Good morning, everyone, and welcome to Monro, Inc.'s Earnings Conference Call for the Second Quarter of Fiscal 2025. Currently, all participants are in listen-only mode. We will have a question-and-answer session later, and instructions will be provided then. This conference call is being recorded and cannot be reproduced in whole or in part without the company's permission. I would now like to introduce Felix Veksler, Senior Director of Investor Relations at Monro. Please proceed.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monro.com/investors. If I could draw your attention to the safe harbor statement on Slide 2, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures will be included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Michael Broderick.

Thank you, Felix, and good morning, everyone. This morning, I'd like to share an update with you on our second quarter accomplishments. After that, I'll outline several objectives that we plan to achieve in the third quarter. Before I begin, I'd like to recognize and thank all of our teammates for their commitment to Monro and our customers. Turning to Slide 3, starting with our accomplishments in the second quarter. We drove a sequential improvement in our year-over-year comp store sales percentage change from the first quarter as well as a significant acceleration in our comp trends as the second quarter progressed. This gives us further confidence that our initiatives are taking hold. We like the progress, but we are just getting started. Importantly, our tire dollar and unit sales improved sequentially from the first quarter, and our tire category exited the quarter with year-over-year growth in units in the month of September. We continue to leverage the strength of our manufacturer-funded promotions, which allowed us to meet the needs of our value-oriented consumer. And although we continue to have more work to do to improve the performance of our higher-margin service categories, as shown on Slide 4, our ConfiDrive Digital Courtesy Inspection Process and our Oil Change Offer allowed us to drive sequential improvement from the first quarter in our service category sales as well as year-over-year growth in both battery units and sales dollars in the quarter. Additionally, we improved our attachment rate for alignments, which resulted in year-over-year growth in both alignment units and sales dollars in the month of September. Consistent with general industry trade-down dynamics, our gross margin in the second quarter was impacted by a value-oriented consumer that traded down more of their tire purchases to our Tier 3 offerings. And while this tire mix pressured material margins in the quarter, we continue to drive labor optimization and efficiencies through productivity improvements, including scheduling, training, and our attachment selling initiatives. Now on to our objectives for the third quarter. Encouragingly, our sales momentum from the second quarter has continued into fiscal October with our preliminary comp store sales down only 1%, supported by improving trends in tires and all service categories, including brakes. Excluding the impact of Hurricanes Helene and Milton, our preliminary comp store sales would have been approximately flat compared to the prior year. We expect to leverage this momentum to achieve our third quarter objectives, which include improving store traffic trends driven by a keen focus on Oil Change Services as well as continued growth in tire units, accelerating the performance of our key service categories, utilizing the benefits from ConfiDrive and optimizing labor and efficiencies through continued improvements in productivity and maintaining prudent cost control. In summary, our initiatives are driving an improvement in our top line results. Our comp store sales trends improved sequentially from the first quarter and accelerated as the second quarter progressed. This was led by our tire category, which exited the quarter with year-over-year unit growth in September. While we have more work to do to improve the performance of our higher-margin service categories, we drove a sequential improvement in service category sales from the first quarter, year-over-year growth in batteries in the quarter and year-over-year growth in alignments in the month of September. This serves as evidence that our initiatives are working. And although our gross margin took a step back in the quarter, we are confident that we remain on a path to restore our gross margins back to pre-COVID levels with double-digit operating margins over the longer term as we return to top line growth. Our sales momentum in October as well as continued traction from our initiatives will enable us to achieve our third quarter objectives. And with that, I'll now turn it over to Brian, who will provide an overview of Monro's second quarter performance, strong financial position and additional color regarding fiscal 2025.

Thank you, Mike, and good morning, everyone. Turning to Slide 5. Our year-over-year comparable store sales percentage change improved 410 basis points sequentially from the first quarter of fiscal 2025, resulting in sales of $301.4 million. Sales decreased 6.4% year-over-year, which was primarily driven by a 5.8% decline in comparable store sales. As Mike just walked through, we drove a significant acceleration in our comp store sales trends as the quarter progressed. For reference, comps were down 8% in July, followed by an improvement to down 6% in August, and we exited the quarter down 3% in September. While year-over-year tire units were flat in the second quarter, we exited the quarter with low single-digit growth in units during the month of September. We also gained tire market share in our higher-margin tiers in the quarter. Turning to Slide 6. Gross margin decreased 40 basis points compared to the prior year, primarily resulting from higher material costs due to mix within tires and higher fixed occupancy costs as a percentage of sales, partially offset by lower technician labor costs as a percentage of sales. Total operating expenses were $93.2 million or 30.9% of sales as compared to $92.6 million or 28.8% of sales in the prior year period. The increase as a percentage of sales was principally due to lower year-over-year comparable store sales and an increase in advertising spend. Operating income for the second quarter declined to $13.2 million or 4.4% of sales. This is compared to $22.4 million or 6.9% of sales in the prior year period. Net interest expense increased to $5.1 million as compared to $4.8 million in the same period last year. This was principally due to an increase in our weighted average interest rate. Income tax expense was $2.5 million or an effective tax rate of 30.9%, which is compared to $4.7 million or an effective tax rate of 26.8% in the prior year period. The year-over-year difference in effective tax rate is primarily due to state taxes and discrete tax impacts related to share-based awards. Net income was $5.6 million as compared to $12.9 million in the same period last year. Diluted earnings per share was $0.18. This is compared to $0.40 for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure was $0.17, and this is compared to adjusted diluted earnings per share of $0.41 in the second quarter of fiscal 2024. Driving the $0.24 difference in adjusted diluted earnings per share was the 5.8% decrease in year-over-year comparable store sales. As a reminder, every 1% change in quarterly comp store sales represents about $0.04 of adjusted diluted earnings per share. Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release and on Slide 10 in the appendix to our earnings presentation for further details regarding excluded items in the second quarter of both fiscal years. As highlighted on Slide 7, we continue to maintain a strong financial position. We generated $88 million of cash from operations, including $38 million of working capital reductions during the first half of fiscal 2025. Our AP to inventory ratio improved further at the end of the second quarter to 185% versus 164% at the end of fiscal 2024. We received $9 million in divestiture proceeds as well as $9 million from the sale of our corporate headquarters. We invested $14 million in capital expenditures, spent $20 million in principal payments for financing leases and distributed $17 million in dividends. At the end of the second quarter, we had net bank debt of $41 million and a net bank debt-to-EBITDA ratio of 0.3x, and total liquidity of $529 million. As we have commented earlier and on recent earnings calls, we have made significant progress in several foundational areas, including gross margin expansion in the first half of fiscal 2025, inventory optimization by leveraging strong vendor partnerships and our solid financial position. These foundational improvements, coupled with our market-facing initiatives, including our ConfiDrive Digital Courtesy Inspection Process, our Oil Change Offer and focus on our 300 small or underperforming stores as well as our relentless focus on improving the customer experience are setting us up for improved financial performance. Now turning to our expectations for the full-year of fiscal 2025 on Slide 8. For full-year fiscal 2025, we continue to expect gross margin expansion versus 2024. We also believe our fixed occupancy costs within cost of goods and operating expenses will be approximately flat on a dollar basis when compared to the prior year. Please note that fiscal 2025 is a 52-week year, while fiscal 2024 was a 53-week year that benefited from an extra week of sales in the fourth quarter. We expect to generate at least $120 million of operating cash flow, inclusive of continued working capital reductions in fiscal 2025. The strength of our financial position, including our cash flow positions us to fund all of our capital allocation priorities, including our dividend during fiscal 2025. Regarding our capital expenditures, we expect to spend $25 million to $35 million in fiscal 2025. And with that, I will now turn the call back over to Mike for some closing remarks.

Thanks, Brian. Our business has long-term durability in an industry that remains fundamentally strong. Our initiatives are driving an improvement in our top line results. This, along with our foundational progress to expand margins in the first half of fiscal 2025 as well as our cash flow generation will enable Monro to reap benefits as tire volumes continue to recover. We are poised to win with our scale, strategic relationships and our experienced management team. With that, I will now turn it over to the operator for questions.

Thank you. Our first question comes from Thomas Wendler from Stephens, Inc. Thomas, please go ahead.

Hey, good morning everyone.

Good morning, Thomas.

Good morning.

I just wanted to touch on the American tire distributors bankruptcy filing. I think your contract with them requires you to purchase 90% of your tires and then you still have a $6.8 million earn-out from them. Can you just kind of give us an idea of the impacts there that you're expecting?

Sure, Thomas. This is Mike. There is no impact right now, business as usual, and they're a big key to supporting us growing our tire category. So we have nothing to report differently than what's been filed. We're just acting as a great customer.

Okay. Yes. Thank you for that. And then kind of shifting gears, I think you mentioned a mix shift to Tier 3 tires during the quarter. Can you just give us an idea of where the tire mix shook out between the different tiers?

Yes, the Tier 1 and Tier 2 categories have definitely transitioned to Tier 3. We experienced growth of about 30%, which aligns with the industry's shift towards Tier 3 at the same rate. This is perhaps the most notable change in the category. The tire business remains consistent, as customers are opting for lower-tier options. Overall, we are gaining market share across Tiers 1 to 3, supported by vendor promotions, and our teams are effectively executing these initiatives. The industry continues to offer a significant number of budget-friendly tires in Tier 4, in which we also participate, but we adopt a more balanced strategy. This approach is beneficial for unit sales, helps us maintain average selling prices, and offers better value for customers.

That was great. Appreciate you guys answering my question. Thank you.

Thank you.

Thank you. Our next question comes from David Lantz from Wells Fargo. David, please go ahead.

Hey, good morning guys. And thanks for taking my questions. Can you talk about the buckets within gross margin in a bit more detail? And then any color you can provide around how to think about the second half would be helpful as well.

Certainly, David. In the recent quarter, material costs exerted the most significant pressure, leading to a 40 basis points decline compared to the previous year. Tire margins were negatively impacted by the shift from Tier 1 and Tier 2 to Tier 3 products. Additionally, lower manufacturer rebates, due to reduced tire purchases in prior quarters, also affected tire margins. The higher percentage of tire sales compared to our service categories, particularly brakes, contributed to the overall material margin strain. Year-over-year, we also saw a 60 basis points decline due to occupancy cost de-leverage related to lower sales. Occupancy costs remained relatively stable compared to the previous year, but with the decline in sales value, they de-leveraged. However, we countered this somewhat with a 130 basis points improvement in technician payroll productivity, which we maintained when compared to last year. Regarding the outlook for the remainder of the year, while I won’t delve into specific predictions, I can outline the dynamics at play. We anticipate that the trend of consumers seeking value will continue, which suggests that the tire trade down will persist. However, we expect that tire purchase rebates will improve in the second half, as our recent tire purchases should support higher rebate levels. Additionally, we are making notable gains in our service categories, which are closing the performance gap with tires, reducing the headwind from our product mix. We expect occupancy costs to improve as a percentage of sales as we enhance our revenue, providing us greater leverage on fixed costs. With technician pay, while we're still delivering solid productivity, we are beginning to compare against last year's strong performance. Thus, while we anticipate continued productivity gains for technicians, the scale of those gains may diminish compared to the previous year.

Got it. That's helpful. And then just for the overall business, could you talk about traffic and ticket trends in the quarter?

David, it's Mike. Everything improved in the quarter, month after month. Looking into October, the progress is consistent across the board. We committed to recovering our tire business, and we have done so. We're also focused on regaining our Oil and Brakes businesses, and we are observing positive results in that regard. While we experienced a customer decline of roughly 9%, we had some average selling price adjustments to help mitigate that impact.

Got it. That's helpful. And then last question for me. You paid down about $50 million in debt this quarter. So curious if you have any color on how to think through interest expense going forward?

Sure. A lot of our interest expense is related to our financing leases. So that roughly $290 million of finance lease debt generates a good portion of that. But we are seeing reductions as we're bringing the debt down. We would expect in the back half of the year for interest expense to be fairly consistent with where it was in the prior year.

Great. Thank you.

Thanks, David.

Thank you. The next question comes from Bret Jordan from Jefferies. Bret, please go ahead.

Hey, good morning guys.

Good morning, Bret.

On the ASP tailwinds, I guess, could you sort of give us some color? I mean it sounds like the Tier 3 tire shift would not be a tailwind to ASP, but obviously, real strength in batteries and maybe what do you attribute that to? And where did you see other price offset to the negative traffic count?

Yes, I would say that the shift from Tier 1 and 2 down to 3 and 4 puts pressure on average selling price. We feel that this is a positive sign as we move into the quarter. We have successfully reversed the significant decline in traffic and tire sales in our organization, and we plan to continue this trend across the board. From a tire perspective, even though the marketplace remains unhealthy, what we are doing at Monro will help us maintain the positive tire trend. Another important aspect to consider is our service categories; I am pleased with how our battery performance is, and I also value our alignment business. The key focus should be on brakes, which represents a significant opportunity as it is a high-ticket item. Therefore, we are going to concentrate our efforts there.

Okay. And I guess in October, how is the traffic versus price in that minus 1 comp?

Yes. We're continuing to see the comp led by price mix, but with improving traffic trends.

Okay. All right. Great. Thank you.

Thanks, Bret.

The next question comes from Brian Nagel from Oppenheimer. Brian, please go ahead.

Hey guys. Good morning.

Good morning, Brian.

I want to better understand the relationship this quarter between gross margin and revenue. The gross margin shifted significantly downward compared to the previous quarter, which raises my initial question. As we look at the strengthening trend in revenue, is that potentially impacting gross margin? Additionally, looking ahead, do you believe there is a way to improve both comparable sales and gross margins simultaneously, or will there be an ongoing trade-off between the two?

I can address that, Brian. First, we need to recognize the environment we are operating in and how trade-down dynamics are impacting our material margins, along with the level of both manufacturer-funded and self-funded promotions we are using to draw guests into our stores to buy tires. This macro backdrop is putting pressure on our overall material margins during this time. Our return to the high 37% to 38% gross margins we experienced before COVID relies on improving this dynamic. There isn't a trade-off between our top line and material margins, but the promotional trade-down dynamic is affecting us right now. Simultaneously, we are enhancing our service categories, which is another factor that could help improve our gross margins. However, in this quarter, with brakes down 12% and tires down 4%, we faced challenges. To achieve those 38% gross margins, we need to continue making progress like we did in this quarter and into October. Additionally, to turn positive in terms of comps, we would need to convert the 60 basis points of occupancy cost headwind into a tailwind. This is how we view the path forward, but I don’t want to underestimate the margin pressure created by the mix effect and the trade-down behavior of value-oriented consumers.

That's helpful, Brian. I just want to follow up on that. If you consider fiscal Q2 and look back at fiscal Q1, I believe there was an improving sales trend during that period as well. However, the gross margins were also stronger year-on-year. So, what was the main change in that dynamic from Q1 to Q2?

Yes. The primary change, I would say, would be the material margins and the Tier 1 and 2 to Tier 3. So up until that point, we really hadn't seen is that much pressure on Tier 1 and 2. We were really protecting a lot of our trade down to Tier 4 by having some really good Tier 3 offerings and trying to preserve that Tier 3 versus Tier 4 mix, which we did in the quarter. We grew Tier 1 through 3 relative to the industry. But at the same time, in the quarter, we saw Tier 1 and 2 trade down in the Tier 3. That was the primary difference between Q1 and Q2. And at the same time, we're starting to lap also the benefits of some of that technician pay improvement. So while that was a 240 basis point tailwind for us in Q1, that subsided to 130 in Q2, which was expected.

Very helpful. I appreciate. Thank you.

Thank you. We have no further questions. So I'll now hand back over to Michael Broderick for closing remarks.

Thank you for joining us today. This continues to be an exciting time to be part of Monro. We have a strong foundation to build upon to create long-term value for all our stakeholders. I look forward to keeping you updated on our progress. Have a great day.

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