Effie Veres - MD, FTI Consulting John Van Heel - President & CEO Brian D'Ambrosia - CFO Brett Ponton - President.

Brett Jordan - Jefferies Rick Nelson - Stephens James Albertine - Consumer Edge Chandni Luthra - Goldman Sachs Scott Stember - CL King Carolina Jolly - Gabelli.

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake's First Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].

And as a reminder, ladies and gentlemen this conference call is being recorded and may not be reproduced in whole or in part without permission from the company. I'd now like to introduce Ms. Effie Veres of FTI Consulting. Please go ahead..

Thank you. Hello, everyone and thank you for joining us on this morning's call. I would like to remind you that on this morning's call, management may reiterate forward-looking statements made in today's release.

In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the company's filings with the Securities and Exchange Commission.

These risks and uncertainties include but are not necessarily limited to uncertainties affecting retail generally such as consumer confidence and demand for auto repair; risks relating to leverage and debt service, including sensitivity to fluctuations in interest rates; dependence on and competition within the primary markets in which the company's stores are located, and the need for and costs associated with store renovations and other capital expenditures.

The company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events, or circumstances described in such statements are material. With these formalities out of the way, I'd like to turn the call over to Monro's President and Chief Executive Officer, John Van Heel. John, you may begin..

Thanks, Effie. Good morning and thank you for joining us on today's call. We are pleased that you are with us to discuss our performance for the first quarter of fiscal 2018. Before I turn to our results for the quarter, I would like to welcome Brett Ponton, who is joining us on today's call. Welcome Brett.

Brett will join Monro as President on August 1st and assume the role of CEO on October 2. Brett has over 20 years of experience in our industry managing and growing both franchise and company-operated stores.

In addition to his operational experience, Brett also brings additional consumer marketing expertise to Monro which I believe will complement our team's current efforts to improve our in-store and online customer experience. I can tell you that he has made a strong initial impression on our associates and I'm pleased he is with us today on this call.

Brett will share his thoughts on Monro and our industry in a moment. But first Brian D'Ambrosia, our Chief Financial Officer, and I will review our first quarter results and our updated outlook for the year.

The outperformance of our recent acquisitions, positive comparable store sales, combined with our continued focus on margin improvement drove first quarter earnings per share of $0.55 at the high-end of our guidance range after adjusting for $0.02 in management transition cost.

The 18% sales increase in the quarter exceeded the high-end of our guidance range and was driven by better than expected top-line performance from our recent acquisition. The comparable store sales increase of 1.4% in the quarter was driven by higher overall ticket of more than 3% in both tire and service categories.

Strong sales performance in brakes front end and shocks was offset by a slight decline in alignments with flat performance in both maintenance services and tire sales. As we enter the second quarter, we continue to see positive top-line trends with an increase in comparable store sales of 1.5% quarter-to-date once again led by higher ticket.

As we noted on our May call, we expected to see higher average tickets due to the pass-through of higher material cost particularly in tires but we were unsure about traffic trends coming off of two consecutive warm winters and continued pressure on the number of vehicles in our sweet spot.

As a result, we focused on sales execution supported by great offers on our drive card credit card to help motivate customers to perform much needed maintenance and repairs. We believe we are seeing some traction from our efforts in the brake and front end categories, while many consumers continue to delay tire purchases until this coming winter.

From a geographic standpoint, both our Northern and Southern regions posted positive comps for the quarter with relative outperformance in our Northern and Mid-Atlantic markets. In fact, our strongest markets continue to be New Jersey, New York, and Maryland, where we saw high single and double-digit increases in comp sales for the quarter.

Turning to gross margins, first quarter gross margin declined by 120 basis points versus the prior year, primarily as the result of the sales mix impact from the fiscal 2017 acquisition.

On a comparable store basis, first quarter gross margin increased by approximately 110 basis points due to lower material cost as a percentage of sales reflecting the strength of our purchasing power and our sales execution.

Total operating expenses for the first quarter increased $12.4 million and were flat as a percentage of sales as compared to the prior year period. The increase reflects the addition of 55 net new stores.

On a comparable store basis excluding management transition cost, total operating expense dollars increased by approximately $2.9 million year-over-year, primarily driven by higher performance based store manager compensation and a shift of advertising expense marginally to the first quarter from later in the fiscal year primarily around test and initiatives to drive sales.

We are bringing the most productive of these forward in the year. While our store manager's bonus plans are based on increasing four-wall profit which we saw in the first quarter, I expect to see the level of store manager compensation moderate for the remainder of the year as we adjust staffing level.

Operating income for the first quarter increased 7.8% to $33.7 million demonstrating the team's hard work and gross margins store level profitability and integration of recent acquisitions. Now I would like to provide a brief update on our customer focused initiatives.

As we discussed on our last call, in March, we launched our new private label credit card, the Drive Card which is replacing a Goodyear branded credit card.

This new Bank sponsored credit card is exclusive to Monro's brands and provides us with complete control over customer targeted marketing and promotional offers which we believe will drive greater long-term customer loyalty.

I'm very pleased that in the first quarter, we processed nearly 10% of our total retail sales on these credit cards which has already surpassed the 6% of sales we processed on the Goodyear branded credit card last year.

We believe we can double the Drive Card's penetration to 20% of total retail sales given the six-fold increase in credit card accounts we opened in the first quarter. At present, our opened Drive Card accounts represent over $120 million in available credit and this will grow to hundreds of millions of dollars as we continue to open new accounts.

Our fiscal 2018 program includes great Drive Card offers such as discounted oil changes, tire rebates, and service discounts, which we believe will drive new customers and more return visits starting this fiscal year.

We expect that the Drive Card upgrades and customer communication, in-store video and other sales support, new comprehensive technician training, as well as improvements to our point-of-sales system will help our teams retain customers, drive sales, and achieve greater store efficiency in fiscal 2018 and beyond.

We noted these enhancements on our May call and we are seeing increasing improvements at the store level which we believe will build as the year progresses as well as positively impact employee retention. We also see these positive results in our increasing number of customer reviews and ratings.

Further, as we move to implement our new CRM system this year, we are increasingly focused on improving marketing and store execution to customers that represent the greatest opportunity for lifetime value.

We're seeing positive results from this focus in our favorable ticket results in the first quarter and also see the impact of this selectivity in our traffic. Now let's turn to our growth strategy. We are continuing the integration of our fiscal 2017 acquisition which outperformed both in sales and profitability in the first quarter.

Sales were higher than planned for the retail commercial location and were even stronger versus plan for the wholesale location which took advantage of Monro's tire sourcing and new and expanded delivery route, covering our stores to make additional sales and gross profit.

The additional tire unit volume from these acquisitions about a 25% annual increase is providing Monro with the ability to mitigate tire cost inflation. Overall we believe these acquisitions will continue to improve in profitability as they fully benefit from our scale and integrated supply chain.

This will further strengthen Monro's competitiveness in the market and expand our acquisition opportunities to include businesses with integrated retail, commercial, and wholesale location. I'm also pleased to announce that we have signed definitive agreements to acquire 20 stores including eight from an existing Car-X franchisee.

These stores fill in our existing markets of Michigan, Illinois, and Indiana. The acquisitions are expected to add approximately 13 million in annualized sales representing a sales mix of 95% service and 5% tires. 12 of these stores will operate under the Monro name and the remaining eight will continue to operate under the Car-X brand.

The acquisitions are expected to close this quarter and will breakeven for the fiscal year. Our pipeline of acquisitions remains robust with more than 10 NDAs signed each of them representing between five and 40 stores within our existing markets.

However we continue to see larger transactions being put on hold at least until the beginning of 2018 are waiting potential tax reform. We are also continuing our Greenfield expansion with a goal of opening 20 to 40 stores per year. In the first quarter we opened seven locations and we expect to open another seven locations in the second quarter.

This is on top of the 30 Greenfield locations we opened in fiscal 2017. As a reminder, Greenfield stores for us include new construction as well as the acquisition of one Q4 store operation. These locations are expected to add approximately 1 million each in annual sales. Turning now to our outlook.

We expect total sales in the second quarter of fiscal 2018 to be in the range of $278 million to $285 million, representing an increase of 13% to 16% year-over-year. This is based on an increase in comparable store sales of 1% to 2.5%.

We anticipate second quarter diluted earnings per share to be in the range of $0.52 to $0.56 including $0.02 in management transition cost.

In light of comparable store sales trends fiscal year date, we now expect fiscal 2018 comparable store sales to increase 1.5% to 2.5% on a 52-week basis or 3.5% to 4.5% when accounting for the 2% comp sales benefits from a extra week in the fourth quarter. This compares to previous guidance of 2% to 4% on a 52-week basis.

The lower fiscal 2018 comp guidance is offset by higher than expected sales in the first quarter and the incremental top-line contribution from today's announced acquisition. Therefore we now expect fiscal 2018 total sales of $1.135 billion to $1.155 billion, representing a 12% increase year-over-year at the midpoint of the range.

For the fiscal year, we expect that a higher realized in tires largely driven by the pass-through of higher cost and the approved in-store sales execution will lead to sustained increases in our overall average tickets year-over-year.

Further we are hopeful that we will finally see some normal winter weather which would be positive for our tire unit sales. We also believe that sales in the second half of the year will benefit as consumers meet their healthcare deductibles.

Our fiscal 2018 guidance incorporates a cost increase for tires and oil combined which we believe is lower than that experienced by the majority of our competitors. Our guidance reflects higher costs for tires partially offset by lower oil cost. Please note that these lower oil costs begin to take hold in our second quarter.

Over the past three months, we've seen tire manufacturers offering greater in off invoice rebates as a result of raw material declining from recent highs and soft sell-through of tires.

We no longer expect additional higher cost increases this year whereas we have provided for at least one increase in the second half of the year in our prior guidance. Given these updated assumption, we now expect to generate operating leverage on a comparable store sales increase above 1.5% on a 52-week basis.

This leverage point is 50 basis points lower than the 2% we guided to last quarter and offsets the impact of lower annual comparable store sales guidance. With that said, let me remind you that every 1% increase in comparable store sales above this 1.5% threshold generates an incremental $0.08 in EPS for the fiscal year excluding the extra week.

We also expect to incur approximately $0.06 in incremental cost in fiscal 2018 related to the management transition. This includes the $0.02 that we incurred in the first quarter, $0.02 we have guided to in the second quarter, and $0.01 in each of the third and fourth quarters.

For the fiscal year we now expect earnings per diluted share to be in the range of $2.05 to $2.20 representing a 15% increase year-over-year to midpoint of the range. This compares to our previous guidance of $2.10 to $2.30.

The earnings guidance continues to include $0.10 per share in contribution from the extra week in the fourth quarter and $0.15 to $0.19 in accretion from recently completed and announced acquisition. Please note that our fiscal 2018 guidance does not assume any future acquisitions for Greenfield store openings.

Lastly, as we have discussed with you on recent calls and as seen again this quarter the commercial and wholesale locations we acquired as a part the Eagan Park acquisitions in fiscal 2017 operate at a lower gross margin than our retail location primarily due to a higher sales mix of tires and with respect to the wholesale locations a higher sales mix of tires without installation.

However these acquisitions also require a lower level of SG&A expenses. In our first quarter the improvement in comparable store gross margins and higher operating expenses somewhat mapped this impact.

However we continue to expect that this change in our sales mix will reduce second quarter gross margin and be offset by a reduction in SG&A expense as a percent of sales until we fully lap these acquisitions in the third quarter. Also because these acquisitions are recent they are still dilutive to overall operating margin this year.

And with that I would like to turn the call over to Brian D'Ambrosia for a more detailed review of our financial results.

Brian?.

Thank you, John. Sales for the quarter increased 18.4% and $43.2 million. New stores defined as stores opened or acquired after March 26, 2016, added $41.5 million including sales of $34.8 million from fiscal 2017 acquisitions. Comparable store sales increased 1.4%.

Additionally, there was a decrease in sales from closed stores of approximately $1.3 million. There were 90 selling days in both the current quarter and the prior year's first quarter.

At June 24, 2017, the company had 1,119 company-operated stores and 114 franchise locations as compared with 1,064 company-operated stores and 134 franchise locations at June 25, 2016. During the quarter ended June 2017, we added seven company-operated stores and closed six stores.

Gross profit for the quarter ended June 2017 was $112.9 million or 40.5% of sales as compared with $98.1 million or 41.7% of sales for the quarter ended June 2016. The decrease in gross margin for the quarter was primarily due to the sales mix shift from recent acquisitions.

During fiscal 2017, we acquired certain tire and automotive repair locations that serve commercial customers and sell wholesale tires to customers to retail.

These locations conduct tire and automotive repair activities that are similar to our retail location other than with respect to the sales mix resulting from the sale of commercial tires as well as the gross margin of the wholesale location being different primarily due to the higher mix of tires sold and the effect of those tire sales do not include installations or other tire related services that are more common at other location.

On a consolidated basis, labor cost decreased as a percentage of sales due to the impact of the sales mix shift from recent acquisition. Distribution and occupancy costs decreased moderately as a percentage of sales from the prior year as we gained leverage on these largely fixed costs with higher overall sales.

On a comparable store basis, gross margin for the quarter ended June 2017 increased approximately 110 basis points from the prior year quarter due primarily to lower material costs as a percentage of sales.

Operating expenses for the quarter ended June 2017 increased $12.4 million and were $79.1 million or 28.4% of sales as compared with $66.8 million or 28.4% of sales for the quarter ended June 2016. The dollar increase is primarily due to increased expenses for new stores and fees related to the management transition.

On a comparable store basis, excluding management transition cost, total operating expenses increased approximately $2.9 million primarily due to increases in performance based manager pay and the timing of advertising expense.

Operating income for the quarter ended June 2017 of $33.7 million increased by 7.8% as compared to operating income of approximately $31.3 million for the quarter ended June 2016, and decrease as a percentage of sales from 13.3% to 12.1%.

Net interest expense for the quarter ended June 2017 increased $1.3 million as compared to the same period last year and increased from 1.9% to 2.1% as a percentage of sales. The weighted average debt outstanding for the first quarter of fiscal 2018 increased by approximately $69 million as compared to the first quarter of last year.

This increase is due to an increase in debt outstanding under revolving credit facility as well as an increase in capital lease debt reported in connection with our fiscal 2017 and fiscal 2018 acquisitions and Greenfield expansion.

The weighted average interest rate increased by approximately 30 basis points as compared to the first quarter of the prior year.

The weighted average interest rate is higher as compared to the prior year mainly due to interest on capital lease and financing obligations coupled with higher LIBOR and prime interest rates in the first quarter of fiscal 2018 as compared to the same period in fiscal 2017.

The effective tax rate was 37.2% of pre-tax income for the quarter ended June 2017 and 37.9% for the quarter ended June 2016. Net income for the current quarter of $17.6 million increased 5% from net income for the quarter ended June 2016.

Earnings per share on a diluted basis for the quarter ended June 2017 of $0.53 increased 6% as compared to last year's $0.50. Excluding the $0.02 per share in management transition cost, earnings per share on a diluted basis for the quarter ended June 2017 increased 10% as compared to the quarter ended June 2016. Now turning to our balance sheet.

Our balance sheet continues to be strong. Our current ratio at 1.0 to 1 is comparable to year-end fiscal 2017. Inventory turns at June 2017 improved as compared to year-end and the first quarter of last year.

During the first quarter of fiscal 2018, we generated approximately $41 million of cash flow from operating activities and decreased our debt under our revolver by approximately $24 million. Capital lease and financing obligations increased $6 million due primarily to the accounting for fiscal 2017 and 2018 acquisitions and Greenfield expansions.

At the end of the first quarter, debt consisted of $158 million of outstanding revolver debt and $235 million of capital leases and financing obligations. As a result of the fiscal 2018 paydown, our debt-to-capital ratio including capital leases decreased slightly to 40% at June 2017 from 41% at March 2017.

Without capital and financing leases, our debt-to-capital ratio was 21% at the end of June 2017 and 24% at March 2017. Under our revolving credit facility, we have $600 million that is committed through January 2021. Additionally, we have $100 million of accordion feature included in the revolving credit agreement.

Effective July 2, 2017 we are borrowing at LIBOR plus 125 basis points up from 100 basis points during the quarter ended June 2017.

We have approximately $425 million of availability not counting the accordion; we're fully compliant with all of our debt covenants and have plenty of room under our financial covenants to add additional debt for acquisition without any issues.

All of this as well as the flexibility built into our debt agreement allows us to take advantage of more and larger acquisition and make it easy for us to complete them quickly. During this quarter, we spent approximately $6.7 million on CapEx and $4 million on acquisitions as part of our Greenfield expansion strategy.

Depreciation and amortization totaled approximately $11.8 million and we received about $700,000 from the exercise of stock option. We paid about $6 million in dividends. This concludes my formal remarks on the financial statements. With that, I'll now turn the call over to Brett..

Thanks Brian. I'm very excited to join the Monro team. I recognize that opportunities like this do not come along very often and I'm thrilled to be here.

As John mentioned, I have been with Tire and Auto Service industry now for over 20 years including leading Goodyear's company-owned tire and service centers followed by my role of CEO at Heartland Automotive, the nation's largest operator of Jiffy Lubes where we followed an aggressive acquisition strategy and most recently as CEO of American Driveline Systems, the parent company that is the franchisor for over 700 AAMCO and Cottman Transmission & Total Car Care locations.

I believe my experience in running three automotive service formats provides me with a strong foundation as I join the Monro team. I'm very optimistic about the future of the automotive services industry and I believe Monro is very well positioned to capitalize on the very positive industry trends we will see over the next few years.

The total vehicles in operation are expected to grow significantly over the next five years with the vast majority of that growth coming from vehicles in our sweet spot of six years or over. This is in contrast to the pressure on this group over the past several years including a significant decline in the number of vehicles six to 10 years old.

We expect that this trend in vehicles of six years old and older will benefit our fiscal 2019 and beyond in particular while this year remains pressured.

Another important driver of that vehicles 13 years old and older accounted for about 30% of Monro's traffic in the first quarter of fiscal 2018, that's up from 28% in fiscal 2017 providing further evidence that the average age of vehicles continues to rise.

Average tickets for these vehicles remain similar to overall average and were up 2% year-over-year in the first quarter demonstrating that customers continue to invest in and maintaining their vehicles even as they advance in age. Vehicles are certainly more complicated today than ever before.

And due to the increased adoption of technology in vehicles that trend will continue. This will drive more consumers to outlets they trust to provide their maintenance tires and service for their vehicles that will pressure smaller competitors in making the investments needed to keep up with these changes.

And finally, our industry is still very fragmented creating significant opportunities for large retail change to continue to grow via acquisition. One of the many reasons I elected to join the team at Monro as I believe this company is very well positioned to capitalize on these positive trends in our industry.

With a strong sixty-year history I believe Monro has developed a solid reputation in the marketplace for delivering good value to consumers with a strong retail presence in the markets it serves today.

I'm also a strong advocate of Monro's business model which has positioned the company as a cost leader in the industry leveraging the strong supply chain coupled with a highly accretive acquisition strategy.

This is clearly proven to deliver significant growth over the years and I'd like to thank John for the tremendous job he has done getting the company to this point. Well my first official period at Monro is not until August 1st. I've already started spending time in Rochester with John and the rest of the senior leadership team.

We have been reviewing current plans and setting the stage for my first 90 days with the company. As I work through my initial assessment my near-term focus will be on helping to advance the company's business strategy. First, continue to aggressively pursue add-on acquisitions using a highly disciplined approach.

Second, maintain Monro's cost leadership position as we let to further leverage our scale and integrated supply chain. And lastly and importantly we build upon the team's current initiatives with respect to the customer experience, store operations, as well as marketing in order to provide organic growth in over 11,00 locations.

I've successfully executed similar strategies in the three companies I've previously ran and I tend to do the same at Monro. I bring a consumer marketing and store operations orientation to the business which I believe will be beneficial as we focus on driving profitable growth both organically and through a disciplined acquisition strategy.

Of course there is still a lot to me to learn about the business and beginning in August then over the next 90 days I'll be spending considerable time in the field with the senior leadership. I intend to visit a significant number of markets across our two store formats as well as spend time with our wholesale and commercial tire businesses.

On the October earnings conference call I'll look forward to updating you on our teams continued progress in these areas as well as my thoughts on where our greatest opportunities lie. This is an exciting time to join the company and I look forward to leading Monro on its next phase of significant growth.

With that John, Brian, and I'd like to take your questions. Operator, please go ahead..

Thank you, sir. [Operator Instructions]. Our first question is from Brett Jordan from Jefferies..

I guess my first question is for Brett I guess and the guy is sort of new to it and obviously you've kicked the tires a little bit literally and figuratively but, we have seen a sustained trend of negative comps.

But I guess we haven’t seen a full year of fiscal positive comp in five years yet you signed a contract it seems there is an option strike price that's 30% above the trading price when you came on and I think 65 bucks.

So I guess could you maybe give us some quick color as to what you see as looking on the outside to change the comp trend and get your option strike price to make sense I guess quick overview what was the crystal moment to make you take the job and sign that deal..

Well, look clearly did on automotive space for a while now and as I mentioned in my comments, I'm very bullish on our industry vehicles and operation continue to grow. There's plenty of upside, I believe, in our business related to just this macro growth we're seeing it direct. Yes, I think given the fact that the Monro has tremendous scale.

Given the 1,100 locations certainly positions it well and have had to do very positive things in the marketplace. As it relates to comp sales, but my orientation is going to be very focused on in-store operational excellence and marketing.

And -- but I think given that orientation over the next 90 days I intend to dig in, work very close to the team, develop a roadmap going forward. Haven't been a competitor at Monro's in the marketplace I think they just have done quite well in the space they have a good reputation.

I don't say those from previous businesses that I have known we've seen similar stress I think on comp sales as it relates to especially in the Northern market so I don’t believe Monro is somewhat unique in that area.

But again I’m also very encouraged by the initiatives the team is already working on as it relates to technology investments and the online experience. I think investments and point-of-sale as well as the CRM investments I think those are clearly platforms that I intend to build on are an effort to drive I think organic growth on a comp store basis..

I guess Monro's term. I guess there is no real shift in the M&A strategy. I mean John commented that we are north of ten NDAs signed and you don't see pulling back on, on the growth as you familiarize yourself with the business..

So I think that's largely -- again you mentioned that the strike price or the auction price, one of the reason why I'm excited about John here is that how we're close to the nature of the business model.

I mean that's a big driver of why I'm here and I've had similar experience in my days [indiscernible] but we were consolidator of the oil change segment if you will and I'm certainly I'm a big fan of that model. And I recognize that Monro has certainly has tremendous room in that area. Certainly I'm not going to slow that strategy down.

I'm excited that John spoke in his pipeline here and if anything we’re look overtime to try and accelerate that at anything..

Once you take an Monro as an acquisition candidate now that you're trading at a multiple below where a lot of the deals have gone lately whether it's Precision Tune or Pep Boys or Express Oil or some of the other strategic and financial buyers that as an active behind the scenes the last couple of years..

Look, I don't know if I have a point of view on that today; certainly I think I would see the company as being undervalued at this point totally. But I recognize that my focus in the first 90 days here is to get engaged with the team, understand the business and develop the forward strategy.

I think would translate into top-line growth, bottom line growth and the valuation will take care of itself..

Okay, great. I'll start with the tough questions and John I got a couple minutes late from I recall, you were talking about the regional requirements in the north and the South were off did you say how much the central states were down..

No, they’re included in the North and they certainly offset some of the positivity that we saw in the North-eastern markets..

Okay and then did the cadence of the quarter did you give the month..

I didn't.

Do you want me to?.

Yes please..

April plus three. May was plus one, one and June was up 20 basis points..

Okay..

And July is up a 150 basis points..

Okay. And then I guess entire comp may be that you broke this out, before I got on. I missed may be five minutes did you do units versus price because we have a little bit of price increase obviously from a couple of manufacturers..

Yes, we said that average ticket was up little over three and that sales were flat in the category so units were down about three..

Okay, great all right. Thank you very much. John you're on the fourth quarter call, right? Are you on the --.

Yes -- I'm not sure yet but we'll see how the transition in that but I'm around for six months after -- after my contract is up..

Okay. We're not….

I will certainly be a part of all that Brett, but I want to make sure that Brett has room to run the business..

We'll take our next question from Rick Nelson with Stephens..

Thanks, good morning. Right like to let know it’s about the acquisition environment, some of your peers are paying big multiples Brett had mentioned that, is that pushing up seller expectations and used [indiscernible] to rethink some of the multiple that you’re willing to pay..

Yes, I guess let me take that for what we've done today here in negotiations that we have in process, it certainly hasn't changed the multiples for the acquisitions that we have gotten done including the couple that we announced this quarter.

So the smaller deals no, we’ve talked about in the past that obviously prices for larger deals are being somewhat impacted by that.

But as you know we bring a tremendous amount of synergies to businesses that we acquire and I think that continues to be something that the board will need to consider as we go forward and evaluate individual opportunities. We -- you've certainly seen us interested in significant opportunities and that interest is not veining at all.

We still have a lot of capability to get larger deals done and a lot of interest there..

Okay. Thanks for that. Also I noticed that you had [indiscernible] used leaving retiring.

Is that a position that you plan to sell?.

No Craig has had a successfully 40 year career, it’s the right time for him to retire later this year and we've been building the field operations team around our Division of Vice President and we’ll continue to do that. In fact this is the structure that we’ll have right now is a structure that we had two years ago.

So we will have those DVPs report directly to the CEO..

Okay. If I could ask you to times that the impact you see from Amazon pushing into the tire category and may be your relationship with TireRack? You've competed with them for a while now --.

Sure..

MD [indiscernible] and discuss some of the economics there..

Yes sure. I can let -- all right let me make some comments about online tire sales. I think the first and most important thing is that you need professional stars to put tires on; it’s nice to be wanted but even nice to be needed. So we’re not going anywhere.

The installations that we performed for these customers are profitable in the high margin and over 50% of those customers are new to our database and we retain them at the same rates as we retain other customers.

Our average ticket on those installation customers is about $120 which compares to a net overall average ticket of $160 and again that's higher margin. Online tire sales are about mid-to-high-single-digits of tires sold in the country despite 20 years of solid competition like you said with TireRack.

So it’s limited and I think it will continue to be limited even though good growth so one really important reason and that’s because we see customers needs for new tires first in our shops and that's a huge advantage, we train to that.

Also relationships matter, consumers like to talk to a professional about what tires are best for them and for their family's safety.

But when you look at the economic side of it, our tire prices are generally competitive with online sellers including shipping and installation we're only about 5% to 6% higher on average than leading online players like TireRack, TireBuyer and that is our top skews and within that obviously there is significant variations between zip codes and between tire lines but that’s where the average is.

And we’re probably another 5% to 6% higher than Amazon and that’s a lot lower than some of the percentages that I’ve heard out there and that’s based on us looking at our top skews. So importantly I think we're profitable at any of those online tire pricing levels.

So I think recent concern is somewhat overdone and what I expect is that we’re going to continue to install for online sellers including Amazon beginning new customers and the related sales, we will continue improving our online marketing and online shopping experience with a new site that we will have out by the end of this year and we will continue working on that sales execution within our stores because again we see the customers need for tires first and we match online pricing and we want to make sure that for those customers that are looking to try to save a few dollars that they understand that they can shop with us and they can get their tires put on today instead of waiting them -- waiting for them to be shipped.

The other thing I think is important is when you look at profitably selling tires online, distribution is a huge piece of it because tires since we cost a lot of money to ship around.

We have 1.3 million tires out in 1,100 stores and warehouses and that is a really significant strategic asset that we’ve been looking at how to leverage and I know Brett is committed to continuing to look at how to leverage that. In fact we're in the very early stages of test we’re running to leverage our tire inventory online with an online partner.

So as we go through that, we get some results, we work that out, we’ll talk more about that. So I guess make any significant trend that requires investment in marketing, digital, training and distribution, this trend favors larger chains and any pressure from it will expand our acquisition opportunities.

So for me the important piece is you need tire installers, we see the need first, we got many ways to react to this and continue to grow our business..

Our next question comes from James Albertine with Consumer Edge..

Thank you.

Congratulations to Brett, wanted to add that as well and then if I may I know John you’re going to be around for a little bit but in case we don’t get the opportunity thank you for all your work and everything you’ve done for Monro and as well to Rob Gross if he is listening, he’s been great over the years and we will miss both of you but certainly Brett thank you for the overview you provided earlier, if I may ask a follow-up to the question that previously was asked.

As you’re looking at the dials and the different leverage you can pull across the portfolio and given your understanding it seems the market nationwide for service and tire centers the comp trajectory to demographics, things of that nature where if anywhere do you see the opportunity to sort of dial up whether is acquisitions or investments in technology sort of dial up Monro’s effort near-term and how should we think about sort of the ethos that you’re going to sort of bring to there, is it one where growing into new markets faster makes a lot of sense despite some distribution in efficiencies.

Just want to understand kind of if there is going to be any shifting incrementally when with respect to the sort of the culture and trajectory of the company?.

I think we’re just reinforcing comments we made earlier further committed to the current strategy at Monro and leveraging our vertically integrated supply chain and all the benefits that provides. So certainly add-on acquisitions in existing markets will be a priority.

But also I would say and I think that's also consistent with the current company strategy, there is high desire to grow in more attractive maybe southern markets that we see a little higher growth rate in.

So I think certainly as we continue to build out the M&A pipeline if you will geographic expansion around the South I think would be a key focus for me and the team as one area.

As it relates to dials or levers to pull, I think as I shared before I will come and work with the team using more of the marketing operations orientation with the firm belief that we can leverage technology that creates better experiences for consumers out of store in-store and improve the post-sale experience as well.

I have done a -- the tendency in the past that focus a lot on in-store conversion with product mix enhancements which would drive I think a discussion and work with the team around packaged selling the good, better, best value propositions et cetera.

But until I give a much deeper understanding of the current state across store markets so I’d like to reserve, little more granular comments on that to the October calls but certainly I think those would be two areas that I’ll be focused on one on the organic side and certainly on the M&A side will be continuity play in terms of current strategy with an emphasis on looking to expand in the more attractive Southern regions..

And absolutely understand that, you don’t even there for a little bit did you have input into the updated guidance at this point?.

I haven't started that company. That will be August but yes John and I, Brian team did an opportunity to go through at great length that and certainly have high degree of confidence and Brian and John’s deal on this.

It kind of work through that with them as a team and I’m comfortable with the guidance as they provided but we've provided I should say and I'm certainly committed to through that guidance..

Very good and then John if I may ask one more I think I heard you on the prepared remarks talked about some of your acquisitions the 20 stores including the car ex Michigan, Illinois, Indiana 95% service, 5% tire mix did I hear that correctly..

Yes, you did. So we have to lot do that….

And as you look at the landscape for growth and maybe even using your NDA as a proxy of the landscape is it a similar mix of service in tires..

I'm sorry could you ask that again..

Yes, so as we're thinking about the acquisition landscape and your sizing up to shopping list as it were do you see a similar mix in terms of the revenue generated from service relative to tires..

Yes, definitely when you look at the NDAs collectively, they've much more represent our global retail sales mix which is, which is in that 40 ish percent tires..

Okay, well thank you again and best of luck and look forward to speaking with you again that as well..

Thank you..

Our next question comes from Matthew Fassler with Goldman Sachs..

Thanks. This is Chandni Luthra on behalf of Matt Fassler. Most of my questions have been answered so, I’m just going to very basic on stores, Could you guys provide the missing pieces of guidance are we to assume items like D&A, CapEx, interest are they all sort of consistent with what was guided in your fourth quarter..

Yes, Yes, we - the primary adjustments to the guidance were for some cost so, yes there are guidance remains very similar..

Great and then just, on the lines of the previous question in terms of the acquisitions activity so your acquisition activity was basically negligible in the first quarter and you you’re briefly talked about tax reforms and sort of there being a hold up and what your announce in 2Q is partly driven by car X.

Are we to sort of assume that given, we are in a positive comp environment this year should we assume meaningfully lower acquisition activity versus a FY17.

You also touched upon you know multiples sort of rerating higher with precision Autocare in a bunch of other deals out there, how should we think about the overall landscape versus, FY17 were in obviously acquisition activity was very robust..

Yes, I think we've talked about it the, the smaller acquisitions we will continue I think to make progress and maybe some of the larger deals to get rid off you late in our fiscal year so, we would still consider those that are, within the fiscal year and I think there is some opportunity there..

Our next question comes from Scott Stember with CL King..

Can maybe talk about the guidance I know that a big chunk of the reduction in guidance related to the transition expenses alongside the compound is just coming down a little bit as well to just talk about what went into that thinking I know that you said that June things paired off little bit seems to come back in July but what are you guys thinking and also you know how does that weigh versus the fact that the, the first half of the year's going up against very, very easy comparisons and then things get more difficult I guess in the back half of the year maybe just talk about that little bit..

Sure yes, I was adjusted the guidance to basically what we've run on the lower end to what we run for four months.

And on the high end that reflects what I think is reasonable expectations for getting some help out of some weather after two seasons of very warm weather in the last few winters and the opportunity here for the consumer to improve in the second half of the year as they deal with some of their healthcare, some of their health care costs..

Okay.

And John did you get what the traffic was for the entire company?.

Yes, the traffic was, was down too..

Great, all my other questions have been answered already. Thank you..

All right..

We’ll take our next question from Carolina Jolly with Gabelli..

Thanks for taking my question. Just really briefly can you review any factor that you think affected this quarterly cadence and yes..

Specific factors that affected the quarterly cadence now I think, like we said there was we had questions about traffic coming off of the, coming off of another warm winter. I think everyone saw a little bit of improvement around the April timeframe and then some deceleration as the quarter went down.

So I mean as I described even on our last quarter call, I think things are incrementally better than they were last year and certainly we're trying to do everything we can with customers to retain them and at the store level to execute on the sales side.

But I'm pleased to see that while the first quarter sort of decelerated we have comps back at, at least 150 basis points in July.

And I know Scott asked about the second half of the year may be being more difficult I didn’t mean to ignore that if you take a look at the back half of the year of the six months and you look at that run rate, it's not that different than the average run rate for the first half of the year.

Certainly we got some help from some snow in December but we had a very difficult fourth quarter like many other businesses in our region so, when you look at the back half of the year I think, the combined comp is down for, down for something so it’s not that, that much different from, from the first half of the year apart from a bit of a different stages we ramp up one adjusted for days in the third quarter and then you know have a real opportunity was down eight and I don't view the up one as a really significant hurdle given any kind of winter weather especially I think the opportunity is significant in November..

That’s perfect. Thanks. And then secondly I guess as I expecting as G&A expense deal lower can you expand on some of the initiative. The sales initiative that you mentioned in your comments and should we kind of expect those moderate by a third quarter..

Yes, I think as I said in my prepared remarks number one we had with we have performance base pay plans to our store level and our executive management team so, those were certainly expenses we didn't have last year starting out very difficult so a big chunk of that is just our performance plan things and the job we did on margin with, is that we show up in the comps but the job we did on margin drove obviously a bunch of, a bunch of contribution which gets those guys paid.

We also as I said we were focused on the sales effort and so we were out of some headcount, earlier in the year and we're currently adjusting that back so, what we see as what we need to go forward through the ready job with the customer and run the business well consistent with our with our cost focus so we’re making all the adjustments and as I said I expect that to moderate as the year goes on..

And that concludes today’s question-and-answer session. I’d like to turn the conference back over to John Van Heel for any additional or closing remarks..

Thank You all for you time this morning. In this choppy market we remain focused on driving profitable sales.

At the same time our team is aggressively expanding our business and scale through acquisition, investing in technology and training that improves our operations and customer experience all [indiscernible] growth for sales and earnings growth this year and beyond.

I’m extremely grateful that I’ve spent 15 years at Munro and honored to have to have the opportunity to lead this great company for the last five, working together to create opportunities for our employees and solid returns for shareholders. As always, I appreciate the support I received from colleagues and shareholders.

I want to personally thank our team for their hard work, dedication and consistent execution and finally I want to congratulate Rob Gross on his retirement and thank him for his outstanding leadership and many contributions to the company over his 18-year tenure. Thanks again and have a great day..

And that concludes today’s presentation. Thank you for your participation. And you may now disconnect..