Valvoline Inc.

Thank you all for joining and welcome to Faveline's Q4 2022 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise and after the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question please press star two and for operator assistance at any time, please press Start Zero. Thank you. I will now turn the conference over to your host, Sean Cornett from Investor Relations. So please go ahead when you're ready, Sean.

Thanks, Priya. Good morning, and welcome to Validine's fourth quarter fiscal 2022 conference call and webcast. On November 15, 2022, at approximately 7 a.m. Eastern Time, Valvoline released results for the fiscal year and fourth quarter ended September 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 10-K with the Securities and Exchange Commission. On this morning's call is Sam Mitchell, our CEO, Laurie Fleece, our President of Retail Services, and Mary Michelsperger, 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 will be discussing our results on an adjusted non-GAAP basis unless otherwise known. 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. 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. This information provided is used by our management and may not be comparable to similar measures used by other companies. The announcement that Valvoline signed a definitive agreement to sell its global products business resulted in the former global product segment being classified as discontinued operations for purposes of GAAP reporting, with the retail services segment becoming the company's continuing operations. Results of continuing operations are comparable to those previously discussed on a pro forma basis at the time of the announcement. On slide three, you'll see the agenda for today's call. We'll start with an update on the sale of global products that we announced in August and an introduction to the post-transaction babbling, where our company will be focused fully on retail services. We'll then talk about our growth strategy for the business and end with a review of fourth quarter and full year results and guidance. I'd like to turn the call over to Sam.

Thanks, Sean, and thank you all for joining us today. The sale of global products marks the completion of Valvoline's transformation from a complex story with two very different businesses into a simple, pure play retail services business that is best in class in the industry. Valvoline's global products and retail services are two differentiated businesses that have their own investment attributes, growth, and profit drivers and strategic priorities. With the success of our retail strategy over the past several years, retail services has grown to a point where it can thrive as an independent business. Today's call will focus largely on retail services, including our strategy for growth and value creation. The new Valvoline is a high growth, high margin, less capital intensive business that has less operating risk given the high percentage of franchise stores. We will have a focused capital structure and capital allocation strategy. This will drive the ability to make more targeted investments to capture opportunities in an evolving car park, including the growth of electric vehicles. At the same time, investors will benefit from increased transparency and clarity due to the simple nature of our new business model. Our team has been hard at work to complete the separation. We continue to anticipate the closing will occur in early calendar 2023. Total proceeds from the transaction will be $2.65 billion in cash. and approximately $2.25 billion net proceeds. We intend to use the majority of the anticipated net proceeds to accelerate the return of capital to shareholders through share repurchases with the remaining portion used for debt reduction. Today, we announced the Board's authorization of a $1.6 billion share repurchase to effectuate this return with the goal to complete the share repurchases within 18 months. Turning to slide six, let's look at the new Valvoline. We have a 150-year history and one of the world's most recognized brands, a brand customers trust for convenient, preventive automotive services. With over 1,700 retail locations across the US and Canada, Valvoline has more sales than any other preventive auto maintenance company in North America. These locations, 54% of which are franchised, have delivered 16 consecutive years of same-store sales growth. System-wide sales, which have been growing at a 19% CAGR over five years, are now nearly $2.4 billion for fiscal 2022. Looking to slide seven, the new Valvoline is expected to generate faster growth, higher margins, and 20% plus EPS growth. taking Valvoline into the top tier of consumer retail growth stocks. We expect our financial and operating metrics to improve significantly post-separation, which will compound value to shareholders. In simple terms, our plan is to grow top-line revenue at 14 to 16 percent, adjusted EBITDA between 16 and 18 percent, and deliver adjusted EPS growth between 22 and 26 percent per year over the next five years. We are forecasting adjusted EBITDA margins to steadily improve with a range of 26% to 29% over the forecast period. We have multiple levers to create value and drive strong growth, including continuing to focus on growing our core business through winning market share and improving service penetration, focusing on accelerating our franchise growth while continuing organic growth via new store development and M&A, leveraging our assets and core capabilities into incremental service offerings as the car park evolves, and maintaining an enhanced capital structure and improved capital allocation policy by returning excess cash to shareholders. We will talk more about each of these growth levers. Valving is a highly attractive investment opportunity. Our compelling value proposition has three broad components, growth, brand, and performance. We're going to accelerate franchise growth, expanding our already scaled footprint and platform as one of the largest preventive maintenance companies in North America. Auto care is a growing, highly fragmented market with significant white space for expansion. We see potential for our differentiated model of providing convenient and trusted service to our customers as a driver to more than double our 1,700 plus retail locations across North America to over 3,500 units. We're confident that our model of quick, easy, trusted service will allow us to continue winning market share while generating attractive margins and significant cash flows in the years to come. Turning to slide nine, we are already a leader in a uniquely attractive industry, preventive automotive care. This market is economically resilient with low cyclicality and established long-term growth drivers. There are over 275 million cars in the U.S. with increasing age and vehicle complexity driving the need for auto care and increased service spend. Additionally, total miles driven continues to grow. This market provides essential services required in any economic environment for any car type. our preventive maintenance business through ongoing improvements in service performance and investments in network expansion, while continuing to develop capabilities for an evolving car park. While there has been a lot of press over the past 12 months on electric vehicles, the reality is that it will take decades for electric vehicles to represent a substantial portion of the car park in North America. With our strong brand, skilled platform, and convenient and trusted service, we are confident we can continue to win share in the evolving auto care market. We have a simple and proven business model. When you look at the core metrics for retail services over the past seven years, they are impressive. We've grown units from 1,068 stores in 2016 to 1,715 in 2022. Our system-wide sales have grown from 880 million to $2.4 billion in the same time period, an average 10% system-wide store sales growth annually, same store sales growth annually. From a profit perspective, both segment sales and segment EBITDA have grown at over 20% CAGR from 2016 to 2022. These results demonstrate the strength of the business model that Valvoline has built. Looking at slide 11, we highlight our mature company stores, which are defined as stores opened prior to October 2018. Recall, we have aggressively added stores over the past five years, hence only about 60% of our store base is mature. The mature stores have provided substantial growth in recent years, with per store revenue growing from $1 million in fiscal 2018 to $1.5 million in fiscal 2022. while per store EBITDA has grown from nearly $330,000 to over $500,000 in the same time period. Additionally, we have a strong pipeline of stores that are working towards that mature store status. We believe there is more than $50 million of incremental EBITDA growth in the years ahead simply from our non-mature stores transforming into mature stores. We expect our same-store sales growth, which includes mature and non-mature stores, to continue this trajectory by compounding at 6% to 9%. Turning to slide 12, we talked about the considerable white space in our fragmented industry to further expand our footprint. We believe we can easily double our store count over the long term through franchise growth and company store additions and continue to win share from our competitors. Our data-driven approach to site selection provides a highly predictive real estate model that allows us to choose ideal locations to maximize store growth. Having a large geographic coverage allows us to maximize cash-on-cash returns today, which is incredibly attractive, while focusing on stores that are equipped to evolve with the car park. Simply put, we still have a long runway on our growth trajectory. Now I'd like to turn it over to Lori Fleece, President of Retail Services. Lori joined us about seven months ago and has jumped right in and is already adding value. Lori's going to talk about our growth strategy in addition to our focus in fiscal 2023. Lori?