Valvoline Inc.

Ladies and gentlemen, thank you for standing by and welcome to Valvoline's first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to Sean Cornett, Head of Investor Relations. Mr. Cornett, please go ahead.

Thanks, Carol. Good morning, and welcome to Valvoline's first quarter fiscal 2020 conference call and webcast. Valvoline released results for the quarter ended December 31, 2019 at approximately 5 p.m. Eastern time yesterday, February 3rd. And this presentation and remarks should be viewed in conjunction with that earnings release. A copy of which is available on our investor relations website at investors.valvoline.com. These results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission. A copy of the news release has been furnished to the SEC on a Form 8-K. With me on the call today are Valvoline's Chief Executive Officer, Sam Mitchell, and Mary Meiselsperger, Chief Financial Officer. As shown on slide two, any of our remarks today that are not statements of historical fact 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 basis unless otherwise noted. Adjusted results exclude 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 results to amounts reported under GAAP and a discussion of management's use of non-GAAP measures was included in our earnings release. The non-GAAP information provided is used by our management and may not be comparable to similar measures used by other companies. As we turn to slide three, let's review our reported financial results for the quarter. For the fiscal first quarter, Valvoline delivered reported operating income of $104 million, net income of $73 million, and EPS of 39 cents. Cash flow from operating activities was $59 million. Beginning this fiscal year, Valvoline adopted the new lease accounting standard. The impact of the standard resulted in roughly $220 million of incremental lease-related assets and liabilities on the balance sheet and had a negative $1 million impact to EBITDA and cash flow from operations in the quarter. Non-service pension and OPEB income of $7 million after tax was the primary key item in the current quarter, with legacy and separation impacts offsetting restructuring. In Q1 of fiscal 2019, non-service pension and OPEB income of $2 million after tax was the one key item. Now, as we move to slide four, we can review our adjusted results. Our adjusted EBITDA in Q1 was $120 million, growing 19%. Adjusted EPS for the quarter grew 30% to $0.35. The strong start to the year was driven by a robust contribution from Core North America, ongoing strength in same-store sales and top-line growth in Quick Loops, and profitable volume growth in International. Now let me turn it over to Sam to discuss our segment results.

Thanks, Sean. Quick Loops had a good start to 2020 with strong system-wide same-store sales growth of 8.3% and solid unit additions in the quarter. The 106 net new stores added since last year helped drive overall sales growth of 15%. EBITDA growth was limited due to the impact of these ramping new stores, short-term labor cost increases, and higher SG&A. Core North America had a very strong quarter, building off a weak Q1 last year. Granted retail volume grew year over year, but was offset by weaker volume in the installer channels. This favorable channel mix and increased sales of premium products along with the benefits of our operating expense reduction program contributed to the significant growth in EBITDA. We saw a return to volume growth in international, primarily from our Eastern European acquisition completed last year. The 7% growth in volume, improved margins, and solid contributions from our JV stroke 10% growth in EBITDA. Let's take a closer look at performance in Quick Loops on the next slide. System-wide same-store sales grew 8.3% in Q1. Company storage grew 6.2% in the quarter, and franchise growth was 9.8%. Our superior in-store experience continues to resonate with customers and drive growth in transactions. Increases in premium oil changes and penetration of non-oil chain services are contributing to growth in average ticket. EBITDA growth of 4% in Q1 lagged year-over-year top-line increases of 15%. We saw some temporary labor deleveraging in the quarter with an increase in labor hours versus traffic. We have taken actions to address these temporary labor impacts and expect they will subside in Q2. Continuing to grow our retail services business is a key focus of the company, and so more of our corporate resources are allocated to the segment, increasing its share of indirect SG&A versus last year as planned. Maybe we'll talk more about this in a few minutes. We continue to expect Quick Lube's EBITDA growth for the year to be in the low to mid teens. The steady pace of unit additions continued with 22 stores added in Q1, primarily in franchise markets. We've added 106 stores since last year as we remain on track to add roughly 100 stores per year over the next few years. Let's turn to the next slide to look at the new store impacts. We opened 44 newly built company stores over the past two fiscal years. Most of these newly built stores are still in or just completing their first year of operations when profitability is break-even or marginally negative, creating a drag on margins. In Q1, these new stores drove 170 basis points of gross margin deleveraging at the Quick Loops overall segment level. Excluding this impact, gross margin rates would have only decreased modestly year over year in the quarter. Based on our estimates for newly built stores, we expect to see an EBITDA contribution of between $4 and $7 million this year and between $29 and $32 million in fiscal 22. This impressive contribution to earnings demonstrates the compounding benefits of our store growth. We are executing on three significant levers to drive Quick Loops profitability. First is to continue to drive operational excellence and same-store sales growth. Second is to aggressively add newly constructed units. And third, to pursue incremental high-return acquisitions. We believe that this approach will allow the Quick Loops segment to deliver strong double-digit EBITDA growth for years to come. Let's take a look at Core North America's results on the next slide. Core North America's EBITDA improved $15 million in Q1 versus last year, driven by growth in branded volume in the retail channel and favorable margins, resulting in unit margin growth of more than 20%. There are three key things to look at to understand the year-over-year performance this quarter in our full-year outlook. First, volume softness in our DIY channel and a higher level of inventory at certain customers drove lower results in the first quarter of fiscal 2019. Actions taken since last year to better position our brand, including a stronger promotional schedule this quarter, resulted in a partial recovery in branded retail volume. The favorable mix from this volume growth substantially benefited unit margins. Second, benefits from the broad-based operating expense reduction program that we announced a year ago, along with favorable true-ups of our trade and promotion cost estimates, contributed to the significant improvement in unit margins and therefore segment profitability. Finally, for the balance of the year, we expect our DIY retail volume to be consistent with Q1, but down year-over-year due to expanded price gaps versus private label offerings. We also expect minimal impacts from recently announced base role price increases. Our unit margin outlook for the full year is now $3.75 to $3.85, lower than our results in Q1, but an improvement on our previous guidance of $3.50 to $3.60. Performance this quarter has improved our EBITDA outlook for the full year to modest growth for the segment. Let's take a closer look at the DIY category on the next slide. Coming off macro declines in 2018, DIY category demand was more stable in 2019. Demand continues to shift toward higher value synthetic products, which now make up almost half of DIY volume. The premium brands are playing an important role in this evolution. Private label continued to make inroads in the category. Retailers are supporting this growth with ongoing and aggressive promotions. Near the end of last fiscal year, most retailers initiated higher promoted price points across all the premium brands, increasing price gaps versus private label offerings. While our Q1 results reflected a partial rebound in branded retail volumes, our results remain below prior trends. which we largely attribute to these pricing actions. For the balance of the year, we expect our year-over-year volumes to continue to be impacted until we lap these changes. We anticipate our retail DIY volume to remain relatively flat sequentially, a sign of improving stability. We continue to focus on our consumer messaging and product portfolio while working with our retail partners on the optimal merchandising and promotion plans for their business and for our brand. Let's take a look at the international results on the next slide. International had a good start to the year with volume growth of 7%, driven primarily by growth in EMEA. A recent acquisition in Eastern Europe drove the majority of this increase. We also saw solid volume growth in key parts of Asia, including a return to growth in China from our strengthening passenger car aftermarket business. This growth offset temporary weakness in Latin America impacted by the recent closure of two of our distributors and a shift in promotion timing from Q1 to the current quarter. EBITDA grew 10% on higher volumes. Year-over-year stability in raw materials led to improved margins. Our joint ventures also provided solid contributions to profitability. We expect contributions from our acquisition along with our ongoing channel development and brand building efforts to drive increased volume throughout the year in most regions. We're also expanding a successful program in Asia to be more global. Our new Mechanics Month campaign will launch in our international markets in March. We're carefully monitoring the coronavirus situation as it could have an impact on our operations in China. Barring these risks, we expect to meet our guidance for fiscal 2020, including volume growth of 6% to 8%, and roughly flat year-over-year EBITDA. Now let me pass it over to Mary to review our financial results.