Valvoline Inc. (NYSE:VVV) Q3 2023 Earnings Call Transcript

Valvoline Inc. (NYSE:VVV) Q3 2023 Earnings Call Transcript August 9, 2023

Valvoline Inc. beats earnings expectations. Reported EPS is $0.43, expectations were $0.36.

Operator: Thank you all for joining. I would like to welcome you all to the Valvoline Third Quarter 2023 Earnings Conference Call and Webcast. My name is Brika, and I will be your moderator for today’s call. All lines are on mute for presentation portion of the call today with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to hand over to your host, Elizabeth Russell to begin today’s call. So Elizabeth, please go ahead.

Elizabeth Russell : Thanks Brika. Good morning and welcome to Valvoline’s third quarter fiscal 2023 conference call and webcast. This morning at approximately 7:00 AM Eastern Time, Valvoline released results for the third quarter ended June, 30, 2023. 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 Sam Mitchell, CEO; Lori Flees, President of Retail Services; and Mary Meixelsperger 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 adjusted non-GAAP results to amounts reported under GAAP 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. As a reminder, the Retail Services business represents the company’s continuing operations and the former Global Products segment is classified as discontinued operations for the purposes of GAAP reporting. On slide 3, you’ll see the agenda for today’s call. We’ll begin by providing an update on the return of proceeds from the sale of Global Products. We will then talk about our third quarter and operational highlights and end with a review of our third quarter results. Now, I’d like to turn the call over to Sam.

Sam Mitchell: Thanks, Elizabeth, and thank you all for joining us today. As we announced earlier this quarter, we completed the Dutch auction tender offer by successfully repurchasing just over $1 billion of shares. Between the tender offer and open market repurchases, we have repurchased 37.9 million shares and returned approximately $1.4 billion to shareholders this year. This leaves $340 million on the current share repurchase authorization and we expect that to be returned over the next 12 months subject to market conditions. This would deliver on our commitment to return a substantial amount of the net proceeds from the sale of Global Products business in line with the original time line of 18 months post close of the transaction.

Turning to slide 7. Let’s take a look at some key highlights from the quarter. We continue to see strong top line growth with $720 million of system-wide store sales this quarter, which is almost an 18% increase compared to prior year. System-wide same-store sales growth continues to be strong and consistent across the network with a 12.5% overall increase. From a profit perspective, we saw a 27.8% increase in adjusted EBITDA over prior year, which once again outpaced the revenue growth for the quarter. We added 23 locations this quarter, bringing our system-wide total to 1,804. Slide 8 shows our growth in key metrics over recent years. We continue to see the resiliency of the preventive maintenance business and our growth potential. Our performance in the third quarter gives us confidence in our full year outlook for fiscal year 2023.

As we wrap up this section, I’d like to address our leadership succession news from this morning. I have announced my plans to retire at the end of this fiscal year. Leading this company over the last 21 years has been the highlight of my career, and I will always be grateful for the experience of working with the talented and dedicated people at Valvoline. Lori Flees, our current President of Retail Services has been named incoming CEO. I’ve had the privilege of working side-by-side, with Lori for the past year. Throughout her career and in our time working together, she has proven to be a strategic thinker, with a natural ability to unite teams and drive results including the delivery of incredible customer and franchisee experiences. The Board and I have great confidence that she is the right leader for Valvoline, as the company focuses on its future as a high-growth, high-margin, pure-play retail services business.

And with that, I will turn it over to Lori.

Lori Flees: Thank you, Sam. I’m excited and honored to be named the next CEO of Valvoline. We have an incredible business and team. Working together with our talented team of over 10,000 people and our strong franchise partners, we’ll continue to deliver a quick easy trusted customer experience while investing strategically to deliver best-in-class value creation for our shareholders. I want to thank the Board for their trust in me, and I want to thank Sam for his mentorship and successful leadership of Valvoline through a critical time of change and growth. Now let’s turn to our third quarter performance on Slide 10. As expected, we saw EBITDA margin improvement both sequentially and year-over-year. Leverage from increased volume related to the summer drive season is the primary contributor of the sequential margin improvement.

Compared to Q2, EBITDA margins improved 400 basis points primarily due to improved efficiency in labor and store operations. We mentioned in Q2, that we were entering the summer drive season from a much better staffing position than recent years and the benefit of that is being seen this quarter. The 200 basis point improvement over prior year is largely due to improved leverage. Compared to prior year, our gross margin rate was largely consistent because the headwinds from waste oil price declines were offset by base oil price declines, improved labor efficiency and some minimal onetime items. SG&A leverage from the increased scale of our business drove the majority of the EBITDA margin improvement. Turning to Slide 11. The demand for our quick, easy and trusted service experience continues to grow and our in-store talent and franchise teams are delivering on our customer products.

In Q3, we saw increased traffic driving approximately 40% of the 12.5% system-wide, same-store sales growth. The increased transactions are coming from a balanced increase from new customers to Valvoline returning customers and miles driven. On the ticket side, we continue to see pricing, premiumization and non-oil change revenue service penetration, all contributing to ticket increases. As we begin to lap the material pricing actions taken in 2022, we anticipate our growth will continue to be more balanced between transactions and tickets. Moving to Slide 12, for an update on our new unit growth, an important part of our growth algorithm. This quarter there were 23 total additional units. On the company side, we saw 22 store additions this quarter, with 12 ground-up openings, eight acquisitions and two franchise conversions.

We continue to focus our new unit pipeline on key markets to drive strong return on invested capital from our company-operated network. For franchise new units, we saw three openings, which were offset by two conversions from the franchise to company. We typically do not plan for conversion, but have had four this year. These are normally done for stores that are geographically proximate to company operations where we can drive a high return for shareholders. Due to permitting and construction delays that our franchisees are experiencing, we had some of the expected franchise new unit slipped from the third quarter into both the fourth quarter and early fiscal year 2024. While our franchise new unit pipeline is very strong, we’re trending towards the low end of guidance for the fiscal year 2023 given these pushouts.

We continue to be positive on our long-term target to accelerate franchise unit growth to 150 per year by fiscal year 2027. And consistent with prior years we anticipate a strong Q4 for unit additions to close out the remainder of the year. I’ll now turn it over to Mary to discuss our financials in more detail.

Mary Meixelsperger: Thanks, Lori. Our Q3 results are summarized on Slide 14. Adjusted EBITDA improved 27.8% to just over $110 million for the quarter. Gross profit improvements continued in the third quarter largely driven by increased transactions during the quarter and continued higher average ticket from pricing actions premiumization and non-oil change revenue service penetration. SG&A investments primarily related to investments in advertising and talent to support future growth impacted adjusted EBITDA by $3.9 million. We are continuing to see improved SG&A leverage driven by the increased sales volume. We also saw strong growth in adjusted EPS with $0.43 per share for the quarter. Turning to Slide 15. Let’s take an updated look at the balance sheet and cash position.

As Sam mentioned we are making progress on our commitment to return a substantial amount of the proceeds of the global product sale to shareholders. We have a strong cash position following the completion of the tender offer and anticipate the remaining use of the Global Product proceeds to be complete in the coming months. We are reiterating our target leverage ratio of 2.5x to 3.5x EBITDA. Our cash flow from operations increased $123 million over the prior year to approximately $250 million. This increase is driven by higher cash earnings as well as favorable changes in net working capital due to the onetime benefit of the growth in trade payables as a result of the sale of Global Products. As a pure-play retail business, we will continue to benefit from the working capital light nature of the business.

This quarter we saw favorable interest income from the investments of the net proceeds from the sale of Global Products earning $24.9 million. Turning to Slide 16. We are updating our guidance range for a couple of key metrics. For adjusted EBITDA, we expect to see Q4 results similar to Q3 and are narrowing the full range to $375 million to $385 million. For adjusted net income, we are increasing the guidance largely driven by interest income earned on the proceeds from the sale of Global Products. Now I’ll turn it over to Sam to wrap up.

Sam Mitchell: Thanks, Mary. We had a great quarter and we’re well-positioned to deliver on our goals for the year. On a more personal note, it has been a tremendous honour and privilege to lead Valvoline over the past 21 years. We certainly have come a longways. First, I would like to thank the analysts, who cover Valvoline. I have always been impressed with the quality of your work and thoughtful questions. I will miss our exchanges as they truly helped us become a more disciplined public company. To our investors, I am grateful for the trust you place in the company and this management team as demonstrated by the capital you have invested in VVV. If you have been a long-term investor, you know that our first priority is building a strong and sustainable business.

The most important driver of shareholder value. Valvoline delivers a very strong return on invested capital and we will continue to invest in high-return opportunities consistent with our strategies. Backed by strong governance and financial controls we will always strive to be clear in our communications and pursue a meaningful dialogue with our investors. Finally, I am proud of our track record in delivering on what we say we’re going to do. I am confident that this will not change. You already know that I’m bullish on Valvoline’s future. While the separation of our businesses was especially challenging, we are already seeing the benefits of increased focus from operations to Board discussions. One important competitive advantage that is difficult to see from the outside is our talent and culture.

We are committed to winning the right way and working closely together as a team. This includes our partnership with our franchisees. Combined with investments in our processes and technology it is our team, our people who truly care about each other and our customers that makes Valvoline a special company with tremendous opportunities ahead. With Lori and a strong leadership team in place, the company is in great hands as we make this transition. Elizabeth?

Elizabeth Russell: Thanks, Sam. Before we start the Q&A, I want to remind everyone to limit your question to one and a follow-up so that we can get to everyone on the line. With that Brika please open the line.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Simeon Gutman: Hi, everyone. Sam congratulations. We’ll miss you. Congratulations, Lori. My first question on the comp, which was great. The — I guess deferred maintenance or the benefit that you saw in transaction and then it sounds like we’ll lap some ticket growth. So I guess, where do we normalize? How soon does that happen? And in terms of pricing or ticket growth where should that normalize going forward? Thank you.

Lori Flees: I think on the transaction Simeon we continue to see the strongest driver of transactions coming from a growth in the customer base. So 40% of our same-store sales growth came from a growth in transactions and a significant part of that was a growth in the customer base. So that bodes very well as we continue to grow share with our current network. On the price, we had made a number of material price increases as costs were rising in 2020. We still continue to optimize our pricing as we add stores particularly acquisition stores where the pricing may not be aligned with our pricing and we do that over a period of time. And so we continue to adjust price in key markets. We’re always analyzing our three-tiered pricing between conventional blend and synthetic — full synthetic.

And I think we talked about at the end of last financial year — our guidance for the long-term is 3% to 9% same-store sales growth. I think you’ll start to see us moving in that direction, but we still expect Q4 numbers to be strong.

Simeon Gutman: Okay. My one follow-up is on the franchise and company-owned mix. Curious if there is a debate or any thought around one side higher versus another? I know what the company’s goals or responses have been, but curious if there is a continual debate on this mix? Thanks.

Lori Flees: Yes. I think we are – I think our main goal Simeon is to grow our network. We have a pretty aggressive growth aspiration to get to 3,500 units. And the only way we’re going to do that effectively is by growing our franchise base, continuing to grow our company side but growing our franchise base at a faster level. Now that does take time to generate. You can’t add new units within a year. It’s a multiyear effort which is why we are – we forecast we’ll be at 150 new units on the franchise side by 2027. And our team is looking at ways that we can accelerate that and pull that in closer. But in terms of trying to stay with goal of where we want to get to other than driving the network to be fully — full coverage in all key markets and we think that’s 3,500.

We don’t have an express goal to get to a certain percentage of franchise. As we add company stores we’re trying to look at infill markets where we know the return on invested capital is the highest because the amount of marketing you spend when you’re adding a store to a market that has demand is higher than in a brand-new market. And so we’re being very smart with where we’re growing on the company side, while we’re really doubling down to invest on the franchise growth.

Simeon Gutman: Thank you.

Sam Mitchell: I think just to add to that too and the first point that Lori has made Simeon is that investors should expect both company stores and franchise stores to grow. But to accelerate the franchise growth, we have begun conversations with potential new partners. We’re looking for well-capitalized partners, who understand and want to invest in this model. And to do that that could include the sale of certain company markets to bring them in and give them a beachhead to grow from. So we would expect to see some change in our franchise mix mainly with a handful of strong new partners to help us achieve that accelerated growth rate.

Simeon Gutman: Thank you.

Operator: Your next question comes from Steve Zaccone from Citi.

Steve Zaccone: Hey, great. Thanks for taking my questions. Sam and Lori, congrats on the announcements. So I wanted to follow-up on Simeon’s question around same-store sales. Just specific to the fourth quarter because it sounds like the fourth quarter is expected to be above that algo, but you didn’t raise the overall outlook for the year on same-store sales. So could you just talk about that why not? Should we expect a similar mix between ticket and transaction? Just talk about that fourth quarter maybe something you’re seeing in the near term would be helpful. Thank you.

Mary Meixelsperger: Sure. This is Mary. I just – in terms of fourth quarter same-store sales outlook, if you do the math and you back in you’ll be able to tell that we’re guiding to the very high end of the range of same-store sales that we originally provided at the beginning of the year. So we’ve continued to see strong demand, as well as we’re continuing to see pricing increases. And I would expect to see a similar balance in Q4 between transactions and ticket that we saw in Q3. And I would expect that we would be at – toward the high end of the range in terms of overall same-store sales. So I think it’s a good question. But I think you’ll see us end the year toward the high end of the range.

Steve Zaccone: Okay. Thanks for that clarification. Then I guess to follow-up on margins. So how do we think about the mix of gross margin versus SG&A leverage in the fourth quarter? And I guess now as we look forward, how do we think about the puts and takes on gross margin rate over the near to medium-term? Would you expect that line to see some modest expansion every year from here on out. Thank you.

Mary Meixelsperger: Yes. So we talked about fourth quarter being fairly similar to third quarter. So I think what you will see in fourth quarter is most of the leverage coming from SG&A leverage year-over-year versus gross margin. We might see some modest gross margin leverage. Lori mentioned in her comments that while we saw some benefit from product cost reductions, price reductions due to lower base oil we’ve seen some offsets to that because we’re obtaining lower benefit from the sale of waste oil to re-refiners. And so we expect that to continue in the fourth quarter. In terms of longer-term outlook, we provided long-term EBITDA range in the 26% to 29% range and we do expect to see gross profit leverage as well as SG&A leverage as we move forward in that – in the next three to five years.

So I think you’re going to continue to see as we take more market share as we continue to build the business and expand the footprint that we’re going to benefit from really strong sales increases and leverage in the fixed cost that we have in the business.

Steve Zaccone: Great. Thanks.

Lori Flees: I’d just add – Yes. I’ll add to Mary’s point just with another color on gross margin, the leverage we get will be on the store expenses, running the stores has a big fixed expense component which will drive leverage and then obviously, the product cost. There is – that moves with base oil pricing up and down and we’ve seen the waste oil piece. On the labor side, we do have plans to drive labor efficiency but we also recognize that minimum wage rates, et cetera will continue to go up. And so our plans are to make sure that we have more than enough initiatives that drive efficiency to counter the increases on wage. But that’s the work to be done. So I think, that’s why Mary is talking about the leverage coming from the G&A side even though there will be opportunities and leverage on the gross profit side.

Steve Zaccone: Great. Thanks very much.

Operator: Thank you. Your next question comes from Daniel Imbro from Stephens.

Daniel Imbro: Yes. Hey, good morning, everybody. Thanks for taking my questions, and Lori, Sam congratulations on the announcement.

Sam Mitchell: Thank you.

Daniel Imbro: I want to follow-up on the last question maybe sort on top line. Mary, I think your words were you’ve seen continued strong demand kind of here in the fourth quarter. I’m curious if we look through the summer months did we see any notable demand shifts month-to-month whether it was traffic or service attachment. And then as we think about service attachment, how is that trending? I mean non-oil change revenue has been a focus for a while. Just any update on how successful you guys have been driving that penetration higher?

Mary Meixelsperger: So I would say in the first two quarters we had a lot of weather shifting demand around. And as we came into the drive season the demand and the volume has been pretty consistent. And so we don’t see — we haven’t seen a lot of surprises month-over-month. As it relates to service attachment obviously, the mix of service attachment changes in the summer, less battery and more air conditioning as an example. I do also think that as our service centers get busier and people get busier. Sometimes you see a slight decrease in service attachment just because they would rather do it at another time that’s not so busy. But our improvement year-over-year and the things that we’ve been focused on we’re still seeing really strong improvement on attach rates. And so you’ll see our non-oil change revenue year-over-year has gone up on a dollar basis and that’s what we’re looking for. But we don’t see anything unique month-over-month that we would call out.

Daniel Imbro: Great. And then my follow-up related to the top line from the fleet business. I don’t think I heard any update in the prepared remarks. But how did that initiative progressed in the quarter? I guess how much of the mix is that today? And as you think about that segment growing and economic sensitivity in the macro, does the higher fleet mix make you more sensitive to maybe small business fluctuations? Does make you less sensitive given that that’s a business that has to make those repairs? Just any general thoughts on how that evolving mix over time will change the business sensitivity? Thanks.

Mary Meixelsperger: Yes. So fleet is roughly about 10% of our top line and that is growing faster than our overall business but still a small portion and it continues to grow at a faster rate than our overall sales. The thing I would say about fleet managers is this is an asset that drives their P&L. And so we don’t see them changing their mix of maintenance, because they’re trying to maintain the assets for a longer healthier period. So we haven’t seen any instability in our base. In fact we have a really strong base of fleet customers that is growing and our focus is on to increase the penetration within those accounts that we have as well as adding new accounts.

Daniel Imbro: Great. Appreciate all the color and best of luck going forward.

Mary Meixelsperger: Thank you. Brika, do we have another question on the line?

Operator: We now have Jeff Zekauskas of JPMorgan. Your line is open.

Jeff Zekauskas: Thanks very much. On the cash flow statement there was an outflow of $298 million from discontinued operations. What was that? And are there any more outflows that will come after that?

Mary Meixelsperger: Yes. That was primarily related to taxes paid on the transaction that are considered as part of the discontinued operations. So the discontinued operation is a gain on the sale of Global Products along with the taxes paid on the sale of Global Products are all considered to be part of discontinued operations, Jeff.

Jeff Zekauskas: Is there more to come after that, or are we done?

Mary Meixelsperger: Yes, there’s a little bit more taxes to be paid. We’ve paid the bulk of the Federal taxes, but there’s still somewhere between $50 million and $100 million of state level and local level taxes that still need to be paid in the fourth quarter. We’ll lap most of that in the fourth quarter. But that is one of the uses of the Global Products net proceeds that we’ve talked about in the past.

Jeff Zekauskas: Sure. And for my follow-up on a normal basis, exclusive of the benefits you get from building new stores, what do you see as your normal rate of volume growth? And what do you see as the normal rate of volume growth of lubricant industry in the United States?

Mary Meixelsperger: Yes. So, we’ve been seeing really strong same-store sales growth in our mature stores. So, our same-store sales growth in the mature stores probably track 100 basis points lower in terms of same-store sales growth on average than the new stores that we’re adding that are growing to maturity a little bit faster than the very mature fleet. I’ll tell you that in terms of the product usage we’re continuing to see volumes track very closely to the sales increases that we see. And the second part of your question in terms of the overall lubricant industry I don’t know if I can address–

Lori Flees: My — the data that I’ve seen published externally is that the Quick Lube business has between 100 — probably around 100 basis points of growth per year coming from just from a switch from do-it-for-me — do-it-yourself versus do-it-for-me. And then you’ve got the miles driven and the drain interval pieces that add to that.

Mary Meixelsperger: And I think overall the consumer drive for convenience is bringing more people to our stores. Our quick easy trusted customer experience and the incredibly convenient experience that we offer to consumers I think is going to continue to drive market share growth for us relative to others where we’re taking share from which we believe includes dealerships and other types of auto aftermarket service centers just because of the convenient experience that we offer.

Jeff Zekauskas: Great. Thank you so much.

Operator: Thank you. We now have Mike Harrison from Seaport Research Partners.

Mike Harrison: Hi good morning.

Mary Meixelsperger: Good morning Mike.

Sam Mitchell: Good morning Mike.

Mike Harrison: I just want to add my congratulations to Sam on an impressive career transforming Valvoline. I’ve definitely enjoyed working with you and congrats to Lori as well on the new role and the journey ahead. In terms of the price cost that’s on your slide there, the $11.5 million that was in that year-on-year bridge. Can you give us a little bit more color on what’s going on there? How much pure pricing was in the 12.5% same-store sales growth this quarter? And what could that year-on-year price cost number look like as we get into Q4?

Mary Meixelsperger: Yeah. It’s a good question, Mike. When we look at our overall same-store sales bridge from a pricing perspective I would say probably about a-third of the overall comp is coming from pricing increases. So if you think about that third — next quarter we still had pricing changes last year in September that we’ll be lapping here in the fourth quarter. So we’re still going to see some nice year-over-year improvements in pricing to help — that’s helping to drive the comp in the fourth quarter as well. So when you look at price cost, I think Lori mentioned that the benefits that we saw from product cost reductions because of lower base oils were largely offset by some of the giveback that we had in getting lower recoveries for our waste oil from re-refiners.

And so I think you can think about that price cost being, primarily driven by pricing in the quarter — in Q3 on the table. There was a little bit of cost benefit, but I think it’s primarily from price. You’ll see more detail in the Q when it comes out.

Mike Harrison: All right. Perfect. And then I know it’s maybe a little bit early to talk about fiscal 2024 but was hoping that maybe we could discuss just some modeling assumptions on what we might be thinking for same-store sales new store additions and puts and takes around EBITDA margin next year. I guess, maybe the broader question is how might fiscal 2024 look different from your longer-term expectation of 14% to 16% sales CAGR and 16% to 18% EBITDA CAGR?

Mary Meixelsperger: So, we’re not in a position, Mike as you know to give specific guidance for fiscal 2024. I’m afraid, you’re going to have to wait for next quarter’s earnings call to get the specific 2024 guidance. But in terms of our long-term guide, we still feel really good about the long-term guide in terms of the revenue CAGR and the EBITDA CAGR that we have provided to the Street. And I think fiscal 2024 will fit nicely into that longer-term approach when we provide guidance into the next quarter call.

Mike Harrison: Understood. I had to try. Thanks very much.

Mary Meixelsperger: Thanks, Mike.

Operator: Thank you, Mike. We now have Bret Jordan of Jefferies. Please go ahead when you’re ready.

Bret Jordan: Hey, good morning, guys.

Mary Meixelsperger: Good morning.

Bret Jordan: It sounded like obviously traffic was pretty positive. But do you have anything sort of more granular as far as oil change interval trends in the quarter? Was there any push out on miles between change, or was it pretty consistent?

Mary Meixelsperger: Yeah. We had a very, very modest impact of oil drain interval for the quarter right around 1% and that was more than offset by the increase in miles driven which was just over 1%. So I think net-net the oil drain interval and miles driven netted out to have very little impact on our same-store sales.

Bret Jordan: Okay. And was there any regional dispersion?

Mary Meixelsperger: Very little regional dispersion. One of the great benefits of this — some of the proprietary processes that we have with SuperPro and with our training, we have just amazing consistency across both company and franchise locations and we see very, very little geographic dispersion unless we see a weather event in certain areas that typically happens in the fall or winter where we might see some different dispersion. But generally, we see very, very consistent results between our regions. Lori or Sam, is there anything you’d add to that?

Lori Flees: Yeah. I agree.

Bret Jordan: Great. And I got one quick question on the franchise. You’ve know that sort of zoning some of the logistical processes pushed franchise opening out, is that tied to a particular franchisee that was doing multiple units, or was it just sort of just across the mix you were seeing some delays in that base?

Lori Flees: Yeah. It was distributed across a number of franchisees. These are things — some of these things we saw on the company side and have been trying to get ahead of both for the company store openings but also for our franchisees things like supply constraints. There’s been, supply constraints for transformers and electrical boxes as well as bay doors. And for company we can order — we can order in advance on the bay doors because we know what our pipeline is going to look like. But for some of our franchisees who are not doing multiple units at the same time they can’t put those, kind of orders out. And so trying to figure out how we can work with them to help them not have the supply constraints slow their process down is one example.

The other one that I know many in the industry have been facing, and we try to learn from others as well as within our network is the local municipalities, the backlog of permitting and site inspections and the understaffing we’re seeing in some markets is hurting the timeline to move through the process. On the company side, we put in some national expeditors where we can, but some of those firms don’t cover all the geographies. So working to get help when it’s necessary with certain local municipalities is something that we’ve been putting in place since last year when we had some challenges on the company side. And then, I think in certain markets we continue to see subcontractor shortages. And in some regions you just have to work through that.

I think as a franchisee, again, if you’re not building out multiple units, you’re subject to the priorities of where the subcontractor is getting business, whereas on the company side given the consistent pipeline that we have we’re able to lock in subcontractors a bit more easily. So these are just some of the things that our franchisees are experiencing. And we’re trying to take — the things that we’ve done on the company side and jump in and support where necessary it’s just certain markets that proves more challenging and that definitely hit the numbers that we showed on the franchisee for Q3. The good news is this is not a reduction of the pipeline. These — just push out, so these units are still — many of these are ground-ups that are still on track in construction and moving forward.

So it’s not a lack of confidence that they will come online. It’s just some challenges with timing of when we expected.

Bret Jordan: Okay, great. Thank you.

Operator: Thank you. For the time constraint, we have no further questions on the line. So I would like to conclude the call here. Thank you all for joining. And you may now disconnect your lines.