So it really comes down to, you know, what Lori mentioned, as much as a 60% finished lubricant cost increase, $5 to $7 for oil change, and making sure that we do what we need to do to cover, you know, to cover that in the quarter. So that's what's driving the margin.

Excellent. Thank you very much. And then just as one follow-up, you know, can you talk about the SG&A leverage in 3Q? It looks like the largest benefit maybe came from the other G&A expenses. Can you break down what's included in that bucket and maybe how we should think about it in 4Q?

Yeah, just as a reminder, in Q3 tends to be our strongest quarter every year. We drive more transactions. It's the peak of the summer drive season. And so, you know, that does tend to help us on the leverage front. The team did a really nice job from an execution perspective around SG&A. we've been really focused on that since we got through and past making the SG&A investments that we needed to make in the business. And really, it's been a concerted effort to manage our overall cost profile across the board, and the team's done a really nice job with that.

Excellent. Thank you very much, and congrats again on a great quarter.

Thanks, Jeremy.

Your next question comes from the line of Stephen Zaccone with Citi. Stephen, your line is open. Please go ahead.

Hi, this is Ariana on for Stephen Zaccone. Thank you so much for taking your question.

My first question is, can you provide more detail on the extent to which pricing actions can continue to offset these increases without negatively impacting customer traffic yeah thanks for the question overall when we look at at least on the product cost side there there's two things that we do one is we we try to time pricing increases on the company store side as well as the franchise product cost pass through to offset those increases. We always do pricing elasticity work to know, you know, exactly what we expect consumers to do. Now, but we're not doing this in a vacuum. The entire industry is facing the same product cost or product constraints that I talked about and the commensurate product inflation that comes with constrained supply. So, you know, we're not doing that in a vacuum. And as you look at the $5 to $7 number that I talked about on a base ticket of $115 on average or higher for some of our franchisees, that's actually a very small percentage of increase. And given our customers come back to us twice a year on an annual basis, it's not a significant out-of-pocket cost when you compare that to foregoing maintenance and the potential risk that you take for bigger repairs. So obviously we look at that and we watch consumer sentiment and we watch consumer return rates. So, and we use and we watch consumer discount usage, all of those things factor into it as we look at passing price on to consumers.

Great. Thank you so much. And my follow-up is despite raising the floor for students for sales by 2050 basis points, the top end of the total revenue remains the same, so I guess what specific revenue offsets are providing a corresponding increase in the net revenue?

Yeah, what I would point out is we actually did raise the midpoint of the full year sales guide from $2 billion, $2.1 to $2.05 to $2.1. So effectively, it's a $25 million increase in the midpoint. Again, we're very focused on providing an update that we feel confident and comfortable with based upon what we know is happening in the broader marketplace with the macro and with our own business. And while we feel really, really good about the things we can control inside the business, the macro environment does remain dynamic. And so, you know, we did raise the midpoint, but, you know, we wanted to put numbers out there that we feel very comfortable with.

Great. Thank you so much.

Sure. Your next question comes from the line of Simeon Goodman with Morgan Stanley. Your line is open. Please go ahead.

Hi, this is Sky Lieutenant on for Simeon Goodman. Thank you so much for taking our question today. I guess with some of the margin compression previously talked about, how temporary do you think that is, and do you think it can be fully resolved by Q1?

Sure, it's a great question. You know, I want to just reaffirm that as product costs remain elevated given constrained supply pace, we feel really good about the supply position that we're in. We have a we have we have an advantage position given our scale and size, not just on a location basis, but on a network basis. And the constraint is being felt, you know, across the system. When the street reopens, it will take some time for product to flow through to the next stream of of lubricant, you know, manufacturing steps. And so we do expect that the elevated costs will persist for some time. Our understanding in working with the supplier is, you know, four to six months at a minimum once the straight is fully reopened. Now, obviously, we have a supplier that has a very, you know, strong network of supply, and they've already been working with alternate sources, etc. But for cost to come down, you'd need the supply chain to be back fully inventoried. And we know that that will take some time, just given how long the strait has been closed and some of the damage that's happened within the overall network.

Okay, great. And then I guess on the cost increases, how much more pressure would you expect to flow through the P&L into the near term and future quarters?

Yeah, we've projected what we know today, and I think it will depend on really the macro, how things play out in the straight, how things play out in the broader supply chain. but we have factored in everything that we know to date in terms of cost increases and and related pricing action that we need to take and we'll continue to do that as as the situation unfolds but um but we've done we've taken action around what we know today okay thank you good luck thank you your next question comes from the line of David Bellinger

from Mizuho. David, your line is open. Please go ahead. Hey, good morning.

Thanks for the questions. This is another clarification on the gross margin line. So you had about six percentage points of ticket or more in this quarter. It doesn't seem like the product cost hit the gross margin line in Q3. Is this more of a timing issue where the higher costs will land in the Q4 period? And why is there such a lag between the cost increase versus the price increase to the consumers? Is there a way you can tighten that?

That's good. It's a good question. I would say that we were proactive around pricing in the June quarter, and intentionally so, as we were being informed of a lot of cost increase that was coming. And the timing of that, it can be difficult to get perfectly right, especially the timing between when we actually see the cost flow and when we take price. But we've tried to be proactive on the price side to protect those gross profit dollars. And we were successful in doing that in the June quarter. I would say as we're in Q4, we face some of those same challenges around the timing of pricing and seeing the cost flow through. And I think in normal times, there's much better alignment around that because it's a more systematized process, whereas right now we're in an incredibly dynamic environment with a lot of things going on and a lot of changes happening. And we're just trying to be as proactive as we can, given where we are right now.

Got it. Got it. And then my follow-up just on the implied guidance for Q4, the system-wide same-store sales number is about 8% to 10% implied there. You also talked about some of these pockets of pressure in June. Can you tell us a little more about how sales have recovered? Are you seeing more transaction growth, or is that incremental uplift, is that mainly from more pricing?

Yeah, it's a good question. And I think we expect the fundamentals of the business to remain intact from a transaction growth, from a premiumization and NOCR, and that we do see the difference really being around price, both in terms of what company store pass-through and pricing is, but also what our franchisees do. I think that was a piece that was hard for us to forecast last quarter is how quickly our franchisees would take price. At the time we had the call, the last quarter, we hadn't had a pass-through yet with the franchisee base because of where the indexes and costs were. So some of that is real-time and dynamic, as Kevin talked out. But you're right in terms of the applied guidance. It's around 8% to 10% with the difference being around what is assumed on the price side.

Got it. Thank you both.

Yeah, thanks.

Your next question comes from the line of John Babcock with Barclays. John, your line is open. Please go ahead.

All right. Thank you. And I appreciate you taking the time to answer my questions. Just first one, what are your partners telling you about the supply and demand in the base oil market? And also, I don't know what they've said around like those trade-off hormones, but I'm just kind of curious. Did the loosening that occurred in May or June, did that help at all?

So in terms of the supply-demand dynamic, obviously it still remains a challenge. There's very little product going through the strait. Lori talked about the supply chain taking four to six months to start to normalize, and that's very real. A lot of base oil is made in Asia, specifically South Korea, and it's been challenging for those companies to get crude oil so that they can do what they need to do to make base oil that eventually will make its way back here and be converted into finished lubricant. Group 3 base oil, which is the primary ingredient for full synthetic, has been the most challenged and continues to be. Group two, less so, but also challenged, partly because of refiners managing their own mix. But this is industry-wide. This is not a Valvoline phenomenon. Where we are right now, though, with our supplier arrangement, we do feel that we are advantaged on an overall basis and continue to work very, very closely with them to ensure that we remain supplied. If you don't mind repeating the second question, I didn't catch it.

Yeah, I mean, the second half of the question was really just around the straight-up from Liz because it opened up a little bit, and I'm just kind of curious if that ended up helping the market or if that was a relatively non-event.

I think as it relates to Group 3s, it was, at least from our understanding, pretty limited relief, limited to little relief. And part of that is when you look at other uses for group threes, it also goes into jet fuel. And obviously, summer season is high peak travel season. So the demand for group three base oils is high. And that constraint is what's driving, you know, the price of that up, which then drives the cost of our finished lubricant up. So I would say there was a little bit of loosening in a few ships that came through in May, but I don't think broadly that was much relief.

Gotcha. That's helpful. And then I guess just a quick follow-on here. I'm just kind of curious, are your suppliers preparing for any contingency plans and what are those plans?

Yeah, I don't want to speak for our suppliers, obviously. But what I would say is, you know, we work with a company that we used to be part of our company, and they have always been very forward-looking on reformulating product to meet the requirements of the product and the quality standards. um and as there is you know whether it was you know whether it was tariffs on other products and or uh now this lubricant um base oil three constraint they are very forward looking at reformulating using new sources of of base base three a group group as well as others so i would just say um you know our suppliers in the business of creating lubricant not just for us but for others and they they do everything they can to keep their customers including us which we are one of their largest customers in stock so that we can continue to serve our guests so i think you know i'll just harken back to what kevin said and that we we are strategically advantaged given our relationship with our supplier okay thank you that's very helpful your next question comes from the line of Thomas Wendler with Stevens Inc. Thomas your line is open please go ahead.

Hey good morning everyone thanks for taking my question. Apologies if I missed this but could you give us a breakdown of the traffic and ticket in 3Q and then you'd mentioned additional pricing actions being taken this quarter. Can you maybe help us gauge the price increases taken in 4Q?

Yeah so as I mentioned in the remarks, you know, our same store sales was very strong across the quarter, both for franchise and company. Ticket drove about three-fourths of the comp and transaction was the remainder. Ticket was slightly more of a contributor in Q3 versus Q2, but I think Q2 was two-thirds and this quarter it was three-fourths, so not significantly different. And that was because of the net pricing contribution that we got within the quarter, both on the franchise and the company side. It was offset by slightly less growth in NOCR penetration, which we typically see in the summer drive season. So those were the dynamics for Q3. Great.

Thank you.

And then understanding this is probably a ways out, but once base oil costs move lower, should we be expecting you know prices to move down or maybe some gross margin expansion yeah if you look at historical um industry norms around price we we have not been an industry that is rolled back pricing as base oil and finished lubricant costs move up or down so we would expect that as the product costs start to moderate and again it will be some time before we see that we would expect margin expansion which which then gets us back to a margin rate that would be more in keeping with our historical pattern and our our objectives for margin expansion overall perfect thanks for answering my questions I'll hop back in the queue your next question comes from the line of Scott Stember with Roth Capital.

Scott, your line is open. Please go ahead.

Good morning, and thanks for taking my questions as well. Just talking about the competitive pricing environment, as you roll out this $5 to $7 increase for oil change, what are you seeing from your direct quick lube customers?

And just trying to get a sense of if anybody is uh trying to use this as an opportunity to gain share across the industry by maintaining price yeah it is something that we watch yeah it's kind of a good question um we we are constantly monitoring competitor pricing particularly in this environment where the landscape is changing i will remind you it is a very fragmented competitor base um and so for us to have true visibility of what independents are doing, what dealers are doing, et cetera, is very challenging. But we are looking at those players who offer a more consistent service that we do from a convenience standpoint. And we are seeing price movements happening in different ways and at different tiers but we are seeing pricing moves now some of it has been more recent and we're not sure if if it's you know pervasive across all geographies that's the work that we constantly do to monitor geographic changes versus whole of network changes on our competitor side got it and then just digging into that five to seven uh uh you know dollar increase per oil change.

In the past, you've talked about some offsets being, you know, increased price of waste oil that you, you know, you farm out. How does that factor into this net equation?

Sure. Historically, waste oil sales back to collectors have been an offset, especially as we've seen crude oil, crude oil costs increase, waste oil has tended to move up some. I would say in the June quarter, we saw very little movement in the price of waste oil. Where we sit in the September quarter, we have started to see some movement upward. So we do expect that that will be a bit of an offset. But as a reminder, with the pace and the quantum of increases that we We have seen, the industry has seen, it'll be an offset, but there's still a gap, and we're addressing that gap with pricing. All of that said, I would say that the team has been executing really, really well around all of that, generating really strong results as part of it, and continues to do that. And we would expect that to continue into the future and drive strong business fundamentals.

That's all I have. Thanks. Your next question comes from the line of Max Recklenko with TD Cowan. Max, your line is open. Please go ahead.

Great. Thanks a lot. So, first, on gross margin, can you speak to the philosophy around babbling potentially starting to take price to maintain margins, not just profit dollars, and, you know, whether there's an opportunity to get a little bit more aggressive to protect the P&L? And then where you said today, assuming everything holds, do we sort of roll the 4-2 pressure into early fiscal 27, or how do we think about that?

Thanks, Max. I'll take the first one and then I'll have Kevin talk through the last part. You know, as we have looked at historical practice, both for Valvoline and what has worked very well, is as we see costs inflate and we pass through to consumers we typically then we do have headwind on a margin rate perspective but maintain margin dollar performance and then we do know that the normal cycle for finished lubricant likely will come back down and that's when you end up having the margin expansion back to a more normalized rate I think where we want to be careful is in in a macro environment where the consumer is is having a lot of inflationary impacts if you raise your prices significantly higher than competitors there will be an at least elasticity trade-off and therefore we just want to make sure that we're managing that in line because transaction volume drives margin in our business so to take short you know short-term pricing positive wins you may not like the consequences long-term with volume if a competitor comes in with a promotional or lower pricing. So it's just a dynamic we have to watch very carefully, and we do, and we have. And we do expect margin rate will expand back as we get through this period of supply constraint.

And Max, as for the second part of the question, I think it's still a little early to start talking about fiscal 27, but But what I will say is a lot of the dynamic that we face is really tied to the macro. It's tied to what goes on with the straight and what's happening with the supply chain and how that could ever flow. And so we will react and even proact to that as that continues to play out. but we in the industry will have to continue to navigate that and we certainly feel like we're as well or better equipped than anyone else in the industry to do that.

Got it. That's helpful. And then can you speak to progress you're making around the Breeze integration? How are synergies tracking? Do you potentially now see more versus less opportunities to achieve whether it's top line or cost synergies? and then just any help around the store conversion timelines.

Sure, thanks. You know, we continue to be really happy with our integration efforts as we look at all the metrics that we track and having them be within or above our initial expectations. We've seen some early positive momentum on the stores we've converted to date. Obviously, it's early and the ramp is significant, so I don't want to overstate, but it is ahead of where we would have expected in the early months of that process. And it's a real testament because when we typically buy, you know, we are buying 30, roughly 30 stores from independent operators every year. And so this is not new in terms of converting stores over to a valvoline instant oil change brand but we typically have employee fall out when that happens and i think because we were very clear in the first quarter that our focus was to settle down the teams to connect with them we have seen very little attrition in the process of converting the stores and i think that has bode well for the early on performance now that said there are many actions that we're taking from a marketing and a fleet sales perspective that is not waiting for the Valvoline brand conversion. And so we are getting the benefit of that. On SG&A, we did talk last time of having some early synergy capture. So when we look at where we are year to date, we're definitely ahead on the cost on the G&A synergy capture that we were expecting, although it's low numbers, but we continue to pace positive. So when we step back overall, the Breeze business is performing, you know, without the changes we made at or about where we expected. And then the changes that we've made are adding some fuel to their performance, which we're really pleased with. And we continue, you know, to have more interactions with their leadership team, their support teams, and it's a very strong team with a very strong culture. And so we continue to be really pleased and have no concerns about the business case and the return on capital invested to be very much in line with what we talked about in the December investor update.

Got it. That's super helpful. Thanks a lot.

Your next question comes from the line of Brett Jordan with Jeffries. Brett, your line is open. Please go ahead.

Guys, with all the refunds from IEPA tariffs being thrown around in the aftermarket and probably a lot of imported filters.

Yeah, I'll take that one. As we look at the tariff impact, that was sized last year as being pretty modest. And frankly, a lot of action was taken to mitigate or avoid a lot of the tariffs that could have come. Frankly, we saw very little impact from tariff actions. Last year, there was no impact when it came to finished lubricants. Those were excluded from any tariff impact, which is obviously a large component of what we purchase. So we saw very little, and to date, we have not received any refunds. But I just want to emphasize that those would be very, very modest if and when they come.

So filters are not imported in your mix?

They are. And our supplier changed their filter supplier geographically to significantly mitigate any tariff impact. And so, again, we experienced very little cost headwind from the tariff actions that were taken. It just didn't impact the business very much at all.

Okay, great. And then I guess you talked about, you know, preferred supply chain relative to competitors on base level, base threes. Do you have any competitors that are sort of disadvantaged from a price standpoint? You know, would Shell have to do more, you know, sort of working backwards to get supply that would add cost to that oil, or is everybody pretty much same footing?

Yeah, it's a good question. And a lot of the information that we have is, frankly, somewhat anecdotal. But what we have heard in the marketplace is, you know, everyone is kind of in the same situation. I think in terms of from a price perspective, everybody is seeing cost increase. And I think where we're advantaged is with the relationship we have, I think we have a lot more surety of supply than probably a lot of others in the marketplace do. And, you know, I don't think there's a whole lot else to say about it. And that's going to just continue to play out.

All right. Great.

Thanks. your next question comes from the line of craig kennison from baird craig your line is open please go ahead yeah thanks for taking my questions it's been a helpful call so far i wanted to ask about non-oil change revenue and whether you expect maybe attachment rates to drop as a result of you know higher you know prices as consumers realize it costs them a little bit more just to get the core oil change?

Yeah, we, you know, as I mentioned, we're not seeing any trade down or deferral, and that includes on the non-oil change revenue. We typically, as we get in the summer drive season, as our stores get busier, sometimes the execution may drop just as people are trying to get cars through our bays. And also customers, if they've had to wait to get into the they they won't take additional services so this is not new and so where we see pressure is on continued growth and penetration in the summer drive season we're not we're not seeing any trade down or deferral we're still seeing positive contribution in the same store sales from NOCR just slightly less than what we've seen in the past two quarters but we're not seeing any consumer demand fall off. I would say consumers remain very resilient, and this is a non-discretionary category. So people want to take care of their vehicles, particularly as they're getting into the summer months and they drive, they're doing more summer road trips.

Thanks, Lori. And then maybe just to follow up on that, what is the inflation trend outside of your base oil impact? So just the inflation trend you're seeing on some of that non-oil change revenue business.

Are you talking about cost inflation or price inflation?

I was thinking about price inflation, what your consumers face, but I'll take both.

Yeah. I would say that our normal pricing, so we have two types of NOCR services. is we have what we call our OEM recommended services, that's radiator flushes and differentials and things like that, that not all of our competitors in the quick lube channel offer. But we typically, you know, dealers, we look at our dealer pricing and we offer a value relative to that. So we're always looking at where dealer pricing is to ensure that we maximize recognize the dollars that we get for those services, but still offer value relative to a dealer. And then as it relates to visuals, we continue to just look at what the customer is willing to pay, what our penetration rates are, and margin levels, and we take regular pricing on those items in due course. I don't think we've done anything significantly different from our normal course on those items.

Okay, thank you.

Appreciate it. Your next question comes from the line of David Lance with Wells Fargo. David, your line is open. Please go ahead.

Hey, good morning, and thanks for taking my questions. On the SG&A front, can you walk through some of the puts and takes that we should keep in mind for fiscal Q4 and how to think through the impact of advertising at the world's top, both on, you know, a top line and expense front?

Yeah, I think, you know, as we have gotten into Q4, like I said, we expect to have year-over-year SG&A leverage in Q4 versus last year. So continued focus on the cost dynamic and how we're managing our cost profile from an SG&A perspective. You know, on the marketing piece, there can certainly be, you know, a little bit of seasonality to that, et cetera, but I would say from a general approach perspective, you know, the marketing program tends to be planned well in advance, and we execute against those plans, and so I wouldn't expect anything particularly out of the ordinary from a marketing perspective in Q4 either.

Got it. And then there's a fairly wide range of store openings implied for Q4. So can you walk through how we should think through that and the split between company operated and franchised?

Yeah, we did have a good healthy number of additions in Q3. We opened 47 net new additions for the quarter, 26 openings coming from franchise growth with one closure, and company opened 20 and had two transfers from the ExpressCare platform for a total of 22. So, overall, a good Q3. Q4 always, if you look in history, is always a heavy new addition. Part of that is driven by the construction timeframe for both us and our franchise partners. So, we do expect to be within the range. I think, you know, some of this is timing of when things fall in September. it depends on where in the weight range will fall but we're very confident that we'll be within the range for q after we finish q4 thank you your next question comes from the line of peter keith with piper sandler your line is open please go ahead oh thank you uh good morning um i want to follow up on a question, I think it was from Brett earlier, just around the base oil, cost

increases and shortages. So while it does seem like everyone is in the same camp from a cost perspective, I don't think everyone's in the same camp from a supply perspective. So we're hearing about smaller players out there facing some shortages, being put on allocation. Sounds like you guys will be a better position than anyone. Does this present a market share opportunity or can you market around it? Or conversely, maybe people just substitute other types of oil unbeknownst to the consumer?

Yeah, it's a great question and one that the team is actively working on. Peter, again, anecdotally, and it's such a fragmented market, we do know that there are players that are either on allocation or are facing some shortages of product. And part of the marketing work we're doing is trying to figure out how we tease that out and take advantage. It's very similar to during COVID when we stayed open because people could stay in their cars and we could safely deliver the service in a time of uncertainty and others could not. We still share during that period. And this is a little different in that, you know there are a lot of customers who would who would typically go elsewhere and they may not get service how do we make sure that we are top of mind at those times and in places that they're searching so obviously from a marketing lower funnel perspective being in the right place at the right time but also augmenting that with our our brand our brand messaging such that we are continually increasing brand awareness and consideration such that when they're in the market to look for a new place because the place they have gone before cannot serve them, we are top of mind and ready to serve. So that is very much a focus within our marketing team. And we are trying to be proactive in getting new customers to trial our brand. So all of that work is well underway and we do see opportunity. Hard to size it, but we are definitely, that's one of the reasons why Kevin's saying we're not pulling back on marketing, because this is the time when you just have to be razor sharp on where you spend your marketing to capitalize on those opportunities.

Okay. All right. Sounds interesting. Thank you for that. And I guess that my follow-up to Kevin would just be on the cost increases related to base oil. So I can appreciate a steady ramp of your own price increases to be competitive. Is the goal right now to basically have that price cost ratio be neutral by the end of fiscal Q4, assuming base oil prices were to stay steady from here?

Yeah, that's a fair assumption. As we've tried to be clear that we want to protect gross profit dollars. We want to be mindful of the consumer and where the consumer is in an inflationary environment. And so we're being as proactive as we can from a price cost dynamic. You know, Q3, very pleased that we were able to do what we did and get out a little ahead of where the cost increases rolled through, but yes, our plan, our expectation is to have those two dynamics match from a price-cost perspective.

Okay, very good. Thank you so much for the rest of, good luck with the rest of the fiscal year.

Thank you.

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