Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to evolve Liens first quarter 2020 earnings conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question answer session.
To ask a question during the session you will need to press star one on your telephone.
If you require any further assistance please press star zero.
I would now like to turn the call over to Sean Kras head of Investor Relations.
Mr Corner. Please go ahead.
Thanks Carol.
Good morning, and welcome to balance first quarter fiscal 2020 conference call and webcast.
The only released results for the quarter ended December 31, 2019 at approximately five PM Eastern time yesterday February Threerd and this presentation remarks should be viewed in conjunction with that earnings release, a copy of which is available on our investor relations website at investors not valvoline Dot com.
These results are preliminary until we file our form 10-Q with the Securities and Exchange Commission a copy of the news release has been furnished to the FCC on a form 8-K.
With me on the call today, our balanced Chief Executive Officer, Sam Mitchell and Marine markets Berger Chief Financial Officer.
As shown on slide to any of our remarks today that are not statements of historical facts are forward looking statement.
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 basis unless otherwise noted.
Adjusted results exclude key items, which are unusual non operational restructuring in nature.
We believe this approach enhances the understanding of our ongoing business.
A reconciliation of our adjusted results to announce reported under gap in a discussion of Valvoline of management uses non-GAAP measures was included in our earnings release.
Non-GAAP information provided these use by our management and may not be comparable to similar measures used by other companies. If we turn to slide three let's review our reported financial results for the quarter.
For the fiscal first quarter Valvoline delivered reported operating income of 104 million net income of seven 3 million and EPS of 39 cents.
Cash flow from operating activities was 59 million.
Beginning this fiscal year Valvoline adopted the new lease accounting standard the impact of the standard resulted in roughly $220 million of incremental lease related assets and liabilities on the balance sheet.
And had a negative 1 million dollar impact to EBITDA and cash flow from operations in the quarter.
Non service pension and OPEB income of $7 million. After tax was the primary key item in the current quarter with legacy and separation in fact offsetting restructuring.
In Q1 fiscal 2019, non service pension and OPEB income of $2 million. After tax was the one key items.
No. That's it was just like four we can review our adjusted results.
Our adjusted EBITDA in Q1 was 120 million growing 19%.
Adjusted EPS for the quarter grew 30% 35 cents.
The strong start to the year was driven by a robust contribution from core North America ongoing strength in same store sales and topline growth and quickly and profitable volume growth in international.
Now, let me turn it over to Sam to discuss our segment results.
Thanks, Sean.
Quickly, which had a good start to 2020 with strong system wide same store sales growth of 8.3% and solid unit additions in the quarter 106, net new stores added since last year helped drive overall sales growth of 15%.
EBITDA growth was limited due to the impact of these ramping new stores short term labor cost increases in higher S. DNA.
Well North America had a very strong quarter building off a weak Q1 last year.
Branded retail volume grew year over year, but was offset by weaker volume and they installer channel.
This favorable channel mix and increased sales of premium products, along with the benefits of our operating expense reduction program contributed to the significant growth in EBITDA.
We saw a return to volume growth in international primarily from our Eastern European acquisition completed last year, the 7% growth in volume improved margins and solid contributions from our JV stroke, 10% growth and EBITDA.
Take a closer look good performance and quickly on the next slide.
System wide same store sales grew 8.3% in Q1 company stores grew 6.2% in the quarter and franchise growth was 9.8%.
Our superior in store experience continues to resonate with customers and drive growth and transactions.
Increases in premium oil changes in penetration of non oil change services are contributing to growth in average ticket.
EBITDA growth of 4% Q1 lagged year over year top line increases at 15%.
We saw some temporary labor deleveraging in the quarter with an increase in labor hours versus traffic.
We have taken actions to address these temporary labor impacts and expect they will subside in Q2.
Continuing to grow our retail service services business is a key focus of the company. So more of our corporate resources are allocated to the segment increasing its share of indirect best DNA versus last year as planned.
Maybe we'll talk more about this in a few minutes.
We continue to expect quickly EBITDA growth for the year to be in the low to mid teens.
The steady pace of unit additions continued with 22 stores added in Q1.
Primarily in franchise markets. We've added 106 stores since last year as we remain on track to add roughly 100 stores per year over the next few years.
Let's turn to the next slide to look at the new store impacts.
We opened 44 newly built company stores over the past two fiscal years.
Most of these newly built stores are still in or just completing their first year of operations when profitability is breakeven or marginally negative creating a drag on margins in Q1. These new stores drove 170 basis points of gross margin deleveraging at the quick lubes overall segment level.
Excluding this impact gross margin rates would have only decreased modestly year over year in the quarter.
Based on our estimates for newly built stores, we expect to see an EBITDA contribution of between four and $7 million this year and between 29 in $32 million in fiscal 2002.
This impressive contribution to earnings demonstrates the compounding benefits of our store growth.
We are executing on three significant levers to drive quick loops profitability.
First is to continue to drive operational excellence and same store sales growth.
Second is to aggressively add newly constructed units.
And third to pursue incremental high return acquisitions.
We believe that this approach will allow the quickly segments delivered strong double digit EBITDAR growth EBITDA growth for years to come.
Let's take a look at core North America's results on the next slide.
Well North America's EBITDA improved $15 million in Q1 versus last year driven by growth in branded volume in the retail channel and favorable margins, resulting in unit margin growth of more than 20%.
There are three key things to look at.
I understand the year over year performance this quarter and our full year outlook.
First volume softness in our DIY channel.
In a higher level of inventory at certain customers drove lower results in the first quarter fiscal 2019.
Actions taken since last year to better position, our brand, including a stronger promotional schedule. This quarter resulted in a partial recovery in branded retail volume.
The favorable mix from this volume growth substantially benefited unit margins.
Second benefits from the broad base operating expense reduction program that we announced a year ago, along with favorable true ups of our trade and promotion cost estimates contributed to the significant improvement in unit margins and therefore segment profitability.
Finally for the balance of the year, we expect our DIY retail volume to be consistent with Q1, but down year over year due to expanded price gaps versus private label offerings.
We also expect minimal impacts from recently announced base oil price increases.
Our unit margin outlook for the full year is now $3.75 to $3.85.
Lower than our results in Q1, but an improvement on our previous guidance of $3.50 to $3 in 60 cents.
Performance this quarter has improved our EBITDA outlook for the full year to modest growth for the segment.
Let's take a closer look at the DIY category on the next slide.
Coming off macro declines in 2018, DIY category demand was more stable in 2019.
Demand continues to shift toward higher value synthetic products, which now make up almost half of DIY volume.
The premium Blatt brands are playing an important role in this evolution.
Private label continues to make inroads in the category retailers are supporting this growth with ongoing and aggressive promotions.
At the end of last fiscal year, most retailers initiated higher promoted price points across all the premium brands, increasing price gaps versus private label offerings.
While our Q1 results reflected a partial rebound in branded retail volumes our results remain below prior trends.
Which we largely attribute to these pricing actions.
For the balance of the year, we expect our year over year volumes to continue to be impacted until we lap these changes.
We anticipate our retail DIY volumes to remain relatively flat sequentially.
A sign of improving stability.
We continue to focus on our consumer messaging and product portfolio, while working with our retail partners on the optimal merchandising and promotion plans.
For their business and for our brand.
Let's take.
Well look at the international results on the next slide.
International had a good start to the year with volume growth of 7% driven primarily by growth in EMEA.
Our recent acquisition in Eastern Europe drove the majority of this increase.
We also saw solid volume growth in key parts of Asia, including a return to growth in China from our strengthening passenger car aftermarket business.
This growth offset temporary weakness in Latin America impacted by the recent closure of two of our distributors and a shift in promotion timing from Q1 to the current quarter.
EBITDA grew 10% on higher volumes year over year stability in raw materials led to improved margins.
Our joint ventures also provided solid contributions to profitability.
We expect contributions from our acquisition along with our ongoing channel development in brand building efforts to drive increased volume throughout the year in most regions.
We're also expanding a successful program in Asia to be more global.
New mechanics month campaign will launch in our international markets in March.
We're carefully monitoring the corona virus situation as it could have an impact on our operations in China.
Following these risks we expect to meet our guidance for fiscal 2020, including volume growth of 6% to 8% and roughly flat year over year EBITDA.
Now, let me pass it over to marry to review our financial results.
Thanks Sam.
Our adjusted results for Q1 are summarized on slide 11.
Sales grew 9% on volume growth of 3%.
Overall favorable volume and mix for the primary drivers of the sales increases.
Mix some benefits from our operating expense reduction program helped to drive growth in our gross margin rate. We also had favorable true ups to our promotion related cost estimates totaling roughly $4 million in the quarter, primarily in the Cormark Americas segment.
Roughly half of the increase in SGN, a was due to higher incentive in deferred comp expense the transition to the new lease accounting standard increased rent expense and SGN a by approximately 1 million.
Investments in the quick Lubes and international businesses made up the remainder of the increase.
Our shared corporate expenses are fully allocated to the operating segments as Sam mentioned earlier quick lubes is growing significantly as a percentage of our business, which is driving a higher expense allocation to the segment. In Q1. This was a 5 million year over year increased a quick lube SGN, a which was partially offset by a low.
Lower allocation of roughly 1 million to core North America.
Let's move to slide 12 to discuss corporate items.
Our reported effective tax rate for the quarter was 24.7%.
Adjusted for key items, our effective tax rate was 25%.
Okay.
Cash flow from operating activities was 59 million down 26 million versus last year, primarily due to an increase in working capital.
Capital expenditures were 28 million, leading to free cash flow of 31 million for the quarter.
Net debt was flat to last quarter at 1.2 billion.
We increased our cash dividend per share by roughly 7% consistent with our approach to grow the dividend in line with earnings as we discussed at our Investor Day last year.
Now, let's turn to the next slide and take a closer look at guidance.
We are raising our full year guidance for adjusted EBITDA and EPS based on better than anticipated results in Q1.
We now expect EBITDA in the range of for 95 to 515 million and EPS of $1.40 to $1.51.
Our expectations for core North America have improved based on performance this quarter and we now expect full year EBITDA to be in the low to mid single digit range.
We are working to mitigate the impact of rising raw material costs through pricing actions in negotiations with our suppliers.
We expect quick moves to continuous strong pace of same store sales growth within our guidance of 68% for the year and that EBITDA growth will improve more in line with topline growth beginning in Q2.
Excluding evolving macro risks in China, we anticipate volume growth in international to continue.
We are maintaining our guidance, where our overall volume and revenue growth as well as capex, we're raising our free cash flow outlook to 160 to 180 million.
Now, let me turn it back over to Sam to wrap up.
Thanks Mary.
We're pleased with our start to the year.
The quickly of steam is still driving same store sales growth at a high rate, while also focusing on delivering new stores.
Our operating expense reduction program is taking hold strengthening our margins and helping to drive stability in core North America.
International returned to profitable growth this quarter.
We are executing on our strategic initiatives aggressively growing our retail services business, maintaining healthy cash generation in core North America, and developing our opportunities international.
This keeps us on track to become a more service driven business fueled by products and they did and enabled by technology and with that ill hand, it over to Sean for today.
Thanks, Sam before we open the line for Q and eight I'd like to remind everyone to limit your questions to one and a follow up so that we can get to every.
Carroll Please open the line.
Thank you.
A reminder, if you would like to ask your question. Please press star followed by the number one on your telephone keypad.
Our first question today comes from Simeon Gutman from Morgan Stanley. Please go ahead.
Hi, guys. This is Josh Cambodian for Simeon Thanks for taking my questions can you talk about the wider gap between the owned in the franchise comps and quickly during the quarter should we expect that to possess just throughout the year as your stores lap your price increases what do you maybe have some other pricing actions that you might have in the pipeline now that could narrow that gap sooner.
Yes, good question and that we had talked about this at our last call to that early in the fiscal year, we'd expect to see a little bit of a separation here because of pricing actions that we took a year ago in our first quarter fiscal 19, and so not having.
Those same increases in our first quarter resulted in the company stores being less than what we delivered last year and that also is the difference between the gap and franchise stores because they were taking pricing actions in Q1.
To the second part of your question.
Our number of services that were adjusting prices on during Q2 and that will help in terms of narrowing the gap, but as we look.
Throughout the balance of the year, we do you expect company stores franchise stores to be performing.
More closely to each other.
Hi, Thank you and then just a quick follow up married could you maybe quantify the benefit over the cost reduction program between gross margin SDMA.
In Q1 fair for the quarter, you might have said I might've missed and apologize.
We have talked about the overall benefits of the program going on annualized basis to be in the 40 to 50 million range.
And we still believe that we're tracking well in terms of that target.
We haven't disclosed specifically, how those benefits breakout by segment, but they are primarily benefiting.
Core North America, and quick Lubes business.
And.
It's the majority of the benefit is certainly within the core North America business.
Okay. Thank you.
Our next question comes from Olivia Tong from Bank of America Merrill Lynch. Please go ahead.
Great. Thanks.
Can you talk a little bit about how long you kind of cost pressures to lasting quickly.
Putting aside the change to the allocation of corporate expense I get that if your store basis, increasing is it fair to assume that there will be continued pressure.
On on margins as businesses.
Got to steady state and then on the labor issues, what exactly happened. There did you just have higher expectations and staff accordingly, or disruption of some sorry. Thanks.
Yes, so breaking down the the increase in.
Our costs in the quickly business.
First was the increase in indirect allocation out some of the corporate expenses. So that's a significant factor.
But importantly in those costs that were managing within the quick groups business and we called out some labor deleveraging.
In our stores and what that was was a change in that we had made in our labor model, which helps our stores planned or labor and this was a change that we had made late in.
Q4, and it turned out that as we dug into it as we're looking at our trends that are model was overestimating labor needs in our stores and so on a per store basis. It resulted in over scheduling costing us about $1600 per store, so even a small adjustment across the company sources.
Them how to.
Fairly significant impact as we discovered this.
We were able to make the adjustment.
By the December month, and so so we feel like Weve addressed the issue with regard to making sure. Our labor model is working as as accurately as possible as we enter Q2 here. So we feel good about that aspect. We do have some increases in our advertising expenses the store.
Base continues to grow so ultimately we still continue to feel very good about the leverage that exist in our.
Our company stores in same store sales performance as we continue to grow that does create excellent leverage.
And our profitability.
That said that the new stores that were adding does create a drag on overall segment performance and and so we're calling that out to make sure.
Testers and analysts I understand that there there is some.
Deleveraging with the store growth and we just we're trying to become just more transparent and sharing both the difference in the company stores than the impact of Boston at the new stores will have on overall margin performance.
You have anything to add to that Mary.
No. It is the only other well actually there is one thing I'd add which is we expect would that new store deleveraging from the newly constructed stores. They have about a three year ramp Olivia. So once we are building 50, 50, plus new stores a year and we are doing that consistently we should.
See that fully baked into our operating margins and have that de leverage kind of level out, but it'll be a couple more years.
Before we get to that consistent run rate of new stores. So I expect that we'll continue to see some new leverage is from deep some de leverage from those newly built stores over the next couple of years.
Hi, Thanks, if I could ask one on core North America.
Can you talk a little bit about the sustainability of that improvement comscore fairly favorable in Q1.
Q2 to Q4, I think you talked about volume potentially being a little bit lighter relative to Q1 also just wondering if a milder.
So far has helped you in any way.
And with first with regard to the volume trends.
The the DIY retail volume was up significantly versus last year, where we had a very weak quarter.
Due to some both promotional issues and inventory issues that we had at certain large retail accounts. So we are certainly comparing versus a weak Q1 last year, but nonetheless, we did see better promotion scheduling.
With that helped drive the performance improvement in Q1 in retail for us, but not to the levels of previous trends. If you look back to prior fiscal years and this has to do with a growing price gap that we've seen in private label and so what we're sharing today is that the this expanded price gap versus prior.
But label for the premium brands versus private label.
Is having a negative impact on our business and thats built into our forecast as we look out.
For Q2 through Q4, what's really going to take us this fiscal year before we kind of lap these changes in.
The pricing strategy at.
At the major retail accounts.
And as it relates to cost Olivia those cost benefits in terms of the operating expense reduction program.
Our solid and we expect to see those continue through the balance of the year. We mentioned some true up of promotional cost save incurred that happened in Q1 net that will not repeat itself.
And then in the balance of the year.
We've got some negative impact of Mick I have a more normalized mix between installer channels and our DIY retail channel as well some pressure from the recently announced.
Based on rail cost increases.
That we factored into the balance of the year. So.
Looking for the full year and core North America as Sam mentioned in his remarks were expecting to see a full year unit margin and 375 to 385, a gallon range within the core North America business.
Okay. That's helpful. If I could just had one last one on international.
If you could give us a little bit more color on China, how big is it.
Whether you have.
Manufacturing and if I could areas and sort of what the game plan is there and I know.
Sure.
Yes.
First.
With regard to potential impact on our business and when you look at total valvoline, while China's a.
Very profitable region for us in terms of its.
You should to overall balancing profitability, it's still in the.
Low single digit range. So it shouldn't have a measurable impact on overall valving results that said, we're we're concerned about the slow down the potential slowdown in the economy and how long it will take to return to normal business. So we're going to be keeping a close oriented courseware in the process of construct.
Our our blending packaging facility, which.
Originally has been scheduled to open up this fall so there's a chance.
We will see a little bit of delay in the construction there.
So, we'll we'll keep everyone up to date as as the situation develops.
Thank you.
Our next question comes from Jason English from Goldman Sachs. Please go ahead.
Hey, good morning, everyone. This is actually CODI on for Jason. Thank you for taking our question.
Good morning, I appreciate the detail that you guys gave on the core North America gross profit per gallon that was very helpful.
One thing that did surprise US was the premium sales inquiry with America, you had a significant jump what drove that and how sustainable do you think that is and I have one follow up after that.
Yes, the premium sales have been a source of.
Strength in corporate America, and as they continue to grow both on the DIY side and on the installer side too and so the continued penetration of new vehicles, which one are requiring synthetics is the big driver behind that and.
And so I think were this this year in 2020, we expect on the new cars to roughly 75% of new car production to require a full synthetic so.
That's why this trend is sustainable will continue to seek growth and synthetics.
Particularly on the installer side, the DIY side is actually a bit ahead of where we might expect that to be but thats because the retailers do you see the profit benefit of selling more synthetic too so for our our strategies definitely when it comes to innovation and thinking about how we defend our share.
Very much focused on how to do that in the synthetic category.
And when we look at our share losses that we've had in DIY to private label, it's really been more that conventional high mileage segment. So while that's it's still painful to have any share loss.
We're we're more pleased with some of the progress that we've made on the synthetic side and again, we'll continue to be our focus.
Great. That's helpful. So it sounds like you guys expect to be in the mid Fiftys to high Fiftys for the rest of the you're in that segment, if I'm understanding that correct.
That's right.
Okay, Great and then last follow up question just drilling into the International segment, you said that the eastern acquisition.
Drove a lot of the volume gains there can you quantify that for us how much gallons. This every acquisition does on a quarterly or annual basis, there how much of the 6.5% lubricant volume growth. It actually added this quarter. Thank you.
Yeah. The business, we acquired is on in just over half a million gallons per quarter.
So it was probably 70% of the growth overall, we did see really nice growth in Asia, and China and a few other.
Regions, but it was offset somewhat by some of the weakness we saw in Latin America.
But.
Over 50% of the volume growth did come from the eastern European.
Since we acquired last year.
Yes, just to add to various comments there we do feel good about the acquisition of this business that's going to help us in eastern Europe, but overall for the international business.
We feel good about trends and the majority of our regions, maybe with one exception of Australia, which is being impacted by the fires and thats slowed down business in Australia, but the other regions, where we're feeling good about Latin America, really picking up and being a significant contributor to the balance of year and our growth and good pro.
Progress in Asia as we noted.
Earlier in our comments and and again overall and in Europe and parts of Middle East Africa. Two are all sources of growth for us. So good good progress in terms of developing our channels to market working with distributors, but also we've got increased emphasis on our marketing plans.
In our international business. So we've increased our ours, our spend plan and support for the brand and.
We're pleased with some of the early progress there and also the opportunities that we have with the the higher level specifications that become required on the heavy duty side of the business across regions, and we think thats going to really help our heavy duty business our co branded.
Product line with Cummins, all should should be performing well throughout 2020, and especially as we entered 2021.
Great. Thank you very much.
Our next question comes from Laurence Alexander from Jefferies. Please go ahead.
Hi, Good morning. This is Kevin I stuck on for Laurence. Thank you for taking my question.
My first question has to do with the timing issues that you guys mentioned in the installer trend on North America, I guess I'm. Just wondering if you could talk a little bit more about that and I guess also how.
I guess, how much of the shift in orders may benefit the balance of the year.
Sure so within the installed channel about.
Half of the little over half the volume decline related to.
The timing of when we recognize orders within our distribution and distributor business, what we call our channel partners business.
That impact was largely just related to having.
Higher deliveries in last year versus this year I related primarily they the channel partners deliver that business onto our quick lube stars at our national accounts.
So we think there was some inventory rebalancing going on there along with some just a broader growth that were seen in both the the quick lube and national account business that though.
Higher volumes, resulting in essentially a higher deferral of those on the revenue recognition we for the recognition of those shipments.
Simonton so.
That was the primary driver of the timing differences.
Sam you want to talk about the underlying business then.
On the installer side.
There's a both some challenges it we're dealing with a on the on.
Lower price, the lower priced product lines and lower priced accounts and then also opportunities and.
And what I mean by that as we.
We have seen some volume softness and lost a couple of.
Accounts, mainly due to pricing.
And and and yet those are tend to be our lower margin accounts that we've lost and so that the thing to take away from that is that we're not going to pursue volume at all costs were going to focus on that business, which is which is profitable sportswear, we can bring real value to that install or in the fleet accounts and in and in those cases that's worse.
Seeing some some positive trends to where are our platform continues to strengthen the ability of our operations team working with our customers in the field. The online training programs that are improving their store level performance of those installer accounts.
And even some of the marketing that's helping to drive traffic, we're seeing good progress there. So I like the the work that we're doing there but.
Appointed as we're still seeing some odd hot challenges when it comes to the the consistent price pressure, particularly for.
The lower end of the business.
So all in all when when you think about core North America.
It's still a challenge environment, but this focus that we have on earnings a stabilization and strengthen the foundation running this business very efficiently.
I feel like we're making solid progress there and you see that in our forecast.
Okay. Great. Thanks, that's really helpful. And then my follow up question attitude International segment and I guess.
Specifically about Asia, what drove that volume growth.
So volume growth in Asia was a combination of improved results in China and.
We have made some some solid progress there to working with our distributors primarily on the passenger car side of the business. So.
The I was really pleased with that and then.
Beyond China. We also saw good solid results across a number of their countries, where we're kind of in that channel building phase in other words, developing our our distributors to to have.
Water distribution of Valvoline salvage product portfolio.
Also mention marketing is being more and more important than.
With some of the leadership changes that we've made we've we've got a stronger focus on marketing and and some of the plans that we put in place we're seeing good progress.
And one that I noted with mechanics week is just a strategy to too.
And to really get at grassroots marketing, where we're talking to the installers directly or through training programs and.
And focused on.
Not just lubricant education, but automotive maintenance some of the changing technology trends.
These are programs that were expanding and I think improving our effectiveness in growing our brand growing our brand awareness.
In developing markets like Asia.
Okay. Thanks.
Our next question comes from Jeff Zekauskas from Jpmorgan. Please go ahead.
Thanks very much.
Recently base oil prices have gone off but oil whether its brand toward stuff you too high.
Has done nothing but go down.
What what to make of the recent base oil lift what do you think the sources of that or.
And.
How do you see is going forward in such a week.
Oil price environment.
Yeah, that's a great question and.
Certainly there's been plenty of discussion with the base oil producers as they've announced this increase.
The because it it has been.
Pretty broad in terms of the market moving and implementing the increase despite the fact to your point that crude prices have come down so.
There really.
Focused on.
What they see is it a tightening basal market due to some of the turnarounds that will take place.
This spring early spring and that having a tightening effect on the base all market. So that certainly is a factor, but how it plays out over the balance of a year I think it will be more determined by.
How basal is trading later in the year so.
As far as the impact on developing business.
We think theres some modest headwind headwinds there that we have to manage through.
But.
Based on the good work that our team is doing and negotiating with suppliers.
And it also even on the finished move market with most of our competitors announcing a price increases we feel like.
This ER. This issue is something that that's manageable for us and that's built into the forecast in the confidence that we have in raising guidance.
Mhm.
Since my follow up.
Can you compare the performance of the branded business in North America.
Actually that is if you take out the true ups and you take out the cost reduction.
Was there any incremental positive change order to stay the same in other words I'm trying to figure out what's the difference in the performance of the business year over year versus the process to resolve.
And you know versus fourth quarter, which was maybe a more normal result.
Particularly on the margins, Jeff, Yes, exactly right the difference in the brand that.
Percentage for example, or PETA that sort of the quality of sub brands.
Yeah I believe it's.
More stable is the way to look at it and so when you factor out some of those onetime benefits that were in Q1 that had to do with.
You know the channel mix and the promotion true ups on a unit basis. So unit margins are relatively stable.
Across the different channels and and yet the cost reduction program that we put in place is helping us at the unit margin level too and so we're seeing that in the guidance that were given but when you look at.
The full year guidance of 375 to 385 and.
When you factor out.
That that bump that we had in Q1.
It's really saying that we expect our Q2 Q4, a unit margins to be in that 360 to 370 range.
And so that that is reflecting an improvement versus where we were.
At the beginning of year as we gave guidance in the three 350 to 360 range and that's largely due to the operating expense reduction program that we've put in place.
Okay and then lastly, thank you for that that's very clear and then lastly in 2019, how much of your cost reduction program to do you accomplish and how much do you expect to accomplish incrementally in 2020.
Yeah. So in fourth quarter, we outperformed on the cost reduction program relative to what our expectations were so.
If you think about what we've done the fourth quarter. My estimate is that we saw his bye bye.
I, just $10 million of class I read that some benefits in the quarter relative to the full year run rate as the 40 to 50 million that I mentioned so.
You know I think initially we thought that it would be more modest than that probably less than 5 million that we were able to accelerate the implementation of several of those efforts on that resulted in better result, so.
You know well, we'll start lapping some of those benefits in the fourth quarter.
Okay, great. Thank you so much.
As a reminder, in order to ask your question. Please press star followed by the number one.
Keypad.
Our next question comes from Stephanie Benjamin from Suntrust. Please go ahead.
Hi, Good morning, I wanted to follow up on the prior question just that they based oil environment, maybe you could dig a little deeper in terms of just how much flex their there isn't the guidance if it does get a little bit more volatile or kind of if you can bracket. The range you except for the year that's incorporated in the there.
Outlet that's really helpful. Thank you.
Well.
Yeah, again, given where crude is trading it's I don't see the baseball environment necessarily getting more volatile if anything I think it's going to be relatively stable that said, we do have this increase that we need to to manage through but our guidance reflects our confidence in.
Our ability to do that so we think it's gonna have yes, it's a modest headwinds of Oh, probably a few million dollars, but that's that's built into.
The back half a year and how we expect to manage through that both with our our cost savings negotiating efforts, but also with pricing actions that will take.
To to move with the rest of the market.
So I don't know if I can you provide anymore than that but I. Just we just don't see it is a major issue.
Based on current market dynamics and.
And yet we do have to see you know how this short term plays out with a the turnarounds.
Got it now that's helpful. I appreciate it and then just Oh My real question here is just to kind of go back to the DIY channel I think it'd be great to get an update I know when we spoke.
For the fiscal fourth quarter resulted in you talked about how you felt pretty comfortable shelf placement here, we're continuing to work on the merchandising strategy, maybe if you could kind of update us on both of those initiatives for that channel.
Income from all the shelf placement and then if you could just walk journey.
Tough or variability and promotional schedules were lapping from last year that could cause.
Outperformance or underperformance in any given quarter, just so we have some quarterly fluctuations that'd be helpful. Thank you.
Yes, that's true in the DIY channel you can see you know because of promotional timing issues you can sheet see shifts from one quarter. The next but we do have a really solid understanding of our promotional schedule at the major retailers between now and the end of the fiscal year.
So are we feel our ability to forecast that you know is the one reflected in that guidance that we've given.
And and so as we think about DIY performance, we know our shelf placement, we know our promotional schedule and we also know that we're dealing with an expanded price gap versus.
What we were facing a in 2019, so that's our challenge and that's why we're expecting our our promotional lifts to be.
Less than what they were in 2019 with the expanded gap and so we do expect DIY volume to be.
Down on a year over year basis through the balance of year.
Such that the headwinds that we're managing through and again thats built into our guidance and again with some of the improvements that we've made in our overall cost structure for core North America.
Yeah, that's helping us maintain the earning stability.
For the operating segment.
And then as we prepare for 2021.
I think there's opportunities for continued improvements in some of our programs.
Our digital marketing, we have a new agency, that's helping us with our targeted media spend we've got some good work taking place around our overall.
Messaging around our product performance and those claims around our products will be broadly are a major part of our message in 2020 and for 2021. We're also working on our product portfolio in how we can optimize that.
For the benefit of both Valvoline and our retailers. So that work is taking place and I again pleased with the progress and I think what it what it means is that.
For US you know, we're going to continue to too.
Defend and strength in.
The core of our business, which includes having a strong the iwai brand and then continuing to strengthen those platforms with installers in the heavy duty business. So that that can ultimately be a source of strength for core North America too.
Thanks, so much I really appreciate the color.
Sure.
Our next question comes from Chris Bottiglieri from Wolfe Research. Please go ahead.
Hi, this is sit down to car on for Chris Thanks for taking my questions.
So just to go back to the guidance again, given the core North America gross profit per gallon this quarter and other segments on track to at least meet the profitability targets by the raw materials increased it seems like raising your EBITDA guidance by justified and then at the midpoint is a bit conservative.
Can you help us understand what the puts and takes off well just a bit of guidance.
Yeah.
Yes, certainly was a conservative adjustment to guidance given the strong quarter and.
The point there is it's early into the fiscal year and as we execute against our Q2 plan.
Well, we'll certainly take a look at guidance for the balance of year.
But right now we feel like the what we've seen in the business is called North America. Some some positive news with Q1 and the outperformance there.
As I've shared earlier in our comments in Q and eight we're able to model what we think the back half of the year looks like for core North America, leading to EBITDA grew EBITDA growth for the full fiscal year. So that certainly is a positive development for us and then with regard to the other businesses quickly profit.
Growth was was slower in the first quarter for the reasons that we've called out but we're very bullish on.
The the back half of the year in the next three quarters for the quickly business. Both in terms of driving same store sales performance, but also getting our expenses right with regard to our labor modeling.
And in some of the other actions that we're taking with regard to pricing on additional services, we've got an initiative targeting.
Diesel trucks.
With both new services and stronger market.
Battery program, that's rolling out so there's a lot of good developments behind our confidence in the quick group business.
That are both operational and with the continued commitment that we have to both building stores and making acquisitions. So.
A quick quickly story continues to be exceptionally strong for us and and so that that that is a big part of the confidence that we haven't our guidance.
Thanks, That's a that's very helpful. And then just related to that or the impact to the second half from raw material cost increases is that sort of across all the segments and what does that imply for pricing for the backup.
Yes, so that the base will increase.
As is a north American increase that we'll see having a modest impact on core North America, and the quick group business, but with regard to overall.
The impact on our profitability again, it's it's mitigated by the price adjustments that we make our up our pricing both for quick roots and also for.
Good portion of our installer channels business adjust off of index. So at a just on a quarterly basis, so that the cost impacts or are also.
Consistent bandwidth pricing impacts it that offset that.
So when you added up its we just don't see this being a major factor.
For our our performance during the balance of the here.
Great. Thank you very much.
You bet.
We would like to thank everyone for attending today. This concludes todays event and you may now disconnect.
Alright, thank you.
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