Valvoline Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Val Balleen Fiscal Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your touchtone phone. Mr. Sean Cornett, Head of Investor Relations, please go ahead.

Thanks, Griselle. Good morning and welcome to Valvoline's third quarter fiscal 2020 conference call and webcast. Valvoline released results for the quarter ended June 30, 2020 at approximately 5 p.m. ET yesterday, August 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. 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 Michaelsberger, Chief Financial Officer. 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. Babbling 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 is included in the presentation appendix. 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 financial results for the quarter. For the fiscal third quarter, Valvoline delivered reported operating income of $88 million, net income of $59 million, and EPS of $0.32. Here to date cash flow from operating activities was $271 million. The key items in the quarter were non-service pension and OPEB income of $7 million after tax, followed by legacy and separation related expenses of $1 million after tax. In Q3 of fiscal 2019, key items totaled $5 million of after tax expense, including business interruption expenses of $4 million, restructuring and related expense of $3 million, partial offset by pension and OPEB income of $2 million. Excluding key items, results for the current quarter included adjusted operating income of $89 million, adjusted EBITDA of $106 million, and adjusted EPS of $0.28. Year-to-date free cash flow was $177 million. Now, as we move to slide four, let me turn the call over to Sam to discuss the results and operations in more detail.

Thanks, Sean. Good morning, everyone. My hope is that you and your families are doing well and staying healthy and safe in this challenging time. At the COVID-19 crisis unfolded, our business was impacted by the abrupt decline in miles driven caused by shelter in place restrictions designed to limit the spread of the virus. As those restrictions began to ease, our business bounced back quickly, as you saw in the sequential updates that we reported for May and June. It continues to perform well. As we monitored the developments, we took decisive action to ensure the health and safety of our people, and other key stakeholders to increase our financial flexibility. Our results for the quarter are quite strong and came in ahead of our expectations considering the scale of the impact that we saw in April. The rapid recovery on the top line was led by our Quick Loops and Core North America segments. In Quick Loops, we saw an increasing contribution from new customers to same-store sales. Within Core North America, the DIY category led the recovery. While Do It For Me lagged DIY, the combined impact of our retail volume performance and lower costs and expenses benefited Core North America's profitability. In fact, segment-adjusted EBITDA grew 20% year-over-year. In international, there was also a significant sequential improvement in volume during the quarter, but the pace of recovery varied by region. Q3 results also include generating $80 million in free cash flow. a 45% increase from last year. Our strength prior to COVID-19 and our performance in Q3 show that the underlying business remains healthy and demonstrates the fundamental resiliency of our preventive maintenance model. Let's take a closer look at the recovery in Quick Loops on the next slide. New customer acquisition is a fundamental component of our approach in Quick Loops. We've been successful at attracting and retaining new customers since we entered the business. That's been especially true for our 13 years of same-store sales growth. While our overall number of transactions were impacted by COVID-19 beginning in the second half of March, we saw an increased mix of new customers as a percentage of our total customers in April and May. Then in June, we saw a significant increase in new customers and same-store sales performance, despite the fact that we reduced our marketing efforts during the quarter. This is due in part to the strength of our stay in your car service model that lends itself to social distancing. In company owned stores, we saw an 8.5% growth in new customers versus Q3 last year. This increase in new customer acquisition was a key part of the recovery in same store sales during the quarter. Our competitive advantages helped to drive this growth in new customers. We worked hard to keep our franchisees healthy and unlike some competitors in the DIFM space, we were able to keep our stores open, which kept our teams actively working and prepared for the recovery we've seen. Combined with their excellent in-store execution, this created new customer acquisition opportunities. We also made some health-focused enhancements to our in-store experience that are meaningful to both new and existing customers, driving higher satisfaction scores and favorable comments in our survey results. The source of these new customers is also significant, as I'll cover on the next slide. As a reminder, we estimate that there are roughly 450 million oil changes performed in a typical year in the U.S. do-it-for-me market. Valley Inc. Oil Change has a solid share position within the Quick Loops category, but a relatively low share in the broader DIFM space. This creates a large addressable market for our convenience-based, safety-oriented service model. Most of our new customers have come from outside the Quick Loops category for some time. This accelerated noticeably in Q3. We're focused on maintaining this momentum and winning new customers. In July, we launched a new ad campaign that highlights the convenience and safety aspects of our in-store experience. This digital campaign is targeted at customers who haven't yet tried Valvoline, representing further opportunity for us to grow share. Let's turn to the next slide. Turnaround in same-store sales during Q3 was remarkably fast. In fact, June system-wide same-store sales growth was nearly back to our pre-COVID-19 levels and was back to those levels in company-owned stores. We have a greater concentration of franchise stores located in regions that were hardest hit by the virus early on. Those stores are also recovering, but not as quickly. Transactions reflecting changes in miles driven have been the driver of same-store sales variations. Importantly, average ticket has remained strong throughout the recent COVID-19 period. Ticket has been a positive contributor at a level consistent with recent pre-COVID-19 history. With the recovery that we've seen, we have not slowed the expansion of our retail presence. We expect to open 20 newly built company-owned stores as part of our plan to add about 40 new stores across the system in Q4. These additions would help drive an increase of nearly 40, excuse me, of nearly 90 stores or 6% unit growth this fiscal year with newly built company stores accounting for more than a third of the growth. Our current pipeline of stores for fiscal 2021 supports our roughly 100 stores per year goal and moves us a step closer to our target of opening 50 newly built company owned stores annually. Slide 8 shows the rapid recovery of volume in Cool North America, which went from nearly a 50% decline year-over-year in April to modest growth in June. The improvement in volume through Q3 was led by the retail channel. Point-of-sale data from the DIY category suggest that motor oil sales bounced back quickly in the quarter, though are still below prior year levels. Our retail volume performed similarly in Q3, with some promotional timing driving stronger sales at the end of the quarter. While the recovery in DIY was rapid, the pace in DIFM lagged in comparison. The significant destocking impacts we saw in the installer channel early on mostly reversed by the end of the quarter. Despite more normal inventory levels in the channel and our continued success winning new accounts, overall installer volume was down substantially versus last year. Overall, we expect Core North America volume to improve as models driven recoveries. For perspective, U.S. miles driven declined an unprecedented 40% in April year-over-year. Trends have improved since April, with May showing a 25% decline, and based on gasoline demand data, June declined in the mid-teens, with July declines trending in the high single digits. Core North America profitability improved substantially year-over-year and helped drive strong past generations. Driven by higher unit margins than we anticipated, as well as a lower level of expenses. Margin improvement was driven by three main factors. First, the favorable mix of higher margin retail channel volume was the most significant contributor. As installer channel volume recovers, we expect a more normalized mix in Q4. Second, we also saw positive price cost lag benefits due to lower raw material costs. which we don't expect to continue going forward. Third, our broad-based operating expense savings initiative continued to provide meaningful reductions in costs and expenses, so we should begin lapping these impacts in Q4. With mixed and price-cost lag benefits not anticipated to be as meaningful, we would expect gross profit per gallon for Q4 to be near $4. The underlying health of the business remains solid, and we expect to make continued progress in stabilizing segment performance moving forward. Let's review international results on the next slide. The trend of progress during Q3 continued with volume in international, as performance in June was much improved from April. While China saw strong growth throughout the quarter, the sequential recovery in volume was driven by several regions. Our joint venture in India had to shut down its plant in late March as part of strict lockdown measures across the country. It fully reopened at the end of May as larger cities began to ease some restrictions. Many countries across Europe and Asia and a few locations in Latin America began to reopen, leading to improved volume in those areas as well during the quarter. There continues to be disparity in the severity of restrictions across geographies. and we expect that timing of recovery will vary by region and or country as well over the next quarter or two. India and Latin America are generally seeing stricter limitations on activity and are likely to lag in recovery, while Asia Pacific and Europe are anticipated to see more steady performance. We remain closely engaged with our customers as dynamics evolve so that we can meet their needs and capture any opportunities that might come up along the way. Margins were primarily impacted by foreign exchange headwinds and reduced fixed cost absorption from lower volume. Raw material costs did not decline as rapidly internationally as they did in the U.S., and FX often acts as a counterweight. Overall segment profitability was also impacted by lower contributions from JVs, though partially offset by reduced discretionary expenses. While near-term recovery continues to build, long-term opportunities remain. We expect underlying market dynamics to drive growth in key regions over time. With continued expansion of the car park expected in many developing markets, demand for lubricants should grow. As engine technology continues to evolve in these markets, the need for premium lubricants will grow as well. These are opportunities for our business, and we plan to make ongoing investments in channel development and brand building to capture market share. Let's review our recent global marketing initiative on the next slide. Supporting and strengthening our brand is important across the business. We recently launched our original motor oil campaign across our lubricants business in core North America and international. The campaign builds off of Dowling's heritage of being the first trademark motor oil brand in the U.S., but we aren't stopping there. The campaign is broadly about innovation, celebrating our first in the motor oil category, first racing oil, first high mileage oil, first synthetic blend. and improved formulas across our motor oil product lines in 2020. As we focus on further penetrating international markets, one critical component is to build strong brand equity and awareness. We've learned that the heritage and innovation associated with valuing resonates well with our target customers and consumers. The original motor oil messaging is more than an ad campaign. Combined with channel development and a robust value offering with our product technology, Brand building is a key element of our strategy to profitably grow our share globally over time. And with that, let me turn it over to Mary to review our financials.