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

Thanks. Good morning, and welcome to Valvoline's Third Quarter Fiscal 2025 Conference Call and Webcast. This morning, Valvoline released results for the third quarter ended June 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-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 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, non-operational, or restructuring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our GAAP to adjusted non-GAAP results and a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix. The information provided is used by our management and may not be comparable to similar measures used by other companies. With that, I will turn it over to Lori.

Thanks, Elizabeth, and thank you for joining us today. I'd like to start with a quick look at our 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% to $890 million and adjusted EBITDA increased 12%, considering the impacts 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 delaying services. In fact, the percentage of customers using our premium products grew both sequentially and year-over-year across the network. We're 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 NOCR service penetration. While we had a good comp 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 trade discussions, our expectations of any impact on 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 already 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 reinforces our confidence in delivering our network growth targets and improving return on invested capital. I'd also like to give an update on the Breeze 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, he's 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 today. Since joining, I've spent considerable time with our teams and on the road meeting with investors. This is a great company with a lot of growth opportunities to drive shareholder value, and I'm excited to be a part of it. 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 reported basis and 12% when adjusted for the impacts of refranchising. System-wide same-store sales increased 4.9% and 12% on a 2-year stack. The majority of the comp growth for the quarter came from increased ticket with premiumization, net pricing, and increased NOCR service penetration all contributing. Transactions also continue to grow. And without the Easter headwind, transactions would have contributed roughly one-third to the comp. 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 of about 50 basis points. As Lori mentioned, we continue to improve our labor management through enhanced demand planning, which leads to improved scheduling. 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 one-third of the SG&A increase over the 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 leverage to return in fiscal year 2026. Sequentially, SG&A as a percentage of sales decreased 80 basis points. 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 impacts of refranchising and adjusted net income of $61 million. Adjusted EPS of $0.47 increased 18%, considering the refranchising impacts. 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 most ranges. Lori already covered same-store sales and network growth. Share repurchases are $60 million year-to-date, having been paused following the Breeze announcement. For sales and 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, profit, and store growth this quarter. We're grateful for their ongoing dedication as we are fully into the summer drive 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.

Our first question comes from Mark Jordan from Goldman Sachs.

I guess as we think about going forward, full year same-store sales growth guidance implies a pretty wide range of outcomes for Q4. 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 bit 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 comps. As Lori mentioned, we did see a slow start in June or slower start to the summer holiday season. And that said, we did see consistent transaction growth across the entire system each month, including tour 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 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, we're pretty focused on the midpoint of that range, and that would be our overall expectation for the quarter.

Okay, perfect. Can you break out the drivers of ticket, including the magnitudes of 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?

Yes, thanks, Steve. Overall, June started a bit slowly compared to the summer holiday season. However, when we take a step back, the strength of our customer base remains very robust. We're not observing customers opting for lower-priced options or delaying service, although there was some timing involved. This could have been influenced by the mild weather and rain, which generally affects our volume. As we moved into July, while the weather issues didn't completely disappear, we experienced a return to warmer conditions. The summer holiday season and increased travel resulted in higher traffic. We also had some advantage from CrowdStrike last year, providing a bit of a tailwind. Excluding that impact, we are optimistic about transaction performance as we progress through July and feel confident about the business momentum. This is reflected in our updated guidance, which shows a slight increase from the previous midpoint.

Okay. That's helpful detail. And then I'm going to ask a 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. While 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 one-third 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.

I'll just add that the fundamentals of the business have remained stable. We've been discussing the same key drivers since I joined the company. The only notable change is the inflationary environment. The fundamentals related to ticket contribution and maintaining a healthy balance from our ticket and transaction opportunities, including NOCR, pricing, and premiumization, along with the growth in our customer base, have not significantly altered. The primary factor is the inflationary pressures we are experiencing. Given the current market conditions, which continue to present strong tailwinds and excellent execution, we expect to see strong same-store sales growth and continued market share expansion.

Our next question is from Simeon Gutman from Morgan Stanley.

My first question on transactions and ticket, so this one-third, two-thirds, 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?

So I think as we see newer stores start to, we will see transactions tick up. We do want to continue to work towards striking that 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 larger role in comp. I think as we go forward and assuming a more moderate inflationary environment, we should see a more balanced view in combination of ticket and transaction. That's our expectation. And again, it's maturing the existing network. It's working with mature stores to continue to grow. It's growing the base footprint as well.

Adding to what Kevin mentioned, this quarter, we faced challenges due to Easter, which affected transactions. With more than 25% of our comparable sales coming from transactions, excluding this seasonal impact, the figures were significantly higher when considering the Easter effect. We're aligned with the trends we've seen in the first half of the year, although we haven't consistently achieved a 50-50 balance. Striking that balance is challenging, but we hope to trend towards it over time. We are experiencing some challenges on the ticket side, although there are still favorable factors. Premiumization will continue as the number of vehicles where manufacturers recommend full synthetic lubricants increases, supporting continued strong performance in ticket sales. Overall, I believe we are moving towards a more balanced approach than what we have shown over the past three years.

If you look at the immature stores that are ramping, how would you characterize the oil changes per day? Are those ramps normal, below average, or above average?

It's a great question and something we regularly review. We assess the plans in place for each store we build or acquire to ensure they are on track. The good news is we approved these based on the expected return on invested capital. There is remarkable consistency in the performance of our new stores according to the plans made at the time of approval. We continue to see strong performance from our new store base, which is expected to deliver mid- to high mid-teens returns on invested capital. Overall, the performance from our new stores remains very positive.

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

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, I'll address the franchisee question. We did have one 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 that. I think as you look at the price portion of the equation for the comp, where we see a lot of opportunity is in continued growth in premiumization as well as NOCR. And NOCR has a lot of room to grow, both on an overall basis within the 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 and potential cost headwinds, we talked about tariff impact last quarter. Nothing's really changed there. And we did give an 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 to ticket are going to be those actions that we take within 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 a much smaller component of that typically.

Yes. I would just say, Mike, we've always talked about there being balanced across the three. I think where Kevin is 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, but 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 one 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 the consumer. But right now, we haven't taken pricing across the board to mitigate any new labor and/or product costs.

I have a couple of questions about acquisitions. I noticed that you acquired eight stores in the quarter. Was that one transaction or multiple transactions? Could you provide some insight into the pipeline of store acquisitions? It appears that you are still pursuing some of these smaller deals even with the Breeze transaction pending.

Yes, that's a great question, Mike. During Q3, we acquired 6 stores from a franchisee in a single transaction. This decision was made after we assessed the geographical alignment of markets and the franchise partner's development efforts, which were better suited for other areas. The franchisee agreed to this transition so they could concentrate on their development elsewhere, resulting in a successful transfer of those stores to company ownership. These stores are located in Louisiana, a market where we see significant opportunities, and they align well with our existing company markets. From a general and administrative perspective, this move is beneficial for us compared to the isolated franchisee operations. We will continue to explore small opportunities in both directions, but it will always be limited to just a few stores. As for our pipeline, we have over 4,000 independent group operators and occasionally, independent owners who wish to transition without passing their businesses to the next generation consider companies like Valvoline to take over, ensure fair compensation, and look after their employees. We are actively pursuing this strategy, as our returns on investment for acquisitions are extremely high, and we have a playbook for converting those stores. We are also still working on the Breeze transaction, and we are in discussions with independent operators to determine the best timing for us to invest in growth and secure a good return.

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 one transaction or multiple?

Sorry, Mike, I was just focused on the transfers. There were multiple. Most of the acquisitions that we do now 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 two questions about Breeze, so I'll put them both out there. First, the Breeze stores generate about $1 million in sales per store, while the average Valvoline store does around $1.7 million. Is there any particular reason for that difference? Secondly, as we consider integrating Breeze into our platform, specifically regarding SG&A, we're getting back to leveraging technology. Are there any costs related to this deal that could complicate that plan?

Yes. That's a good question, Steve. When we assess the performance of the Breeze stores, we note that they are expanding their network fairly rapidly. The maturity level of these stores varies, but because of their size, they tend to have a larger proportion of less mature locations, which will definitely have an impact. Additionally, the investments being made in marketing and fleet activities differ, as the brand is still being developed. Although the brand has existed in the market for quite some time, as it grows geographically, it will require appropriate marketing, technology, tools, and customer data—elements we have built over many years. This means it will take longer to increase volume across these stores. We see these factors as contributions to our decision-making, which made the acquisition appealing. We believe it will deliver strong long-term returns for shareholders. On the positive side, the Breeze business operates similarly to Valvoline, with similar service menus, although it doesn't offer all the services available in our IOC business. There is potential for growth there as well. Regarding costs, we will maintain a focus on safety with our team; however, we don't anticipate any major significant obstacles or large capital investments at this stage based on our current position 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 one of these large franchisees was taking more price. You spoke to that, 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?

Thank you for the question, David. When examining our franchisee pricing, we see that it varies by region, particularly in the Northeast and California where costs related to labor and rent are higher. This regional difference also typically results in higher ticket prices due to factors like parking. Over the past year, our franchisees set their own prices based on local market research. One notable franchisee brought in new talent last year, which led them to realize that their prices were below market average. They subsequently raised their prices last fall. While their price increase wasn’t massive, it was significant. Additionally, other franchisees and our company also adjusted prices. However, this particular franchisee's adjustment was a major factor influencing the pricing differences in same-store sales between our franchises and company-owned locations.

Got it. And then just to pivot over to the tech investments. I think you mentioned one-third of the SG&A growth this quarter. That could equate to something like a 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 smaller investment cycle within OpEx? Any way to frame what that potential could be into next year?

Yes, I think that’s the right way to think about it. It’s important to note that we expect the leverage to improve over the year. We still need to account for some investments made early in fiscal '26 that were initiated earlier in this fiscal year. Therefore, we anticipate less leverage in the beginning of the year, with growth as the year progresses. The overall amount is likely close, but historically, we've observed SG&A growth in the high single digits to low range based on sales growth. It is still too early to predict what fiscal '26 will bring. However, as we expect SG&A to moderate this year, we generally anticipate improved leverage throughout '26. It's early to quantify this right now, and we will likely share further insights on the next call.

Our next question comes from Peter Keith from Piper Sandler.

Elizabeth, Kevin, it's great to see you. I wanted to ask about the labor leverage. You experienced a 100 basis points improvement in gross margin, which is quite impressive. You're discussing the implementation of new demand planning tools. Is there anything specific about this quarter, or could this level of labor leverage be expected in the future with similar performance in comparable sales?

Yes. I think what's unique about this quarter is we're starting to see the impact of a lot of work that has 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 that 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 shifts. 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 a 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 on board, 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 holds 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.

Being relatively new to the 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 it 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 that we can communicate it and then very importantly deliver on it going forward.

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

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?

First of all, the FTC has a standard approach to assessing market competition that is not specific to us. This is the first significant acquisition they've reviewed in recent years, as they seek to ensure adequate competition in the market for the benefit of customers. Their intentions align with their historical focus, and this is the first time it's pertained to our sector. The discussions with the FTC are ongoing, and we are actively collaborating with them. One potential solution might involve selling a number of stores, and we're currently sorting through those details in a constructive manner. We need to secure the FTC's approval, which involves a defined process and requirements. However, I am optimistic about the progress we’ve made so far and the level of engagement we have. If the FTC agrees, the path we take will align with our strategy, enhance long-term shareholder value, and extend our reach in line with our growth strategy. As I mentioned in a previous discussion, we were surprised by this situation, but upon reflection, it makes sense. This development does not alter our growth narrative or how we plan to expand in the future. We have not received any signals indicating that we will need to alter our strategy moving forward.

Okay. Do you anticipate any risks associated with converting the brand to Valvoline, considering the brand equity it likely has in several other markets?

That's an excellent question. Our main priority is the FTC process to finalize the transaction, which has somewhat limited our discussions with Eric and his team. We fully understand the loyalty that has built up within that chain, not only among customers but also among the staff. Ultimately, it's the people who shape the customer experience. Therefore, we need to approach integration thoughtfully, though this is not new territory for us. As noted earlier, we have experience acquiring independent operators and previously merged with other chains. We carefully consider how to manage these transitions and collaborate with the teams that will be joining our company. I feel optimistic about our ability to navigate this process based on our experience, but of course, each situation has its own unique characteristics.

Our next question comes from Justin Kleber from Baird.

I 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 of some of the other benefits or efficiencies you expect to realize from all these tech investments?

Yes. I think one of the more obvious is moving a lot of information, both information that we generate internally as well 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. I think 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 them. So it's actually a pretty exciting opportunity for us going forward, both with what we've done already as well as some of the things that we could certainly do in the future.

I'll expand on what Kevin mentioned because I'm truly excited about the opportunities ahead of us. When considering the ERP and HRIS, we've discussed the early successes in labor within HRIS, indicating there's significant potential for growth. This potential arises from our technology investments and how we integrate both the tech and employee experience to generate benefits. Regarding ERP, we recognize that the new automation and retail-focused capabilities will enhance our efficiency in G&A as we expand. As Kevin pointed out, moving to the cloud, similar to our customer data approach, enables our marketing team to operate more intelligently and in real-time, allowing for flexible marketing expenditures across various channels. This strategy enhances our customer acquisition costs and fosters better relationship management throughout the customer lifecycle. Moreover, focusing on store technology, such as replatforming our SuperPro Tag and improving in-store tech, streamlines training for our technicians and, more importantly, enhances the customer experience. A better customer experience positively influences retention, store throughput, and ticket performance, allowing us to present services more effectively. We perceive substantial opportunities that technology will unveil, and we are just beginning this journey.

Super helpful. I apologize if I missed this, but your prior guidance for the full year assumed a flattish gross margin. I'm curious how you would like us to think about gross margin in Q4. Should we expect to see continued year-over-year margin rate expansion similar to what we saw in fiscal Q3?

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 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 is to pay down the revolver. We currently have a draw on the revolver. The pricing is very similar. By moving it into the Term Loan B, we will increase our optionality without significantly changing our cost of capital or cost of debt. It's really that straightforward.

Okay. I appreciate that. And then kind of an unrelated one for me here. 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 Max Life 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 Max Life into full synthetic. Most of that is driven by the switch up between Max Life 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 the premium mix. And as they switch out 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 '26? Just trying to get a bit more color on thinking through the ramp to 150 per year by '27.

Yes, we are continuing to accelerate the pipeline, which is crucial. There remains significant opportunity to expand our stores, particularly since the market is quite fragmented and our stores currently reach only about 35% of the population. Regarding the refranchising effort, we mentioned that the new franchisees or territory owners will need some time to build their pipelines. We anticipated that the existing franchisees would account for around two-thirds of the 150 new units annually, and they are maintaining a strong pace in their growth. The new franchisees will contribute the remaining portion, but their impact will be more noticeable later on in the ramp-up. This expectation is being validated. We will keep working toward that overall target of 150. Additionally, we are optimistic about the development agreements we've signed with our franchisees and the speed at which they are building their pipelines to meet these agreements.

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

Yes, the investments we're making in our fleet are yielding positive results as our fleet customer base continues to grow faster than consumer transactions and ticket sales. Our partnerships with franchisees have also increased this year. We've focused a lot on this for company markets, not only partnering with national fleet companies but also collaborating with regional and local fleet management and owners. This expansion with franchisees is helping us drive growth in that area, which is still a significant contributor to our overall performance.

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.