for other reasons. So when we look at drive interval, there's very little deferral on drive interval and our miles driven is fairly consistent across the network.

Again, it takes a protracted duration of high gas prices to start to impact miles driven. People can't change their daily habits and routines that quickly or it's done very much on the margin. You also have trade down activities of people choosing not to fly instead to drive that all bodes well for our business.

Your next question is from Mark Jordan with Goldman Sachs.

Congrats on great quarter. Just wondering if you can talk a little bit about same-store sales trends, how they progressed throughout the quarter. And maybe what kind of momentum we're seeing thus far during 3Q? Because I think if we take the updated guidance and couple that with the fact that 2/3 of the comp in the 2Q were driven by ticket kind of implies things slow down a little bit in 3Q. So just any commentary you can provide there?

Sure. I'll cover Q2 and then I'll ask Kevin talk about how Q3 has started. The comps overall, there were some puts and takes by month in the quarter. We talked about January in our last earnings call, we ended that month fairly light because there was weather in the last week that pushed demand into February. We talked about the fact that we expected to get that volume back. I think we did February was very strong given the January push, but it was also strong because last year in February is when we had weather, which pushed volume to March. So we had kind of a double whammy really driving volume in February. And our teams across franchise and company did a great job responding and ensuring that we have labor in the stores to deliver on that demand. And then March, we saw good growth, but it was more modest, given the comp from last year's Feb push to March, we expected a lower comp on the transaction side for March, and we saw that, but still really good growth across the quarter when you take out some of those puts and takes.

And Mark, looking at Q3, we're still early, but we do have a full month end plus a week in May. And we're seeing no change in behavior. We're seeing no change in how the business is performing. April was a good month to start the quarter. Net sales and same-store sales growth were both solid. Consumer behavior remains very consistent with what we've been seeing. NOCR is performing pretty much as it has been as well. So we're not seeing any trade down or deferral on really anything in our customer base.

As we think about the full year we're really pleased with how the first half landed. Company and franchise performed really well. Breeze is performing ahead of expectations as well. So we've got good momentum going into the remainder of the year. We did raise the guide as indicated, same-store sales growth profit metrics. That reflects the strong first half we had. But just to be transparent, we're still being a bit measured as we consider the uncertainties that exist in the back half. with the Middle East conflict and nobody knows what the duration of that is going to be or the overall impact. And so we do continue to be measured.

That said, we remain incredibly focused on delivering on the financial commitments that we discussed at the December investor update. And thus far, I think we're doing a good job of that. As we think about the rest of the year, we do typically see operating leverage across our store base in the second half of the year. We'd expect to see that this year as well. More specifically, we should see some labor leverage for the full year, but that's going to be a bit muted for two reasons. Number one, we had some big wins last year, and that's hard to comp. Also Breeze is a negative impact to margin, albeit less than we expected so far, and we expect that to continue. So that's really a lot of what we're thinking about when we think about the overall guide and the second half of the year.

Okay. Perfect. And then just last one, if I could. The competitive landscape, it's changed a little bit here, I think, in recent months with one of your larger competitors announcing the sale. I guess with that, do you expect any changes to the competitive environment either intensity or maybe impacts to your white space projections?

Yes. No, I think our industry is still incredibly fragmented, and we haven't seen nor do we expect at least in the near term to see any material changes in the competitive environment? Obviously, with -- there's a lot of distraction in our category. But I do think that we compete against the players that exist today. And we performed very well. So when you look at our stores proximate to the next largest players, we've been competing against these brands for a long time. We continue to add stores in markets where we compete against these brands. We deliver -- we're delivering very good returns still maintaining mid-teens or higher returns on invested capital in the stores that we build and our franchisees are still building.

So it's unclear how new ownership and some of the turmoil is going to impact or change, but we're confident in the strength of our business model. Our customer proposition, our marketing execution and just our overall store execution across the network.

Your next question is from Chris O'Cull with Stifel.

Congrats on the great report. Lori, could you elaborate a bit more on the risk of lubricant shortages?

Yes, I'll do a little bit at a high level and Kevin, you can add on to it. the lubricants that we use in our business are blended from a number of different base oils. Our supplier who develops that is always looking on its formulation to meet the OEM specs. And so this is something that they're always looking at in terms of managing supply and demand across the base of products that they produce. When you look at the Middle East conflict, it's really base oil trees. That tend to be -- are potentially being impacted, and we're working very proactively as our supplier is to make sure that we mitigate any risk. But that -- that is something that will depend on how long the conflict continues. But at least as it relates to the guidance that we've updated, we believe we've been very measured to outline more of the bottom end would have that taken into account to the extent we see any risk.

Yes. I think Lori said it really well, but we've got very adequate supply today and for the foreseeable future. And it really will be about the duration of the conflict. But again, in very close contact with our supplier on this, and they get it and are doing everything they can to ensure that we remain and continue to remain supplied.

Okay. And then Kevin, I had a question on the guidance. The comp range was raised meaningfully, but the full year revenue range wasn't changed. I was hoping maybe you could just elaborate on what else changed in the underlying assumptions. And then I wanted to clarify, the EBITDA range was also increased on the same revenue range. Is that because Breeze margin is better than initially expected?

So, Breeze is performing better than initially expected, and we would expect that to continue based on how they're executing. So that does certainly play some part in it. As we look at the overall revenue range, I would say at this point, we were comfortable with the range, which is why we didn't change it. I would say that we are trending above the midpoint. I think another point worth making here is depending on how much price movement we need to do there could be a need to change that range down the road. But we're comfortable with where it is right now and feel like there's room in there based on our current forecast of the business.

Your next question is from Steve Shemesh with RBC Capital Markets.

Nice results. Just a follow-up on cost inflation and pricing and kind of where that pricing has gone into the market company operated versus franchise. And then just thinking about have you priced to where you think inflation is going to go or based on what you've seen in the market today? And could we see additional pricing throughout the year?

Yes, great question. So as we mentioned, we started to see our cost forecast for lubricants go up for the third quarter. And therefore, on a company basis, we did take some pricing actions within this third quarter to mitigate. We are trying to stay measured with that to make sure that we cover the cost increases, but we're also putting those into the market in an appropriate way, much like we do our pricing all the time. So we've been running in test and some of this pricing, we feel very comfortable and confident in the customer elasticity benefit or a net benefit that we would receive. So we feel very good about the company side.

Our franchisees, not all of them, have taken pricing actions. Some took some pricing action already in the second quarter. Some are still reviewing. Some have decided or are in the middle of deciding what they will do in the month of May. So we're really in a transition phase as we're looking at cost increase wanting to make sure that we are appropriately pricing to pass that through to the consumer where we can't mitigate it otherwise.

Understood. And then just a follow-up. I mean, presumably, as price goes into the market, your list price contribution to same-store sales should increase as well. So I guess just as we think about the contribution of traffic versus ticket for the back half of the year, should it be a little bit more weighted towards ticket? Or do you expect it to be balanced with what we saw in the first half?

Yes. It most likely will be a bit more weighted towards ticket. I think the other piece of the equation, though, is especially in the non-Breeze part of the business. We do tend to have a pretty high transaction level in the second half of the year compared to the first half of the year just due to the seasonality of the business. So we would expect the transactions will also remain a meaningful contributor in the back half of the year. But I think the way the math will work is we will see incremental improvement to the comp more on the ticket side.

Your next question is from Scott Stember with Roth Capital.

Well, and congrats on the very strong results. I'm not sure if you mentioned this in the call already, but could you talk about whether there is any meaningful difference in same-store performance versus franchisees versus company-owned stores?

Yes, I did mention this, but I'll go ahead and cover it again. Overall, same-store sales across the network of 8.2% was really strong. The franchise stores did outperform company relative to the average. That was higher driven primarily by transaction growth. There were puts and takes on the ticket, but ticket was largely the same. So the majority was coming from transaction growth. And there are a number of different factors I mentioned. One is new store contribution. We had a couple of our franchise system, fairly larger ones that had more new builds and they're coming into their cost than they would have had a year ago.

Another system is lapping weather with the wildfires in California. And so there are different puts and takes that drive some of that transaction growth that we know and can point to. But overall, when you step back and you look at company store performance and franchise store performance, averaging out to 8.2%, it's meaningful, and the comp was strong on both. So we're really pleased with where Q2 landed.

Got it. And could you talk about how fleet did in the quarter? Any meaningful improvements over what we've been seeing over the last few quarters?

Fleet continues to perform very consistently across the board, and we would expect that to continue. Just as a reminder, fleet continues to make up less than 10% of our system-wide sales, but growing at a very rapid rate. We have a lot of room to run in the fleet business, both on the company and the franchise side. We have resources devoted to those customers to not only serve them, but also to continue to build that business. Again, both for us and our franchise partners. And we're very bullish on not only where that is, but where we expect it to go.

Yes. When we look at fleet growth -- when we look at fleet growth, just to chime in there a little bit, there was a little bit slightly higher fleet contribution on the franchise side, the same store sales and company, it was small but meaningful on its base. I think the other thing that's happened that we're really pleased about is our last large franchise system has just decided to move their fleet business to be managed in our managed sales group, which we do on behalf of all of the other large franchisees, but this was the last one, which will allow us to really go after meaningful business across the nation when you look at key regions. So we're really excited about the opportunity to grow fleet. There will likely be meaningful fleet growth. On the franchise side, just because we've started to focus on that on behalf of our franchisees more recently.

Your next question is from Peter Keith with Piper Sandler.

Good morning, everyone. Great results. With the guidance range I'm curious if you've touched the back half of the year, the guidance seems to imply a bit of a step down in the comp trend despite the continued momentum, certainly can understand being conservative, but maybe just help us understand the guidance raise is it mostly flowing through what's happened in the first half? And has there been any changes to the second half?

Again, we are being measured in the second half in terms of the overall guide. You're right, the second half guide remains largely unchanged. We started off strong in Q3. We feel very, very good about where we are, the momentum of the business and how it's performing. But again, we did want to be measured based on the things that we don't know and that we can't control. And as we get through Q3, we'll take a fresh look at it again. And if we need to adjust, we will. But you are correct. The second half is largely unchanged from where we started.

Okay. That's very helpful. And then for Lori, I'm always curious around the efficiencies you're getting from moving your tech architecture to the cloud. And you've talked in the past around improved marketing analytics. Is there anything you could update us on that front where you've made some recent progress.

Yes. We continue to look at our net pricing and the efficiency of our discounting activity. And I would say that we've made a lot of progress in that as we continue to grow ticket, we're managing the discount levels very effectively. We've been able to pilot some different offers in a very targeted way to figure out if there are things we want to do more broadly. Probably nothing too early to share the impact. Some of the things that we have are in our plan. Some of them would be upsides to the plan, which obviously, we're always working to deliver.

We're very early in the shift of some of our budget from local media spend and national media spend, that's driving our cost per impression down or increasing the number of impressions for the spend that we're using. And we're seeing increased organic traffic to our brand assets, which obviously lowers our customer acquisition cost. So overall, probably too early to share some of the metrics, but we're seeing some very promising results of the investments that we've made both to move our marketing data and assets into the cloud, but also in the early stages, very early stages of the shift to more of the national media spend.

Your next question is from Steven Zaccone with Citi.

Congrats on the strong results. Most of my questions are answered, so I wanted to follow up on a couple of model things. First on -- let's talk about gross margin for the second half of the year. So you talked about 2Q being up 40 bps ex the depreciation. How should we think about the second half because you still have Breeze being dilutive? And then it sounds like labor efficiencies will kind of be a bad guide. So just can you talk about second half gross margin expectations?

Yes, Steve, we would expect gross margin in the second half to improve as it normally does, given that we do tend to have higher volume in the second half with the summer drive season and just general seasonality in the business on an overall basis for, call it, the non-Breeze part of the business and we fully expect that to continue. On the labor piece of the equation, we were really, really strong on labor leverage in the second half last year. And so we don't expect a lot of improvement on the labor side, but we would expect some nominal improvement there, partially offset by Breeze. Because just as a reminder, they do have lower volume stores. And so their labor as a percent of sales does run higher than ours. It's one of the advantages that we'll gain as we build momentum in that system.

But on an overall basis, we'd expect to get a bit of leverage from most store expenses, again, just through the throughput that we'll see in the second half. And while you didn't ask the question, I will also say we would expect to see continued SG&A leverage in the second half, again, as that is a stronger part of the year for us.

Okay. When you say improved, do you mean sequentially gross margin rate, not necessarily year-on-year?

That's right. And part of that is due to the fact -- just to clarify, remember, we do have Breeze included in the equation, and that is a bit of a margin headwind much less in Q2 than we expected, and we would expect it to be less for the full year than where we thought it was going to be, but it will be directionally a small headwind to margin in the second half as well.

And part of that is because when you look at the volume in our stores, and the way that it ramps during drive season for much of the country, it's less so in states like California, though there is some. And when you look at their volume per store, just the amount of leverage that we'll get because it will take time to drive that demand curve on the Breeze sites.

Okay. Understood. And then the other follow-up I had is I may have this wrong, but the original thinking for Breeze dilution was about 100 basis points to EBITDA, that one was that right? And two, what should we be thinking about as the dilution from Breeze on an EBITDA basis?

Yes, that was right. We expected about 100 basis points of overall EBITDA margin dilution. We didn't really talk about the gross profit piece of that. But it was much less in Q2 than 100 basis points. That said, we did have synergy capture that was earlier than expected. So on an overall basis, it will be less than 100 basis points for the full year. Not really prepared to disclose exactly what we think it's going to be, but it will be less than 100 basis points.

Your next question is from David Lantz with Wells Fargo.

On your expectations for second half SG&A leverage, Curious if you can parse out how we should think through some of the moving pieces within advertising, payroll and G&A?

Sure. Advertising as a percent of sales will be fairly consistent sales will be higher, advertising will be higher in the second half as it normally is. But on a percent of sales basis, it doesn't change very much typically. May move around a little bit on a month-to-month basis, but for a quarter or the full year, it's pretty consistent. As far as the rest of SG&A, goes. As we think about the full year, we'll talk about Q2 first. We had about 60, 70 basis points of leverage. And I think most of the big tech investments are behind us. We've lapped that, and we're seeing that come to fruition.

But one of the things we're really pleased with is that the improvement is really coming across a broad range of categories. which is how it should happen. So we're not seeing outsized impact from any one area like labor or what have you, kind of all the big areas are improving a bit. And we would expect that to continue. There's -- there will be a natural amount of that again in the second half because it's busier for us. We'll see more sales and the labor and other costs to support those sales really won't change very much. And so we should naturally see leverage higher leverage in the back half.

That said, we are also very focused on making the business more efficient every day. we're looking at ways to do more with less to employ technology in new and better ways and to generate as many ideas as possible to continue to create and build SG&A leverage going forward.

Got it. That's helpful. And then could you also talk about the cadence of new unit openings in the second half and provide an update around new unit economics as well?

Sure. I'll talk about the new unit profile of openings and Kevin can talk about capital. Obviously, we added 31 stores to our network, 29 netting out the 2 closures. The new units continue to wait to the back half. It's typical given the geographies that we serve and the weather patterns of when construction and conversion can happen. We actually had 14 openings in April, 9 of which were franchise. So again, we continue to feel really good about the health of our pipeline, both on the company and the franchise side.

That includes both ground-up builds and independent Quick Lube acquisitions. So overall, you can expect to see a weighting of unit openings in the back half, particularly on the franchise side.

As we think about unit economics, we and our franchise partners have been very focused on reducing the amount of capital that it takes to build a ground-up store as well as the capital required to convert an acquired store to Valvoline Instant Oil Change. And the team has been pretty successful with that, bringing that cost down, call it, 10%, 15% with line of sight to do another 10% to 15% over the course of time. It will take some time for that build cost to roll through as -- especially with ground ups because there is a certain amount of time it takes to open one of those from start to finish.

That said, as we look at unit economics, it really hasn't changed. From an IRR perspective, we see mid- to high teens. That's why we continue to invest in the units. It's why our franchise partners have increased their investment in the units and made commitments around that with new development agreements. So we really see no change there, and we will continue to invest in new units for the foreseeable future.

Your next question is from Bret Jordan with Jefferies.

In the non-oil change revenue mix, did you see anything of note there, whether customers either push back on some of the higher ticket stuff like a differential flush as the quarter progressed? And I guess if you could talk about sort of strengths or weaknesses in that category.

NOCR was a good contributor in the quarter. And as we look at the trending of NOCR -- I think we've said this in the past. NOCR tends to run around 25% of ticket, give or take. As we looked at that in Q1 versus Q2, April versus Q2 and Q1, et cetera, it remains very consistent, both across the company and the franchise partners. So there's been no change there thus far.

Okay. And then I guess when you think about past oil volatility, as you take prices up, and obviously, they might come down if we resolve the Middle East, can you capture margin as you hold price for a bit against the lower input cost? Or does it ratchet down pretty quickly with competition?

Lori can correct me if I'm wrong, but I don't think we've ever lowered list price on our oil changes. And that's just -- that's an industry standard, I would say. So there is potential opportunity for some margin recapture going forward as a result of that if we do see declines in the cost of lubricants.

Your next question is from Thomas Wendler with Stephens.

Great quarter. Most of my questions have been answered, maybe 1 more quick one for me. With the Breeze acquisition, I think there was an expectation from any rollout of additional services there at the Breeze locations. Can you give us an update there?

Yes. We're in the process of looking at the menu and understanding what equipment would be required to expand the menu of offering between an oil changers location and a Valvoline Instant Oil Change is fairly consistent. Obviously, the lubricant offering has some differences that we're working through. And then they don't offer tire rotations. And so we're working through what equipment that would be required in training as we look at that opportunity and the oil changers, there are pretty small other changes here and there still an opportunity for upside, which is factored into our overall growth expectation for Breeze.

There are no further questions at this time. This concludes today's call. Thank you for attending, and you may now disconnect.

Hello, everyone, and welcome to the Valvoline's First Quarter Fiscal 2026 Conference Call and Webcast. My name is James, and I'll be your operator for this call. [Operator Instructions] The conference call will now start, and I'll hand it over to our host, Elizabeth Clevinger with Investor Relations to begin.

Thank you. Good morning, and welcome to Valvoline's First Quarter Fiscal 2026 Conference Call and Webcast. This morning, Valvoline released results for the first quarter ended December 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 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 and in our remarks, we will be discussing our results on an adjusted non-GAAP basis, unless otherwise noted. A reconciliation of our GAAP to adjusted non-GAAP results and a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix.

With that, I will turn it over to Lori.

Thanks, Elizabeth, and good morning. Thank you all for joining us today to review our first quarter results. We delivered a strong quarter to start the fiscal year, driven by strong productivity gains in our stores, network expansion and margin improvement, which translated to meaningful earnings growth. I'd like to begin by thanking our team members and franchise partners for their execution in delivering these results. At our December investor update, we shared our targets and are focused on executing against those. Our first quarter performance reflects good progress against these commitments.

Starting with top line highlights. We saw another double-digit increase to both system-wide store sales and net sales. System-wide same-store sales grew 5.8% and 13.8% on a 2-year stack. This quarter, ticket contributed the majority of the comp with all 3 levers contributing. Net price and premiumization were the largest drivers. We also saw continued positive transaction growth despite a tougher year-over-year compare. As we look at same-store sales breakdown between company and franchise stores, franchise was slightly higher than the system average for the quarter and for the 2-year stack. We continue to grow our active customer base in line with what we expected, while bringing in new customers, including fleet to the network.

We continue to innovate our marketing to connect with new customers. We have some fun taking inspiration from college sports with our Instant Transfer portal, which was designed to invite drivers to transfer from their current oil change provider to Valvoline. Customer demand for our nondiscretionary services remains resilient, and we are not seeing signs of trade down or deferral. And our customers continue to tell us they are delighted by our quick easy trusted service and are giving us a 4.7 star rating across our network and NPS scores over 80%.

Looking at network growth, we saw significant store additions this quarter. The onetime contribution of 162 stores from the Breeze transaction is a noteworthy step forward in our path to a 3,500-plus store network. The Breeze business is performing as expected and integration activities are underway. Our teams are working well together as we integrate the organization. For example, the team has already consolidated and prioritized our acquisition and construction pipeline. We continue to be excited about both the growth potential of the Breeze stores as well as the opportunities to share best practices across the team.

Outside of Breeze, we added 38 net new stores with 10 coming from franchise. While franchise openings were more modest in Q1, we have a healthy pipeline for both company and franchise and are confident in our full year expectations. We're pleased to see expansion in both our gross and adjusted EBITDA margin, driven by the work we discussed at our December investor update. Kevin will cover the details. But as we think about the rest of the year, I'll remind you that Breeze is only reflected in our Q1 results for 1 month, and we still expect near-term headwinds on our margin rates with the addition of 162 immature stores.

Driving productivity within our stores, growing our network and expanding margin rate translates into meaningful profit growth. And in Q1, both adjusted EBITDA and EPS grew double digits year-over-year for the quarter and grew faster than top line sales. The first quarter demonstrated the strength of our business and the continued resiliency of customer demand. We executed our playbook to deliver meaningful profit growth to start the year. As we look to the remainder of the year, we feel it's too early to make changes to our guidance, but we are pleased with our Q1 performance.

While not directly in our financial results, I want to share a couple of team highlights. First, Valvoline earned the #1 ranking within the automotive services category for Entrepreneur Franchise 500 for the fourth year in a row. And we were also named one of Yelp's most loved brands. These recognitions highlight the strength of our franchise model and the strong customer trust and loyalty built across our network.

And second, I want to thank our customers, franchisees and teams for an incredible 16th annual campaign with Children's Miracle Network. Through funds donated by guests at the time of service, corporate-led fundraising efforts and contributions from franchisees, we raised more than $1.8 million for local children's hospitals in the communities where we operate, a nearly 40% increase over the prior year.

With that, I'll turn the call over to Kevin to provide more detail on our financial performance.

Thanks, Lori. We've provided a summary of our financial results on Slides 5 and 6. Let me spend a few moments to talk about some of the highlights. We saw strong top line growth with net sales of $462 million, an increase of 11% on a reported basis and 15% when adjusted for the impacts of refranchising in Q1 of last year. The gross margin rate of 37.4% increased 50 basis points year-over-year, driven by leverage in labor and product cost, offset by increases in other service delivery costs, which includes rent, property taxes and depreciation. Leverage would have improved by an additional 50 basis points, excluding the impact of depreciation, primarily from new stores.

We remain committed to managing SG&A in the business. That said, SG&A as a percent of net sales increased 30 basis points year-over-year to 19.3%. The primary reason for this is related to a nonrecurring payroll-related benefit of about $2.4 million in the prior year quarter. Absent this benefit, year-over-year SG&A as a percentage of sales would have declined by 30 basis points. Overall, adjusted EBITDA margin increased 60 basis points to 25.4%. On a GAAP basis, we reported a loss from continuing operations of $32.2 million, largely driven by the loss on divestiture of certain Breeze stores that was required by the FTC. On an adjusted basis, income from continuing operations was $47.6 million.

Turning to EPS. We saw an increase of 16%, 28% when adjusted for refranchising. As a reminder, we expect pretax interest expense to increase by about $33 million in fiscal '26 versus fiscal '25 due to the new Term Loan B. Operating cash flows improved to $64.8 million and free cash flow was $7.4 million, improving approximately $20 million compared to the prior year quarter. Taking into consideration the new term loan, our leverage ratio is 3.3x based on adjusted EBITDA for a trailing 12 months.

As a reminder, you'll now hear us talk about leverage in terms of net debt to adjusted EBITDA. As we continue our core business growth and integrate and grow Breeze, we are focused on getting our leverage back down to 2.5x as quickly as possible so we can resume share repurchase activity. All in all, the results for this quarter are strong with double-digit sales and profit growth, margin expansion and improved free cash flow.

I'll now turn it back over to Lori to wrap up.

Thanks, Kevin. We delivered a strong quarter to start the year and feel confident in our ability to deliver on the guidance we set for fiscal year 2026. The Breeze integration work is underway, and our teams are working well together. The fundamentals of our business remain strong. As we shared at our investor update in December, we're an established category leader with a track record of industry-leading performance and growth. That, along with our differentiated capabilities, will continue to drive strong margin and cash generation, positioning us to deliver long-term value to our shareholders.

I'll now turn it back over to Elizabeth to begin Q&A.

Thanks, Lori. Before we start the Q&A, I want to remind everyone to limit your questions to 1 and a follow-up. With that, operator, can you please open the line.

[Operator Instructions] And we now have our first question from Mark Jordan from Goldman Sachs.

This is Mark Jordan. I joined a minute late, so I apologize if this is already covered. But for same-store sales, it looks like some or all of the new Brakes revenue is now included in the calculation. And I'm just wondering what impact it had on 1Q? And then on the mobile channel in particular, how big is that business in terms of revenue?

Thanks, Mark. Yes, we mentioned during Investor Day that we were piloting opportunities to expand our reach with mobile service delivery. We want to be transparent about the definition of inclusion while we were early -- in the early stages of doing that. It is relatively small, limited to a couple of markets. And it's really tied to trying to meet the needs of both consumer and fleet demands for increasing convenience. In terms of the overall contribution into our comp this quarter, it was around 20 basis points.

Excellent. And then just one follow-up on franchise store growth. I know it usually ramps throughout the fiscal year, usually back half weighted. But can you just let us know how you feel about the pipeline for openings this year?

Yes, Mark, it's a great question. The quarter -- we had a good quarter overall for new unit additions, but it was light on the franchise side. I will note that we had 13 gross additions. We had some closures, which are unusual, relatively small for our fleet, but those netted out to 10. When we look at January, our franchise partners have opened 9 units in January. So again, a real indication that the pipeline is robust. And considering the Winter Storm Fern in the back half of January, 9 was a pretty good result. So when we look at our pipeline for the rest of the year, it's still very strong, both on the company and the franchise side. And we continue to build momentum to get to that 250 new units in fiscal year '27.

Moving on to our questions here. We have Simeon Gutman from Morgan Stanley.

This is Skylar Tennant on behalf of Simeon Gutman. First, can you speak to the complexion of sales this quarter in terms of how pricing and units are trending? Are you seeing certain trends by region or in newer, younger markets? Or do trends seem to generally be pretty broad-based?

Thanks for the question. We -- actually, in the quarter, from a cadence perspective, October, November were pretty much as expected. December was strong. We saw good growth on both ticket and transaction. Ticket was the larger contributor to our same-store sales growth in the quarter. But overall, the growth was quite balanced and good, both on the franchise side as well as the company side.

I think the only thing we may have saw in November was a little bit of early weather in the Thanksgiving period in some of our geographies. But other than that, there weren't any notable differences or significant trends regionally across our network.

Okay. And Lori, maybe how much time do you think needs to be spent on Breeze? Can you kind of give us a sense on how much focus is needed there versus the core business?

Yes, it's a great question. I think it's important to remember that while a sizable M&A, Breeze represents less than 10% of our financial commitments for FY '26. And you can see that the underlining business, given Breeze was only 1 month of the Q1 results is the momentum in that core business is really strong. Now we continue to be excited about the growth possible in the 162 Oil Changers stores that we've added, and we're certainly starting to share some good best practices. But I think we've got to keep context that Breeze is an important asset, and we are going to spend time to integrate it and integrate it well, but it is a small portion of the overall financial picture for us.

Moving on to our next question from Max Rakhlenko from TD Cowen.

Congrats on the nice quarter. So with the strong 1Q comps and easing compares the rest of the year, how should we think about the shape of the year in the context of your guide? And then just any comments on the first month of 2Q?

Do you want to start and then I can cover Q2.

Sure, sure. Yes. Thanks for the question. I mean we're -- as we said at our Q1 call and on the investor update, we've taken a measured approach to the outlook for the full year. Really, really pleased with how Q1 played out. It was a strong quarter, and we're very happy about that. There's still a lot of year left, and we want to continue to see how that unfolds. But we're confident in the guide that we put up in Q1 and reiterated at the investor update in December. So again, we feel really good about where we are. There's a lot of year left. We're still working through the Breeze transaction, obviously, in terms of integration. But Breeze also performed as expected for the month that we owned it in Q1. And so overall, it's a great start to the year. And again, we're very confident in meeting our commitments for the year.

Max, as we think about Q2, apart from Winter Storm Fern, our start to the quarter was really strong. Now with the snow and ice conditions that hit many of the geographies that we operate in, particularly on the company side, momentum obviously slowed, and we're still, in many areas, Kentucky included, still not thought out completely, which has impacted consumers kind of return to normal activity. I think as you look at the forecast and the groundhog said we have another 6 weeks and the polar vortex that they expect coming and the storms that could follow with that, we think it's going to take a little bit more time to recoup the transactions that pushed out.

We don't see significant customer deferral when we look a couple of weeks at a time. But we do know from history that customers will return to get their cars serviced when their normal day-to-day activities resume. So we expect that as we go out through the balance of the quarter, we'll recoup some of the volume that we obviously missed as people stayed off the roads. But overall, Q2 just before the weather started very strong.

Got it. That's very helpful. And then on Breeze, what's the latest thinking around the timing of the store conversions? How many locations do you plan to convert this fiscal year? And then what could be left for year 2 or year 3? And then how should we think about both the revenue as well as the margin impacts the rest of the year sequentially?

Are you -- on the last question because I'll have Kevin answer it, are you talking Breeze specific or more broadly on the margin and the...

How do you factor Breeze on the P&L?

Okay. All right. Yes, I'll cover the first part, which is just really our integration overall. We closed the transaction in December and simultaneous with that had to complete the divestitures that were required by the FTC. And while that may sound simple, there's a lot of co-mingling of data in every part of the business that we had to start to separate and transition that out. And so a lot of the focus in the first month was really getting that business stood up within our portfolio and stabilizing the team to ensure that they continue to deliver. And as Kevin said, they delivered exactly as expected, and we feel really good about that business.

Our teams have been meeting, obviously, you have the holiday period, but we're 2 months into integration planning. And I would say we're having the discussions around how we integrate the Breeze stores into our network and all the things like systems, and I talked about pipelines being integrated just to make sure that we're not competing against each other in any market. So there's a lot of work underway with parts of our team, but it's a little premature for me to share the specifics on store conversions. We're obviously engaging the team specifically on that.

As far as the financial impact, consistent with the commitments that we made at the investor update in December, we would expect the Breeze stores to add about $160 million of top line for the 10 months that we will own the business in fiscal '26, around $31 million of EBITDA. And I think as a reminder, obviously, we did take on leverage to do this transaction. We expect the cash interest to be about $33 million on a pretax basis. And that we would expect to have about a $0.20 per share impact on EPS for, again, the 10 months that we own the business.

Next question here is from David Bellinger from Mizuho.

Sort of macro related, we've been hearing a lot more about these affordability concerns across most of the consumer, high prices holding spending back to some degree. But Valvoline has consistently seen trade-up activity, product premiumization. Why do you think that's the case? And does it say something about the pricing potential of this business and maybe something more you can gradually tap into over time?

Yes, David, it's a very good question. Valvoline is a strong brand and business in a category that, as you know, is nondiscretionary. And there are a lot of tailwinds that affect us. One is the aging car park that leads us to present more non-oil change revenue services on average per customer that then gives us that lift despite the macro may be running encounter because people feel like they need to maintain the vehicle they have such that they don't have to replace that vehicle. I also think that the car park has evolved. And as the new vehicles start to age into the car park, the automotive manufacturer is the one who specs the kind of lubricant that is required. Now as a customer has a high mileage vehicle starts to get over 100,000 miles, they really do want to maintain that vehicle rather than having to trade up into a new one or a newer one.

And so those are the things that are driving some of how we've been bucking the trend. our team educates the customer on their choices. They educate them as to the choices for their vehicle based on the mileage and the age of the vehicle and what the OEM requires. So we just run our play and educate the customer, which builds trust, and I think that serves us well. We continue to look at pricing. I think we always want to be a little cautious given the macro environment to not move too quickly. But obviously, we continue and net pricing was a contributor to the comp this quarter, and we continue to adjust our pricing appropriately given our value proposition to the consumer.

Great. Great. Second question, completely different topic, maybe for Kevin. But the material weakness for internal controls that's been in your filings, that's lasted somewhat longer than the time line you initially laid out. So how much of that is simply waiting for approvals with the new systems in place? Or is there more technical work you have to do to get all that cleaned up?

Yes. Thanks for the question. The team has put in a tremendous amount of work to get us to the point where we are. As a reminder, in fiscal '25, we really had 2 aspects of the material weakness that we were working on. The first was around systems, so call it, IT general controls that needed to be put in place, remediated, tested, proven to work and proven to be effective. And we passed that test as part of fiscal '25. That was in our 10-K disclosure.

The second part of the material weakness is around business process-related controls. That work remains underway, and we continue to work with both EY, our auditor, as well as several third parties who are helping us with this project. What it really comes down to is just a massive amount of work to get everything in place in terms of controls documented, making sure that we have the right controls in place and then proving to ourselves and to our auditors that those controls are working and that the overall control environment is effective.

And that's what the team is working on as we speak and has been working on for a while. But good progress has been made. We're still climbing the hill, and it's certainly our expectation that by the end of this fiscal year, we will be able to put this to bed. As a reminder, the test or the opinion is an annual opinion. And so we won't be out of the woods on this until we get through the fiscal year and EY has a chance to review the control environment in its entirety based on the work that's been done, the testing we've done, the testing they'll do to arrive at that conclusion and an opinion.

I'll just add that both us and E&Y have -- do not have concerns on any statement -- any risk of our financial statements not being accurate and reflective of the business. So this is around business process controls, making sure they're documented, making sure they're executed, making sure they're tested. It's not any concern around the financial reporting of the business.

Next up, we have Steven Zaccone from Citi.

I wanted to start on the gross margin performance because it clearly came in stronger than expected. Can you elaborate a little bit more on the strength in the quarter? And then do you see this organic growth rate of kind of 50 basis points expansion as the right run rate for the balance of the year? And then help us understand how Breeze will impact that gross margin performance since you have better visibility at this point than when you first gave guidance a couple of months ago.

Yes. Thanks for the question. We were pleased with the gross margin progress that we made in the quarter versus prior year. As indicated in the prepared remarks, we were up about 50 basis points year-over-year. Labor and product were the primary drivers of that. We've been working and continue to work on the labor piece of the equation. The team has done a great job with that as we've expected. We've not only held on to but been able to improve upon that labor leverage a bit, and we would expect that progress to continue. The team is really looking at all aspects of store spend, controllable store spend and labor has been a big focus because it's the largest piece of COGS. The product side, we did see some benefit in the quarter. We have seen base oil come down just a bit.

As a reminder, we get the benefit of that, but we also pass that benefit along to our franchise partners. So those 2 are the primary driver. On the flip side of that, we did see increases to other service delivery costs, which include things like rent, property taxes, depreciation. Those increases are largely driven by adding new stores, especially the depreciation part, which was about a 50 basis point negative versus prior year, but we did also see some increases in terms of both the rent and property taxes, again, primarily related to new stores, but also just ordinary course.

In terms of the full year and the Breeze impact, as we said, we're bringing -- or we brought 162 immature stores into the system that will have a negative impact on overall margin. I believe at the investor update, we indicated that we would expect it to be about 100 basis points of EBITDA margin impact. We continue to expect that to be the case, but obviously, are working with the Breeze team and with our internal team to improve the business, to grow the business so that we can increase those margins, both gross and EBITDA.

Okay. And just a clarification, the 100 bps of pressure margin, is it more weighted to grosses than SG&A as we think about the model?

It's more on the EBITDA line. It's a bit of both, but 100 basis points on the EBITDA line. Because they do have a corporate center.

Okay. Second question is just you talked about pricing and ticket in particular being a bigger contributor to the comp. Just remind us, how do you see the balance of the year for same-store sales between ticket and transaction?

We'd expect on an overall basis to really be balanced as we have been. As you look at fiscal '25, as we talk through that, it's more heavily weighted to ticket, but transaction growth is also very important. And I think also importantly, we saw transaction growth across the system in Q1, just as we did in fiscal '25. We would expect to see that for the balance of the year really across the system, both franchise and company. And so both are important to the comp. It has been the case that ticket has been a bigger driver, and we would expect that to continue to be the case. But again, both are quite important to the comp.

Moving on, we now have Scott Stember from ROTH Capital Partners.

A question about just bigger picture potential gains that the quick lube market, particularly Valvoline is seeing maybe for people trading down from car dealerships. Could that be a potential benefit in this very high inflationary environment? Are you seeing that? I'm just trying to get a sense of where things are coming from.

Yes. When we open a new store, and we track where our customers last got their oil changed, we know that they come from where they're going in the marketplace. And about 40 -- 35% to 40% of customers still go back to a dealership. And so we know and track that when we open a new store and we bring in a new set of customers into our system, about that same proportion are coming from outside the Quick Lube market and within dealerships. Now I don't want to get into the psyche of the customers as to whether or not they're doing that to trade down.

I think the reality is we offer a much more convenient service where it's stay in your car, you don't have to make an appointment. You don't have to wait in a waiting room. You don't have to leave your car and come back for it. It's 15 minutes or less. It's a much more convenient experience for the consumer. And I think that's really what the consumer is making the decision on. I can't -- we don't get into the details of why they decided to pick us in enough detail across our system to be able to say it's much different than that. I am sure there are people who trade down, but I think convenience is likely the largest driver of switching.

Got it. And then last question. Obviously, store closures due to Winter Storm Fern. But once stores start opening up again, could you potentially talk about potential benefits that you guys will see, whether it's batteries, windshield wipers need to be replaced because of the ice. Just talk about any tailwinds we can get from that.

Yes, absolutely. And this time of year, we always see that. So while this storm may have been broader in reach and maybe more prolonged in some areas, the things that you're talking about are the things that are driven during this time. So batteries, batteries that are older tend to falter during this time and need to be replaced, windshield wipers definitely need to be replaced. So these are things that we typically see in our business. And as we have these weather impacts, we do try to modulate our labor. So we won't add labor. We won't do new -- as much new customer marketing during this time, and we wait until the weather pattern has passed. And then we ramp that back up again in order to serve the customers who did not get service during the winter sort of storm period. But all the things you're talking about are exactly right. This time of year, we always have storms. It just depends on when in the quarter they happen and for how long they last.

And moving on to our next question here is from Steve Shemesh from RBC Capital Markets.

So as we think about the comp, it sounds like ticket was maybe 4.5 points given the tougher transaction compare. Any color you can share just on the breakdown of premiumization list price and non-oil change revenue?

Yes. We don't normally get into the specific components of it. As we look at the mix between ticket and transaction, I would say that for the quarter, the ticket was roughly 3/4 of the comp is the way to think about it. But again, as we look at the comp, we saw growth in all those categories that you mentioned on the transaction side. And in terms of ticket, also positive in terms of price premiumization and NOCR for the quarter. So again, a good balance. But yes, ticket was a bit higher in the quarter than maybe what we saw in, say, Q4 of fiscal '25.

Got it. That's helpful. And maybe just as a follow-up on a different topic. So at the time the deal was announced, you talked about 18 to 24 months from deal close to delever to 2.5x to potentially resume share repurchases. As I just kind of look at the model, at least on my end, it seems like you could maybe get there by year-end. So I guess just from where you are today, 2 months of Breeze under your belt, is 18 months still the right way to think about it? Or do you think you can potentially get there sooner?

Well, we wanted to frame it up in terms of a target that we felt very comfortable with, and we're still comfortable with that. To your point, we'll continue to monitor this. And as we make progress on the balance sheet as the top line and EBITDA continues to grow, our commitment is once we're back in the range, you should expect us to return to share repurchases. So if we get there sooner, then we will, in fact, start repurchasing shares sooner as well. Does that answer your question?

Moving on to our next question here. We have Chris O'Cull from Stifel.

Lori, we noticed in the FTD that the company may start a national ad fund in fiscal '27. Can you talk about why now may be the right time to launch a fund, but maybe you're learning about the potential efficiency of national advertising and maybe how quickly the system could grow this fund over the next few years, if that's the path you move forward with?

Absolutely. You hit on the main driver. As our network has grown and the reach and densification has improved, moving from a hyperlocal-only marketing spend to a national fund drives significant efficiency. And as it relates to some of the company store spending, we've already started shifting some of our company marketing spend for stores into more national funding. And as we've proven out and shown the benefits of that to our franchisees, that's the reason why we're moving towards that. In terms of how big it could get, I think it's premature to say, but we'll obviously just keep monitoring. And as we see more efficiency, we'll obviously balance our spend.

Okay. When do you think you would have an estimate for what the contribution rate could be? I think the FTD mentioned like 0.25 point, but I assume it will be much larger than that.

Again, I think we're working in partnership with our franchisees. And I think the FTD spells out how we're going to start. And I think based on the results and the performance of the national fund, we'll continue to optimize across the marketing pools of spend.

Okay. And then I know the average sales ramp of new stores is in that 3- to 5-year range. But can you talk about the variance around that average in markets where brand awareness is high versus markets maybe where brand awareness and penetration are relatively low?

I'm not sure I caught the first part of your question.

3- to 5-year ramp.

3- to 5-year ramp. Got it.

How does it compare in markets where the awareness is high versus maybe expansion or greenfield markets?

Yes. So what we typically see is the ramp in the first 3 years is a bit faster if we are adding a store to a market that has good brand awareness, and it would be a little slower. But we do modulate our marketing spend given that. And that's all factored into our new unit forecast, which continue to drive really strong IRR returns in the mid-teens. And so that's factored into those forecasts.

We now move on to our next question here from Tom Wendler from Stephens.

You've now lapped some of the larger refranchising activity in fiscal quarter 4Q '24 and 1Q '25. Can you give us a little bit of an idea of how much the 10 stores refranchised this last quarter impacted results?

Yes. First, I'll just comment and restate what we have been saying for the better part of last year and in our December investor update that we really don't have any plans to do any further large-scale refranchising, but we do make transfers. And I think what you're referring to is we had a 10-store transfer in Q1 from franchise -- from company to franchise. Similarly, in Q3 of fiscal '25, we had a 6-store transfer from franchise to company. And we're really doing that to optimize market boundaries so that either the franchise or company can optimize our G&A and marketing spend in a geography. Now the specific transfers in Q1 were not really material from a financial standpoint, and we incorporated that into our guidance. So unlike the previous refranchising where there were 3 transactions that happened over a 2-quarter period and fairly sizable, we're not going to continue to adjust numbers or recast them going forward for these small transfers between.

Perfect. Appreciate the color. Maybe on a separate note here, the Instant Transfer portal campaign, I think you mentioned you saw some early success in the first few weeks of this quarter before the storm. Can you maybe give us some early reads on the Instant Transfer portal? Is that the driver there?

I wouldn't -- I would say that all of the marketing activities that we do end up driving engagement in our brand and conversion into our stores. The transfer portal was a really creative opportunity that our marketing team and our marketing partners came up with to sort of capture on a lot of the frenzy and college sports. It created very strong creative engagement, which is around brand impressions and offers, which when we look at that relative to our other social performance, it benchmarked very well. So when you're trying to find new ways to reach new customers who haven't had the experience of your brand, this kind of creativity goes a long way. And that I'm really proud of the team for some of the things that they're working on and that they've done.

Moving on to our next question. This is from Peter Keith from Piper Sandler.

This is Sarah on for Peter. First, can you just give us an update on some of the progress with your technology initiatives? Are you finding the company's move to a cloud-based tech architecture providing any competitive advantages in the channel? And then if so, what are these?

As you know, we have -- since we became a pure-play high-growth retail services company, we have been investing in retail-specific technology. In the first year, we implemented a new CRM system for both our fleet business as well as our franchise and business development businesses or areas. We then implemented SAP or the first phase of SAP in 2024. And in fiscal '25, we implemented HRIS. We also, in fiscal '25, moved our customer data into the cloud, and we have been slowly working on replatforming our proprietary system we call SuperPro for our stores. We've upgraded our infrastructure in the stores so that it could support a cloud-based architecture. And so we're in the process of becoming more modern.

And with that, you typically see the maintenance cost from a technology standpoint go down. So you get efficiency as you get into more of the capabilities of SAP and HRIS, you get more efficiencies in your back office. And then on the customer side, you end up having a better, more consistent process where you can optimize and take time out of the service experience for the customer or take labor out as you apply more technology and tools to the store day-to-day operations. So I would say this is a journey for us, but we're through some of the basic parts of the technology replatforming.

And now we're getting into the more value-added efficiency and effectiveness driving initiatives. But we don't see the investment in technology continuing to need to go up, as we've mentioned in our Investor Day update. We did grow technology spend, and we will continue to spend in technology, but we don't see the year-over-year growth of that going faster than sales. In fact, we would expect that to moderate.

Okay. That's very helpful. And then just on advertising, where are you guys leaning in most here and then just early results that you're seeing?

We have a pretty sophisticated marketing playbook that includes both what we call our life cycle management, which is us keeping in touch with the customer. We can predict when the customer is going to need to come back in for not just an oil change, but for also added services based on their driving pattern and what we see or in doing look like analysis.

So we have a fairly robust process of keeping in touch with our customers. And that we just continue to optimize in terms of how and when we insert certain promotions to that communication process. And then as it relates to new customer acquisition and new store openings, we continue to modify to drive down our customer acquisition costs in those environments. We continue to test new channels. And I would say that the performance continues to improve. Our return on ad spend is very productive, and we continue to optimize that at the same time as optimizing the discounting or optimizing net pricing for every transaction that we have in our stores.

And moving on, we now have David Lantz from Wells Fargo.

So you guys called out the nonrecurring payroll-related item in SG&A in Q1, but curious if you can talk through some of the puts and takes through the balance of the year.

Yes. Happy to answer that. Yes, we did have a nonrecurring item in Q1 of last year. Taking that out of the equation, we did see SG&A leverage of 30 basis points year-over-year, which our commitment is to continue to do that throughout the balance of the year and going forward. As we look at the rest of the year, we should continue to see overall improvement from a core business perspective. We're very focused on scrutinizing spend across really all categories, not just SG&A, but also capital costs around store builds as well as cost of goods sold as we've talked about with labor improvement and other areas. So we're continuing to really bear down on these categories and would expect to continue to see improvement as we go throughout the course of the year.

Got it. That's helpful. And then clearly, Winter Storm Fern is driving some choppiness around transactions. But curious if you guys could help us parse out the potential impact to Q1 comps that, that will have. Excuse me, Q2.

You mean Q2. Yes, I think it's a little too early to say. We had a strong start to the year, and our expectations really are not changing for Q2 through Q4. Obviously, we're monitoring the weather and we make adjustments. But again, if you look at history for our business, as we have a weather pattern cycle through, it just shifts around when we capture the demand and serve the guests. It doesn't have a long-term impact or downward impact on our business. So again, we have to be smart to manage labor cost and manage our marketing spend. And when we do that, and we've proven we're getting better at doing that as we apply more tools and technology, we can manage our -- both our sales line and our profit line pretty effectively.

Thank you, David, for that question, and that is it. Our questions queue are now clear, which concludes today's call. Thank you all for joining, and you can now disconnect your lines. Everyone, have a great day. Bye for now.

Welcome to Valvoline's Investor update. Whether you are in the room or joining us virtually, I'm so glad to have you with us today. During our time together this morning, we'll show you how our strategy, execution and disciplined capital allocation delivers superior returns. This is about clarity in our plan and confidence in our future. Lori Flees, our President and CEO will kick off our presentations today, followed by Linne Fulcher, our Chief Operating Officer. After a short break, we'll be joined by Adam Worsham, our Chief Franchising Officer and Kevin Willis, our Chief Financial Officer.Following the presentations today, there will be time for Q&A. [Operator Instructions] The materials are available for download at our website, which is investors.valvoline.com.

Before we get started, I'll ask you to take note of our safe harbor statement. Today's presentations may include projections and expectations about future business performance. These forward-looking statements are based on current assumptions and beliefs and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. I'd invite you to review our SEC filings at investors.valvoline.com for a detailed discussion of these risks and uncertainties. Unless otherwise noted, we will discuss adjusted results in today's presentation.

On our website, you'll also find a discussion of management's use of non-GAAP and key business measures and reconciliations between GAAP results and the non-GAAP measures included in today's presentation. Once again, thank you for joining us today. We'll start with an intro video, and then Lori will join us on stage.

[Presentation]

Good morning, and thank you for joining us, whether you're here in the room or you're joining us virtually. Built to win and built to last is a fitting topic for our investor update. Valvoline is a leader in its category, and we've built assets and capabilities over several years, many years. And those capabilities and assets have delivered industry-leading performance. We have a simple and focused strategy and how we'll strengthen our position and deliver stronger returns over time.

Joining me today to help tell more of our story, our members of our leadership team, and they're going to share with you why Valvoline wins how our flywheel generates increasing margins and returns and how that, combined with capital discipline will drive shareholder value. We've listened to your feedback over the last year and particularly in the last few weeks, and we're going to give you more information on the Breeze acquisition as well as share our financial commitments beyond fiscal 2026.

Our goal today is simple. We want to clarify our strategy, we want to clarify our financial plan, and we want to outline how we're creating long-term shareholder value. To simplify, we want you to leave this session with just as much confidence as we have about our future ahead.

So let's start at the beginning. Valvoline's history dates back almost 160 years when it's focused on quality and innovation in automotive care started. Fast forward to 1986, almost 40 years ago when we opened our first preventative maintenance service center. That was quickly followed by our first franchise location and that creating our blueprint for the retail model we operate today. 2016, almost 10 years ago, was a pivotal time for the company. We actually went public, and we crossed the 1,000 store threshold.

That combination unlocked capital, which really fueled the growth that you've seen since. And just 3 years ago, we simplified our business by divesting our Global Products business, we became a pure-play retail services provider. That enabled us to focus our people and our capital on this high-growth, high-margin business. And now with a network of over 2,300 locations, we're a proven retail model that's built to win and built to last. As we shifted to our focus in retail services, we assembled a leadership team that was purpose-built to drive high-quality profitable growth.

Our leadership team brings over 100 years of combined retail experience and 100 years of experience at Valvoline. This is a unique balance of industry know-how with institutional knowledge. And we've recruited talent from across retail industry to bring us the expertise that we needed to quickly further our scale and operate more efficiently. As for myself, I started my career in the GMC truck division of General Motors. I supported and worked at dealerships. From there, I spent 17 years in consulting, where a chunk of that time was advising convenience store retail companies.

After about a decade at Walmart, learning e-commerce, innovation and retail service business management, I came to Valvoline just over 3 years ago. Now the purpose at Valvoline is very straightforward. We simplify vehicle care so our customers can do what drives them. Whether that's a consumer who needs to get their -- get to work or get their family or whatever activity they have on their agenda or whether it's our fleet customers who want to make sure that their assets have the most productivity and drive their business results.

And we deliver on that purpose with 4 key core values: a people-first focus, a strive for greatness, doing the right thing always and committed to serve. These values are key to our culture. And our vision is simple. We want to be the preferred destination in automotive services for all of our stakeholders, whether that's consumers or customers, whether that's franchisees or employees. But let me get to what matters most to you as investors. We're committed to delivering attractive returns.

As this slide shows our financial commitments over the next 3 years. Everything else you'll hear today is about how we're going to achieve these numbers and why we have the confidence in our ability to do so. Kevin will walk through them in much more detail. But these targets tell a story about how we're driving productivity in our existing stores, how we're growing our network to capture attractive market share, how we're expanding our operating margins and how that translates into meaningful earnings growth. And we'll be disciplined about how we allocate capital to ensure that we're maximizing long-term shareholder value.

Our approach has 3 guiding principles. First, we'll invest in high-quality network growth that delivers high return on invested capital. We learned the hard way how the FTC is viewing large acquisitions in our space. The Breeze acquisition, which we announced much earlier this year was an A+ deal for us. But after the FTC required divestitures, it became a B to a B+ deal. I know you want to understand that math in more detail, and Kevin will take you through it. It's likely, given that process that Breeze will be the last large transaction across brands in our category.

Now we feel very fortunate Breeze was a very attractive asset that we have been following for quite some time, and we know we can deliver value from it. But what it means going forward is that our investment in growth is going to be pretty straightforward and look very similar to what we had been doing prior to Breeze. We're going to focus on small tuck-in acquisitions new construction builds and growth in our existing stores. After investing in growth, our second guideline will be to maintain a strong balance sheet. Financial flexibility matters. Keeping our balance sheet healthy will ensure we are operating from a position of strength regardless of any cycle.

And third, we will return excess cash to shareholders through share repurchases, reinforcing our commitment to shareholder value creation. It's a simple framework: invest wisely, operate from a position of strength and return capital to shareholders. And that's exactly what we'll be doing over the next 3 years.

Let me share why we have confidence in our ability to deliver on the financial commitments. Valvoline starts from a position of strength. We are the category leader, and that's driven by, first, our strong brand. Valvoline is a high-quality brand with high awareness that customers trust. And when customers want to maintain their vehicles, often a very significant capital expense on their portfolio or their balance sheets, a trusted and known brand matters. Two, we have a scaled and very productive network. We have the largest store footprint. We have the highest system-wide store sales, and our per store transactions are the highest in the industry. So very productive stores.

We have a strong and tenured store leadership team where virtually all of our store managers and above have been promoted from within, driving great experience and performance. Four, we have long-standing franchisee partnerships who are committed to driving their business, our brand standards and are committed to future growth. And five, but certainly not the last on the list, we have the best-in-class customer experience as rated by our customers.

Our post service NPS score, Net Promoter Score is above 80% across our 2,000-plus fleet, incredible. And we operate in a very attractive market. The market for do-it-for-me oil changes is highly fragmented. The customer has hundreds of thousands of options of where to get their oil changed. And over 70% of oil changes completed today are still done in dealerships and general automotive service providers. When we open a new location, that's the percentage that we pull our customers from. Then the car park is aging. The vehicle -- the average age of a vehicle is older than it has ever been and older vehicles require more maintenance. This drives up additional services opportunity for our business. vehicles are also becoming more complex, really aiding in the shift from do-it-yourself to do-it-for-me. And as vehicles get more efficient, they require more premium products like premium synthetic lubricants. That creates ticket and margin opportunity for us.

And most importantly, for our category within oil changes. The customers are prioritizing convenience. When you ask any customer on what basis they make their choice of a retail provider, more than 3/4 of them will say it needs to be convenient. If you had told my 16-year-old self working at Taco Bell for my first job that people would spend as much on DoorDash delivery as they spend for their tacos, I never would have believed it. But the reality is convenience -- customers want quick easy service without a hassle. And that's exactly what our category does and why we're driving transactions.

Bottom line, we're in a durable market with substantial run rate for expansion, especially for providers like Valvoline who offer speed, quick, easy and are trusted. And our track record speaks for itself. As you can see on this slide, we've delivered consistent growth in both top and bottom line financials with double-digit compound annual growth rate since the time we became a pure-play retail business. We don't just see the opportunity. We are able and proven that we can execute against it.

We've built a formula that works, grow our store footprint, deliver operational excellence and maintain margin discipline. And our ability to scale profitably is what gives us confidence in the path ahead. So what drives our performance. I talked about our brand, but it does start with our brand. Valvoline is a trusted brand with strong awareness. That, combined with our quick easy trusted proposition leads to strong customer loyalty and high retention. Over 80% of the customers that come into our stores across our network are returning customers. That's on the basis of the experience that they've already had and a brand that they trust.

Second, we deliver that experience with a scalable playbook. We've built repeatable, proven operating model that drives consistency in experience and consistency in profitability across the network. It's really a combination of our service menu, our training, our SuperPro process and our store technology that all come together in every location with our brand to deliver consistently great customer experience.

And our customers over the past 12 months, over 1 million customer surveys are giving us a 4.7 stars across our network. It's the reason why we've been recognized 2 years in a row at Forbes Best Customer Service list, and we're incredibly proud of what we deliver to our customers every day. Third is our people. Our culture is really a secret sauce, and we have an apprenticeship model for our talent development. This leads to high retention and performance. We invest in training and intentional upboarding steps from day one. We have a culture centered around celebration and improvement.

Our teams love operating in a pit like environment -- a pit crew environment where they're operating with speed and they're working together as a team. And we love to celebrate their success. We offer our employees an incredible compelling career path. When you take our high internal promotion rate combined with the number of stores that we add every year, we -- it's a fantastic opportunity for advancement and growth of our people, and that drives retention.

Fourth is our robust data. When you combine the customer data that we've been built -- that has been building over a decade with our real estate data and detailed real estate data on over 2,000 store locations, the competitor benchmarking data, the vehicle data that we pull together to serve our customers our recruiting and employee data, we have over 9 billion points of data that we use to optimize everything we do, from how we price every service in every store to how we tailor customer reminders about their next visit. From every site we decide to build or acquire to how we plan a labor schedule for every hour of every day that store is open.

And including the tailoring of every aspect of the service provision when a customer comes in based on the vehicle they're driving, if they've been with us before and how much miles and what's required for their vehicle. Everything is tailored for that unique customer experience. This isn't just guesswork. This is data-driven decision-making at scale. And last but not least, our franchise partners. Our franchise partners have been critical to our growth, and they will continue to be so. These are experienced, committed multiunit operators who are deeply committed and driven to drive their business. And they have committed significant capital with the average tenure of 26 years, our franchise partners have committed to more than $1 billion in future growth.

These aren't assets that we're hoping to build. These are assets that we have today, and they are driving results. As we look forward, our strategy is pretty straightforward. We have 3 strategic priorities that will drive shareholder value. One, will drive full potential of the core business; two, we'll deliver sustainable network growth; and three, we'll innovate to meet the changing needs of our customers in the car park. These aren't new, and that's intentional. We know that this is what will drive shareholder value.

So let me touch on each of these priorities and that the team will expand upon them in more detail. I'm driving full potential of the business. This is about expanding margins while continuing very strong top line growth. We expect our net sales to grow by 9% to 11% over the next 3 years. This will come from a healthy balance of same-store sales growth and new store growth. Kevin will take you through the same-store sales growth in more detail. But it will be a good balance of ticket and transaction.

Transactions will grow from welcoming new customers into both our immature and mature stores from both high return on ad spend marketing investments and also our fleet growth. So growing our fleets in terms of number accounts and the penetration within them. It will also come from increasing the efficiency of our service delivery in store so that we can increase the throughput in our mature stores. That allows us to welcome more guests.

All the while we do those 2 things, we want to maintain our very high customer retention rates that we enjoy today. Ticket growth will continue to be a contributor to same-store sales, and that will be driven by a healthy mix of increasing premium mix, net pricing increases and continued growth and penetration of non-oil-change revenue services. On the profit side, you're going to hear more from Linne about the drivers that will enable attractive margin expansion. They're really 4, and they're all meaningful.

First, the category tailwinds that I talked about will actually help grow margins. So aging vehicles and the shift to premium lubricant will bring more margin -- higher-margin business in our stores. Two, we've been driving operational efficiencies that we're in the early innings on. We've already started in areas like labor management and store expenses with more to come. And we get the benefits of portfolio shifts in our business as immature stores as a percentage of the total decrease and as franchise new units increase as a percentage of the total, our margin will have a benefit.

And last and certainly not least, we'll be leveraging our G&A because we will be growing that slower than our sales are growing. This isn't about chasing new opportunities. This is about driving consistent growth in a business that we know and have been operating in for 40 years. The next priority is around sustainable network growth. Despite 19 consecutive years of same-store sales growth and growing our store count by a considerable amount, we still only have 6% market share of oil changes.

And our stores are only within 10 minutes of about 40% of the car park. Just those 2 stats alone would tell you and underpin that there is still significant run rate to expand our footprint. And we're committed to a goal of 3,500 plus new stores. We expect to get over 2,900 by the end of 2028.

Now Kevin will talk a little more about how we're also decreasing the capital costs for the new units that we add, how we've done it, and we expect that to continue. He'll also talk how we've maintained and improved our return on capital for new stores. And when you combine the capital reduction with the margin expansion, you know that the return on sale -- the return on capital invested for new store is going to increase.

Last is around innovation to meet the evolving customer needs and needs of the car parc. Obviously, ICE and hybrid is our bread and butter business today. We know that the technology and customer expectations are going to continue to evolve and so will we. We expect the car parc to look different over time. I want to share some examples of how we're innovating in our core business today. And then I want to talk about how the car parc evolves and what we are doing.

So first is our fleet business. Since 2022, our fleet business has grown 17% compound annual growth rate, and we expect high-teens growth to continue. Now we've leveraged technology in those 3 years to make it easier to do account management and account sign-ups that has increased our base of fleet customers. But we've also put more control in the fleet managers' time to approve services. This ensures that when a fleet customer comes into our bay and we scan them VIN, we know what services to provide. We don't have to sell them. We don't have to wait for approvals. We just get to work.

That is a meaningful difference and is part of driving ticket for our fleet sales -- for our fleet customers. And we're going to continue to innovate in this area. We've recently just started piloting mobile service delivery as a low capital cost way of increasing our business with key fleet customers.

Second area is we've been investing in technology to drive the customer experience. This includes simple investments like upgrading the WiFi access and putting handheld devices in the hands of our technicians so that they can start the service in the parking lot and speed the process up through the bay.

And the replatforming work that we're doing on SuperPro will allow us to tailor the service experience based on how many times a customer has been in our store. A brand-new customer needs more education about what our service is and the needs of their vehicle than someone who's been with us more than 4x. That will allow us to optimize our process and speed will improve.

Another area that we have continued to look at is adapting our service menu in preventative maintenance. This isn't about getting into car wash. This isn't about getting into tires. This is about the normal preventative maintenance and how we evolve our service menu.

Over the past year, we actually started stocking a brand-new store based on the car park that was surrounding that store versus giving it an average stocking set of inventory. That ensures that we have the right parts for the right cars that are going to come into that location. And it's using the data that we already had to make ourselves more efficient. We also know that premium synthetic lubricants have been introduced in the market some time ago. And as customers continue to ask for that, we'll want to add it to our service menu. That will drive further ticket and margin expansion opportunity.

Now some of the innovations I've talked about here in the core business, we've already implemented and they're delivering great results. A few of them that I've talked about, premium synthetic lubricant, the mobile deliveries of services for fleet, those are not in our projections and they offer some upside to the commitments we've made. Now we'll scale those when we've proven out the return and operationally that we could do it, but we do think there's continued upside for profit expansion in our business.

Now let me lay on top of the graph you just saw, the penetration of battery electric vehicles into that graph. As you can see, EVs are still a very small part of the car park today and they're forecast to be about 4% in 2028. It's an even smaller percentage when you look at the core of where our customers are in years 4 through 8, it's even a smaller percentage. This gives us a really long runway in our core business while we prepare for the future. When you look at other industry transitions like e-commerce or media, the incumbents in those businesses started to see an impact to their business when penetration rates were at 20% thereabouts.

And the leaders who had the most traffic or the biggest customer list had the longest runway to evolve. We have that advantage and 20% penetration is a long way off given the tempering around EV demand and manufacturing that has occurred in the last 12 to 18 months. However, we have been and we'll continue to invest to learn. We've invested in R&D, market research and even pilots to expand our learnings around how we will serve EV customers with the assets and capabilities that we have.

Some of the research that we've done, some conclusions here are on the screen. We did a survey of 1,500 customers, of which half were EV customers to ask them their perspectives on maintenance and maintenance providers. First, very high percent, 98% believe that their vehicles or EVs would need preventative maintenance, and that would be beyond the battery health. Now it's early days, but if you look at what OEM providers charge for a service package, it is considerably higher than what an ICE and hybrid customer spends for maintenance today.

Second, 75% of them said that they would trust a non-OEM provider to deliver maintenance services. That's higher than the number that say that today or go to dealerships. Dealers have more than 25% of that market. So they're very open, and they want a better service provision. The service experience they have today is anything but quick, easy and trusted in some cases.

And third, when we ask them what would be important to them when picking a service provider, they said 3 things very consistently. They wanted it to be fast. They wanted it to be simple, and they wanted to ensure the provider they picked had expertise to do the work. So the electrification of the car park is going to require the way we evolve, but the runway to get there is quite long. And at the end of the day, our purpose remains Valvoline will simplify vehicle care for our customers so they can do what drives them regardless of the powertrain choice that they pick.

So let me bring this back together on why we believe Valvoline is a compelling investment opportunity. First, we're an established category leader with a track record of delivering industry-leading performance and growth.

Two, we have differentiated capabilities that drive and will continue to drive strong margin and cash generation.

Three, there is significant runway for growth, both in our current stores as well as in our network in a very fragmented category.

And fourth, we'll be disciplined in the way we allocate our capital to ensure that we're delivering very attractive shareholder returns.

Bottom line, we have the market position, operational excellence and financial strength to capitalize on the significant upside in front of us. This is a business that's proven, and we're just getting started.

Now in a moment, we're going to hear from Linne Fulcher, who'll share more about the operational excellence we have and the margin expansion path that we're on. But before he joins us, I'd like to turn to the video where Chris Calabrese, our VP of East Operations, will be giving you a store tour. Thank you.

Welcome to Valvoline oil change. My name is Chris Calabrese. Vice President, Company Operations, and I support our great Canadian Oil Change in Canada as well. Really happy to have you here today, a little bit by myself. I've been 32 years with the company. I got to spend 8 years in the stores growing up, learning our operation system and then went on to a multiunit management and now supporting stores across the United States and Canada.

I love to show you around the store today. So come on and join me. Welcome the top side. This is where, as a guest, you get to experience things in full view. Transparency is really important to us to make sure you can see what's going on with your car and you have a full-time customer service representative to really walk you through what's needed for your car and make sure that you're satisfied before you leave. I'd like to show you over here as well.

Let's get started. Once our guests are safely in our bay, our customer service representative Kyle today, is here to engage the guests, see what their needs are, identify what we can help them with, walk through our recommendations for the vehicle and really get our bottom side services started or topside service started on the vehicle. Let's see what's going on in front. While Kyle is engaged with our guest, we're also doing our topside safety checks, includes 18-point safety inspection, lights, wipers, fluids and also tire pressure.

We're coordinating also with our bottom site technician. So we're trying to get you in and out as fast as possible. So we're going to go down and see what's going on bottom side next. Come with me. We're heading downstairs. If you see we got a really big basement down here. This allows us to store a lot of fluids involved. It's also a better work environment for our team. So let's go take a look at the bottom side. Welcome to bottom side, as you can see, we have a full pitted basement. This allows us for a few items that are really cool and unique to Valvoline Instant Oil Change. One, we have plenty of storage. That allows us to keep things downstairs, keeps the upstairs nice, neat, clean and organized. It creates a little bit better guest experience.

Also down here, unique to our system is we have a bottom side monitor. This keeps our bottom side technicians informed the vehicle that's on the bay, the right part numbers. So we'll make sure that we're servicing a vehicle correctly according to the manufacturer specifications. Our catwalk system is pretty neat. It allows our technicians to roam basically from bay-to-bay-to-bay. One employee can service 3 vehicles at a time. The whole time we're working in concert with our topside technicians who is doing our safety inspection and also our customer service representative. They're doing call-outs for this whole process. One, keep each other informed to keeps our team members safe as they're servicing the guests and to make sure that we're expediting because real time is important for our customers.

Let's go back up and let's see where we can finish off with our guest experience. All right. Welcome back to top side. We're wrapping up this oil change. Angelina is doing second-party checks, ensuring everything is secure beneath the hood. Kyle is reading the work order, answering any final questions I guest might have. Great job team, awesome job. Thanks for joining me today on a tour. I hope you enjoyed seeing a kind of a quick easy trusted, behind-the-scenes view of what our Valvoline Instant Oil Change process is all about. We hope to see in the future. Thank you.

Good morning. Good to see you. I love this video. It takes to hope you enjoyed the store tour. I've always thought that stores is where it happens in retail. That is where the rubber meets the road. And with us, it is definitely where the rubber meets the road. So first, my name is Linne Fulcher. It's nice to meet you. Many of you I've never met, so I look forward to getting to speak to you a little bit today and do some introductions. And thank you for your time investing in us. You probably had options, and we appreciate you being here to hear our story today.

I have been with Valvoline for 3 years. I joined 3 years ago, actually a couple of months back. And before then, I spent most of my career at the world's largest retailer. For about 1/3 of that time, I was responsible for stores, spent most of my time in and around the operations, multi-operation units across the United States and/or supporting the operations units. The second duration of my stay with them, actually had me support stores, and I had responsibility for technology. So for about 10 to 12 years, I was responsible for the U.S. store technology from the scheduling, labor pricing systems to the infrastructure that was needed in the store that brought the WiFi to the guests.

Then the last part of my stent with them actually had me spend time on customer services, focus really, I had responsibility for customer insight and strategy and do a lot of work around U.S. type strategies. And so I was excited to actually take all that I had gained there in the 33 years and actually bring it to the Valvoline. And I am as energized today as when I started, and I'm looking forward to kind of showing you why because the opportunity is in front of us and the things that we've already started to unpack since I've been here.

So let's just get started. Let's dive in. First, I want to talk about our operational story. It really comes down to these 3 key points. We have a proven track record. We're a category leader with a record of consistent industry-leading growth. Second is the fact that our performance isn't accidental. If you just look at the duration of time and how consistent it's been. But it's actually enabled by our differentiated approach to people, process and technology. And I'm going to take you a little deeper into what that means. And then third, the scale that we've got off of what we've built, you apply scale to that, and it actually gives us leverage for margin expansion. And we're going to dig into some of that today as well.

This scale advantage actually has a clear runway in front of it. that I hope you see clearly today when I'm finished. So let's start with the history of delivering the operational excellence that we've delivered. First is we shifted to a pure play retailer. Our transactions, we look at our metrics, the metrics have continued to grow since we've made that shift. Transactions are growing across both new stores and our existing store base, and we're capturing market share. We've seen an increase in market share in this duration of time.

Operationally, our 4-wall margin in mature stores has grown 270 basis points. So I would tell you, translation here is we're not just growing revenue, not just growing revenue, we're actually doing it more efficiently and growing margin at the same time. And we deliver the consistent profitable growth that I hope you see has given us a platform that will continue into the future. The results that you just saw were driven by really consistently high customer service, a focus on our guests. Our service accuracy, I think, is very impressive. 30 million oil changes last year, and we only had 0.3% service issues.

Now the world I come from, this is execution at the highest level regardless of the industry that you look at. I would argue that we've got a pretty consistent base here that allows us to deliver that level of execution. And customers are telling us this, too. Look at the NPS scores over 80%, look at our customer rating at 4.7%, and the customers are telling us that they are delighted by our quick, easy and trusted performance. And I'll tell you, it builds customer loyalty, retention, drives new customers to the box because it's a great referral program that our current customers have given us, right? When they're this happy and they give you this type marks, we have a great referral base in place.

Our differentiated approach starts with 3 elements. And I want to take you through a little deeper, this differentiated approach that we believe is a platform to our success. First, it does start with people, process and technology. Now these 3 elements were -- those 3 working together. And I'll dig into that here a little bit deeper as well. But these 3 elements enable our proven operating model that is replicable, scalable and it's been tested over the years that we've been here, a long period of time. And that operation model is what delivers the customer experience that you just saw on the previous slide.

So all of this connects together. You combine that with scale advantage that I want to show you today, you actually see the opportunity for us to get more efficient and unpack more margin expansion because of how this all works in tandem. So allow me to break down each part of this framework. First, let me start with our people, our foundation. We have a differentiated approach to how we look at our employees, our family members, if you will. And it starts really with how we onboard.

When we onboard, we've realized and we've learned there are 5 moments of truth for our employees as they start. Their first hour, their first day, their first week, their first paycheck in their first month. And we are purposeful with those time frames. We schedule connections with them at those moments in time because we see huge benefit of taking that moment in time when were making sure everything is going as expected, answering their questions.

And I would underpin that we do this because onboarding is more than just filling a labor spot that you have. It's actually the beginning of a relationship, and we believe the beginning of a career. Second is our training. We have award-winning training over 270 hours of education that we give our employees. And even though it's award-winning, we're innovating. We haven't stopped with where we are. We're actually evolving to a new task-based training that we're testing right now, which will actually be even more engaged for our employees. Imagine being able to train, learn a segment of the job and then go do that job. It drives confidence and it drives execution.

And they feel like they're part of the team faster than sitting through 300 hours of training. So we're breaking it down into bite-size chunks, and we're already seeing benefits off of this. And then third and most important, I would tell you is our culture. I'm under no delusion that every company probably talks about their culture and how important it is. I have 30 years of culture somewhere else. And I can tell you, I've never seen culture like this. When we say it's about our people, it's about empowering them and letting them show up with who they are and be a part of the team, it is actually real at Valvoline.

We have a culture of healthy competition, whether it be March Madness competitions or Oilympics, which is where store submit teams around the nation. We come together once a year, and they do a -- think of a NASCAR type bake-off on who can drive the fastest oil change speed with accuracy, drives a lot of competition and fun in the workforce. But we also do a lot of celebration. And the highest of our celebration is our max horsepower winners. Every year, we take the best of the best of the best, and we herald them, we lift them up. They get special recognition over-the-top award. But the culture is one of competition and recognizing that success.

And at the heart of all of this, at the heart of all of this is a 9- to 11-person team in each store, a small nucleus that actually drives this culture, working together, rallying together to achieve the goals and to show what's possible. This culture again exceeds anything I knew where I came from, anything I've seen or touched, and it actually gives us, I believe, a very strong competitive advantage. Because what you also see is most of our hiring comes from within. Most of our promotions come from within. We source most of our field team and leadership from within our units, whether we're building new units or acquiring multi-units, we build the talent from within.

Not only is this good for morale, but think about the strategic advantages it gives us. Our team members have been trained in our system with our culture and our model. And the leadership, the field leadership actually came from within, started from the lower ranks know how to do the job, know how to teach it and know how -- know what's expected. And the muscle memory that we get from this organically grown is off the charts and delivers the consistency that we've got.

In the cycle, well, our best people stay. They continue to train the next generation in our operational knowledge, execution and culture gets stronger as we grow, not diffused. Later, you're going to hear from Kyle McMahon, our Vice President over the Western division about this very journey that he went through. So just remember that here momentarily. And I think you'll like his story. So now let's talk about process. We have a proprietary process, SuperPro, that drives the consistent execution that we see across the network. It's embedded in our training, our point of sale and our store operations.

And I would challenge you that whether you drive into a store in New York City, California or Kentucky, you will find the consistent process at every store. It's intentional, and the consistency is powerful. We see improved throughput. We see service with speed. We see higher customer satisfaction because of this consistency. And it also allows us to drive higher penetration of NOCR of non-oil change revenue services. And it's a process by which we can lean into as a field and drive the expectations and the execution that we want to. It's predictable, repeatable and very profitable.

And as we scale, it just continues the same pattern. Underpinning all this is the data and technology that we've got into the network. Our robust data environment captures data across our network. We are using millions of data points to determine everything from the OEM spec of what your vehicle uniquely needs to the best site to place our next store. You mix this with the best-in-class technologies that you see on the right, and these are some new entries into our tech portfolio. And what you actually get is a great mix of things that really increase our customer and our employee services and expectations -- our environment.

Let me give you some examples. For customers, Lori talked about fleet management. What we've been able to unpack here is every fleet has a different set of services that their fleet manager has approved. As a fleet unit comes into the store, and we scan it. We've actually built auto integrate that goes out into the repository of fleet cars, understands what fleet B versus C versus D services that have been approved are and quickly pulls that into our SuperPro point-of-sale, integration into the system so we can get on with speed in servicing that customer.

For our employees, we spent a lot of time, and I'll give you a little more here in a moment on the labor work that we've done, but Workday has allowed us to unpack efficiency for our field leadership. As we rolled Workday out mid-summer this last year, we've actually already seen more fine-tuned schedules, but 60% less time for our managers to have do the schedule. So we've removed time from our leadership team to actually produce schedules that are better than we would have had a year ago. This data combination -- data and tech combination allows for higher return on capital and drives more efficiency in the operating model.

And all of this translates to financial performance here. On the left, you'll see meaningful margin improvement that we've seen in the last 3 years, while we've been investing in what you saw in the previous slide. So the strategic investments we've made, retail infrastructure, upgrading systems and strengthening our operating model, and I want to pause because most of what you see on the right-hand side, you'll understand. Cloud computing, CRM, fleet, but I want to shine a light on something that's not a system and that's central operations.

So we invested in a team that actually filled with leadership that comes from other retailers like Michaels, Harbor Freight, CVS. And this group responsibility is to go look for the gaps and our efficiencies in our store, look for the processes that need to change. And they're applying that diligence to SuperPro enhancements as well as managing our labor and scheduling systems. That central operations team, I believe, is the tip of the spear to help us find and drive the efficiencies that will still take us into the next few years.

When you look at the strategic investments we've made on the right, mixed with the margin growth that we've seen on the left, what you're not seeing here is the trade-off that most companies have to make. Most organizations decided to trade off between investments or margin. And it's a balancing act. We've actually been able to do both. And that margin expansion that we've seen with the technology investments we've made, I want to take you a little deeper to that now and show you why we believe it's not petering out, still has opportunity in front of it.

First, we're going to start with the car parc. Lori hinted at this earlier, but the car parc is aging. In the last decade, the car parc -- the average vehicle has gone from 11.5 years to 13 years in age. People are holding on to their vehicles longer. And when they do that, they require more maintenance. We're long past just oil changed. We're into transmission flushes, differential flushes, higher services at higher revenue and higher margins. The other piece of the car parc, though, is actually where the OEMs are shifting recommendations or requiring more premium products.

This past year, GM surprised everybody with a 040 premium that was hard to find. Very premier product, very high margin. And so you've got a twofer going on in the marketplace for the car parts. And we don't have to change customer behaviors here. It's organically happening in the car parc. It is happening with the car parc driving it itself, and there's organic margin that we're going to get off of this tailwind. The second margin driver is operational cost efficiencies.

We have multiple initiatives underway here, and I want to start with labor. And I keep coming back to labor because clearly, on any retailer's P&L, labor and inventory are your 2 highest cost factors. Three years ago, we started with labor with that central ops group. And it was about reporting and measuring and helping the field operators understand what really good needed to look like based on what we received. But with the infusion of Workday now, we're actually getting more granular and system-led. And it's not just up to educating the stores, we're creating parameters that they must live within.

This last year, in FY '25, we've seen about under 100 basis points of leverage on labor. Think about how big that is. And we're still not done because Workday has only been out for about 6 months for us. And Workday now is allowing us to take the engineering studies that we've done, the workload mappings and time studies that we've done on a store-by-store basis and actually pipe into Workday what's uniquely needed for that store based on the demand that it sees. Certain vehicles take different time to service in the stores. And as we dial into what we call workload drivers, we are loading that into the system at a store-by-store level, which is allowing us to more surgically drive labor down.

We still have labor leverage to get. SuperPro improvements. Lori mentioned this as well, and you saw Chris on the screen when he was giving you the store tour in bottom side, point to a monitor below. We are breaking apart SuperPro. We are bifurcating SuperPro, and we are actually creating the environment by which the workforce and the store is getting served their unique instance of what they need from SuperPro to do their job, which allows us to move even faster.

SKU optimization and store expense management, we will continue to drive as well. There's been a lot of up work underway with SKU optimization. I think retail 101, trading-out stores, what products needed where, what's your safety stock levels. So you never get out and give out on what you need for your guests. And all of this is work underway that I'm excited to watch as it comes to fruition.

The third driver, changing network mix. Immature stores as they increase their margin -- as immature stores increase their maturity, they increase their margin. Makes sense? When you look at the last few years of our growth and you look at the number of stores we've put on the street, new immature stores, then I give you the calculation that it takes about 3 to 5 years for an immature store to hit maturity. So when you look at the number of stores we've opened in the last few years, 3 to 5 years to hit maturity and 40% of our stores are not yet at maturity, it gives us the expectation of about 700 basis points in leverage that we're going to see in the next few years.

And the second, the store mix is changing. Our franchise stores contribute a higher margin to us than what our company-owned locations do. And as franchise additions become more of the mix, well, you're going to see natural margin expansion from this as well. Both of these things are already in motion. In fact, a lot of what I've told you, I'm just adding to the list, are things already underway and gives us increasing confidence in the margin expansion that we've got.

And fourth is SG&A or G&A. Now G&A, of course, you know there's a fixed portion and a variable portion. Our fixed portion is infrastructure, systems, leadership. And the variable portion really scales more with the business. And the power that we've got and the systems that we've built, the platforms that we built as we continue to scale, we're seeing a leveling off curve of what it takes to, invest wise, to support the mass. So you're actually going to start spreading the G&A across the boxes as we continue to open and get margin expansion and leverage here.

And all of what I've covered is recapped here on this adjusted EBITDA waterfall. These drivers coming together over the next few years, we expect 100 to 200 basis points in margin gains. And these aren't hopes and wishes. I'll say it one last time. These initiatives are already underway. We've already put on our P&L some of the leverage. I gave you a glimpse of that at the beginning, and there's just more to come.

So I'll end where I started. We have a proven track record of operational excellence. You see in our transactions, our sales. Hopefully, now you see it in our margin expansion. And it's enabled by our differentiated approach to people, process and technology. We've shown you the 4 margin expansions as a recap, aging car parc plays in our favor, operational efficiencies well underway, improved portfolio mix and G&A leverage.

All of this, combined with the scale that we continue to grow towards will deliver our future margin expansion. So our foundation is built. We'll continue to execute. And as we scale, you're going to see the full power of what we created. I look forward to meeting you as we go out the rest of the morning and afternoon. Thank you for having me. And I think at this moment, we're prep for a break. So I've been told to tell you, you've got about 10 minutes. If we can be back in our seats in 10 minutes, we'll go on with the program. Thank you so much.

[Break]

I really appreciate Kyle shooting that video for us. Kyle is someone that really embodies the culture and why working at Valvoline is so special. While Kyle has immense operational experience. He also led our franchise division for some time. So he's certainly someone that's a resource for me and an asset to not just myself but the entire leadership team. Well, good morning.

I'm Adam Worsham, Chief Franchising Officer. It truly is a pleasure to be with you all today. in my nearly 2 decades at Valvoline, I've witnessed our company's transformation from a product-centric organization to a leading pure-play retailer. I've had the honor of leading our franchise business for the last 5 years. And today, I'm excited to share with you not just the important role that our franchise business has played in Valvoline's history. But more importantly, I want to share with you the critical role our franchise business will play in driving Valvoline's future growth and profitability.

So in this franchise section today, it's really going to be centered around the turnkey partnership and the best-in-class value proposition we provide to our franchise partners. It's incredible when you think about the average franchisee's tenure in our system exceeds 25 years. Their commitment to upholding Valvoline's people-first culture as well as their dedication to leveraging Valvoline's playbook, coupled with their commitment to not just meet but exceed the brand and operational standards that Valvoline has put in front of them has been essential to driving the consistent high-quality results we have experienced.

When you look at our strategic existing franchise partners as well as the new franchise partners we are bringing into our system, these folks and teams and companies are well capitalized, and they are committed to accelerating the unit growth for Valvoline. And as our franchise business accelerate its growth at a greater rate than our company-operated stores, we are able to multiply our growth in a capital-efficient manner.

In my opening, I highlighted the pivotal role that our franchisees have played in our success here at Valvoline. And I want to just provide you some context of this. When you look back at our franchise unit count going back to 2022 to now, our franchisees have expanded locations at an 8% compound annual growth rate, reaching 1,164 stores. The exciting thing, though, is when you look back over the last 2 years, our growth rate has been greater than 8%. And as we continue our acceleration efforts, as we continue that momentum, we fully expect to continue to deliver on this momentum in 2026 and beyond.

Remarkably, even as our franchise partners have started to really emphasize their focus on driving new unit growth, they've also been able to deliver extraordinary same-store sales growth. Over this same period, since 2022, our franchisees have grown their average unit volume at a 6% compound annual growth rate. What does that mean? That means that our Valvoline franchisees that we have on our system lead the entire Quick Lube industry with net revenues per store greater than $1.8 million.

So when we look at the value proposition that Valvoline provides to our franchise partners, it's not just best in automotive. It's one of the best in all of retail. There are 4 differentiators that I want to highlight for you today. The first is the Valvoline brand. Valvoline is a high-valued brand that people know and trust. And that's important because when you look at the automotive industry, it's so fragmented, so that trust matters. With over 160 years of experience and one of the highest brand recalls in our category, our brand continues to provide a real advantage for our platform.

The next differentiator I want to highlight is our proprietary operating model. We call it SuperPro. SuperPro is what encompasses our operational process. It's what encompass the award-winning training platform that Linne highlighted for us earlier as well as our in-store technology. SuperPro has been critical for us. As we continue to scale, it allows Valvoline to drive efficiencies, quality and consistent results.

The next differentiator I want to highlight is our marketing expertise. We use deep customer insights and data to strengthen retention as well as find new customers through awareness and performance marketing channels. Every strategy is tested and proved out in our 1,000-plus company-operated stores before we bring it to our franchise partners. That means that our franchisees benefit from proven programs that drive both transaction growth at a positive return on investment.

Last but not least, biggest differentiator for Valvoline is our unit economics. When investors from entrepreneurs to private equity firms are looking to make investments in a franchise system, they want strong returns with manageable risk. With 19 years of consecutive same-store sales growth in unit economics that outpace many leading QSR retail systems, Valvoline stands as the top choice for franchise investors. Because of the tremendous success of our 2 franchise platforms, both Valvoline Instant Oil Change and Great Canadian Oil Change, we continue to receive significant industry recognition.

In 2025, we are proud that Valvoline as an oil change earned the #37 spot on the Franchise Times Top 400 list. In addition, this year, Valvoline ranked number 24th overall and #1 in automotive on the Entrepreneur's Franchise 500 list. Lastly, in Canada, in the J.D. Power Customer Service Index, Great Canadian Oil Change earned the highest marks in customer satisfaction. These achievements truly reflect the dedication and excellence of our outstanding franchise partners across North America.

You know, when you look at our system, we feel Valvoline is very fortunate to be anchored by a group of strategic well-capitalized partners that have been with us for 3 decades. Over this 30 years, as these organizations have grown, they now today represent 74% of our system and our franchise base. Each of these systems have built exceptional scale businesses, but the neat thing for them is they remain committed as ever to advancing the Valvoline platform, and this is underscored by the continued investments they're making in their existing stores, as well as the fact that we now have robust development agreements with each of these partners.

I want to highlight one example here of about an extremely strong partner that we're fortunate to have in our system, and that's Henley Enterprises. Henley is Valvoline's largest franchise partner and their growth truly reflects our shared commitment to excellence. What began as a single location in Summerville, Massachusetts that opened in 1989 has evolved into an impressive network of over 260 locations across the United States, but they're not done yet. They've got commitments to add an additional 100 stores by the end of 2030.

I think the thing that's really neat and incredible about Henley is the owner of Henley has built an incredible team, but he remains so actively involved in managing the business. He's a trusted member on our franchise advisory council. And we've got many Henley leadership team members that are on various councils that we leverage to really engage with our franchise partners and really tackle the opportunities and initiatives and challenges that we have. So Henley has been a great partner as we continue to drive growth in our system.

Another great example of an extremely strong partner for us in our system is Quality Automotive Services or QAS. QAS has been a valued member of our system for more than 30 years. But in July of 2021, Carousel Capital acquired QAS. At the time of the transaction, QAS had 78 locations. Today, they've expanded locations of 220 across the Southeast and Mountain West with commitments to open an additional 100 locations by the end of 2030. QAS success is a powerful example of what is possible when you have a strategic sponsor that partners with an exceptional management team.

QAS is one of the first partners that -- or one of the first sponsors that we've had in our system in quite some time, and their management team has been critical in assisting us and looking at what's valuable for sponsors as they come into our system and ensuring that we're continuing to evolve the win-win partnership and win-win solutions we're bringing to them. So we truly push at everything Carousel Capital and QAS is doing for our system.

Over the past few years, we've also been intentional about attracting new partners into our system to diversify our network. Especially, we're targeting these new partners to really help us build out underpenetrated markets. These partners range from accomplished entrepreneurs to leading private equity firms, and they are projected to contribute about 1/3 of the new unit commitment that we have through 2030. We I've highlighted some of these partners here over the last couple of years, we've brought in franchise Equity Partners, which owns our system, Velocity Auto Care. ICV Partners recently entered our system through acquiring one of our long-tenured partners. And CMG Companies is an incredible family office that's helping us build out some underpenetrated markets as well.

And we're excited about the incredible impact that these new partners are going to have on driving growth for Valvoline in the future. As we looked at both existing and new partner growth, refranchising has been an important lever that we have used to accelerate our progress. Since 2022, we've refranchised over 65 locations and those partners have committed to tripling the unit count that we have projected in those markets. So far, we are extremely encouraged about the momentum that we are seeing across the refranchise markets.

At this time, we have no active plans in place to do additional refranchising, but looking ahead, refranchising opportunities will be evaluated thoughtfully and on a case-by-case basis. So when we set out to accelerate our network, we knew we're going to need acceleration from our existing franchise partners and new franchise partners that we would bring into the system, and that is exactly what has happened. I want to put our acceleration efforts into some context here. If you go back to 2021, that was the year that really the first round of legacy development agreements that we had in place that expired in '21.

We have 5-year commitments, and they all expired around 2021. When you look at all of those commitments, the total unit count that was committed in those agreements was around 150 units. In just the last 16 months, we've secured commitments of 4.5x that with franchise partners committing to investing more than $1 billion in capital over the next 5 years. And we're not stopping there. The franchise team is actively pursuing additional development territory commitments that could add an additional 100 to 150 units on top of what's already been committed.

The strong development interest that we continue to receive from both our existing partners and new partners is really driven by the strong predictability of growth, the robust top line performance and the attractive EBITDA margins. Our franchise partners are generating cash-on-cash returns of greater than 25%. Valvoline's unit economics consistently outperforms peers across the Quick Lube service industry, consumer services and automotive retail sectors. This exceptional financial profile truly makes Valvoline the franchisor of choice for growth-minded investors and operators alike.

We've spent a lot of time today talking about the value proposition that we're bringing to our franchise partners that assist them in driving profitability. And I wanted to take a little bit of time talking about what our franchise partners deliver to Valvoline. On average, our franchise locations are generating approximately $200,000 of net sales to Valvoline. We put that in context at maturity. That's about 10% of the average net revenue that they are generating. And it's a very strong -- sorry, it's a very strong return on invested capital of greater than 55%.

In closing, I'm incredibly proud of what we have accomplished with our franchise partners. Our partnership with our franchisees have delivered consistent, high-quality results, but the opportunity ahead is even greater. Valvoline's compelling value proposition continues to attract significant capital investment into our system, which allows battling to scale at a capital-light way. The combination of our strong franchise partners and the enduring strength of the Valvoline brand will continue to drive sustainable growth and long-term success.

With that, I'd like to invite Kevin Willis, our CFO, to this stage. And I really appreciate your time today. Thank you.

Thanks, Adam. Good morning, everyone. Whether you're in the room, online, I appreciate your time today. Thanks for being with us. You've heard from Lori about our strategy, a durable financial flywheel, our commitment to capital allocation discipline. Linne talked about our history of operational excellence, driven by people, process and technology, and how these, along with our scale, team up to set the table for margin expansion going forward. And Adam provided insights into our very strong franchise partner network, our value proposition to those partners that compels their growing investment in the business and how franchise network fuels capital-light growth for us.

I'll spend a few minutes discussing our go-forward value proposition and lay out our financial commitments for the upcoming 3 years. Our business has nearly 40 years of history, delivering an excellent profitable growth trajectory, underpinned by 19 years of same-store sales growth. Today is about showcasing the business and the team, but it's also about making tangible commitments. I hope the road map you've seen today gives you confidence in our ability to deliver strong, profitable growth with attractive and growing returns. An important part of our commitment here today is to maintain capital allocation discipline and sharpen our pencils to grow margins and returns while continuing to invest in this excellent business.

We're going to maintain a strong balance sheet, as Lori indicated, and we will return capital to shareholders via share repurchase. As I'm sure you're aware, I'm relatively new to this role, but not at all new to this business. During my career at Ashland, I watched this business grow and grow. And since Valvoline became a public company in 2016, the store network has grown still by more than 120%. In my 13 years as a public company CFO, I've seen a lot, but this is a truly special company and a truly special team.

With that, I'd like to spend a few moments sharing some observations since rejoining the business about 7 months ago. Coming in with fresh eyes, a few things became clear very, very quickly. Our business is strong, well positioned in the market and poised to deliver strong and growing returns going forward. With only 6% market share in just over 40% of our stores within 10 minutes of the car parc, we continue to grow our network while generating strong and growing returns on those investments.

I enjoy coming to work every day because of the great team that I am privileged to be a part of, not just words. This team is purpose built, disciplined, focused, committed to winning together. I'm also realistic about where we've been. Since selling the products business, we've made much needed investments in the core business to create a solid platform for future growth.

And we've refranchised 3 territories. Adam talked a bit about that, which was the right thing to do given the growth opportunities that were created by those transactions, multiply that footprint times 3, with the investments of our franchise partners. These actions, along with a drawn out Breeze transaction due to the FTC review has really overshadowed the strength and the potential of this business.

To quote a shareholder I met with recently, this is a great business, but it hasn't been a great stock. We get that. In fact, the quote sums up the opportunity and why I'm so excited to be part of this team today. The fundamentals are there. Now it's about consistent execution, clear communication. We understand the need to remove the noise from the situation, make the story cleaner and clearer. And we're committed to doing exactly that. You've seen this slide today. Our strategic priorities are clear and unchanged. What I want to emphasize is that it's about commitments, execution and accountability, clear measures of success, both in the core business and our growing network while also addressing opportunities in the car parc.

These metrics are straightforward. We'll walk through the details, but the takeaway is simple. We have a focused strategy that will deliver disciplined execution, and we will be transparent with you about our performance. And the strategy is working, by the way. Over the last 3 years, our business has delivered impressive growth, increasing margins. This is a high-performance growth engine that is delivering across key metrics. This gives us significant confidence as we look to the future.

19 years of consecutive same-store sales growth. It puts us among the very elite group of retailers. In fact, in my research, there's only one other that I was able to find that actually matches our track record. Our business grew during recessions, the financial crisis, the pandemic. This speaks of the durability of our business as well as the nondiscretionary nature of what we do, the services we provide.

Just a few weeks ago, we provided the guidance that you see on the screen that reflects our confidence in the business while at the same time taking a measured approach to the overall metrics and inclusion of the Breeze acquisition. We expect continued growth in the core business based on the momentum we have, the pipeline we've built and the execution capabilities we've demonstrated. The addition of the Breeze stores will be an important part of what we do going forward.

We're just in our second week after closing the Breeze transaction. However, we do know that the business finished fiscal '25 well, and we are excited to welcome the Breeze team to Valvoline. The 162 stores that we added to our footprint of nearly 2,200 are well operated. And still, we see significant upside. Including Breeze, we expect to add 330 to 360 stores to the network in fiscal '26. The low end of the range implies that fiscal '26 store adds would be about the same as they were in fiscal '25. This is intentional. It gives us flexibility around company store additions as we work through the detailed planning integration for Breeze. Could require us to allocate our company resources a bit differently as we go through that process.

To be clear, we expect our franchise partners to continue to ramp their new store additions. I think Adam's presentation around that was very clear in terms of what our franchise partners have committed to. At the midpoint, we expect sales to grow about 20% in fiscal '26. Approximately $160 million of this growth is expected to come from the 10 months that we will own Breeze. The EBITDA reflects our expectations around year 1 investments we'll need to make in the Breeze business to position it for future growth as we would with any acquisition, we've included approximately $30 million in the outlook for fiscal '26 for Breeze.

That, along with the interest cost, in terms of the investments we'll make, the interest costs that we will incur to -- for the Breeze purchase will limit EPS growth in fiscal '26. I'll talk more in a bit about our view of the multiple we paid and how we expect Breeze to perform going forward. Our growth model creates a compounding effect through 4 reinforcing components. First, drive profitable revenue growth from new stores and same-store sales; second, expand our network with high-quality, high-return stores in strategic locations; third, increase margins through scale, mix shift and SG&A leverage; and finally, convert profitably into strong free cash flow, fueling reinvestment and shareholder returns with mid- to high-teens IRR.

Each element feeds the next. We grow, we get more profitable. We generate cash. We reinvest in the business, grow again and reward our shareholders with return of capital. This is our plan to create sustainable compounding value over the next 3 years. And the beauty of this plan is completely consistent with what this company has been doing for years. We expect to deliver 3% to 5% same-store sales growth over the medium term. This assumes normalized inflation and a continuation of the current macroeconomic backdrop that we have today. This does not change our fiscal '26 outlook of 4% to 6% same-store sales growth. I want to be very clear about that.

But it does reflect the growing mature store base as we move forward. Our same-store sales growth has a strong foundation in both ticket and transaction. And we see multiple levers across the system to add to that. We expect ticket to grow 2% to 4% from continued premiumization, additional service penetration in NOCR and net pricing. We plan for transactions to grow from 1% to 3% new stores entering the comp will be a tailwind to that. And as our mature stores have continued to improve, they're also driving transactions through both fleet expansion and ongoing growth in the customer base.

We have clear line of sight to the high end of that range. And we also fully expect to outperform the overall market, while setting solid but realistic and achievable performance expectations. In addition to solid same-store sales growth, we remain bullish on our overall network expansion opportunities. Our teams have vetted our store expansion opportunity from every direction, leveraging our proprietary data and real estate analytics tool, we have mapped, prioritized and strategized against every trade area in the U.S. and Canada. We are confident in our ability to continue to add high ROIC units to build out a network of 3,500-plus units over the coming years, in addition to the Breeze stores we just added, we expect to deliver unit growth north of 7% per year for the next 3 years with 50% to 60% of that growth coming from our franchise partners.

Every incremental dollar invested in new stores must clear a mid- to high teens IRR hurdle on maturity, non negotiable. Linne touched on this earlier. To be clear, margin expansion will be a core part of our growth story. We ended fiscal '25 with a robust 27.3% EBITDA margin, while Breeze integration creates some near-term headwinds with the addition of 162 immature stores that have not yet enjoyed the benefit of our time-tested playbook, multiple tailwinds position us for margin growth.

First, the car parc is aging and there's a clear shift to premium synthetic. Aging cars means higher need for preventive maintenance. As you've heard from both Lori and Linne. Our margins are more than 10% higher on a synthetic oil change due to the leverage we gain on labor and fixed assets at the higher ticket. Second, four-wall EBITDA margins have room to grow. We have stores today generating over 40% 4-wall margins while the system average is about 35%. So opportunity there. We're committed to optimizing returns on our mature assets.

Third, as of the end of fiscal 2025, we had over $80 million of EBITDA to come from store investments that are still ramping to maturity. So these are immature stores that will mature over the course of time. This benefit will come in the form of gross margin expansion as well as the benefit from our franchise partner growth, which delivers nearly 100% gross margin rates to us.

Fourth, the compounding effect. Choiceful operating and capital investments will enable us to drive margin leverage while continuing to invest in the business. Our capital allocation priorities have not changed. And we're sharpening our execution focus. We will invest in the core business, specifically to expand our network with high-quality, high-return stores. You'll hear us talk about leverage in terms of net debt to EBITDA going forward. With the Breeze transaction, our leverage is about 3.2x.

As we integrate and grow Breeze and continue our core business growth, we'll be focused on getting our leverage back down to 2.5x as quickly as possible. Once there, excess cash will go back to shareholders in the form of share repurchases, unlocking value, not currently reflected in our share price. Driving down build cost is a critical lever to grow returns and generate more free cash flow. Strong business performance has enabled us to maintain and slightly improve margins in spite building cost inflation -- in spite of building cost inflation.

We're bending the curve on build costs. Over the last 2 years, we've taken 10% to 15% of cost out of the box. We're not done. We're targeting an additional 10% plus savings by fiscal '28. And lower capital costs, mean higher returns, more free cash flow, creating further margin expansion and return of capital opportunities ahead. No surprise to anyone that we fielded a lot of questions about the Breeze transaction.

Before I talk about Breeze specifically, we thought it would be helpful to take you through the life of an acquired store to highlight why we're confident the Breeze deal will create shareholder value. Our M&A approach is disciplined and strategic. We focus on scale, growth acceleration and strong returns. Our track record speaks for itself, successful integrations, expected returns delivered, competitive position strengthened. Whether one store or a large deal like Breeze, the criteria never change, strategic fit, integration capability and shareholder value creation.

Typically, we do invest early to accelerate returns. That's what we'll do with Breeze. This creates a modest year 1 profitability dip. Then we see step change in years 2 and 3, a maturity, usually by year 4, purchase price divided by run rate EBITDA is approximately 45% lower than an acquisition. While Breeze will likely take more time to integrate simply due to the number of new stores we're bringing in, 162 at once, it's almost a year's worth, we'll run the same playbook, and we should have the same results.

So what's that playbook mean for the Breeze transaction? So current Breeze revenue per store is about $1.1 million, which is actually pretty consistent with year 1 revenue when we build a new store. We expect to expand top line significantly as we would with any acquisition. For example, areas such as NOCR, non-oil change revenue and fleet represent attractive growth opportunities with the Breeze transaction. At the same time, we'll gain leverage efficiencies, and we will capture synergies.

As a reminder, when we announced the Breeze transaction, the EBITDA multiple was around 11x. With acquired EBITDA of approximately $45 million, our effective purchase multiple was around 13x. Through a combination of sales growth, margin expansion, synergy capture, we expect to more than double EBITDA at maturity, bringing the effective multiple down to closer to 7x. Despite the FTC-driven divestitures impacting the deal economics, this acquisition will still create significant value over time.

Organic profit growth and improved capital efficiency compounds into strong free cash flow, growing 4x to 5x over the next 3 years from $48 million in fiscal '25 to $200 million to $250 million by fiscal '28. Near term, excess cash will be used to reduce Breeze related debt. We've committed to returning to 2.5 turns of leverage in 18 to 24 months, and we are going to work to accelerate the time line. Once within the range, we'll return capital to shareholders via share repurchases.

Combined profit growth and buybacks will drive mid-teens EPS -- mid- to high teens EPS growth over the period, and this includes our expectation of much more modest EPS growth in fiscal '26 due to the Breeze interest and the impact of integration costs. As I said at the outset, this is an outstanding business that has delivered incredible results for a very, very long time. And our team is committed to continue delivering on a set of financial targets that we feel are very attractive.

We expect to deliver 3% to 5% same-store sales growth and 7-plus percent network growth, generating 9% to 11% net sales growth that is after the 20% growth that we expect to see in fiscal '26 due to the Breeze acquisition. We expect 9% to 11% per year following that. The foundation is set, and we're on pace to expand margins by 100 to 200 basis points. Linne took you through that. We'll create leverage on the bottom line and deliver low to mid-teens EBITDA growth.

Free cash flow will grow to $200 million to $250 million, 4x to 5x of what we delivered in fiscal '25. Earnings growth and disciplined capital stewardship will deliver mid- to high teens EPS growth, positioning us for top quartile shareholder returns.

To close this out, we're the category leader with a proven track record. We have the scale and capabilities to capture significantly more market opportunity than we have today. We're executing a clear strategy with a road map to more profitable growth and higher returns. Fundamentals are strong and the team is fully committed. We'll continue to be disciplined capital stewards. I'm more excited to be a part of this company today than when I joined just 7 months ago. This is a compelling investment opportunity. And we're committed to unlocking value for all of our stakeholders. Really appreciate your time.

We're going to take a few moments to reset the stage for Q&A and then we'll get back to it. Please stay where you are. Thank you.

Let's kick off our Q&A session today. First, I'd like to welcome back to the stage our management team that you've already heard from today. They are joined by Laura Carpenter, our Chief Customer Officer; and Brian Tabb, our Chief Development Officer. [Operator Instructions]

We'll start with our first question.

The medium-term outlook is 3% to 5% same-store sales, but the guidance for FY '26 is for 4% to 6%. Can you elaborate on the difference? Is it conservatism? Or is the business just stabilizing to lower organic growth?

Thanks for the question. As we think about the algo, it's important to us to set targets from an overall growth perspective that are solid, but realistic and achievable. We have clear line of sight as we said, to the high end of that range, and we're committed to doing everything we can to deliver that. However, we're also realistic about our maturing store base. We're realistic about the macroeconomic backdrop that we're in today. And while we see no reason to not be able to deliver on that, at the high end, we want to give ourselves the flexibility and frankly, set, again, reasonable and realistic targets.

In terms of the 4% to 6%, that's much more near term. And again, we see clear line of sight to deliver on that, and we're committed to delivering on that.

Okay. Our next question is on margin expansion. Margin expansion can stem from 3 drivers: one, same-store economics improve over time; two, mix of franchise versus corporate, three, as total company grows, leverage fixed costs and the margin expansion you laid out. What portion should stem from 1, 2 and 3? How should we think about the levers and where is the most risk?

Overall, I think Linne covered it well in terms of 4 drivers. There's one missing, which is just the car parc evolution, which will drive some margin mix expansion. When you look at -- that will drive a bit, but the most comes from the 3, I think, that were mentioned. Operational efficiency is driven by both transaction growth with a lot of the fixed overhead in the stores remaining constant. So there's margin as we continue to grow our mature stores in transactions.

And just to remind you, in 2025, we grew our transactions across our entire network in Q4 and for the whole year, in our mature store base as well as across the network. So we have a track record of continuing to do that. But that, combined with the efficiency work around labor management and store operations that will be a big chunk of the margin improvement.

Our mix shift will drive naturally a good chunk, not -- probably not as much as the efficiency on the operational side and then SG&A. So I would say that the book ends will drive the more meaningful and then our portfolio will add to that as well as a car parc. I would also just say that the 100 to 200 basis points of growth as a management commitment. We see line of sight for higher than that. We also want to be a bit tempered same with the same-store sales growth that the macro environment continues to be something we want to be cautious about. One, as we think about -- we have great pricing power, but we want to be careful because it is a fragmented market and customers have a lot of options, not to overplay pricing in our algorithm and be tied to doing that in the detriment of long-term growth.

So I think similar to what Kevin was trying to outline, we're trying to be conservative. We see line of sight at the top end of the ranges, and we see upside. But we want to be tempered because there are downside risks. And so what you'll see is we've taken both of those into account, and we're laying out commitments that we feel highly confident we can achieve.

Thanks, Lori. Next, we'll turn to a question on our franchisees. Can you discuss how conversations with new franchisees are progressing and provide any color how you expect the base will evolve over the next 3 years. As the system grows, how do you ensure that franchise and company-owned strategies remain aligned and consistent?

Yes. So I'll start with the first as far as conversations with new franchise partners. As you all can imagine, we're talking to a very diverse group of interested parties. So one, we've got a long, a very high tenured base, and those franchise owners have told us that they care about their legacy, they care about their people. They've asked us to engage various firms that we feel could be great partners if and when they look to exit. So those conversations are ongoing and there's significant interest there.

And then when you get down to more of the traditional family office funds, a lot of times being the industry leader, I think we've got the advantage where it's less about us selling them. I think they see it in the data. They see it in the performance, as I talked about earlier. It's more about can we carve out enough or can we give them enough territory that allows them to expand and meet their needs. So those conversations are ongoing. As I mentioned in my presentation earlier today, we're targeting an incremental 100 to 150 units. And it will come from those new partners that we're talking to.

There's significant interest there, and we're excited about bringing in those new partners to help diversify our network and help us generate that roughly 1/3 of the unit commitments. On the next question around how do we ensure that we align on -- I believe the question was around margin. What -- can you repeat the question, Elizabeth?

Of course, as the system grows, how do you ensure that franchise and company-owned strategies remain aligned and consistent?

Strategies remain aligned. Thank you. Yes. So I think it's more about at the highest level, valuing our primary -- our primary goal is to drive shareholder value. Our franchisees primary goal is to be more profitable tomorrow than they were today, right? And those are very much connected. I think the 3 items I would hit on, we talk about how we generate that alignment. One, it's about a relationship. I think Valvoline is very unique. We're in the business with our franchise partners. We've been working with them many times 25-plus years.

So there's significant trust. And I think that personal kind of relationship and commitment we have to each other goes a long way. I think the second thing we started doing this around 2 years ago, and I think it's worked really well for us is we've kind of -- we've adjusted our incentives that we have for our franchise partners to ensure they are aligned with our mutually established goals. So we have incentive in place for driving strong same-store sales growth.

We have incentives in place for franchisees to remain on top of or ahead of their development commitments. And those incentives are driving win-win solutions and partnerships for both Valvoline and our franchise partners. And the last thing I would hit on is the contractual commitments. So we know how profitable or how valuable, I should say, having exclusive development rights are. And we structured those agreements in a way where our franchisees continue to maintain those exclusive rights. But in order to have that, they have to stay on top of or ahead of their commitments. So I would say, again, the 3 things we use to generate alignment is our relationships, the incentives we have in place as well as the contractual commitments.

Thanks, Adam. The next question is on our network growth. What does the road map to 3,500 stores look like? And how many locations do you believe the market can ultimately support?

So our current piece of growth will get us at 3,500 units sometime in early 2030s. But I think what we're most excited about is the work we're doing around driving down capital costs. And by driving on those capital costs, we see a path beyond that 3,500 and the path is pretty clear. I believe Kevin and both Lori mentioned some things that we can drive growth in their presentations. Lori mentioned that currently, we only have 6% market share. So a ton of room to grow and eat more market share as we expand.

Kevin also mentioned that only around 40% of the current car parc lived in 10 miles of existing Valvoline. So tremendous opportunity to grow that percentage upward as well. With the momentum we've had through Adam's leadership, the commitment from the franchisees to add 50% to 60% of growth going forward, along with over $1 billion of committed growth from them. We see a way to expand our growth beyond 3,500, while certainly still driving higher return on invested capital.

Thanks, Brian. What role do you see technology playing in driving margin expansion over the next few years?

So much like I discussed earlier, technology is going to be critical to margin I'll give you some examples earlier around Workday. But let me back up just for a second. When I joined Valvoline, I was extremely impressed with the amount of data that we had. And we believe and we're pretty clear that we're leading in this industry around our technology and our data. But compared to other retailers, we still have some catch-up to do. And so I've discussed with you, we've done a lot with Workday using technology really dialing where the efficiencies are. And we see using technology to both manage efficiencies and gain more efficiencies out of the box to actually gain a little more control and/or forward view of what's happening inside the marketplace.

For example, one thing I didn't hint to is our data. We spent a lot of time taking the data that we had in cleansing it and really categorizing it in such a way where we can quickly get our hands on it and understand the patterns that are happening inside the environment, which allows us to forecast better and understand better when forecasts of what's occurring. But there's other things we're doing that I didn't share with you. We've rolled out a brand-new really high-tech digital camera systems, about 600 stores last year were finished out this year that is allowing us to hone into the stores and actually pick up gaps to use the technology more gaps in our processes.

And when we make a change to something we can actually dial into the stores and see is it behaving as we thought. Are we returning what we thought we would get back out of these type changes. So whether it be SuperPro that I've talked about, whether it be Workday that I know I exhausted in the presentation this morning on what we still have to gained in labor. We're using eyes in the sky in the stores to monitor and measure the efficiencies that we're expecting. And we've got a plethora of data really categorized in such a way to get our hands on that will both give us insight into what we expect to expect or expect instead what we expect as well as use the data to start building out new things around customer propositions and better ways to serve our guests.

And if I can build on that, specifically from a marketing perspective, I think technology will certainly play a role in marketing efficiency. It already is. When you think about AI and machine learning, which we already are implementing in our marketing programs that creates the usage of that data that you referenced in a much more efficient way. And so I'll give you a couple of examples of things that are already happening. Campaign, automated billing, automated bidding and campaign -- I can't say the words. I'll start over. Sorry about that. Automated bidding and campaign management, particularly within search, right? That's already happening today.

Next best action within our life cycle programs, that's our retention program. So that's helping us to really understand and be efficient around delivering the right offer in the right channel at the right time to the consumer to not avoid waste and subsidy. And then finally, I would say everybody is expecting on the marketing front, a reduction in production costs. for content creation. And so those are some of the things that we're already implementing and we're already looking for those improvements.

The next question stays in the marketing space. How do you decide where to allocate marketing dollars to optimize both customer acquisition and retention?

So I think the first thing I would say is we really think about our marketing spend as an investment versus just a spend line item on the P&L. And to that end, every investment we do has a measurement component, particularly within marketing, we're looking at return on ad spend against every performance channel and every campaign, whether that's acquisition or retention focused, and that's driving decision-making. And specifically around acquisition, I would give you an example because a lot of people are skeptical about the return on acquisition because it is more expensive to acquire a customer, obviously, then to retain.

And even our most -- our highest offer, a promotion to try to drive customer acquisition, it's still driving incremental profit on that first visit. And so those are some of the decisions that we make in terms of the balance of the spend between acquisition and retention. I would tell you, again, from an efficiency standpoint. As we continue to build on the strength of our brand and now scale to a national level, it affords us opportunities to buy in channels that we couldn't previously at that national spend level. And that will give us the opportunity, again, not only to expose our brand to more consumers from an acquisition perspective, but it also makes everything else from a retention or a demand capture perspective, much more efficient.

Thank you, Laura. How is Valvoline addressing the inherent terminal value risk associated with the shift to EVs?

I tried to cover this in the remarks I made earlier. The reality is the time frame with which EVs are going to grow as a percentage of the car parc and as of the percentage of the car parc that we typically serve. It's a pretty extended runway. We're looking at well into the 2030s before it would start to have an impact if we did nothing. And the reality is, is we're not standing still. So I think we have done pilots. We have been engaging EV customers. The technology is still evolving. But there are key maintenance requirements and our asset base, both our footprint, our relationship with fleet customers and the makeup of our stores, we can leverage our assets to serve EVs.

Now the menu is going to look different, and the way we price that menu will actually have to be fit for purpose for an EV. But everything right now as it's evolving, gives us great confidence that we are in a position, both brand and consumer trust in our brand that we will be able to evolve as necessary over time. It's quite easy to think about in a 2 or 3 base store as a car parc evolves around that store. You can start to customize a bay to serve a different vehicle powertrain. And so because we can actually start to flex our store base and the bays. And think about each bay is serving specific guests, we can actually make that evolution fairly seamlessly location by location.

Our next question is on the Breeze deal. On the Breeze deal, it was mentioned the divestitures pushed this from an A+ steal down to a B or a B+. Is that based solely on locations? And can you walk us through how those locations can get average unit volumes up to about $1.7 million and in line with core Valvoline? How does it fit into this medium-term growth algorithm?

Yes, great question. I'll let you cover the impact on the medium-term growth algorithm. What I will say is, having to divest the number of stores that the FTC required in an auction timed process is what really changed the economics from an A+ deal to a B or B+ deal, the amount that we had to pay and then sold those stores for. And I think Kevin was quite clear on the multiple change is what changed the economics of that deal. And when we talk about a post-synergy multiple of 7, that multiple would have been much less had we not had to divest those stores at the prices that we did.

But looking at the store base that we have, it's not like we got rid of the best stores or they were stores that were roughly average. We've looked at every single store in their portfolio and run it against our real estate analytics, which has proven to be very robust forecasting mechanism of what our brand, our fleet and marketing capabilities and our playbook will generate in terms of volume and return. So we run that real estate model against every single site, the 162 that we've maintained.

And we know that there's significant upside on the sales line, when you take our marketing playbook plus our fleet penetration in those regions, plus the SuperPro process and technology, which enhances the service experience and the retention rates. We know that we can get it up to the system average. Now there'll be some stores, particularly in California, which will be higher than that average, and there will be some in smaller locations, that will be lower. But we feel quite confident that there's a significant upside that will drive margin improvement.

When you grow a store from $1 million to $1.1 million to $1.7 million to $1.8 million, that margin accretion is very attractive. There will be other synergies as well as we integrate that business more fully into Valvoline from a G&A perspective. But when we buy those stores, we also invest -- they do have to do some investment. They do spend money on marketing, but do not have the efficiency and/or the mechanisms that we do to drive the kind of volume. So there will be some investment in marketing.

We'll have to invest in technology and training as we integrate them into our portfolio. So there are some investments that we have to make in the short term, and that's the reason why you start with a higher EBITDA, it comes down a bit before it accelerates. That is the process that we use for every independent acquisition, whether it's 1 or 3 stores. We just happen to be taking on 160 over time. And the algorithm that we've placed and the commitments that we're making for FY '26 take into account a measured approach for how we integrate that business into ours over time.

We're not assuming we can get that all done in a short period of time. We still have a very active pipeline in the core business that we had before Breeze that we'll still want to move against. But it does create return even with the required FTC divestitures.

Lori, I think you covered it really well. As I said in my remarks, we expect Breeze to add about $160 million to our revenue in '26, about $30 million in EBITDA, and that's for 10 months of ownership. As we think about what that means for the medium-term algorithm. I think Lori explained it very well. The short answer is we would expect those 162 stores to act much like any store that we acquire, and we tend to acquire 30 to 40 stores per year. We run the same playbook on those stores. We invest incrementally to integrate those stores into our system, into the training program, et cetera. And then we start to see that ramp year 2, year 3, year 4 as they grow towards maturity. We expect the same thing to come from the Breeze locations that we just acquired.

Our next question turns to our fleet business. On the fleet business, how large is that as a percentage of overall revenues? And can you help us understand the margin associated with that business relative to the overall company margin rate?

Sure. I think Lori mentioned it in her comments. From FY '22 to now, we've seen a 17% compound growth rate in top line revenue for the fleet business. And yet, it still only represents less than 10% of our overall net sales. And so again, that's why we're bullish on the upside of that business. In terms of the margin question specifically, it is higher than consumer, and that's based on a couple of factors.

The average ticket, even with a discount for fleet is higher than consumer. And that's based on the fact that they have a higher attachment rate of non-oil-change revenue, and they have a higher penetration of synthetic based on the age of the vehicles that they're driving. And so those factors drive that higher ticket, which in essence gives us the efficiency and labor to create margin.

I would talk a little bit about why it's an area of focus and what we're doing just to build on that because, again, if you look at the fleet the car parc, the vehicles and operation growth as well as the miles driven growth is outpacing consumer. So again, there's a larger opportunity here in front of us based on the share of that business that we have today. And there's a couple of areas that we're really focused on. I would say we have made significant investments and continue to make significant investments in our sales and marketing capabilities and resources to support that business.

We are partnering in different ways with the fleet management companies. And we're also partnering with technology companies, as Linne mentioned, like auto integrate, to help drive our capabilities the way that we can service those customers in the fleet space.

The second area is franchise enablement. And so we've really started to expand our ability to help them with their sales capabilities at both the local and a national level so that we can bring the learnings that we've had in our company stores as the franchisor to the franchise business.

Thanks, Laura. Next question. How do you manage net sales and margin performance across the company-owned store system?

Sorry, could you repeat the question, please, Elizabeth?

How do you manage net sales and margin performance across the company-owned store system?

Sure. Well, first of all, robust technology and a lot of robust data gives us direct insight on a daily basis into exactly how each and every store in the network performs. And so we can take very quick action if we see dips in performance we can also take learnings from our top stores and drive that through the network. We've talked about it before. We do quartiling but we also do deciling so that we can understand the performance of each and every store in the network and using the data that Linne talked about, we can actually tease out what's driving better performance, what's driving lower performance and apply those learnings really across the network. And that's very, very powerful for us.

I'll add to that. So like any retailer, what Kettle was just speaking of, we dial into today. We watch stores, we watch performance, we know our top, our bottom we learn from the top. We apply pressure to the bottom. We understand -- is it microeconomic factors? Or is it operational factors we got to get our hands around? Then there's a longer view that I want to add is that the data that I talked about earlier and understanding of the marketplace. We know what we project performance to be. We know where the rises and falls are throughout the cycle of the car parc annualized over 365 days.

We understand what our biggest time periods and time frames are. We watch the -- as the car parc evolves and mileage interval goes up, we know what to expect against our customer base. Are they hitting those intervals? And so we actually have the ability to watch and understand with the businesses that we are forecasting, we're projecting and how that's playing out to then if it doesn't, to dig in and understand why and make adjustments to our forecast.

So very close control on the day-to-day operations of it with also a macro view of how it's progressing and how we would apply those changes in the levers that we would pull for the longer-term view of the performance.

The next question is on our build cost. How is the team progressing on initiatives to lower upfront capital? The slide describing franchisees' returns indicated that the initial investment was approximately $2 million. Is that what franchisees are currently investing? Or is that the level you are targeting? Is the 10% reduction intended to offset likely inflation, keeping the build cost the same?

So I think Brian cover the capital cost reduction to date as well as going and then you can talk to the franchise piece.

Sure. So as Kevin mentioned, we've reduced our capital spend on a per project basis by about 10% to 15% over the last couple of years. We do have clear line of sight to put another 10% to 15% going forward. So what I'll do, if you don't mind, I'll touch on a few things that we're working on that we've already to make the box little cleaner already and to drive higher returns.

Number one, we've introduced more 2 bays into the system. 2-bay buildings involve a lower upfront capital spend we build them in a manner that we can expand them to a 3-bay or a 4-bay in the future if the market dictates. Going forward in 2026, you'll see about 60% of our new builds will be those 2 bays. Secondly, with Adam's support and leadership, we've partnered with the franchise community, and to you to take a new look at our current prototype, really dug in anything from the specs to the designs, truly create a leaner, more efficient prototype that can deliver some significant savings.

What we'll see going forward is the number of builds of this new prototype will increase exponentially from '25 to '26. It generated a lot of savings there. We are also, which is exciting, working on a new prefab model that we will pilot in 2026. That will do a couple of different things. That will not only increase speed to market, but it will greatly reduce the spend that we spent with contractors.

And then lastly, we're working on another design to reduce the square footage of our basements to drive costs even lower. So we're really at the mindset of lowering and addressing capital spend, and we're not compromising customer or employee experience.

Yes. And I think on the franchise side, one thing I'll say before Brian got into the organization, development was very much handled in isolation, meaning company was kind of focused on our own development opportunities. Each franchise system was focused on their own, and there wasn't a lot of collaboration. There wasn't a lot of sharing. And that's changed over the years. We now have a development council. We're actively meeting. And as you can imagine, our franchisees are very entrepreneurial in spirit and they continually work with us and look for ways to lower capital cost.

I think we were talking about capital cost, it becomes challenging, right, because across regions or certain local and regional requirements that are going to drive certain costs up, et cetera. But we are seeing costs from some of our franchise partners in certain markets below the $2 million that was initially quoted.

And I'll just add that we're early on in the Breeze discussions. With the FTC review, we couldn't get into anything competitively sensitive. But in the last 2 to 3 weeks, we've been really encouraged by the Oil Changers team and their site design and cost. And therefore, whenever you -- when we buy small acquisitions, these are not small operators that are building stores, but Oil Changers has been buying and converting and building stores. And so they have -- it's a fresh chance for us to look through what they're doing that we could actually port into our network.

The other thing that they've had good success on is build-to-suit. So they have a couple of build-to-suit partners where they lower the capital costs consistently, varies considerably with a high rent expense. And this is something that we have been trying to build some capability and partnerships for because we have small franchisees who do not have the size in order to have a dedicated real estate development team to manage those projects. So by giving them a build-to-suit partner, not only can they lower the capital cost but they have a turnkey solution with which to add units.

In our last 2 franchise workshops are smaller franchise partners, they may have 5 to 10 units. They have been asking for more solutions and more support so that they can double their units within their smaller systems. So I think some of the -- some of what we're seeing within the Breeze Oil Changers team is pretty exciting and will lead to more potential for us.

Lori and Kevin, the next question is directed to you. From your perspective, why hasn't this been a better performing stock? And what do you think the market most misunderstands about Valvoline?

I'll start. Having been here 7 months, one of the things that, again, I was just so impressed with when I joined is the team and the quality of the business. I think as I look at it, and I said this in my remarks, I think there may be 3 things that contribute to the -- what I would call a misunderstood company. It's an exceptional company that is underappreciated, let's say. Number one, a lot of change has occurred since the separation of the products business. Investments have been made to really set a foundation for growth. And I don't think the market really appreciates the value in that focused more on the now, not on the future.

I think the second thing is the 3 refranchising transactions happened very close together. That wasn't originally the plan. Lori can talk to that. But those ideally would have been spread out more, but they did happen very coincident with one another. And I think that created a lot of noise in the system. While those will create value, those transactions will create value because of the development agreements that came with them. I think that contributes to, call it, an underappreciation of the company and the potential.

And I think the third part is the overhang from that extended Breeze transaction. I mean, that deal was announced in February. We just closed it a couple of weeks ago. I think that creates some overhang. Hopefully, by what we've been able to show you today, tell you today and maybe most importantly, commit to today, you can actually see that there is an incredibly bright future for this company and this organization that should translate into a much higher multiple and a much higher value from a stock price performance perspective.

Yes, I'll just add that apart from Breeze, everything that we have done since we became a pure-play retailer we've been talking about. So we talked about wanting to agitate franchisee unit growth because we were underpenetrated, not just in the company markets we operated, but on the franchise side. And we needed to increase the development commitments that they were putting which we have done, and I think Adam demonstrated that pretty well.

We talked about franchising white space markets. We've done that. We brought in partners like CMG and another couple in areas that weren't being developed at all. We talked about bringing in new capital to back existing franchise partners who had stopped developing because of where they were and their time horizon in career. We've done that with companies in the middle of the country, there's still more in discussions and underpin the additional opportunity that Adam talked about.

And we talked about the potential for refranchising. So all of the things we've said we were going to do, we've done. I think the refranchising piece came much faster than we thought because there was such demand, and the demand came from the economics and the returns that Adam shared relative to QSR, but it came very quickly. And I think our misstep was we did -- we were not as transparent in disclosing the information around those transactions to make it easier for you to follow the underlying business momentum versus the impacts of refranchising.

I think as we look at Breeze, obviously, with the FTC required divestiture, there would be concerns around how much value can be created. Our intent today was to share more information on that to share our commitment around what the business will do and how much upside there is. So I think part of this is us learning around how to provide more information so that investors can truly look at the business performance and hold us accountable.

Lori, one last question for you. What would you like investors to take from today's update?

I think it's a pretty simple message. One, we are the category leader, and we have built amazing moats from an asset and a capability standpoint that we have built over time, but that have also delivered industry-leading performance and we'll continue to do so. Two, there's still a lot of upside in our business, whether it's the margin expansion that Linne talked about or the network acceleration or network growth footprint growth and the acceleration on the franchise side for new unit delivery.

I think those things will drive profit faster than sales -- profit growth faster than sales over the medium term. And that, combined with disciplined capital allocation, will lead to top shareholder returns. So I think as you step back and look at where we stand today, we've done a bunch of the investment. Some of the lumpiness of the refranchising in Breeze is -- will move up -- will move -- continue to move forward from that. And as you look at '27 and '28, it will be a very attractive, high profitable and high cash growth generating business. So we think it's a great investment opportunity.

Thanks, Lori. This concludes our presentation today. We appreciate your interest in our story, and thank you for joining us.

Hello, and welcome, everyone, to the Valvoline's 4Q Earnings Conference Call and Webcast. My name is Becky, and I'll be your operator today. [Operator Instructions]. I will now hand over to your host, Elizabeth Clevinger with Investor Relations to begin. Please go ahead.

Thank you. Good morning, and welcome to Valvoline's Fourth Quarter Fiscal 2025 Conference Call and Webcast. This morning, Valvoline released results for the fourth quarter and fiscal year ended September 30, 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-K with the Securities and Exchange Commission.

On this morning's call is Lori Flees, our President and CEO; and Kevin Willis, our CFO. As shown on Slide 2, 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 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.

Thank you, Elizabeth, and thank you for joining us today. Let's start with a look at some key highlights for fiscal year 2025 on Slide 3. System-wide store sales again saw a double-digit increase to $3.5 billion and we delivered our 19th consecutive year of system-wide same-store sales growth. This nearly 2-decade-long street accounts for almost half of our retail businesses history and puts us in a special category of retailers. The network continues to grow with the addition of 170 system-wide stores this year bringing the total to 2,180 across the U.S. and Canada.

We also saw double-digit growth in adjusted EBITDA, taking into account the impacts of refranchising and including the investments in technology we made this year. This would not be possible without our team and our strong franchise partners, and I'd like to thank both groups for all of their work that went into driving these results.

Slide 4 shows our performance over time on key metrics. Our historical performance shows our track record of steady new store growth, strong same-store sales comps and compelling net sales and profit growth. This performance is a function of the attractive market we operate in and the capabilities we've built over time, which allow us to deliver best-in-class customer, employee and franchisee experiences.

Turning to Slide 5. We'll take a look at our fiscal year 2025 performance compared to our updated guidance from August. Net revenues and system-wide same-store sales growth came in at the midpoint of the guidance range while adjusted EBITDA landed above the midpoint. System-wide store additions of 170 demonstrate meaningful progress in new franchise store growth. They added 71 net new stores and 104 total stores this year, including transfers. Adjusted EPS came in at the low end of the range at $1.59 per share and our capital expenditures were above the range, driven by the timing and mix of new store additions at the end of the year. Overall, we're pleased with our fiscal year 2025 results and the continued growth of our business.

Now I'd like to provide an update on the progress we've made against our strategic priorities this year. Our strategic priorities remain the same: first, drive the full potential of our core business. We are the retail leader in automotive preventative maintenance services and will continue to drive transaction and ticket growth with increased store level efficiency.

Second, deliver sustainable network growth. We'll continue to extend our reach to more customers across North America, and we'll do that in a way that maximizes return on invested capital. And last, we will continue to innovate to meet the evolving needs of our customers and the car park.

We made very good progress in fiscal 2025 to drive the full potential of our core business and we continue to believe we have a lot more opportunity in front of us. This past year, we saw strong same-store sales growth with a healthy balance from transaction and ticket. Transaction growth continued across the network, including in our mature store base. We also saw ticket growth across the network with contributions from premiumization, net pricing and increased [ N OCR ] penetration.

Our efficiency initiatives within company-operated stores in fiscal 2025 included a continued focus on labor productivity. Workday implementation, combined with scheduling process improvements already underway, drove meaningful efficiencies in our largest cost category. As of Q4, all U.S. company-owned stores have migrated to use Workday's forecasting and automated scheduling tools that enable our field leadership to more easily monitor and optimize schedules to match both team member availability and experience with expected customer demand.

We recently spent time with both our operations leadership team and our franchise partners across the U.S. and Canada. We spent time celebrating our accomplishments in 2025 and getting focused on 2026. Our core business remains focused on 4 key things: one, consistent process execution. Our technology-enabled SuperPro process earns a 4.7-star rating from customers, and this builds loyalty.

Two, increased store efficiency by leveraging fully the work started in FY '25 in both labor and store level expense management. Three, enhanced return on marketing spend as we gain benefits from our network scale and reach. And four, continued team member retention to help improve store throughput and [ NOCR ] penetration.

As it relates to network growth, we closed fiscal 2025 with a strong Q4, delivering 56 net new system-wide stores in the quarter and bringing our total to 170 additions for the year. Over 60% of this year's new stores across the system were ground-up builds, a testament to our real estate analytics capabilities and our proven playbook for successfully opened new construction sites.

Franchise ground-ups drove much of the increase year-over-year as they had 41 greenfield additions this year. At the end of 2024 and beginning of fiscal 2025, we refranchised 3 markets: Denver, Las Vegas and West Texas. Our franchise partners for these markets committed to significant development agreements to grow the market by 2x to 3x in size. Since the closing of the refranchising transactions, we have seen the new store additions in these markets grow by more than 150% over prior year, and these franchise partners' pipelines continue to grow. And our new store growth will continue to ramp in FY '26 with continued momentum across our franchise partners.

Fiscal '26 will also include the expected closing of the Breeze Autocare acquisition. As we shared previously, bringing a year's worth of store growth in one step, will allow us to leverage many of the investments we've already put in place across a larger store base, including retail specific technology investments and fleet sales expansion.

At the end of last week, we received regulatory clearance from the FTC and plan to close the transaction on December 1. As part of the agreement with the FTC, we will divest 45 stores bringing the net additions to 162. Although we had to reduce the number of store additions in order to gain FTC approval, we believe this is still a good use of capital and will create long-term shareholder value.

Turning to the third priority. Fleet growth continues to outpace the growth in our consumer business. Our fleet customers tell us that they value the speed and convenience of our service to maximize the productivity of their assets. This year, we've increased our work with our franchise partners to grow our fleet business across their geographies. Early days, but significant opportunity for growth.

Before I turn it over to Kevin to discuss our financial results in more detail, I want to invite you to a planned investor update on December 11. We'll introduce you to more of our management team and provide a deeper look at our strategic priorities, long-term growth targets and the initiatives driving our business forward. Now I'll turn it over to Kevin.

Thanks, Lori. Let's turn to Slide 8 and start with a more detailed look at our financial results.

For the fourth quarter, net sales grew to $454 million, increasing 4% on a reported basis and 10% when adjusted for the impacts of refranchising. System wide same-store sales increased 6%, with about 1/3 coming from transaction growth. We do continue to see transaction growth across the portfolio.

For the fiscal year, net sales grew 12% when adjusted for the impacts of refranchising to $1.7 billion. System wide same-store sales grew 6.1% and over 13% on a 2-year stack. For the year, transaction growth accounted for just over 1/3 of the comp also across the portfolio. On the ticket side, we saw contributions from all 3 levers: premiumization, net price and [ NOCR ] service penetration.

Slide 9 looks at the other drivers of the financial results for the quarter. The gross margin rate of 39.1% was flat year-over-year driven by leverage at the labor line of about 120 basis points, offset by increased product costs. We continue to drive operating leverage, generating a 60 basis point year-over-year improvement excluding increased depreciation expense.

SG&A as a percentage of sales increased 40 basis points year-over-year to 18.2%. Sequentially, SG&A as a percentage of sales decreased 30 basis points as we continue to see our SG&A growth to moderate. Overall, adjusted EBITDA margin increased 20 basis points to 28.7%.

Turning to the next slide, we'll take a look at the financial drivers for the full fiscal year. We'll start with gross margin. We are very pleased with the benefit coming from labor leverage for the year, which drove 90 basis points of margin expansion.

Operating leverage improved 70 basis points year-over-year, excluding increased depreciation expense. SG&A as a percentage of net sales increased 80 basis points from the investments in both teams and technology to support growth and provide a better operational foundation for the future. As we look forward to fiscal 2026 we will continue to invest in growth, but do continue to expect SG&A growth to moderate. Adjusted EBITDA margin was flat with SG&A investments offsetting gross margin expansion.

On Slide 11, a we'll take a look at our overall profitability for the year adjusted for refranchising. In fiscal 2025, adjusted EBITDA increased 11%. Adjusted net income increased 6% impacted by increased new store depreciation. On a recast basis, adjusted EPS increased 8%.

Turning to Slide 12. We'll take a look at the details of our balance sheet and cash flow and cover the Breeze acquisition. We ended fiscal 2025 with a leverage ratio of 3.4x on a rating agency adjusted basis. Our capital allocation priorities have not changed. First, fund growth with a focus on strong returns on invested capital; second, to stay within our target leverage ratio and third, to use share repurchase as a way to return value to shareholders.

Turning to cash. Our CapEx for the year was $259 million, about 70% of the spend was for new store additions. Now let's take a look at some details of the Breeze acquisition. As Lori mentioned, we plan to close on December 1. We will acquire 162 stores following the divestitures required by the FTC for a net purchase price of $593 million, subject to adjustments for acquisitions and sale-leaseback transactions completed by Breeze since signing and customary closing adjustments.

We will fund the purchase price entirely with a newly issued $740 million Term Loan B. The excess proceeds will initially be used to pay down the revolving credit facility. The additional debt will increase our leverage ratio to approximately 4.2x. We expect it to take approximately 18 to 24 months to return to the target leverage ratio through a combination of EBITDA growth and debt reduction.

Now let's take a look at our outlook for fiscal year '26 on the next slide. These amounts include the Breeze acquisition, which makes some of the ranges broader than they might normally be. We expect system wide same-store sales growth of 4% to 6% and overall network growth of 330 to 360 new stores. The low end of this range reflects the need to carefully consider our overall capacity in light of the Breeze acquisition.

At the midpoint, we expect sales to grow by about 20%, with EBITDA growth of approximately 15%. Including Breeze and our planned company store growth, we expect fiscal 2026 CapEx of $250 million to $280 million. We expect adjusted EPS of $1.60 to $1.70 per share. At the midpoint, this represents a 4% growth over the prior year, including an impact of approximately $0.20 per share related to interest expense for the acquisition. Similar to prior years, we anticipate approximately 40% to 45% of adjusted EBITDA dollars to come in the front half of the year.

As we move into fiscal 2026, we are excited by the opportunities in front of us and are confident in our ability to execute. We look forward to sharing more details about our long-term outlook at our planned investor update on December 11. I'll now turn it back over to Lori to wrap up.

Thanks, Kevin. As we wrap up this fiscal year, I want to again thank our team and our franchise partners. Their dedication to delivering a quick, easy and trusted experience to our guests, remains a key driver of our long-term growth.

In fiscal year 2025, we delivered compelling growth and financial results while making investments to support our future. The fiscal year 2026 guidance Kevin laid out underscores our commitment to drive continued financial performance. Our resilient and durable business model positions us for ongoing growth in fiscal year '26 and beyond. We look forward to sharing more with you at our planned investor update. With that, I'll turn it over to Elizabeth to begin Q&A.

Thanks, Lori. Before we start the Q&A, I'd like to remind everyone to limit your questions to one and a follow-up so that we can get to everyone on the line. With that, can the operator please open the line.

[Operator Instructions]. Our first question comes from Justin Kleber from Baird.

Just a few on the outlook. I was hoping you could maybe frame the revenue and EBITDA contribution from Breeze just so we can understand the core Valvoline business is expected to perform? And then a follow-up related to the guidance. Just what's driving the decline in EBITDA margins in fiscal '26? It looks like about 100 basis points. How much of that is kind of core Valvoline versus simply including the Breeze business in your consolidated results?

Yes, I'll take that one. First, we do expect the core business to continue to perform well in fiscal '26, really no change in that. In terms of how we considered what to include for the Breeze transaction. It's still early days. We haven't closed on the deal yet. We have received recent financial updates on how the business is doing. And as part of the conclusion of the FTC second request process, we're getting reengaged with the team.

And we tried to take all of that into account and be measured in our approach in terms of what we included in the outlook for Breeze. And that's partly why some of the ranges are admittedly a little bit broader than we would normally make them without the inclusion of an acquisition like this. So we're not prepared at this point to really talk specifically about Breeze in terms of what exactly is included in there. But rest assured, we did take a measured approach and consider that very carefully as we included Breeze to the end of the numbers for the 10 months we expect to own that business in fiscal '26.

Okay. And then just as it relates to the acquisition, I'm not sure how much you could share given you haven't closed the deal yet, but it looks like the divested locations, right? If we compare the net purchase price relative to what was discussed back in February, it seems like you're divesting those locations for less than $1 million a box and you're acquiring the remaining stores at close to $4 million a box. So can you just help us reconcile those 2 numbers? And maybe why the divested locations look like you're selling them at such a lower price relative to what you're buying the remaining outlets for.

Yes. The FTC, when they do their review, they really were looking at maintaining a level of competition across all the markets that oil changers is located. And they defined competition significantly more narrowly than what we do and what we see when we open stores or when we operate stores in the market.

However, we had the process requires us to go out and divest the 45 stores that have been agreed to with the FTC and so we conducted that process. It was a competitive process. And that's where the outcome is and where the numbers that Kevin shared where the net acquisition price is $593 million, which reflects the sale price of the locations that we have to divest.

I will just underscore what I said in my prepared remarks is that we know where the stores are that we will be integrating them into our portfolio. We've assessed them with our real estate analytics capability. And when you take that analysis with our proven playbook around integrating acquisitions, which we have been doing pretty much since we started the business, we have confidence that we're going to deliver long-term shareholder returns.

At the outset, as Kevin mentioned, we do have the latest information through August of the performance of the business that we will be integrating, but we have not been able to spend time and detail with their leadership team because of the FTC review. So as Kevin mentioned, we've tried to incorporate what we know and what we believe we can accomplish in this fiscal year with the new assets that we'll be adding to our portfolio, but we have been appropriately measured in how we incorporated them in the ranges that we're providing.

Our next question comes from Simeon Gutman from Morgan Stanley.

Lori, my question is we have, I guess, a slightly lower outlook or algo than what we used to do. And frankly, I think the market has been hoping to have something that's like a little bit more conservative. So we are getting together, it sounds like in a few weeks.

So can you talk about expectations for the core business. It sounds like nothing is changing, I want to confirm. But how do you think about the core business? Is the algo change reflective of anything structural or tactical or it is just being prudent in setting up a reasonable range for the business to grow off of?

Yes. Thanks, Simeon. The same-store sales guide has really been the material difference in our longer-term algorithm in our current year algorithm. And as we look at FY '26, we're very confident in the 4% to 6% range. We will be sharing more of the longer-term algorithm, probably more medium term, but the fundamentals of our business remain incredibly strong.

And when you compare it to where we were in 2022, the material difference is twofold. One, is the percentage of new stores within our network. Obviously, new store ramping contributes to higher same-store sales for those stores than our mature stores. And so as we continue to scale our business and the new stores become a smaller part of the overall same-store sales, you would expect that to naturally come down.

The second is the interest in the inflation environment. When we were coming off of the COVID era, there was significant inflation that was running through our same-store sales comp, and we're back down to a more moderate normal level. Now obviously, that could change. We don't expect it to change. But we expect that, that changes, it will only go up. So I think we feel very good about the 4% to 6% guide. I think we'll be able to share our longer-term outlook in December, and we'll be able to break down why we have confidence in that longer perspective.

And then a follow-up. Can we talk about the, I guess, the number of stores in the market and expansion by you and others. It looks like capacity or number of oil changes is increasing steadily. Curious how you look at that, how your own cannibalization rates look? And if there are any markets that you are not going to enter or you have thinking twice because a competitor is already well positioned there.

Yes. Simeon, we look at every new unit, both in terms of the demographics of that geographic areas, the travel patterns, the household growth, the income and what's been happening with the income levels. We look at broad competition, not just [ Quick Lube ] competition, but others that are competing for customers' preventative maintenance business. And we look at where our stores are in proximity with any location.

We know that customers will seek out quick, easy, trusted service in the most convenient locations. So we know when we add a store, we're pretty high precision around knowing what transfers will happen from our existing stores. And we also know what the impact of potential competitive entry are. Sometimes we have a pretty long lead time with that with construction timing and sometimes a little less so if it's an acquisition.

But what's been happening in the market is not changing. So the competitive environment that we operate has been relatively consistent. The competitive -- it's very fragmented. There's still a significant number of customers that are not going to the most convenient, stay in your car, quick easy trusted service. So whenever we add a site, 70% or more of the customers are coming from outside our specific category, our specific channel.

But we see normal behaviors from our competitors as it relates to adding sites. And we know what the impact is in the short term. They typically have high promotions, and we may have customers that go and try it in order to take advantage of a new store opening promotion but then they return. They return back to their trusted service provider. So there's really not any changes that we're seeing. And there are no margins we stay away from because of the competitive environment.

Again, the [ Quick Lube ] channel has such a small percentage of the preventative maintenance market, but there is a lot of share to be captured by the category, and we have been capturing that share right along with it or more so.

Our next question comes from Steven Zaccone from Citi.

Can you help us think through the margin outlook for '26 with the new 4 to 6 same-store sales guidance? There was some prior commentary that you were hopeful to see SG&A leverage at some point in '26. So how does that stack up with the new guidance?

I'll take that one. And we were really pleased with how we continue to see SG&A growth improvement of our SG&A growth moderate in Q4, continue to moderate versus what we saw in Q3. And that's -- we think that's a very good sign. We're going to continue to invest in the growth of the business. But as we said before, we do expect to return to leverage in fiscal '26. I think a comment though worth making is that with the inclusion of the Breeze acquisition in the numbers, that's going to be more difficult to tease out, and we'll continue to provide color around that.

As we've said before, we would expect to lap the technology investments that we've made sometime in Q1, again, while continuing to invest in the growth of the overall business. So we do see some opportunities there. I think from a gross margin perspective, we continue to see opportunities, good progress, great progress really has been made from a labor perspective. But we continue to see room to improve in the overall

[Audio Gap]

store operating profit as well. And we're focused on that. We're going to continue to work that fiscal '26 and beyond as we operate the business and find new ways to improve the profitability.

The key thing, Steve, just to add on to what Kevin -- sorry. The key thing to add on to what Kevin is saying is whenever we do acquisitions or start new stores, it typically has a lower margin 4-wall EBITDA and any new store we acquire or we build, and that ramps over time. In this case, we are adding 162 stores that have a lower margin profile than our existing base.

And so as those stores as we can apply our playbook, you should fully expect that margin improvement to happen. We're just taking on a significant increase in new stores in the overall mix. But from an SG&A standpoint, we will be levering relative to the business without the Breeze edition, and we'll work through continuing to leverage SG&A as we integrate.

Okay. That's helpful. The follow-up I had is just on the same-store sales guidance last year, you faced a difficult compare in the first quarter. So if we think about the quarterly cadence of comps, is there anything to be mindful of below or above that guidance range as we go each quarter?

As we look at it based upon our current view of the fiscal year, we would expect the same-store sales growth to be pretty consistent across all 4 quarters. We don't really see any reason for there to be much variance around that throughout the course of the year.

Obviously, weather can be an impact if it happens, but typically, that just changes timing. It doesn't necessarily change what our guests actually do. As we look at where we are, obviously, it's still relatively early in we're seeing that play out. So far, the core business is operating as we would expect it to in Q1. So that does help support the commentary, I think.

Our next question comes from Mark Jordan from Goldman Sachs.

Looking forward to the investor update. For the same-store sales guidance, you've gone to a little bit, but how do you build to that 4% to 6%? What's the mix like between traffic and ticket? Is it more ticket heavy? And how should we think about the mix of franchise versus company operated?

Yes, I'll try to give you a little bit of color on that. As we look at both Q4 and the year, we had a nice balance between transactions and ticket across the system. Q4, it was about 1/3. The same-store sales growth was about 1/3 transaction and 2/3 ticket. And again, that's consistent with both company and franchise. As you look at the full year, very similar. Again, the core business is operating and performing as we'd expect it to. And so as we look at fiscal '26 on an overall basis, I wouldn't really expect that to change materially over the course of the year for the business as we're operating it today.

Okay. Perfect. And then just one quick follow-up, I guess, kind of on your current trends, health of the consumer, you're seeing, we've heard a little bit about concerns around deferral and non-oil change services or just an extension oil change intervals. Is there anything you're seeing there in your current business?

Yes. Thanks, Mark. Automotive maintenance is a nondiscretionary spend for consumers and the demand for our services has been very resilient over this more uncertain macro environment. We continue to see the same dynamics. So we are not seeing customers trade down or defer. Premiumization is up across all customer types, which is a reflection of the car park. And we saw growth in customers across all levels of household income.

I think the interesting thing when we look at the past 5 years, intervals between service have been largely stable. Although in FY '25, we saw slightly less days and miles between oil changes for our customers. Again, we've been talking about car maintenance in almost like a peace of mind becomes a seasonal or time of year sort of consideration, less than an exact number of miles.

And so what we've seen in FY '25 is slightly less days in miles between oil changes. No, we are not expecting that to hold or continue to go down. We would expect for the days and miles to be more consistent. But in '25, it was interesting that we did see a shortening of the cycle.

Our next question comes from Chris O'Cull from Stifel.

Great. This is Patrick on for Chris. I had a quick follow-up on the comp guidance. Lori, the company guided to 4% to 6% this year. And I'm just curious what factors you're seeing in the business that could get you to the lower end of that range, given kind of where you exited 4Q.

Yes. I think -- what we've talked about is at the low end, we would assume fairly more even balanced between transaction and ticket and on the high end, it might be a little bit more weighted to ticket. So some of the things that would factor in is the [ NOCR ] improvement year-over-year.

We've got a few things that our teams are executing against, but that would sort of -- depending on how that plays out, that would get us to the higher end of the range, just specifically on [ NOCR]. And then there is some -- we are always doing pricing tests. So again, assuming that our pricing tests show both from a competitive positioning as well as elasticity of demand that we would move forward with some of the pricing that we have planned and that our franchisees would do the same. Those are the 2 things that I think pull you up to the high end of the range, but the other fundamentals are consistent across the low and bottom end.

Got it. That's helpful. And then can you provide an update on the company's efforts to improve new unit build costs? And just maybe help us understand how much savings you think you can achieve relative to current levels? And is there any other opportunity you see in terms of improving the new unit economics outside of improving the build costs?

Yes, great question. And this is something that I know we'll spend more time on in December because it has been an area of focus for us for the past 2 years. When you look at our new unit costs relative to 2 years ago, we've actually reduced those costs by about 10% in this year. And we're fairly early in our journey. Some of the things that we've done, like we've got -- I talked about it in the last quarter, we had a new prototype design, which would reduce the cost of the building.

We had bids out the last time we spoke, and we just opened our first new prototype design in June, which does deliver nice savings relative to the old building design. And so that was the first one in June. So when you look at where we will be in this year, those factor into our CapEx numbers, and we're in the early days.

There's still additional work that we're doing and so we look forward to sharing more of those plans and the impact that, that will have on CapEx. I will just state though that when we look at returns, we've always talked about 30% cash-on-cash returns and/or mid- to high teens IRR on a new unit. Even through the period of our CapEx or new unit capital costs going up, our returns have stayed high and improved in many cases.

And this is because the fundamentals of the core business have gotten stronger. So each box is returning a higher 4-wall EBITDA margin again, over a slightly elevated CapEx that still delivered a really fantastic return for both us and franchisees. Now that will continue to improve as that denominator starts to get more optimized. So really excited to share more information on that in December.

The only thing I would add to that is there's also the aspect of converting acquired stores. There's been a lot of focus also on really sharpening the pencil around what we spend when we buy a store, which we typically do buy 30 to 40 stores in a normal year. Obviously, we'll be taking that into consideration as we think through the Breeze stores as well once that deal is closed.

Our next question comes from Peter Keith from Piper Sandler.

Congratulations on getting the Breeze acquisition done. Just on a separate topic, I wanted to dig into a little bit on the higher product cost impact. It looked pretty impactful at around 120 basis point drag for the quarter. Could you give a little more detail on what this was and if we're going to see this headwind continue or if there's any potential offsets as we step into the new fiscal year?

Yes. As we look at product costs, there are several components to that. As we all know, crude oil pricing continues to be down versus prior year. And typically, we would expect to see base oil pricing come down as well. That typically takes some time, 3 or 4 months is not uncommon for that curve to catch up. Unfortunately, we really haven't seen much there yet.

And in the case of supply chain costs, we continue to see inflation there which does create a drag on the product cost side. When base oil pricing does decline and we would expect it to at some point. We would see some benefit from that as well as our franchise partners and since our franchise partners will benefit from this as well as we pass those savings along to them.

Another component to this that has also been a drag and, I would say, marginally gotten worse, would be used oil pricing. It's also a component of product costs. Historically, it's been more of an offset as we sell the used oil. Used oil prices do tend to move with crude oil pricing, and that has been the case even more so than the case. I would say, to the extreme, we've seen used oil pricing come down considerably to the point that some providers out there are starting to charge customers to pick up used oil versus actually buying that.

So just a function of the market dynamics as crude has gone down and stayed down, there's just less demand on the used oil side and so it becomes more of a drag. But we've seen an outsized impact to that as well. We are not currently paying providers to pick up our oil, but we're also not realizing very much in terms of the sale of our used oil either. And we expect to see that trend continue for the time being and would expect to see that in fiscal '26. And we've included that in the consideration around our outlook as well.

Okay. All right. That's helpful. And then I guess a simplistic question on optics. So the comp was quite good for the quarter, EBITDA at the high end and then the EPS at the low end. So I guess optics do matter. You did miss the EPS consensus estimates a bit. To me, it looks like you had a $0.02 headwind from higher interest expense. Maybe you can comment if -- why did interest expense jump up so much? And if there's anything in your model that maybe caused the drag on EPS?

Yes, there were a couple of things in there. Depreciation in the quarter was a little higher than we expected because of the timing and mix of new store additions in the quarter. So that's part of it. The effective tax rate is also just a bit higher than what we expected as well. And I would say probably from an interest perspective, I'd say net interest is probably a little bit higher, meaning interest income that we would have expected to see was a bit lower as well. So it's really pieces of all of that, that I would say, contributed to us landing at the bottom end of the range for the full year.

This marks the end of our Q&A session for today. So I'll hand back to Lori for closing remarks.

Well, thank you, everyone, for joining and for the questions. As we step back and look at FY '25, we feel really good about what we delivered from compelling growth and financial results. And as we look at FY '26, we know there's more to come as we continue to drive the core business and moderate the G&A growth and spend in our existing business.

Now with Breeze, while we're adding 162 stores to our network, this is not something that is new to us. We have been doing bolt-on acquisitions for a long time. This is obviously larger scale, but we have the playbook and the team ready, and we will -- following the close on December 1, we'll start our integration process. And I feel really good about the Breeze team and again, the strategic rationale for that acquisition remains the same.

When we closed the transaction, Valvoline will be the category leader in store count, revenue and transactions, both on an absolute and an average per store basis. We'll have over 2,300 -- well over 2,300 stores, which we can leverage our investments against. So using our playbook, we'll bring these stores into the portfolio, and we do see significant growth opportunities ahead.

Our resilient business model remains unchanged, and it will continue to position us for momentum in FY '26 and beyond. So I want to thank you all again for joining us today, and I look forward to seeing you either virtually or in person at our investor update in December. Thanks all.

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

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...

No. That sounds good.

Perfect. You mentioned greeting customers while they're out in the queue. Is that one of the things where if someone sees 3 or 4 cars ahead of them, you can kind of get ahead of that when they might turn around and say, "I thought it was going to be a quicker trip." You can get them onboarded, tell them what they need, then you'll retain them faster.

Correct. So we learn a lot from quick service drive-thru. And the reality is, when you see those brands like Chick-fil-A, that have long lines, they've moved their people, or In-N-Out Burger, they move their people out well in advance of the podium, the menu board and the traditional ordering point. And the reason is because they get the order in and started while the car is moving around. And that's exactly what we do in our busiest stores. We call it an outback process, where we go out back and greet the customer as they drive in and we start the service on the lot.

Now when the lines get really long, the benefit of that is you could have a customer drive up and be ready to drive off, you could intercept, you can offer them some kind of incentive to come back at another time. So you've had that interaction. They give them a reason to come back versus just drive off. We do have a few stores that are approximate with one another, that they even know like I can direct them to the other store, which typically is less busy than this one. So they do work together as teams as well to serve as many guests as we can.

Perfect. Perfect. And then on the flip side of transactions, you have ticket. It's been a strong driver of same-store sales in recent years. But as we think about ticket, there's many more drivers except just net price. So can you talk about the various drivers there? And maybe just in terms of price, how do you approach price relative to the broader market?

Sure. Net price is an important part of ticket. And I think it's important to think of it as net price because there's the posted price and then there's discounting that we do. And I'll give a shout out to our marketing process and sophistication again here because we're much better able today based on the changes that have been made to how we do our marketing, where marketing resides and the cloud customer information in the cloud. We are able to be much more targeted in terms of the discounting that we offer so that it's much closer to what the customer needs versus just assuming a number. And so we found that to be helpful. We think that's going to continue to be a source of improvement.

On an overall basis, we're constantly in the market doing pricing tests. We do benchmarking as well, both for oil change and non-oil change services. But we're constantly in the market doing price test to understand what's possible, what the market will bear, what we can do, where we are, et cetera. And those are just part of the process that we execute from a price perspective.

Premiumization. We've talked about it a lot. 80% or so of the transactions that we do involve a premium lubricant. That's a semisynthetic or a full synthetic lubricant. And today, that's, call it, roughly split about 50-50 between those 2 with the remaining around 20% being more conventional oil changes.

There's a natural tailwind. And Lori talked about the evolution of the car parc. That's going to continue. More OEMs are requiring more premium lubricants, and we're benefiting from that today. We'll continue to benefit from it in the future. And you think of the 80% as, okay, so you're here and you've got this much to grow. Well, even within the premium piece, given that it's more like a 50-50 split between semi and full over time, we will see more vehicles, more OEMs move up the scale to requiring a full synthetic. And so even the semisynthetic that we do today, we will continue to see improvement from there.

Another piece of the equation is we have top quartile stores in our system, and we have stores that are not top quartile. So we continue to see the top quartile stores get better. And we spend a lot of time and attention moving the lower quartile stores closer to the middle. So...

I think that's on non-oil change revenue services.

That's right. Thank you, Lori. Yes, I got into the next part of it, which is an OCR, another important aspect to ticket. And it's an area that's been focused on a lot and we've had a lot of success, but there's still -- there's room for penetration across the system, improved penetration. And again, the quartiling, the stores that are at the lower end of the spectrum, moving them up. And so that all contributes to improved ticket over the course of time. We feel like there continues to be a good bit of runway there.

And in terms of premiumization, the big thing, as you both mentioned, is the OEM requirements, which obviously is just very naturally going to flow through. But I think there's also the trade-up opportunity where you see a higher mileage vehicle come in, maybe the vehicle requires conventional oil. But because it's a higher mileage, older vehicle, you can trade them up because the synthetic blend or fully synthetic is more appropriate for them to have them last longer. When that happens, do you ever see them trade down? Or is that trade up very sticky?

Yes. Normally, people pick a lubricant type and then they maintain that choice until the vehicle hits a milestone or they change vehicles. So customers are -- tend to be very consistent in that.

Is there an education component though, if they're sticky on conventional for price reasons and you say, well, it's better for your vehicle?

There is, and we lay out the options for the guests when they come in. And based on the mileage, the person in the window and if they know the customer, a lot of times, we have customers who've been with us for a long time. And they understand perhaps the price sensitivity of those customers. But if they don't, the technology which guides the experience and helps the adviser, the tech in the window with the customer really talk through their options and what's the merit of each of those options. We never -- we really push our people not to oversell, but to let the transparency of what's on the screen and the information guide that discussion really to educate the customer.

Perfect. Okay. And then Kevin, you were touching on the non-oil change and the different quartiles that you have at the top and the bottom. What is the big driver there? What is the top quartile doing right? And what can the bottom quartile improve on? And my guess is this a lot to do with training and retention of employees.

Yes. It is. It is. And I think that's going to always be the case. I mean it's about making sure, first of all, that we have the right equipment in the stores to do all the services that we offer. It's about making sure that we have the techs trained to do those services. They understand how the equipment works if, in fact, other equipment is required. And then beyond that, it's the process, as Lori said, educate the customer about, in some cases, what the OEM recommends if it's an OEM service, like a differential service or a radiator flush or transmission fluid change, those sorts of things.

I think another important aspect of it is executing well, and there are different levels of execution across the system around things like what we call visuals. So there are the things that the customer can look at and know whether or not a service needs to be done. Are your wiper blades operating the way you would like for them to? If they're streaking and smearing, then perhaps it's done for a change. So that's something we would offer.

We do battery testing. And we do that every time. That's part of what we do, part of what the technician does. We show the customer the health of their battery. And oftentimes, it's perfectly healthy. Over the course of time that might change. And so by repetition, we help improve on and enhance that trusted aspect. Now we're not trying to sell you a battery. We're trying to show you whether or not your battery is healthy. And so over the course of time, once that battery goes from green to yellow or yellow to red, we'll tend to see uptake. It's an infrequent thing because batteries tend to last a long time. But again, it's just -- it's part of the overall process that helps enable that.

Air filters, whether it's the air filter under the hood or a cabin air filter. That's another part of the visual aspect. It's either dirty or it's not. It either has leaves in it or it doesn't. And usually, the customer will take the visual cue and make a decision around that. And for some of these services, which can be more expensive, much cheaper than what you would pay for, for them at a dealer, a customer will take time to think about that. And so I come back to marketing. We know that we've offered a service, perhaps the customer said, I'll think about it, so we'll follow up on that. And they may come back on an individual basis specifically for that service or they may do it the next time they get their oil changed. But we will set that up as a reminder for them that, "Hey, we talk to you about this, and you might want to consider getting this done."

Perfect. Perfect. And then I think moving to fleet. I think that's an underappreciation opportunity for growth in the business, right, both in terms of transactions and ticket. Can you just guys give a broader overview of your fleet business? Maybe how the average fleet transaction differs from retail and then what you're doing to grow that business?

Yes. So fleet is a very attractive business for us. It's less than 10% of our revenue today, but is growing and outpacing our consumer business. About 4 years ago or so, we actually really professionalized our approach to fleet business. So we treat it like a B2B customer. We deal with all sides of the fleets. We have national fleet accounts. We have regional accounts. And then we just have local, whether it's a landscaping company that has a few trucks. They could be one of our fleet customers.

And the reality is, is that we provide a program that allows the fleet manager to go into a system and basically tell us what services they want done and at what intervals, what lubricant type they want done in the vehicle and what visual services and what other maintenance items when they are due on what interval.

Most fleet managers are trying to ensure the safety of the vehicle because it's a business. And if they don't maintain the safety, then they have a liability. And also, they want to maintain the value of the asset to get as much productivity out of that asset as possible. So they are the least likely to defer. And what that means is the ticket tends to be about 20% higher.

We do offer discounts to our fleet based on the volume, but those discounts are not significant. They're not higher than our consumer discounts in general. But we also offer other services. So we provide them data on what services were done at what interval. We can set up consolidated billing, or we can take fleet cards. So we are very flexible based on how they want to do business, but the biggest added value is that they tell us what services they need. We don't have to contact them for approval and have the car sit in the bay longer. When it comes in and we scan them in, we know exactly what we need to do. We take care of business, so we get it back -- we get them back into business. And that is a huge value for our fleet customers.

Keeping the fleets running, keeping them in operation.

Keeping them productive, making money for their owner is really what we try to do.

Perfect. Perfect. And then I think the company has great white space opportunity targeting over 3,500 locations longer term. More recently, you brought on some newer franchise partners to help accelerate growth in that side of the business. And that remains in the early stages of their development. But can you talk about the progress you're making or they're making and how you incentivize them to grow?

Yes. About 3 years ago, we were pretty clear that we had a significant opportunity in our fleet -- in our franchise area to grow units and the penetration rate of the stores and the market share that we had in markets that were really franchisees were running had a lot of opportunities. So we put a fairly ambitious, but we felt very realistic goal to triple the number of new units from 50 to 150. And we were very clear on the approach we would take to get there.

First, we would really try to use all of the work we had been doing around real estate analytics and understanding the car parc demand and the returns for new stores, even when you're getting to a much higher market share, still very strong. We use all that information as well as the fact that we had interest from other parties to become franchisees to actually get our existing franchisees to commit to higher growth levels. And so we work to put new development agreements in place that would really get -- move the 50 to 100 over time. Now it does take time to build that pipeline. And so we're starting to see some of that growth now and it will continue. But that would get us to about 100, give or take.

We then said we would look to bring in new partners new partners and white space opportunities, new partners, maybe recapitalizing an existing franchisee who was at a later tenure in their career and wanting to cash out and bring new capital in to develop or take territory away and give it to someone else. And then we were open to refranchising, taking company markets that still had significant growth potential, where we were -- we didn't have a lot of stores, and there was still a lot more build out to do, and we didn't have our real estate team focused in those markets. And the reality is we've made progress on all of them.

So in the white space opportunities, we've welcomed at least 3 new partners to develop those areas. And they've already started. They've opened some units and their pipeline is building. We've had taken territory away from partners, again, with full communication around what it would take to keep that territory, but if they weren't willing to commit to the appropriate amount of capital that we would see that territory to new partners or help them bring in new capital partners into their business. And we've done that. Those are areas that weren't being developed and now are being developed at a much faster rate.

So in one of the partners we had, they developed 1 store every 2 years. They've already opened 3 this year. I think they have a couple more that may open before the end of the fiscal year. So to go from half a store a year to 5 in 1 year. Big, big change.

Hello, and welcome, everyone, to the Valvoline's Third Quarter Earnings Conference Call and Webcast. My name is Becky, and I'll be your operator today. [Operator Instructions]. I will now hand over to your host, Elizabeth Clevinger, with Investor Relations team to begin. Please go ahead.

Thanks. Good morning, and welcome to Valvoline Third Quarter Fiscal 2025 Conference Call and Webcast. This morning, Valvoline released results for the third quarter ended June 30, 2021. 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 the call is Lori Flees, our President and CEO; and Kevin Willis, 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.

The information provided is used by 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 Third Quarter highlights on Slide 3. We are pleased to have delivered strong sales, profit and store growth for the third quarter. System-wide sales increased 10% and to $890 million, and adjusted EBITDA increased 12%, considering the impact of refranchising. We delivered good same-store sales comps of 4.9%, including an 80 basis point impact for Easter, and we added 46 new stores in the quarter. As we continue to drive the full potential of the core business, we benefit from the resiliency of our customer demand.

We continue to see no evidence of customers trading down or delay services. In fact, the percentage of customers using our premium products grew both sequentially and year-over-year across the network. We are pleased to see continued transaction growth for our same-store base -- we also saw transaction growth in our mature store base for the quarter.

Our ticket growth was benefited by premiumization, net pricing and improvements in an OCR service penetration. While we had a good current result of 4.9%, we believe June, while positive, was impacted by a slower-than-normal start to the summer holidays. We remain confident in our same-store sales expectations for the full year and are narrowing our guidance range to 5.8% to 6.4%.

Our team continues to manage our cost of sales to deliver long-term margin expansion and enhance shareholder value. Labor improvement drove the gross margin rate expansion this quarter through better labor management, especially from enhanced scheduling practices. In Q2, we discussed the expected impact of tariffs in detail. While there continues to be uncertainty in the global vacations of any impact to our financials are minimal and unchanged.

As it relates to network growth, this quarter, we added 46 new stores, bringing our year-to-date total for gross store additions to 116, 114 net of the 2 closures in Q2. During Q3, we had a transfer of 6 stores from franchise to company ownership. This transfer was driven by strategic considerations to align markets and enable our franchise partners to concentrate their development efforts in markets where they are best positioned for growth.

The strong delivery of stores this quarter, along with the stores are in construction and in the acquisition pipeline gives us confidence in meeting our store addition targets for the year. We continue to track to the midpoint of the range, while recognizing consistent with what we shared last quarter that our pipeline is more back-end loaded this fiscal year.

We're pleased with the continued momentum of new store pipeline growth, including our recently refranchised markets. The progress of both our company and franchisee development teams reinforce our confidence in delivering our network growth targets and improving return on invested capital. I'd also like to give an update on the Brede transaction. We continue to work diligently with the FTC on a path to close this transaction.

This path to close could include a plan to divest certain stores subject to FTC approval, but we're still too early in the process to know the specifics, and there is uncertainty around the timing. We hope to close in late Q4 or early fiscal 2026 and we'll provide more information as soon as we're able.

Before handing it over to Kevin to review our financial results, I want to officially welcome him to his first Valvoline earnings call. As expected, is quickly getting up to speed on how Valvoline's business looks today, and I appreciate the strong financial expertise he brings to the team.

With that, I'll turn it over to Kevin.

Thanks, Lori. Glad to be with everyone day. Since joining us spend considerable time with our teams and on the road meeting with investors. This is a great company with a lot of growth opportunity to drive shareholder value, and I'm excited to be a part.

Let's turn to Slide 6 and take a more detailed look at our financial results for the third quarter. Net sales increased 4% on a reporting basis and 12% when adjusted for the impacts of refranchise. System-wide same-store sales increased 4.9% and 12% on a 2-year set. The majority of the comp growth for the quarter came from increased ticket with premiumization, net pricing and increased NOCR service penetration. Transactions also continue to grow. And without the Easter headwind, transactions would have contributed roughly a third income.

Similar to Q2, we're seeing stronger same-store sales growth from the franchise stores. Pricing actions taken by some of our large franchisees continue to be a key driver.

Turning to the next slide, we'll take a look at the financial drivers for the quarter. Gross margin rate increased 80 basis points year-over-year to 40.5%. This was primarily driven by labor leverage of more than 100 basis points, partially offset by increased depreciation from the addition of new stores for about 50 basis points. As Lori mentioned, we continue to improve our labor management through enhanced demand planning, which leads to improved schedule. SG&A as a percent of sales increased 80 basis points year-over-year to 18.5%, reflecting our previously discussed investments in technology infrastructure.

Our technology investments accounted for about 1/3 of the SG&A increase over prior year. Year-over-year, when adjusted for refranchising, SG&A increased generally in line with the sales increase. We expect year-over-year SG&A in fiscal year 2026. Sequentially, SG&A as a percentage of sales decreased 80 basis. On an absolute basis, sales growth outpaced SG&A growth in the quarter.

Adjusted EBITDA margin increased 30 basis points to 29.5%. On Slide 8, we'll take a look at overall profitability. Similar to the previous quarters this year, the refranchising transactions impact the comparisons to the prior year. We delivered strong profit growth with adjusted EBITDA of $130 million, a 12% increase over the prior year, considering the impact of refranchising and adjusted net income of $61 million. Adjusted EPS of 18%, considering the refranchising impact.

We finished the quarter with approximately $68 million in cash and the leverage ratio on a rating agency adjusted basis of 3.3x. Turning to Slide 9, you will see our updated outlook for the year. Across the board, we expect to fall within the prior outlook and have tightened to most ranges. Lori already covered same-store sales and network growth. Share repurchases are $60 million year-to-date having been paused following the Graves announcement. For sales at EPS we narrowed the ranges around the midpoint, and we raised the low end of the adjusted EBITDA range based on performance to date.

With that, I'll turn it back over to Lori. .

Thanks, Kevin. Before we wrap, I want to thank our 11,000-plus team members and our franchise partners whose hard work helped deliver the strong revenue and profit and store growth this quarter. We're grateful for their ongoing dedication as we are fully into the summer drag season. We feel good about where our performance will land for the year and are narrowing most of our guidance ranges. We have a resilient and durable business model that positions us well to deliver strong performance and long-term shareholder value.

Now I'll turn it back over to Elizabeth for Q&A.

[Operator Instructions] Before we start the Q&A, I want to remind everyone to limit your questions to 1 and one followup. Our first question comes from Mark Jordan from Goldman Sachs.

I guess as we think about going forward, your same-store sales growth guidance implies a pretty wide range of outcomes for 4Q. Can you talk about the different scenarios you see playing out there that might lead you to the high end and low end of the range.

Sure, Mark. First, just a little about the comp for the quarter. We're definitely pleased with the financial performance of the business in the quarter, good growth across the board for every key metric. We're happy about that. April and May performed in line with our expectations with good costs. As Lori mentioned, we did see a slow start in June or slower store to the summer holiday season. .

And that said, we did see consistent transaction growth across the entire system each month, including on our stores. Transaction growth accounted for about 25% of the comp. Going forward, and we've talked about this a fair bit. We expect to see a good impact and good growth, both in terms of transaction and ticket. As we look at Q4 we narrowed the range. And while you're right, the absolute math would imply a pretty wide range of outcomes. And we're pretty focused on the midpoint of that range, and that would be our overall expectation for the quarter.

Okay. Perfect. And then I think on -- transactions are 25% of the comp there. So 75% or so over ticket. Can you break out the drivers of the ticket, the magnitudes there NOCR, net pricing and premiumization. .

Yes. All were contributors to ticket in the quarter. We don't really break those out specifically in terms of exact numbers, but all were contributors in the quarter both for company stores as well as for franchise stores. So we were pleased with that. I would say, across the board on an overall basis. .

Our next question comes from Steven Zaccone from Citi.

I wanted to follow up on the previous question. Can you just help us understand a bit more maybe what you saw in June? Do you think it was weather? -- do you think it's some macro impact? And then just given the guidance for the fourth quarter, we can kind of do the range, what are you seeing thus far in July? Like have you seen a bit of an improvement versus what you saw in June?

Thanks, Steven, and overall, we feel June started a little slow relative to the summer holiday season. But when we step back, the resiliency of the customer base is still incredibly strong. We're not seeing customers trade down or defer service, but they're was some timing. And I think some of that could have been the mild weather in the rain. We typically see that just slide volume around. And I think that was a contributor for June. However, as we went into July, those not that weather went away completely.

But the high weather came back, I think the summer holiday season and the driving picked up, we saw good traffic. Obviously, we have some benefit in July because of CrowdStrike last year. So we have a bit of tailwind. But if we take that impact out, we feel really good around transaction performance as we move through the month of July, and we feel very good about the momentum of the business, which is why our guide and narrowing slightly up from the previous midpoint.

Okay. That's helpful detail. And then I'm going to ask the question just how should we start to think about same-store sales planning for next year, since you clearly have confidence you're going to be able to return to SG&A leverage. Maybe just help us think about the preliminary planning for same-store sales growth next year. .

Sure. Well, it's a bit too early to comment on fiscal '26. I can say that we and the entire team are engaged in and working on plans for the upcoming year, and we'll be excited to share those plans a little bit later at a more appropriate time. In terms of SG&A, we're definitely pleased that SG&A growth has moderated as we expected it to. And as we indicated in the comments, technology investments are mostly done, I would say, and accounted for about 1/3 of the year-over-year SG&A growth as we fully lap those investments, which should happen early in fiscal '26, we should expect SG&A leverage to return in 2026. .

And I'll just add -- I was just going to add to what Kevin said. The fundamentals of the business have not changed. We've been in talking about the same drivers here since I joined the company. And really, the only significant change is really the inflationary environment. And so the fundamentals that we're seeing around ticket contribution and having a healthy mix of that coming from ticket sorry, ticket and transaction on the ticket side from continued opportunities in NOCR, pricing and premiumization combined with the growth at our customer base, the fundamentals of our business haven't changed for the most part.

The biggest thing is the inflationary environment. So I think considering what we're seeing in the market today, which is just a continuation of credit tailwinds, great execution. I think you'll continue to see strong same-store sales growth from us and continuation of growing share.

Our next question is from Simeon Gutman from Morgan Stanley.

My first question on transactions and ticket on -- so this 1/3, 2/3, we've been, I think, in this mode for a bit. It used to be a little more balanced. So could it get to be more balanced and then getting to a slightly higher sustainable comp rate. Do you need the transactions to lift? And is that expected to happen? Or is this the new normal? .

I think as we see newer stores starting in tour, we will see transactions pick up. We do want to continue to work towards tracking on balance between ticket and transaction. As Lori indicated in the past few years, we've been in a very inflationary environment and by default, ticket has played a large role in comp. I think as we go forward and assuming a more moderate inflationary environment, we should see a more balanced, more balanced view in combination of ticket and transaction. That's our expectation. And again, it's maturing the existing network. It's working -- looking to our stores to continue to grow is growing the base footprint as well. .

And Simeon, I'd just say that adding to what Kevin is saying -- in this quarter, we did have the headwind of Easter, which impacts transactions. So at North of 25% of our comp being from transactions. When you take that out, it was significantly higher when you factor in the Easter flip. And we're consistent with what we've seen in the first half of the year. So we're not quite always sitting a 50-50 balance, and I think that's hard to strike exactly, but we would be hoping to be more in that balance range over time.

We do have some headwinds on the ticket side, which will continue in our favor. Premiumization is going to continue as we see the car park evolve and the number of cars where the OEM is recommending of both synthetic lubricant is growing. So we do have some tailwinds, which will continue to keep that ticket momentum strong. But again, I think we are getting to a much more balanced than what you've seen from the index over the last 3 years.

And then a follow-up and it's related. If you look at the immature stores that are ramping, the oil changes per day. So I guess that would be the transaction gauge. Those ramps are normal, below average, above average? How do you -- how would you characterize them? .

So Simeon, it's a great question, and it's something that we review on a regular basis, looking at what plans to be put in place for each of the stores that we put -- that we went to build to buy -- and are they on track? And the good news -- and by the way, we approved those based on the return on invested capital that we're going to -- that we expect to get. And again, there's incredible consistency around the performance of our new store ramps relative to that plan at the time you make the approvals. So we continue to see very good performance from our new store base and those stores are expected to return, again, mid- to high mid-teens in terms of return on invested capital. So still really positive performance from our new store base. .

Our next question comes from Mike Harrison from Seaport Research Partners.

On welcome to Kevin. Looking forward to working with you again. To the extent that average ticket is going up, I was hoping we could dig in a little bit on how much of that is pure pricing. Presumably, you guys are responding to some higher costs for parts or filters or maybe some increases in labor costs and trying to push pricing. You also noted some incremental pricing actions by your franchisees as well. So I was just wondering if you could give us any help around quantifying that pure pricing component of average ticket, really just trying to get a sense of how much pricing momentum could be reflected in average ticket into next year?

Sure, Mike. First off, I'll address the franchise question. We did have 1 large franchisee that made some price adjustments. We talked about that last quarter, that's continuing to impact the comp on the franchise side versus the company side. Over time, we'll lap that. But we do still see. I think as you look at the price portion of the equation from comp, where we see a lot of opportunities has been continued growth in premiumization as well as NOCR and NOCR has a lot of road to grow, both on an overall basis within company and system as well as improving the gap between our lower quartile performers in our system versus the higher quartile performers. .

In terms of price related to potential cost headwinds, we talked about tariff impact last quarter. Nothing's really changed there. And we did give -- given the indication of expected impact to operating costs based on the environment at the time, it hasn't changed all that much. And certainly, this is an industry that tends to take inflation, get inflation back via price, and that would be our expectation.

But in the end, the larger contributors -- larger contributors to ticket are going to be those actions that we take in the store from an execution perspective, around premiumization, which, again, car park impacts that and of course, NOCR with pricing just on an absolute basis being much smaller component typically.

Yes. I would just say like we've always talked about there being balanced across the 3. I think where tenants coming from is the car park evolution driving the premiumness and the NOCR penetration upside, it's certainly been strong contributors for us over the past 12 to 18 months. Pricing has been a contributor. And we continue to review our pricing and do pricing tests actively in the marketplace. And price was a very good contributor not out of line of the expectations that we talked about in our long-term algorithm minus significant inflation.

So we'll continue to look at our pricing. I do think we have taken at least 1 regional action relative to cost in that region, but that was not pervasive yet. So while in my comments, we talked about no significant tariff impacts as we have those, we will either find ways to mitigate them through other cost reductions or we will pass this through to consumer. But right now, we haven't taken pricing across the board to mitigate any new labor and/or product costs.

All right. Very helpful. And then I had a couple of questions related to acquisitions. I see that you acquired 8 stores in the quarter. Was that 1 transaction or multiple transactions. And I'm just hoping that maybe you can give us some color on what the pipeline of store acquisitions looks like -- it seems like maybe you're still moving forward on some of these smaller deals even with the Brede transaction kind of pending here. .

Yes. Great question, Mike. So during Q3, we purchased 6 stores from franchisees was 1 transaction. The transfer was driven by really us stepping back, looking at how the markets were aligned geographically as well as where the franchise partners' development efforts in markets we're best positioned. And this was a mutual decision between us and the franchisees that they actually wanted to focus their development in other areas.

And so got to a very good outcome to transition of stores to company ownership. They are in the Louisiana market. It's a market that we think there's a lot of opportunity. And we actually have company markets that are adjacent, so from a G&A standpoint, it's actually synergistic with the company side versus their -- it was isolated from the franchisees that is operating. And so we'll continue to I think look at -- they're really just small opportunities, and they'll go in both directions, but it will never be more than a handful of stores.

I think as it relates to our pipeline, we continue to have -- there are 4,000 independent operators. And there's always, from time to time independent players who want to make a transition, and they don't have -- they're not going to pass it out into the next generation. And they want to make sure their people are taking care of, so they look to companies like Valvoline who can step into that business, play them, pet a fair market price and take care of their people.

We continue to use that strategy the returns on invested capital for acquisitions are incredibly strong, and we have a playbook. So we know how to compete those stores. We continue to build our pipeline. The Breeze transaction is still pending, and we're still working hard toward it. But we continue to talk to the independent players that we've been talking to about their timing and where it makes sense for us to invest in growth and get a good return, we'll do that. .

All right. I did just want to clarify, though, there were 6 conversions from franchisees, but it looks like there were also 8 acquired stores. Was that 1 transaction or multiple.

Multiple -- sorry, like I was just focused on the transfers. There were multiple. Most of the acquisitions that we do now are majority of them are single store operators or a couple of store operators.

Our next question comes from Steve Shemesh from RBC Capital Markets. .

I wanted to ask 2 on Breeze, and I'll throw them both out there. First, -- the B stores do about $1 million in sales per store versus an average Valvoline about $1.5 million. So first 1 is, structurally, is there any reason for that gap -- and then secondly, as we think about integrating Breeze onto the platform, from an SG&A standpoint, we're lapping over the tech. We're talking about getting back to leverage, are there any costs associated with the deal that might throw a wrench in that plant?

Yes. Good question. Thanks for asking Steve. So first of all, when we look at the performance of the Breeze stores, they've been building that network relatively quickly. So the level of maturity of those stores varies. But given its size would be more heavily weighted to less mature stores. So that will obviously be an impact.

Second is the amount that is being invested in marketing and fleet activities is different. And that's because they're building a brand. While that brand has been in the marketplace for a long time as they expand geographically if they're not rightsizing the marketing and have the technology, the tools and the customer data and the things that we've invested in building over many years, it's going to take more time to build that volume across those basic stores.

So we think those are all contributors and it's part of the reason why the acquisition was attracted to us, and we believe that it will it will provide a very strong long-term shareholder value return. In terms of the cost -- the good side about the Breeze business is it actually operates very similarly to Valvoline. So these are pinned stores. They in the way their service menu is largely similar, although they don't provide all of the services that we do in our VIOC business.

So there's some upside there, too. But in terms of costs, we'll have the normal, we'll want to make sure we look at safety, but this is a team that focuses on our people. So we don't expect to have -- I'm sure there will be small surprises as we get the okay to move forward. But we don't see any major significant stumbling blocks or capital investments at this time and be where we are in the process.

Our next question comes from David Bellinger from Mizuho. .

I want to follow up on the franchise side. It seems like at least 1 of these large franchisees was taking more price. You spoke to that and maybe more price just across the board on the franchise platform. Can you speak to the magnitude of that differential versus company-owned? -- any consumer pushback in those markets? And if not, should the company owned pricing close that gap over the next several quarters? Is that an opportunity for the core company owned to push price a bit more forcefully going forward? .

Yes. Thanks, David, for the question. When we look at our franchisee pricing, some of that is geographically based. So we look at our franchisees that are -- a big portion of them are in the Northeast and in California. And so that does create some pricing differential, labor costs and rent expenses higher and it typically runs a higher ticket also because of the car park. So that is a difference. In this last year, our franchisees are independent price centers. So we do not tell them what they need to price.

They do their own market studies based on the markets that have evolved. And we had 1 fairly large franchisee who hired some new talent in their organization in the middle of last year and did some work and recognized that they were not priced with the market. They were below the market. And so they did adjust their pricing in the fall and it was across the board. And it was -- I wouldn't say massive price, but it was significant.

And they were not the only 1 to adjust price company, we had price adjustments and in other franchisees, they made price adjustments. But that 1 was an outbuyer and is creating the significant part of the difference in the pricing contribution to same-store sales between franchise and company.

Got it. And then just to pivot over to the tech investments. I think you mentioned 1/3 of the SG&A growth this quarter. that could equate to something like 20 to 30 basis point impact. Is that the right level of SG&A margin we should get back next year as we move behind this the smaller investment cycle within OpEx? Any way to frame what that potential could be into next year?

Yes. I think directionally, that's the right way to think about it. I think it's important to note that we would expect the leverage to improve throughout the course of the year. We do still have to lap some of those investments early in fiscal '26 that were done earlier in this fiscal year. So we'll see, I would say, less leverage early in the year and growing throughout the course of the year.

Again, the quantum is probably pretty close. But as we look forward, I think historically, based on sales growth, we've seen SG&A growth grow kind of high single digits to low. In the end, it's too early -- it's really too early to say what fiscal '26 is going to bring. But -- but directionally, as we see SG&A moderate this year, it would generally be our expectation to see leverage improve over the course .

Again, too early to actually size it at this stage of the game, and we'll provide you wrong then most likely in the next call. .

Our next question comes from Peter Keith from Piper Sandler.

Kevin, Elizabeth, Kevin, nice to see you. I wanted to ask about the labor leverage. You saw 100 basis points of gross margin benefit. So that was fairly impressive. You talked about taking advantage of new demand planning tools. So is there something unique to this quarter? Or is this some -- in the ballpark of the type of labor leverage you can see on a go-forward basis with similar comp performance? .

Yes. I think what's unique about this quarter is we're starting to see the impact of a lot of work that's happened over the course of prior quarters in terms of developing an approach and really driving overall better execution.

And I think another key aspect of this as part of the tech investment stack that we've done, was the implementation of Workday. As we continue to mature Workday, that should continue to provide us with opportunities to take a different look at how we're implementing labor across our store footprint, which should ultimately provide us with some opportunities to continue to improve that over the course of time.

And some of that demand planning that's done is more sophisticated. So really thinking about the level of technician that's required and the mix of technician skills, as you get more sophisticated in the tools, you can start to rightsize the wage rates that you need to cover the shift -- and I think our team has been working through some of that demand planning, which then allows for the better scheduling. .

So it's really just the continuation of some of the things we've talked about, but just getting more sophisticated based on the tools that we have exactly what Kevin said.

Okay. That sounds exciting. And then I guess with Kevin or Lori, so I don't know if it's a question for Lori or for Kevin, but I think a lot of investors have been eager to see if you're going to put in place a new long-term comp growth framework. Is that still the plan? And is that something maybe you're thinking about with the fiscal Q4 print?

Yes, absolutely. We continue to evaluate the market environment. I think at the beginning of this year, there was so much uncertainty around how the macro environment was going to progress. Things have certainly been more stable for us than what we might have anticipated, though there's still some uncertainty. We feel really good about the momentum of the business. Obviously, the inflationary environment still hold some uncertainty. And having Kevin on board really allows us to take a fresh perspective and figure out how we guide a long-term algorithm despite some of that uncertainty.

So really having him on board has been a great time to help us think through that. We are looking forward to sharing more at the right time and in the near future.

And from being relatively new to the new story or at least new to this version of the story, it has given me an opportunity to really step back and take more of a holistic look at the business and the company and the growth potential and really is a tremendous organization, a tremendous company -- and there's a lot of growth ahead for this organization. And we are working to really size that and get the algorithm right so we can communicate it and then very importantly deliver on it going forward. .

Our next question comes from Chris O'Cull from Stifel.

Thanks. Good morning, everyone. Lori, are you surprised that you may need to sell some of the Breeze shops to get approval, just given how fragmented the market is today? And does that influence your thinking about future opportunities, acquisition opportunities? .

So first of all, we'll just say the FTC is -- has a normal approach that's not unique to us that looks at competition in the market. Again, this is the first acquisition of any scale in any recent years that they looked at. So -- they really are looking to make sure that there's enough competition in the market to serve customers best. So I think their intentions are very consistent with where they have always focused.

It's just I think this is the first time it's been something in our space. In terms of the discussions are really ongoing, and we're working with the FTC, one of the path forward could be to sell a certain number of stores. We're obviously still working through those details. And I think it's a very destructive process.

Now -- we have to get the FTC to approve. And so there is a process of requirements of that. But I think I'm encouraged by the progress that we've made today, the level of engagement that we're having -- and ultimately, the path forward will -- assuming the FTC agrees, will be consistent with our strategy, will drive long-term shareholder value and have the benefit of extending our reach consistent with the overall growth strategy.

So as I mentioned, I think on 1 of the fire side chats, Were we surprised yet. But when you actually get into the conversation, we shouldn't have been surprised. And it certainly doesn't change our growth story and delay that we will grow going forward. We're not getting any indication that there will need to be a change in our strategy going forward.

And then -- do you see any -- I'm assuming you're going to be converting the brand to Valvoline. I'm just curious, do you see any risk in converting the brand of Valvoline, just given the equity, I'm sure that chain has in several other markets.

It's a great question. We're really focused on the FTC process to get to the closing of the transaction. And that has actually limited some of the discussion that we've had with Eric and his team. What we absolutely recognize that there is a loyalty that has been built up across that chain. -- not just with customers, but with the people. And at the end of the day, the people are what driving the experience for those customers.

So we absolutely have to be thoughtful around how we integrate, but that's not new for us. So we as was mentioned in the previous question, we acquire independent operators and have acquired previous chains. And so really thinking through how we make those conversions is something that we have experience in, and it's something that we work with the teams that will be coming on board with our company. And so I feel very good about how that can progress given our experience. But obviously, every situation is unique.

Our next question comes from Justin Kleber from Baird.

Wanted to follow up on the tech spend. just given investors have been so focused on the cost and the deleverage in the model and not as much on what the paybacks are. So nice to see the labor leverage showing up in margin. Can you remind us some of the other benefits or efficiencies you expect to realize from all these tech investments? .

Yes. I think 1 of the more obvious is moving a lot of information, both information that we generate internally as well as as external information to cloud-based platforms so that we can make more real-time decisions around how and when we interact with our guests, both existing and potential. .

We've already seen some advantage come from that as well, and we would expect to see that grow into the future. And I don't want to imply that there will be no tech investment going forward, because there always is. And I think for us, what's going to be really critical is developing those business cases that will give us clarity and confidence in our ability to generate a strong return from those investments. As we debate and consider them internally and then ultimately execute on. So it's actually a pretty exciting opportunity for us going forward. Both with what we've done ready as well as some of the things that we could certainly do in the future.

And I'll just tell on what Kevin said because I couldn't be more passionate about the opportunity that's in front of us. So -- when you think about the ERP and the HRIS, we talked about HRIS in terms of even some of the early wins on labor and then there's more opportunity there. That comes from the tech investment and how we both combine the tech as well as the employee experience together in a way that drives that kind of benefit.

On the ERP, we know that there is automation and more retail-centric capabilities that the company had not had before, that will make us more efficient on the G&A side over time as we scale. Kevin rightly pointed out, as we move things to the cloud like we've done with our customer data, it allows our marketing team to be more sophisticated, more real-time oriented and shifting marketing spend between different channels, which just makes our cost of customer acquisition and our life cycle management relationship building with our customers more efficient.

And then as we focus on store technology like the replatforming of our super protect or even just the technology that we have in stores that improves the ability to train our techs and get them up to speed more quickly, but it also most significantly benefits the customer experience. And when we benefit the customer experience, that positively impacts customer retention.

It impacts throughput in the store. It impacts ticket because they're able to present NOCR services better. So we see a lot of opportunity that tech will unlock and we're in the early stages.

Thank you super helpful. Just an unrelated follow-up, and I apologize if I missed this, but your prior guidance for the full year assumed a flattish gross margin. Just curious how you would have us be thinking about gross margin in 4Q? Should we expect to see continued year-over-year margin rate expansion similar to what we saw here in fiscal 3Q? .

Yes. For Q4, we would currently expect margins to be at or modestly above prior year as reported. Obviously, we're still early in the quarter, but based upon our forecast, that's what we'd expect for the quarter. .

Our next question comes from Thomas Wendler from Stephens.

I wanted to kick it off here with the $740 million of the Term Loan B. $625 million of that's kind of accounted for for the Breeze acquisition leaving $115 million remaining kind of to be deployed. How are you thinking about utilizing that? .

The current thought process around that would be a revolver paydown. We do have a drag revolver currently. -- pricing too is very, very similar. So by putting it into Terminal B, we'll just increase our optionality without really changing our cost cable cost of debt. So it really -- it's not more complicated than that. .

Okay. I appreciate that. And then kind of an unrelated 1 for me hearing. There's been a little bit of discussion about premiumization kind of impacting last quarter. Can you give us an idea of what the current premium mix is for the oil changes? .

So I think overall, we've been open to say that our premium mix is around 80%. And that is a combination of both the blended synthetic MaxLife and the full synthetic. And so what we see is that there is a shift into premium from conventional, but that's drawing against the 20% of our car park, give or take. And then you have a change up from MaxLife into full septic -- most of that is driven that switch up between MaxLife and full synthetic is when you have older cars where they were high mileage and a customer had switched up because of the high mileage to a blend, and they switch to a new vehicle, and the vehicle OEM recommends a full synthetic.

So that there's still more upside. What we look at is the car park we're serving -- and the car park on the coast is higher premium than the car park in the middle of the country. So that obviously has a driving effect of where premium mix has more upside across our network than not. But it's really car park driven. And as the car park continues to age, people move into premium mix. And as they switch up to newer vehicles, it switches up more dramatically.

Our next question comes from David Lantz from Wells Fargo.

Any early indications on how we should think about franchise unit growth in 2016? Just trying to get a bit more color on thinking through the ramp to 150 per year by '27. .

Yes. We continue to accelerate the pipeline, which is the most important. And there's still a lot of opportunity to grow stores given how fragmented the market is and the fact that our stores only reach about 35% of the population. With the refranchising effort, we talked about the fact that those new franchisees for new owners of territory. They'll take some time to build up the pipeline.

So we knew that that the current franchisees would contribute about 2/3 of the 150 of 150 new units per year. So that continues to grow and pace nicely and that the new franchisees would then contribute the rest and that would be pretty back-end loaded in the ramp.

And that definitely is proving to be true. But -- so you'll continue to see us moving towards that $150 million target overall. But I think we still feel very good around the development agreements that have been signed with our franchisees and the pace with which they're building the pipeline to deliver on this.

Got it. That's helpful. And then just 1 more. Any update on fleet performance and how that looks today and if it's still outperforming the company average? .

Yes. The investments that we're making in fleet continue to pay off this growth and our fleet customer base continues to outpace the consumer transactional and ticket growth. The partner -- we -- our partnerships with the franchisees has grown this year. So we put a big effort on this for company markets, obviously, working with nationally companies, but also mini fleet management or fleet owners are regional or even local in nature. And so as we expand our partnership with franchisees, it allows us to drive growth in that area. But it continues to be a very strong contributor to our overall. .

This marks the end of today's Q&A session and therefore, concludes today's call. Thank you for joining us today. You may now disconnect your lines.