Valvoline Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the Babylon Incorporated 2Q 2021 earnings conference call. At this time, all participants are on a listen-only mode. At the district'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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Sean Cornett. Thank you. Please go ahead, sir.

Thanks, Christy. Good morning, and welcome to Valvoline's second quarter fiscal 2021 conference call and webcast. Valvoline released results for the quarter ended March 31, 2021, at approximately 5 p.m. Eastern time yesterday, April 28th, 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 press 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 Michaels-Berger, Chief Financial Officer. As shown on Slide 2, any of our remarks today that are not statements of historical fact are forward-looking statements. These forward-looking statements are based on current assumption 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. Bottling 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 second quarter, Valvoline delivered reported operating income of $131 million, net income of $68 million, and EPS of $0.37. Year-to-date cash flow from operating activities was $190 million. The key items in the quarter were $27 million of after-tax expenses related to a new debt issuance and retiring our 2025 senior notes, non-service pension and OPEB income of $10 million after tax, and business interruption insurance recovery of $2 million. Excluding key items, results for the quarter included adjusted EBITDA of $152 million and adjusted EPS of $0.46. Year-to-date free cash flow was $116 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.

Thanks, Sean. Our results in Q2 were outstanding, exceeding our expectations and part of an exceptional performance in the first half of the fiscal year. Sales grew 21% in the quarter, and adjusted EBITDA increased by 38%, excluding large unfavorable changes in variable compensation and LIFO inventory accounting. We continue to benefit from decisions that we've made to drive growth. Q2 was the first quarter where Quick Loops contributed more than half of our total adjusted EBITDA, as our strategy of shifting to a more service-driven business model takes hold, supported by the strong cash generation of our products business. We're also benefiting from an improved macro environment, including stimulus and broader economic reopening. Our strong top and bottom line growth and outperformance so far this year gives us the confidence to raise our 2021 guidance. We now expect adjusted EBITDA to be $590 to $610 million, representing high teens growth at the midpoint, and free cash flow to be roughly $260 million. Turning to the next slide, The top line improved across all segments in Q2. Quick Loops and International each saw sales growth in the mid-30% range and adjusted EBITDA growth of roughly 60%. Core North America had solid top line growth and had a 4% decline in adjusted EBITDA due to price-cost lag, excluding a LIFO inventory accounting impact. Let's discuss Quick Loops in more detail on the next slide. Quick Loops had an outstanding quarter. Same store sales growth was more than 20% with a balanced contribution from transactions and average ticket. Some of this growth is related to the onset of COVID-19 impacts in the second half of last March. However, our normalized same store sales grew more than 10% driven by our strong digital marketing performance and excellent in-store execution of a preventive maintenance model. Same-store sales growth combined with unit growth of 9% drove a 34% increase in overall revenue. Top-line growth and improved margins generated a nearly 60% increase in adjusted EBITDA, a truly impressive performance. Throughout the pandemic, our Quick Loops business has produced impressive results due to our convenient, safety-focused, stay-in-your-car service model, an exceptional performance by our team. Let's turn to the next slide to discuss how our broader menu of preventive maintenance services drives store sales. Key component of driving same-store sales growth is ticket. One aspect of ticket that we pay particular attention to is non-oil change revenue, or NOCR, from our wider array of service offerings. These include OEM scheduled maintenance services, fuel system cleaning, battery changes, tire rotations, and ancillary items like cabin air filters and wiper blades. It is important to note that these services tend to carry exceptionally strong margin contribution. We continue to focus on ways of growing NOCR. As an example, last year we relaunched our battery change program. We moved to a different supplier and branded the batteries as Valvoline, matching the branding across the product lineup we use in our stores. This also gave us access to improved testing equipment for our store employees and better understanding of battery health for our customers. We invested in our supply chain capabilities to make sure that we had the right inventory in place at the right time. The result has been a near doubling of battery chain service penetration in the first year. We completed the rollout to company stores in December and are in the process of expanding to our franchisees. As a result, we expect this service to be an important growth driver of NOCR in 2022. As a safety precaution, we suspended cabin air filter services in the early stages of COVID-19. We've begun reintroducing them and expect a solid contribution to Ticket in the second half of the year. Not all change revenue continues to steadily grow over time and currently makes up nearly 25% of average Ticket. We have a tremendous opportunity to expand NOCR and increase penetration rates of these important services to drive ticket growth while expanding our customer base. Let's look at the other drivers of same-store sales on the next slide. Both transactions and average ticket drive same-store sales. We leverage our strength in digital marketing and data analytics to attract new customers and retain our current ones. We've grown our oil changes per day, a measure of transactions, at a healthy 3% CAGR over the last several years. This reflects the success that we've had growing our customer traffic and gain in share. In contrast to an upsell approach, we focus on educating our guests on what services their vehicles need based on the vehicle's service history and OEM recommendations. This builds trust with our customers and, combined with the competitive advantages of our model, allows us to have pricing power, capture the shift to synthetics through premium mix, and grow non-L-change revenue. The multiple levers that we have to drive same-store sales give us the competence and the sustainability of strong, long-term same-store sales growth. Let's review Core North America's results on the next slide. Progress in Core North America continued in Q2. We have passed through raw material cost increases to our index-based accounts. We have also successfully completed the first phase of pricing to negotiated accounts. Raw material costs have increased significantly since our Q1 earnings call. While we will execute price increases in Q3 and Q4, we also expect short-term margin pressure from the price-cost lag effect. Unfavorable price-cost lag caused a decline in segment EBITDA. A significant component of the decrease was the impact of LIFO inventory accounting. Excluding the LIFO impacts, year-over-year gross profit was up slightly, and adjusted EBITDA was down modestly. Overall volume was up 7% year-over-year, despite significant cost and pricing pass-through pressure. We saw growth in both channels. DIY retail channel volume continues to outpace miles driven. Growth is coming from continued progress in traditional DIY outlets and from new distribution, where we've been under-penetrated historically. We're making good progress in gaining more shelf space in farm stores, C-stores, hardware, and online. Our focus in the DIY category is on working with our retail partners to market and merchandise our brand. Innovation, particularly in synthetics, is a key part of that strategy. For example, we recently introduced flex-filled packaging for our synthetic gear oil. We have received great feedback from consumers and customers, and early sales results are strong. Valvin is the number one brand in transmission fluids and gear oils, and Flexbill further strengthens our position. In the DIFM space, demand is recovering more slowly than in DIY. Our focus remains on helping our installer customers drive value. Our success is demonstrated by the fact that we have extended or renewed long-term agreements with many of our key installer customers. We also continue to win new business, and our volumes continue to outpace miles driven. We are well positioned to see the benefits as the market recovers. Let's review international results on the next slide. The international segment delivered another impressive quarter of growth across all regions in Q2. Sales and volume increased. We're up in the mid to high 30% range, led by Asia Pacific and particularly China, which had the largest COVID-19 impact in Q2 last year. Topline volume growth was driven by our marketing programs and new distribution, which led to market share gains. We continue to add new distributors in all regions, building channels, and expanding market coverage. In general, we saw improving market conditions and some distributor restocking impacts. We're closely monitoring the impacts of COVID, rising COVID-19 cases in India and other parts of Asia. Adjusted EBITDA growth of 63% was driven by strong volume growth in both affiliates and JVs. Raw material cost increases impacted Q2 and are expected to continue across all regions. We expect margin pressure to increase in the near term as we work to pass through these increases. On the next slide, let's take a closer look at one of our marketing programs that help drive brand awareness and strong volume growth in the quarter. Along with channel building and service platforms, building our brand is a key element of our international growth model. A key pillar of our brand-building efforts is our Global Mechanics Month program, which took place across more than 50 countries, including the U.S. and Canada, in March. Bowling has proudly supported mechanics with a variety of programs, including training and professional development throughout our history. The 2021 campaign focused on recognizing the work mechanics have done to keep our economies going. Their critical efforts kept essential service workers moving to help those in need as the world manages through COVID-19. The program saw significant engagement across multiple channels, as well as direct retail activations with signage and promotional materials in mechanic shops. In the end, All elements of the event were focused on recognizing mechanics and driving customer visits, helping deliver a record volume month in international in March. Now let me turn it over to Mary to review our financials.