Valvoline Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Fevelin Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 will now let the hand of conference over to your speaker today, Sean Cornett, Head of Investor Relations of Valvoline. Thank you. Please go ahead.

Thanks, Tania. Good morning, and welcome to Valvoline's fourth quarter fiscal 2020 conference call and webcast. Valvoline released results for the quarter ended September 30, 2020, at approximately 5 p.m. Eastern time yesterday, October 28, 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-K 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 Michelsberger, 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 non-recurring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our adjusted results to amounts reported under GAAP in 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 and the year. For the fiscal fourth quarter, Valvoline delivered reported operating income of $176 million, net income of $122 million, and EPS of $0.56. For the fiscal year, following delivered operating income of $485 million, net income of $317 million, and EPS of $1.69. Full-year cash flow from operating activities was $372 million. There were several key items in the fourth quarter which netted to an impact of $37 million of after-tax income. The largest of these related to non-service pension and OPEB impacts. including mark-to-market remeasurements, these total $24 million of after-tax income. We had a benefits policy change related to paid leave, the approval of which resulted in $9 million of one-time after-tax income. Tax-related key items, including those related to legacy tax assets, resulted in $30 million of pre-tax income and were largely offset in tax expense, resulting in a $2 million after-tax benefit. Other key items related to restructuring and business interruption recovery, which combined a $2 million of after-tax income. In Q4 of fiscal 2019, key items primarily related to $50 million of pension and OPEB after-tax expense. Excluding key items, results for the current quarter included adjusted operating income of $132 million, adjusted EBITDA of $150 million, and adjusted EPS of 46 cents. For fiscal 2020, Valeline generated adjusted operating income of $444 million, adjusted EBITDA of $510 million, and adjusted EPS of $1.48. Full-year free cash flow was $221 million. Now, as we turn to slide four, let me turn the call over to Sam to discuss our results and operations in more detail.

Thank you, Sean. My hope continues to be that you and your families are doing well and remaining healthy and safe. I want to take just a few moments to reflect on a truly unique year. In many ways, the COVID-19 pandemic and the abrupt, wide-ranging changes it caused made fiscal 2020 one of the most challenging years in my career at Valvoline. It also demonstrated the strength of our team. At Valvoline, it all starts with our people, and the team came through in tremendous fashion, helping to deliver record results. The durability of the Valving business model was reflected in our rapid recovery from the depths of the COVID-19 impacts, ending the year with outstanding results that drove year-over-year growth and profitability. We have strong momentum as we begin fiscal 2021, and we see next year as an inflection point for the company. Our shift to a service-driven business is accelerating and will drive faster growth in the future, including expected double-digit adjusted EBITDA growth next year. Let's take a closer look at Q4 and fiscal 20 on the next slide. Galvin's product and service business is focused on preventive maintenance, which remains steady across economic cycles. Our growth is driven by the competitive advantages that we continue to invest in in our quick group segment and a hands-on, customer-centric approach across all of our businesses. Our performance in Q4 was exceptionally strong and generated results that exceeded our expectations. Overall sales improved 26% and adjusted EBITDA increased by 42% from our results in Q3. These strong sequential improvements happened across all three segments. Adjusted EBITDA and EPS both grew in the mid-teens for the quarter versus last year, driven by improved margins in all segments. For the full year, adjusted EBITDA grew 7%, with a strong performance in Core North America, lifting roughly flat results in quick groups and overcoming larger COVID-19 impacts than international. We are delivering on the plan we shared at our May 2019 Investor Day. As a result, we're well positioned to see growth accelerate. With Quick Loops, our highest margin, fastest growth opportunity, expected to generate more than half of our adjusted EBITDA in fiscal 2021. Let's take a closer look at Quick Loops results on the next slide. System-wide same-store sales grew 8.3% in Q4, demonstrating significant improvement from Q3 and continuing the progress we saw in June. Same-store sales growth in Q4 matched our results in Q1, bookending the most severe impacts from COVID-19 in March through May and contributing to full-year growth of 2.3%. This year marks our 14th consecutive year of annual same-store sales growth. a testament to outstanding operational performance and in-store execution. Q4 same-store sales were once again driven by both ticket and transactions. Ticket growth was driven by premium mix and increase in non-old change services and pricing. Transaction growth was driven by digital marketing programs and continued growth in new customer mix. This combination helped offset the decline in miles driven and put our performance this quarter in line with our pre-COVID-19 five-year average. Total sales in EBITDA and Q4 each grew in the mid-teens versus last year, driven by same-store sales and unit growth. We added 30 net new stores to the system this quarter, including 22 newly built company stores. Overall, we grew our store count by 6% in 2020 as we continue to build our pipeline, positioning us for fiscal 21 and beyond. We recently announced three acquisitions that will give us a great start on unit growth for fiscal 21. We're adding 26 net new company-owned stores, growing our presence in Texas, and expanding in the Pacific Northwest. We're also acquiring a franchise system of 21 stores, primarily in Kansas, a strategic fit for our company store markets in the adjacent geographic area. We can discuss the Quick Lube's outlook for 2021 beginning on the next slide. System-wide, same-store sales are expected to grow in the low teens in fiscal 2021. This reflects continued strong operations and recovery from the most significant pandemic impacts in the middle of fiscal 2020. Normalizing for those impacts, same-store sales would grow 6% to 8% in line with our longer-term target. The new company stores we started building in late 2018 and those added in 2019 will be part of our comp base. but still ramping to maturity and accounting for roughly 100 basis points of same-store sales in 2021. Comp stores in our base since 2016 have driven substantial operating leverage. While COVID-19 impacts the same-store sales and our efforts to keep stores staffed and open drove modest deleverage in 2020, we expect continued improvement in store-level profitability in 2021. Bottom line, store level performance continues to be the number one profit driver in this business. As you can see on slide eight, we expect a very strong year for unit growth in 2021 with 150 stores added or 10% growth at the midpoint of our guidance. This expansion is planned to come from across the system. First, based on our development agreements, our franchisees should add 30 to 40 new stores. Second, this coming year we anticipate reaching our goal of opening 50 newly built company stores. When combined with the stores we've built and opened in the previous three years, we expect a significant contribution to EBITDA. Lastly, with the acquisitions we've already announced and the pipeline we have in place, we anticipate adding nearly 60 acquired stores. Let's turn to the next slide. The Quick Loops growth drivers, same-store sales, newly built company stores, franchise unit growth, and acquisitions are expected to be firmly in place for 2021, leading to top-line growth in the mid-20% range and EBITDA growth in the mid-30s, which is partly resulting from lapping the weak Q3 2020 results due to the COVID-19 impacts. We see significant long-term opportunity in each of the growth levers. Same-store sales are expected to be driven by transaction growth, including new customer acquisition, and ticket growth from premium mix, non-all-chain services, and pricing power. We also have substantial opportunity to increase our household penetration by building and acquiring more stores. Over the long term, we anticipate top and bottom-line growth in the low to mid-teens range with each of the growth drivers contributing. Let's review Cool North America's results on the next slide. Cool North America's Q4 adjusted EBITDA grew nearly 30% year-over-year behind a higher than anticipated improvement in gross margin. The majority of the margin increase was driven by ongoing favorable channel and product mix and continuing price cost lag benefits from lower raw material costs. We saw continued strong performance in the retail channel due in part to the effectiveness of our merchandising and promotional strategies in DIY. Retail channel volume grew modestly in Q4 and was flat for the full year, a good sign of progress in our efforts to address challenging DIY category dynamics. We also benefited from our broad-based cost savings initiative during the quarter. Favorable channel and product mix. Lower raw material costs and benefits from our savings initiative also drove full-year margin expansion. Improved unit margins combined with the expense reductions we implemented during the early stages of the pandemic offset the impact of lower installer channel volume. The installer channel was significantly impacted by COVID-19. Recovery in the channel continues to build with Q4 installer volumes up almost 50% from Q3. Let's take a look at Core North America's outlook on the next slide. Core North America's volumes are expected to increase modestly in fiscal 2021. The DIY category is anticipated to be fairly stable with volume down roughly 1% and continued growth in the synthetic segment. Valvoline's retail channel volume is expected to be relatively flat. We have solid merchandising plans in place across the key retailers, and price gaps to private label are expected to be steady. Segment growth is primarily due to installer channel volumes rebounding from the significant pandemic impact in 2020. In addition, we expect to continue winning new installer customers with our value-added selling approach. We've recently renewed a number of key national accounts, securing a portion of the installer base and extending our relationships with these important customers. A normalizing channel mix is anticipated to be a headwind to margins. Lapping favorable price-cost lag benefits along with the recent modest increases in raw material costs are the primary drivers of the anticipated low double-digit decline in EBITDA for the upcoming year. Despite the headwinds in 2021, we expect EBITDA to be higher in the low double-digit range over 2019 results, well ahead of our targets that we gave at the investor day in May 2019. Unit margins are expected to remain solid, near $4, as the benefits from our cost savings initiative have structurally improved margins from the $3.60 to $3.80 range in the 2018 to 2019 period. Let's look at internationals performance on the next slide. The international segment delivered substantial sequential improvement in top and bottom line results across all regions in Q4. Volume in the quarter, including joint ventures, was nearly back to pre-pandemic levels from Q1. Versus Q4 last year, China had strong volume growth coupled with solid performance in Australia and other parts of Asia. This growth was offset by continued COVID impacts in Latin America, EMEA, and India, driving the overall year-over-year volume declines in the quarter. An increased contribution from higher margin geographies and joint ventures, as well as overall improved margins, drove a 9% increase in segment EBITDA. For fiscal 2020, lower volume, especially related to COVID-19 impacts in Latin American India, led to the decline in EBITDA. We anticipate significant top-line growth in 2021, with volume in sales each increasing in the low double digits, excluding sales from our new China plant to the China joint venture. Although levels of activity could be uneven across geographies depending on COVID-19 recovery, this broad-based growth is expected across regions. Our new lubricants facility in China recently completed a construction phase under budget and began initial testing in Q1. We expect the plant to come online by the end of the calendar year and be producing essentially all of our lubricant volume for the China market by the end of fiscal 2021. And the long-term logistics efficiencies and the elimination of third-party polling fees is anticipated to drive meaningful cost savings, while the move to in-house production enhances our standing in the market, creating opportunities for volume growth. We plan to continue investing for future growth, through channel and platform development and brand building. The original motor oil global campaign, our new partnership with Sevilla Football Club, and our ongoing global partnership with Cummins are key parts of our approach to building brand equity and awareness and capturing opportunities to generate profitable volume growth. Continued SG&A investments and costs to ramp up the China plant are expected to moderate EBITDA growth in 2021 to the high single-digit range, but still in line with our 2019 Investor Day target. Let me now turn it over to Mary to review our financial results and guidance in more detail.