Valvoline Inc.

Thank you for standing by and welcome to Valvoline's third quarter 2022 earnings conference call and webcast. My name is Sam and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question at this time, please press star one on your telephone keypad. I'll now hand the call over to Sean Cornett with Investor Relations. Sean.

Thanks, Sam. Good morning, everyone, and welcome to Valvoline's third quarter fiscal 2022 conference call and webcast. On August 3rd at approximately 5 p.m. Eastern time, Valvoline released results for the third quarter into June 30, 2022. This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our investor relations website at investors.valvoline.com. Please note that these results are preliminary until we file our Form 10Q with the Securities and Exchange Commission. On this morning's call, Sam Mitchell, our CEO, and Mary Meiselsberger, our CFO. 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'll be discussing our results on an adjusted, non-GAAP basis, unless otherwise noted. Non-GAAP results are adjusted for 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 non-GAAP results to amounts reported under GAAP and a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix. The information provided is used by our management and may not be comparable to similar measures used by other companies. Now as we move to slide four, I'd like to turn the call over to Sam.

Thanks, Sean, and thank you everyone for joining us this morning. In case you missed our announcement on Monday, we are excited to have reached a definitive agreement to sell our global products business for $2.65 billion in cash. I encourage you to review our announcement presentation and press release for further details on the transaction. With the separation of global products, Valvoline is marking a pivotal step in its strategic transformation. As a pure-play auto aftermarket service company, Valvoline expects to be a faster growth, higher margin business with lower margin volatility and a long runway for reinvestment opportunity. The sharpened corporate focus, enhanced capital structure, and capital allocation policies further cement our corporate transformation into a high-growth auto aftermarket retailer. The long-term benefits of the transaction are clear. Historically, Valving has been a combination of a predominantly slower-growth cash-generated products business and a high-growth high margin services business. The separation will drive increased clarity and transparency on the performance of our fast growing retail services business, which should lead to a more appropriate public market valuation and a new shareholder base focused on high growth retail concepts. We believe Valvoline as a standalone auto aftermarket services company represents a compelling value opportunity for investors. Valving's board and management team are committed to executing our strategy and delivering best-in-class results for our shareholders. Moving to slide five, let's discuss how we plan to utilize the transaction proceeds to drive our transformation. Valving expects to receive approximately $2.25 billion in net cash proceeds. We anticipate paying down some debt, particularly the 2030 bonds, which we expect to redeem at par given the asset sale covenant provision. and other indebtedness specifically related to global products. Our enhanced capital structure is targeting 2.5 to 3.5 times rating agency adjusted net leverage ratio, which allows Valvoline to both invest in the business and return cash to shareholders via share repurchases. We believe in the long-term value of our stock and will retire a substantial percentage of the shares outstanding to right-size our capital structure and minimize earnings dilution from the separation. Let me walk you through how we expect the transaction to impact long-term EBITDA margins for our business. Slide six is consistent with what we shared on Monday, though a slightly different view to help add some clarity. We anticipate that our portfolio realignment will improve our overall corporate margins by roughly 400 basis points, while demonstrating a faster growth and high returns profile. Beginning with our guidance of 30% to 32% retail services segment margin, we must allocate approximately 50% of our legacy corporate costs to derive a comparable corporate EBITDA margin. The synergies from the transaction, mainly incremental standalone and supply agreement costs, reduce margins by roughly 300 to 400 basis points to generate our 23% to 26% margin targets. The brand use for product purposes is reflected in the transaction consideration, and so no brand licensing fees are involved going forward. Despite separation to synergies, we're confident in our long-term growth, margin profile, and cash flow generation. Regarding sales growth, we've outperformed historically, driven by same-store sales and store additions, so there's room for upside in our outlook as well. Pro forma 2022 EBITDA margins are forecasted to be slightly below our long-term expectations, primarily due to the price-cost lag from the extreme raw material inflation that we have seen this year. The improved Valvoline corporate margin profile, coupled with optimized capital structure and capital allocation, is projected to drive 20% or more of EPS growth annually. Let's review our Q3 results, starting on slide 8. Our results in Q3 show that the demand profile for Valvoline's products and services remains robust, with both businesses continuing to capture market share. While we are experiencing temporary dilutive effects on profit margins due to higher costs and price pass-through impacts, the strength of our top-line growth highlights the non-discretionary nature of our preventive maintenance business and positions us well for margin expansion when the current inflationary cycle eases. Let's turn to the next slide to look at retail services results for the quarter. Our retail services segment continues to generate strong top line growth, with Q3 sales increasing 16%. System-wide store sales also increased 16%, driven by a nearly 10% same-store sales growth and an 8% increase in units. On a two-year stack basis, our same-store sales in the quarter grew in excess of 50%, And for the year, we expect growth in excess of 30%. At the end of fiscal 22, we expect to have delivered our 16th consecutive year of same-store sales growth. We have a three-pronged approach to expanding our retail footprint, building company stores, acquisitions, and working with our franchisees on their store development. We anticipate adding 140 to 160 units this fiscal year with a strong franchise contribution as they continue to invest in growth. Turning to slide 10, let's review our recent margin performance in the context of our segment strategies, our segment targets, and by comparing year-over-year and sequential performance. In Q3 last year, EBITDA margins ran well ahead of our long-term targets, driven by high store utilization levels. We were understaffed in our stores, but seeing a significant rebound in transactions, leading to roughly 300 basis points above the midpoint of our target range. As we said during our earnings call last quarter, our segment EBITDA margins in Q2 were below our long-term targets due to product and labor inflation, as well as labor investments we made to improve staffing levels and turnover. We took pricing actions beginning in early Q3 to improve margin performance. Those actions were successful and drove a 230 basis point sequential increase in margin rates this quarter. While improved, our Q3 margin was slightly below our long-term target driven by continued inflationary pressure, as well as a dilutive impact of passing through higher product cost and sales to our franchisees, which drove 100 basis point of margin decline year-over-year. In Q4, we expect similar margin performance to Q3. However, with continued top-line growth, we expect better flow-through to profitability, leading to a solid year-over-year growth in segment EBITDA. While the macro environment remains challenging, we are monitoring potential impacts of higher inflation on consumer behavior and any differences by region. We do have levers to address any developments, including adapting our digital marketing offers, among others. We remain confident in our targeted segment margin range. Given our top line strength, we are well positioned to see both improved EBITDA dollar growth and margin expansion as inflationary pressures ease and the margin leverage of our model is demonstrated. Let's review global products results on the next slide. Volume growth in global products continues to be impressive, with a 9% increase in Q3. These results were generated despite disruptions to the business from geopolitical events and COVID, particularly the lockdowns in China. With demand strength continuing, combined with pricing actions, adjusted EBITDA grew 7%. Unit margins continued their sequential improvement progress in Q3, highlighting the business's ability to efficiently pass through earlier rounds of raw material cost increases with pricing. Nonetheless, with raw material costs continuing to increase, we expect impacts to profitability in Q4. Despite disruptions in higher costs, discretionary recast flow for the segment remains strong and steady. I will now pass it over to Mary to further discuss our financial results for the quarter.