FY2024 Update on Valvoline (NYSE: VVV)
This post serves as an update on Valvoline (NYSE: VVV).
You can find my writeup on this business here: https://possiblevalue.substack.com/p/valvoline-nyse-vvv
Closing price on 3/22/2022: $30.96
Closing price on 12/19/2024: $36.40
Share price return between 3/22/2022 (publishing date of my writeup) and 12/19/2024: 17.57%
S&P 500 return between 3/22/2022 and 12/19/2024: 30.04%
I’ve been keeping my eye on Valvoline over the last couple of years. FY2024 marked the first twelve-month period where the business operated as a pure play oil change and car maintenance business, and I decided to check in on its performance.
So, what happened during FY2024? Let’s take a look.
Separation of the Retail Services and Global Products Divisions
I mentioned way back in 2022 that the business was exploring a separation of its Retail Services and Global Products divisions. The separation was completed in March of 2023 when the Global Products division was sold to Aramco for $2.65 billion which resulted in a pre-tax gain of $1.572 billion. Almost all the pre-tax gain was used to repurchase $1.524 billion worth of common stock in FY2023.
New CEO and Her Compensation
Lori Flees became President and CEO of Valvoline in October of 2023. Her background is shown in the screencap below which was taken from p. 2 of the FY2024 Proxy Statement.
Ms. Flees’ compensation is comprised of a base salary, annual incentive, and long-term incentives.
Base salary – Ms. Flees’ base salary for FY2024 was a cool $900,000, up from $700,000 in FY2023.
Annual Incentive – Per p. 32 of the FY2024 Proxy Statement, this cash award was weighted 50/50 between Valvoline’s net sales and “adjusted EBIT”. Per the same page, the Compensation Committee believes these metrics are closely aligned to the financial and strategic goals of a pure retail services business.
Her target incentive opportunity was increased from 75% of base salary to 100% for FY2024.
The screencap below, taken from p. 40 of the FY2024 Proxy Statement, shows how she and other NEOs performed against these metrics.
The screencap below shows how Valvoline calculates “Adjusted EBIT”. It was taken from p. 82 of the FY2024 Proxy Statement.
The $4 million difference between what is shown directly above and the figure shown in the “Performance Against Fiscal 2024 Metric” is described in Note 2 of that screencap.
Long-term incentives – Ms. Flees’ long-term incentive opportunity was increased from $1 million in FY2023 to $2.5 million in FY2024.
Shown below is what the Compensation Committee calls the “Equity Mix” for the CEO’s FY2024 long-term incentives. The screencap was taken from p. 41 of the FY2024 Proxy Statement.
Additional information was provided about the PSUs on the following two pages of the proxy statement, which I think is helpful. I’ve screencapped the information below.
Below is information about the design of the FY2024 – 2026 PSUs. The screencap was taken from p. 43 of the FY2024 Proxy Statement.
Overall, I’m not too crazy about her compensation. I’m just never going to like using adjusted metrics to dole out incentive-based remuneration.
Ms. Flees’ total compensation is shown in the screencap below which was taken from p. 52 of the FY2024 Proxy Statement.
While I’m not crazy about her incentive-based compensation metrics, I don’t think total compensation is egregious.
Per p. 72 of the FY2024 Proxy Statement, Valvoline directors and executives own 844,292 shares which is ~0.66% of total shares outstanding. Not exactly what I want to see.
Valuation
Revenues
Net revenues increased 12.2% to $1.619 billion in FY2024 from $1.443 billion in FY2023.
System-wide store count increased 8.5% to 2,010 locations.
System-wide same-store sales increased 6.7%. This marks the 18th straight year of same-store sales growth.
Valvoline current trades at ~2.9x FY2024 revenues given its market capitalization of ~$4.72 billion at the close on 12/19/2024.
Capital Structure
Valvoline’s balance sheet is shown in the two screencaps below which were taken from p. 58 of the FY2024 Annual Report.
Not really a ton of concern on either side of the balance sheet. The only thing I looked in to further was its debt load, which weighs in at almost $1.1 billion as of the publishing date of this update. The debt consists of notes due in 2031, a term loan, and revolver.
Its 2030 Notes of $600 million were paid back during FY2024. Good riddance.
Per p. 80 of the FY2024 Annual Report, its 2031 Notes “… consist of 3.625% senior unsecured notes due 2031 with an aggregate principal amount of $535.0 million.” The full $535 million is still outstanding as of 9/30/2024.
Information regarding the term loan and revolver are shown in the screencap below which was taken from p. 80 of the FY2024 Annual Report. As of 9/30/2024, the term loan and revolver had outstanding balances of $439.4 million and $125 million, respectively.
Real Free Cash Flow (RFCF)
Valvoline’s Cash Flow Statement is shown in the screencap below and was taken from p. 59 of the FY2024 Annual Report.
RFCF, defined as operating cash flow minus stock-based compensation and CapEx, was $28.7 million in FY2024.
Valvoline trades at ~164x FY2024 RFCF given its current market capitalization of $4.721 billion. I double checked this to make sure it was accurate. That is an eyewatering multiple.
Two additional notes regarding the Cash Flow Statement:
Management continued to buy back stock in FY2024 to the tune of $226.8 million. Weighted average diluted shares outstanding decreased from 162.6 million at the end of FY2023 to 131 million at the end of FY2024.
Dividends were discontinued during Q2 of FY2023.
Returns on Invested Capital (ROIC)
Valvoline’s ROIC calculation for FY2024 is shown in the screencap below. The data were taken from TIKR.
Valvoline’s first full fiscal year as a pure play oil change and car maintenance business produced solid returns on invested capital. Let’s hope that management keeps it up.
Returns on Incremental Invested Capital
I will not be making these calculations as the business is entirely different now that it has sold its Global Products division. I’ll have to wait until the end of FY2025 to take a crack at Valvoline’s ROIIC.
FY2025 Guidance and Conclusion
Management guidance is presented in Slide 19 from the Q4 FY2024 Investor Presentation which is shown below. You can find a link to the presentation here.
It’s encouraging to see continued same store sales growth, store additions, and share repurchases. I’m not so thrilled about revenue guidance considering it’s expected to increase by 6.7% on the high end for FY2025. Assuming CapEx stays relatively flat, I’m not seeing how Valvoline’s real free cash flow will increase enough to justify its current valuation of >160x FY2024 RFCF.
Final analysis: I like that Valvoline is now a pure play oil change and car maintenance business. It was smart to sell off the Global Products division. Management can now focus on one operating segment. I’m not crazy about the CEO’s compensation, but it doesn’t seem egregious given the total stock-based compensation figure. The business is efficient and indicates that capital allocation is pretty good as highlighted by my ROIC calculation. With that being said, I can’t pay >160x RFCF for a business that’s only expected to grow revenues by <7% in the best-case scenario next year. I have to pass on Valvoline shares at this time.
Thanks again as always for reading. If you like this writeup, please feel free to share it and subscribe!
Please reach out to me at possiblevalueresearch@gmail.com, @PossibleValue on Twitter and @Heshy on MicroCapClub with any comments, concerns or questions. Lastly, don’t forget to tell someone that you love them.
*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***
Disclosure: I do not own shares in Valvoline.
I really enjoyed your post! A couple of things to consider- I'd love to hear your thoughts based on my comments.
First, I'm wondering why you're choosing to value VVV on the RFCF metric. Do you think most of the capex is being spent on maintenance? Most of the capex is being spent on growth, per their latest 10-K (~85%). I think that this should result in RFCF increasing to $217.2M, based on your stated goal of the RFCF. This puts VVV at a much lower multiple (~22x). IMO, paying ~22x FCF for a business w/ ROIC of ~20%, revenue growing ~7%, a large TAM, and the potential for a large increase in margins, is well-worth the investment.
I also think that you're not measuring true revenue growth properly. For example, Valvoline is selling some corporate locations to franchisees- decreasing revenue (temporarily) but freeing up capital to invest in higher RoR investments (e.g. franchisees). On my calculations, unit growth of 10% and SSS growth of 6%, would lead to a 16% revenue growth for VVV, on the basis of assuming all stores were corporate (which isn't true). In other words, I think that the GAAP measurements are unfairly decreasing VVV true growth. I think of franchising locations as being like transitioning from products to SaaS- you're going to experience a temporary decrease in revenue, during the transition period.
Lastly, a huge growth driver IMO is operating leverage- overhead doesn't need to increase at the same rate as revenue, leading to large margin expansion.
Personally, I think that VVV is eerily similar to AZO & ORLY- and not just because they both operate in the vehicle industry. They all represent a company scaling rapidly, operating in a fragmented industry dominated by mom-and-pop stores, deploying capital wisely (share buybacks), high ROIC, and a strong customer experience.
Regarding ROIC, I can't help but wonder if it is misleading, due to the huge growth in the retail segment. If I were to guess, in a few years, ROIC will have increased significantly due to many stores reaching maturity.
Let me know your thoughts- would love to hear them!