Q1 2021 Valvoline Inc Earnings Call
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I would now like to hand, today's conference over to your Speaker, Sean Cornett Cornett head of Investor Relations. Thank you. Please go ahead.
Thanks, Stephanie.
And welcome to Valvoline and first quarter of fiscal 2021 conference call and webcast.
Valvoline released results for the quarter ended December 31, and 2020 and approximately five PM Eastern time yesterday February three 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 Dot com.
These results are preliminary and 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, Chief Executive Officer, Sam Mitchell, and Mary Michael Burger 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 restructuring and 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.
And if you turn to slide three let's review our financial results per quarter.
For the fiscal first quarter and Valvoline delivered reported operating income of $124 million net income of $87 million and EPS of <unk> 47.
Year to date cash flow from operating activities was $79 million.
The key items and the quarter were primarily non service pension and <unk> income of $10 million after tax.
Excluding key items results for the quarter included adjusted EBITDA of $145 million and adjusted EPS of <unk> 41.
Year to date free cash flow was $44 million.
And as we turn to slide four let me turn the call over to Sam to discuss our results and operations and more detail.
Thanks, Sean.
Our results and Q1, where sales grew 8% adjusted EBITDA grew 21% and adjusted EPS grew 17% represent a great start to fiscal 2021 and puts us on track to meet our goals for the year.
Our performance this quarter is clearly benefiting from the strategic actions, we've taken to drive growth and profitability even in the face of continue and impacts of the COVID-19 pandemic.
The performance of the business gave us the confidence to raise our dividend and complete share repurchases in Q1, returning $81 million and cash to shareholders, while making substantial growth investments.
Turning to the next slide.
Profitability improved across segments and quick Lubes, EBITDA increased 21% driven by same store sales growth and strong unit additions.
For North America.
<unk> EBITDA grew 2% as favorable channel and product mix helped offset modest volume declines.
International segment, EBITDA grew and exceptional 64% driven by top line growth and margin improvement.
These segment results drove overall Q1 performance and delivered our best ever first quarter profitability, even with estimated miles driven down low double digits and the U S.
Let's discuss quick lubes and more detail on the next slide.
Quick Lubes began the fiscal year with outstanding top and bottom line growth compared to Q1 last year sales grew 17% and adjusted EBITDA increased 21%.
These results were driven by continued strong operations and in store execution.
And which were made even more challenging by COVID-19, and its related impact on customers and our employees.
We've seen some margin deleveraging due to unproductive labor and other costs related to COVID-19.
Despite this increase and cost we performed well and had strong profit growth.
System wide same store sales grew 6% in Q1, continuing to run well ahead of miles driven.
Same store sales varied during the quarter with softer results and the middle of the period.
This was likely related to a step up and restrictions, which negatively impacted miles driven including holiday related travel.
And an echo effect of lower transactions from earlier in the spring.
Since November we have seen very strong same store sales results that continued through January.
Total sales and EBITDA on the quarter also benefited from strong unit growth of 126 stores or 9% versus last year.
More than 40% of the new stores added in the past year came from acquisitions that we closed in Q1.
Most of the remaining unit growth came from newly built company owned stores.
Our franchisees are also investing and growing stores and <unk>.
Access of our franchise network and the strength of our partnership across the system are key differentiators of our retail services business on.
Entrepreneurs franchise 500 recently listed Valvoline instant oil change as the number one automotive franchise system and and the top 20 overall franchise systems.
Let's turn to the next slide to discuss our data analytics and digital marketing continues to grow our customer base.
Key component of our same store sales performance is our ability to expand our customer base and gain share via retention of existing customers and acquisition of new ones.
Let's start with data analytics, and digital marketing and how to grow our customer base.
Recapture and an enormous amount of data on customer experience and vehicle service history, along with OEM recommendations. This.
And this data allows us to make the appropriate service recommendations and incentive offers that drive both traffic and ticket.
And predictive power of our data analytics allows us to reach the right customers at the right time to remind them to come in for the next service or acquire them from a competing service provider.
This approach led to healthy growth and our active customer base and company owned stores and Q1.
Throughout Covid, our new customer acquisition continues to be strong.
We've been able to retain these cuts and new customers at a higher rate than our historical average.
Let's look at how our superior customer service execution and drive satisfaction and the retention of the broader customer base on the next slide.
And our data driven approach expands beyond marketing tactics.
Take customer experienced seriously and measure everything that we do including customer satisfaction and every store.
With more than 250000 customer responses annually, our customers continually rate us with an overall satisfaction level of four six out of five stars.
We've even improved our top box satisfaction scores. During this challenging period. This is a key driver and retaining our loyal customer base.
And.
Talented and engaged employees and lead to satisfied customers. Our talent strategy incorporates leading edge technology to identify and hire a selective talent base that is focused on customer service skills Apis.
Opportunities for career development and advancement allow us to promote nearly 100% of store and market leadership from within <unk>.
Supporting rapid growth across our quick lubes business.
And 2020, we were recognized by the association for talent development with their number one best award highlighting our commitment to develop top rate meters.
Bottom line for US, we hired great people, and we give them industry, leading business tools to deliver and outstanding customer experience at every store every day.
I've heard from a number of investors that didn't flow that they didn't fully appreciate what makes styling different until they experienced it firsthand.
So I encourage you to visit one of our stores and the coming months.
Let's now review and core North America's results on the next slide.
Yes.
Adjusted EBITDA and core North America grew 2% and the quarter driven by improved gross margins, resulting from favorable channel and product mix and lower expenses we.
We saw another solid performance and the retail channel led by branded product sales year.
Year over year volume has grown in the past two quarters and our share and DIY has remained steady and we continue to optimize our promotional pricing and offers and support our merchandising plans with effective marketing, which are reflected in our recent results.
While retail while retail channel volume has been outperforming recently installer volume has declined.
And as severely as miles driven.
This represents the ongoing impact of COVID-19, and the slower pace of recovery and the broader difm's space.
We have continued to add new business with our value added approach by leveraging our investment and digital tool for direct customer engagement interactions.
This success and new business wins combined with the strength of our long term customer relationships position us well for recovery and in the installer channel business at miles driven rebounds.
Moving on the next slide.
While it's not unusual for base oil cost changes to occur during the fiscal year, we have seen and unusual swing over the past 12 months with sharp declines last year and offsetting increases happening this year, most of which we anticipated and our outlook.
We are and the process of executing price increases across channels that we expect will fully cover this increase and cost.
Our strong brands and strategic relationships with our customers have allowed us to successfully manage the short term impacts and the past and we don't expect this year to be any different.
While we anticipate unfavorable price cost lag over the next couple of quarters.
EBIT margins are forecasted to be back near the $4 range and Q4, and we continue to anticipate a similar level of performance for the full year.
Let's look at internationals performance on the next slide.
The international segment delivered impressive growth across all regions in Q1.
Sales and volume were up and the mid to high teens range.
This performance was driven by a combination of organic growth and onetime benefits.
We've won new business and grown our existing customers across regions and China, we continue to see growth and the passenger car segment with our key national accounts and benefit of our optimized product line.
Ongoing recovery from COVID-19 impact led to some distributor restocking and the quarter, particularly in Latin America, and within our India JV.
Growth and volume coupled with improved margins from mix benefits and increased contributions from JV led to an exceptional 64% growth and adjusted EBITDA.
We expect international segment profitability to continue to demonstrate meaningful year over year growth, but at a lower rate than experienced in Q1 and inventory restocking short term margin pressure from increase in raw material costs and certain promotional events that occurred in Q1 will not repeat.
Let's take a look at the growth driver day and international on the next slide.
We have and established growth modeling and international with three key components of developing channel delivering value through our service platform and building the brand.
Let me give you three examples of this model and action from Q1.
First we added a significant new distributor in Mexico, which we expect to meaningfully increase our presence in key markets throughout the country.
We also added new distributors, and EMEA and Asia and continued to improve our network and China and India JV.
Second during the pandemic, we focused on staying connected to our current and prospective customers by leveraging digital tools and virtual connections.
And our India JV, we increased customer connections by more than 40% versus Q1 last year. This focus on customer service resulted and key new account wins and share growth.
Third we continue to build on the original motor oil campaign launched last summer and our partnership with the severe football clubs to enhance our market presence and strengthen our brand equity.
Continuing to focus on these core strategies is putting the international segment and are positioned for sustainable and profitable growth.
Yes.
Now, let me turn it over to Mary to review our financials.
Thanks Sam.
On slide 13 shows our adjusted results for Q1.
Quick lubes and international relative to growth in sales and the quarter versus last year. And addition to in addition to favorable foreign exchange and benefits from acquisitions, which combined contributed nearly 300 basis points to the overall sales growth.
Higher mix of retail volume in core North America, and improved margins and international led to the increase in gross margin rates.
SG&A increased modestly as ongoing travel related expense reductions were offset by wage and benefit inflation and increase in depreciation and amortization as well and acquisition costs.
Volume growth favorable mix benefits and a higher contribution from unconsolidated joint ventures.
<unk> and a 21% year over year increase and adjusted EBITDA to $145 million a record for fiscal Q1, even as COVID-19 continues to unfavorably impacts miles driven.
Let's move to slide 14 to discuss the balance sheet and cash flow.
The strategic actions, we've taken to drive growth are clearly visible and our profitability and cash flow cash.
Cash flow from operating activities increased $20 million year over year, driven by growth and adjusted EBITDA.
We continue to make growth related capital investments, primarily and that quick lubes business.
With Capex up $7 million, and Q1, leading to free cash flow of $44 million and increase of $30 $13 million.
There was only modest capex and the quarter related to the China plant.
Production on the China plant began in early December and the plant remains on track to produce substantially all of the company's lubricant volume for the China market by the end of this fiscal year.
We called our 2025 bonds and refinance them and January using a combination of $312 million and cash and proceeds from issuing new 2031 bonds.
The coupon on the new longer term debt and 75 basis points lower than the 2025 series.
This transaction lowered our gross debt to $1 7 billion as at the end of January while reducing our cost of capital since.
Since the initial impacts of COVID-19 business performance has improved and cash generation has remained strong and <unk>.
<unk> the confidence to reduce our gross leverage and normalize our liquidity.
We continue to follow a disciplined approach to capital allocation, we focus first on deploying cash for growth, both organic and through acquisitions, where we deployed $218 million and Q1 by acquiring and quick Lubes stores, then returning cash to shareholders through our dividend, which we increased by 11%.
And $58 million and share repurchases.
In total we returned $81 million to shareholders, while making growth investments during the quarter.
Let's move to the next slide to discuss our outlook.
We are reaffirming our full year guidance, including same store sales growth of 12% to 14% or 6% to 8% on a normalized basis and.
Adjusted EBITDA was $560 to $580 million adjusted EPS of $1 57 to $1 67, and free cash flow of more than $200 million.
Our guidance reflects full year EBITDA growth and the 10% to 14% range for Q2, we expect our business performance to remain strong and our profitability will be roughly in line with last year due to the one time reversal of incentive compensation accruals and the prior year.
For the second half of the year, we remain confident and our business fundamentals and expect to be in line with our full year outlook.
As we've said previously our guidance is dependent on current expectations, which could be significantly impacted by external factors.
Round and the ongoing COVID-19, pandemic and its impact to miles driven.
Now, let me turn things back over to Sam to wrap up.
Thanks Mary.
Our strong results and Q1 and our expectations for 2021 demonstrates that we are driving growth despite macro headwinds thanks to the strength of our model and dedication of our team.
I expect improving consumer sentiment and the likely improvement and miles driven and to provide tailwind for valvoline as the year progresses.
Our broad portfolio of products and services is expected to continue generating growth with.
Strong adjusted EBITDA margins and the 20% range.
Strong momentum continued and the quick Lubes segment, we experienced a great quarter and our international business and saw continued performance and core North America.
The investments made in quick lubes growth and the performance of the segment in Q1 represent our commitment to accelerating our shift to a service driven business model.
And with that I'll hand, it back to Sean to open the line for Q&A.
Thanks Sam.
Before we open the line, let me just remind everyone to limit your questions to one and maybe a follow up on <unk>. So that we can get to everyone. This morning.
With that Stephanie Please open the line for Q&A.
Thank you as a reminder to ask and audio question. Please press star followed by the number one on your telephone keypad. Once again that is star one to ask a question and.
And your first question is from the line of Simeon Gutman of Morgan Stanley.
Thanks, everyone. Good morning.
I wanted to ask sitting on about Hey, good morning, I wanted to ask about the price increases.
You mentioned that you started to enact them.
Can you talk about stickiness and can you talk about do you expect any change in market share and have others and the industry followed have you seen net this is going to be the norm and everyone's going to be taking pricing up.
Yes.
Seeing as that competitors are also moving on price, we have seen a significant increase and raw material costs. So it really puts everyone and positioned to to need to move on on price. So we've begun those discussions and begun implementation.
Across all of our channels, both in the U S and and international.
Got it and and as.
Far as market share goes.
Ounce, which has always been a big part of our installer business.
On larger accounts definitely are feeling the effects of the miles driven being off and so that's where we see some of the tougher.
<unk> declines and our overall volume, but we're continuing to pick up new business and so we believe we're growing overall share obviously at a modest rate right now, but a good steady rate. Nonetheless, so the installer business is the one business that is underperforming force right now, but it is really well positioned.
<unk>.
As as miles driven and begins to improve too to see more of a recovery there but were certainly encouraged by the good steady performance and the DIY channel and steady share there too and Tim and I would remind you that and.
A substantial portion of our installer channel business operates under indexed.
Contract for pricing so contractually.
Any change in underlying raw material cost up or down and get pass through to <unk>.
And all of our National account customers and many of our other regional account customers through AR.
And index debt based off of those posted pricing for raw material. So.
And in terms of that business, we certainly have and.
Strong margin controls there through the contractual index.
It's a good reminder, and debt.
With those index pricing contracts, we see very little price lag effect on the installer side of the business with those large accounts, it's really more self and the DIY business, where we've got scheduled promotions in place.
And through the next number of months and so we've always had a bit longer price lag impact in DIY and and so we will feel that and.
Primarily in Q3, but we expect to be and really good shape as we begin Q4.
And did you say what your outlook for.
Oil prices for the rest of the year because I think you said you still expect $4 gross profit per gallon.
And your scenario and your model, but does that assume.
And don't go up further from here and then.
Nice increase.
It gets you there or what if prices continue to go higher.
Yeah.
Certainly I think we've seen the biggest part of the move and raw material costs.
And of course, the pesos, followed crude overtime and <unk>.
Base oil.
Crude has moved from the twenties back into the mid fifties and so I think the major move has occurred and those cost increases.
And now are coming through with base oils and additives. So we're taking the appropriate pricing action and could we see.
And additional modest increases that's possible, but I don't think it's going to have a meaningful impact on how we have forecasted the balance of the year I think we'll be on a really good shape.
Okay. Thank you good luck.
You bet.
Your next question from the line of cases, Jason English with Goldman Sachs. Your line is open.
Good morning folks this is actually Cody on for Jason. This morning, Thank you for taking our questions and just.
I wanted to unpack I, just wanted to unpack the drivers and strength.
This quarter, it's actually quite surprising to us with the quick lubes on are weaker than we expected and international a little stronger. So you did about 6% same store sales growth. This quarter, you mentioned mobility restrictions likely weighed on same store sales growth, but since November it's been stronger are they and line same store sales.
And with with what you did last quarter, meaning the September and if so who do you think youre taking share from and the Niagara Falls.
Yes first of all for the overall strength of the quick lube business and as I noted in my comments that we saw and the middle of the quarter.
And if basically in November and.
Slowdown and same store sales growth and we do think that was because of some of the increased restrictions and reduced driving around the Thanksgiving holiday.
And and we also.
And our analytics team.
And so that we see a bit of an echo effect and we saw that debt back in the spring.
On the initial COVID-19 restrictions.
Those customers that would have delayed service.
No.
And you have.
And you would've expected them and that November time period, and and that and so because that did happen and.
And that April may time period that we felt that impact in November but what was really encouraging is that we just bounce back very strong.
At the close of the quarter and December and that strength has carried through into January and January and same same store sales and the double digit low double digit range. So we're really feeling good about the quick lube business and how we're continuing to take share and as far as where we're taking share from.
We believe we're taking it from.
Not just competing quick lubes, but again, the broader DSM market because of the convenience service model and.
And the effectiveness of our marketing that I pointed out.
And so it's a little bit from multiple channels is where that volume is coming from but.
And again, we're carrying some really good momentum into into Q2 and and feel really good about the just the overall strength of that business. So.
Again, when you step back and you take and look at quickly performance.
Sales of growth of 17% and 21% adjusted EBITDA growth is of a great quarter, and really exciting and for us given all the new stores that we're bringing online too.
Tremendous effort of our team.
And continuing to deliver the customer service and our existing stores, but onboarding. These new stores as you know is it.
On a work, especially in this environment and they just did an outstanding job. So again, we're really well positioned and the quick lubes business and definitely taking share.
Great. That's very helpful color I, just wanted to pivot real quick to the strength from international because this is really surprising given the choppiness in the past.
Relative to your expectation pattern per Pam can you discuss the main drivers of strength and a little bit greater detail and did you mention that this could possibly just be a pull forward of demand out of QQ and <unk>. Thank you.
Yes, it's important to break down the difference between.
The underlying strength of the business and then some of the onetime effects that we did see and Q1 and the magnitude of those were somewhat and unanticipated. So first of all.
We have been making some important investments and strengthening our team and and investing in marketing and building on our channels to market over the last few years and.
We're really getting some good momentum and that business and we had that in 2020.
And back half of 19, and and going into 'twenty before Covid hit we are seeing some of the fruits of our investments.
Obviously, that's slowed dramatically with the Covid impact, but then you started to see that recovery and Q4 of last year and then the start of this year really gives us a lot of encouragement for what we can expect ongoing. So this is a business that we feel now that like the underlying growth rate is.
Ben and that they are high single digit range now.
For a while once you factor out the impact of Covid and so we saw that in Q1, and so we have done a lot of work internally to understand okay. What was the and more of a onetime impact versus the underlying growth because we were seeing growth across all the regions and.
And we feel it was like close to half of the overall growth and international.
And part of it was.
Particularly in Latin America, and India, which were very hard hit by Covid and a little bit slower on the recovery when we go back to last summer.
And so as those markets began to pick up we did see distributors restocking and so that COVID-19 recovery and distributor restocking was definitely part of the Q1 strength, but when we factor that out we nonetheless saw good underlying growth, particularly in China on the on the passenger car.
Our side of the business had a really strong first quarter, very encouraging underlying growth and and and.
And share building and through channel building in Latin America I pointed out. The addition of our very important distributor and Mexico.
A key market for us and and one that we're investing in.
But also saw good solid growth and our Europe branded business, Australia was particularly strong on.
On the DIY side of the business retail side, so when we see strength like that across regions.
And that we're making significant progress and building our capabilities, serving our customers and and.
And allows us to invest back and the brand more aggressively so international is a real.
Highlight here for us.
Not just for the quarter, but the growing confidence that we have and the long term potential of that business.
That's great to hear and if I can think and one very quick clarifying question. When you said you mentioned.
And that competitors have followed your price increases and core North America does that include private label and then I'll pass it on thank you.
It does we've seen announcements from the private label Blenders.
And core North America too.
Great. Thank you very much.
Your next question is from the line of Stephanie Benjamin Shirley.
Hi, good morning.
Good morning, Brian and Stephanie.
I wanted to first just a clarification question on core North America unit margin.
Can you so and the first quarter I'm, assuming there was a bit of a benefit from our from price cost benefit and then that fair to roll off or areas that and correct and then.
And as we think of the cadence you know and as we kind of focus on our four dollar unit margin for the full year or should we expect a lag on that price increase benefit and the second quarter and then start to see it kind of rebounded and the back half just wanted to kind of think about the seasonality of that margin.
And it's a Stephanie.
We did see some modest.
And price costs lagging in in Q1.
Primarily because of our accounting method with LIFO.
Causing a little bit of it and that was.
We saw strong net.
<unk> mix and customer mix performance in the quarter.
Debt that help keep those unit margins above well above four.
And $4 a gallon, although we saw.
Sequential decline in margins as we saw some of those costs start to come through we expect a bigger cost impact of raw material increases.
With the lag in pricing pass through.
And to be and and the balance of the year and as Sam mentioned Q3 will be impacted so I am expecting.
On lower unit margins in Q2, and Q3 with a recovery and the unit margins towards the $4, a gallon range and the fourth quarter and.
Likely to be in that range for the full year as we see debt recovery of as we pass through those cost increases.
And the middle Middle part of our fiscal year.
Got it that's really helpful. And then I just wanted to switch gears a bit to the quick lubes segment.
See tremendous growth and continue through both acquisitions as well as net store growth have you seen anything.
Due to COVID-19 or anything else that has.
And kind of impacted your ability to expand the store count argue remained pretty on track from the <unk>.
And that you've laid out.
For the year just any color you can you can add to the store expansion would be helpful. Thank you.
No I think thats. The good news is that Covid is not impacting our ability to add stores and this is true.
On the acquisition side and when you look at our pipeline for acquisitions.
Anything I think it.
And improves our position given the impacts of Covid and particularly on smaller operators.
And then as far as and our ability to execute our store build plan.
Team is doing an excellent job, there and and we've.
Got a pipeline in place to deliver against our targets for fiscal 'twenty, one and.
And do an excellent job to have our pipeline in place for fiscal 'twenty two ground up growth. So.
No real impact from Covid on.
And our ability to grow stores.
Truly and the operational challenges when we interest.
If one of our employees comes down with Covid then.
And that effects.
The store and and.
On mid meeting to quarantine and.
And then re staff that store.
The operations team has done an excellent job of some dual staffing models and the ability to move employees with end market to keep our stores open and operating so you see that and the results and really really proud of the work that they're doing instead.
And Stephanie I would call out.
And we saw some higher cost in Q1 in quick lubes.
Related to the Covid impacts, where we were had some labor inefficiencies because of what Sam talked about as well as some costs incremental costs associated with no debt.
<unk> debt covenants driving and the store.
And in addition to that we had.
And bottom line and half dollar of acquisition related expenses for the deals that we did and the first quarter.
That debt.
Debt.
And impacted and the P&L, so the account and combination of those two things probably.
About $3 million, three and a little bit one $3 million of higher expenses and equipment for the quarter.
Got it. Thank you so much for the color.
Your next question is from the line of Laurence Alexander of Jefferies.
Hi, there.
My questions have been answered, but I guess can we sort of dial back.
Our largest scale picture question.
And think about mix.
How much does do mixed variations swing the results quarter by quarter.
And how much does that predictable or under your control.
And how much of it is sort of noise and the system.
And through driven by factors that are on the consumer level.
So largely you're getting up to like the mix between the operating segments on a mix between core North America or a little bit about when youre, explaining the results you all from sort of point to kind of mix contributing to.
And profit progression and I think just and it'll be helpful.
Tara and just how much of that is the lever that you control or.
Do you flex it where do you see other trends not working in your favor or is the day or is it something which is kind of more noise and the system.
Yeah.
So first of all if you break it down by operating segment.
The predictability and the quick Lubes segment is is extremely high and you don't see as much variation and.
And any type of mix impact a mix impact.
Happens, primarily and and core North America, we see a little bit and international we mentioned that mix was a factor and international business and some of the strong growth that we had and international was with some of our.
More profitable.
<unk> lines and regions skewing, a little bit towards the passenger car side of the business. So.
But the bigger impacts do happen and core North America.
And with within core North America, and one of the strength this year and and last year too was.
And the DIY side of the business.
So our mix has shifted a bit to the higher margin DIY business versus installer.
Due to the fact that the and installer business has been soft and this COVID-19 environment.
But the promising thing and when you look at the profitability and stability of that business as we look longer term as debt as DIY has strengthened and our brand position and strength and we're seeing stability and the price gaps.
And our merchandising plans.
On the distribution that we have and DIY.
And this all results and steady share and and and so that's good news and Thats driving a good solid mix and.
And the performance of that business.
And the pass on a quarter to quarter basis, you can see swings depending on the timing of certain merchandising events, and DIY, which can impact it but it's not huge impacts.
It's just really this year, what we're seeing is DIY being stronger than installer because of the COVID-19 impacts on installer now we do hope that as COVID-19, as we move beyond COVID-19, and milder and begin to picks up we would fully expect that the installer business will begin to see improved volumes now while that day.
Have a modest.
Impact negative impact on our unit margins it will lift overall profitability, because it's not going to take away from profitability and DIY and that will just be adding improved profitability coming from the installer side of the business.
So so I hope that helps.
Obviously, it's been a really dynamic time and COVID-19.
And and how that's impacted them.
Next slide.
On a step back and take a look at what we were able to deliver last year through COVID-19.
Given the.
Moving fundamentals that we see and and the overall core North American business and then.
And the confidence that we have and our guidance and what we're going to deliver this year and it speaks a lot to just the improving durability.
Durability of growth that we talk about durable growth and this business model and that continues to get better and our ability to manage through volatility whether it's on the demand side or even on the product supply side. So feeling really good about the progression of this business and the strength across channels and segments.
Okay, great. Thank you.
Once again, if you would like to asking out of your question. Please press Star One and your next question is from the line of Olivia Tong of Bank of America Merrill Lynch.
Great. Thanks, most of my questions and then ask but one if I could follow up on on on something you talked about earlier I was just on GP per gallon and getting back to former box and by year and.
So far and <unk> been pretty good about coming and better than you had expected alright for quite a bit now so and talking about that first just relative to your expectations, what's come in better than you had anticipated and the path.
And then have you talked to retailers yet about the price actions that you plan to take to get back to.
About $4 and it didn't have any color in terms of what your peers aren't doing or have done or discussions that are taking place and that would be great as well. Thanks. So much.
And I don't I'd take the second half of the question and then Barry can address.
The forecasting process.
But with regard to retail price increases, yes, we have begun those discussions and.
And so.
We.
Like I said earlier, we have a strong and relationship with our key accounts they understand the cost increases and it's really about how do you implement these increases and a way that doesn't impact our merchandising plans debt that we have in place with our key retailers. So that we execute well throughout this period.
And.
Yes.
The strength of the Valvoline brand and the investments that we've been making and the Valvoline brand and the partnership with the retailers is what gives us the confidence that we'll be able to manage through this period and protect our margins and keep our business and.
And a strong stable position so with regard to exactly what competitors are doing we know that they are all.
Taking price actions.
No the status of their negotiations Thats never true.
But we do feel that the market is definitely moving and given the size of the cost increases that we're managing through right. Now so we feel good about it but like I said there'll be a lag impact, we'll feel that and into Q3 and it will be and much better positioned and Q4 with regard to forecast Mary.
Hi.
We have.
<unk> seen some challenges in forecasting for.
On the timing both in terms of as those.
Cost pass through we had success in.
Delaying some of the.
On price cost changes and with our suppliers and we've had success.
And at different times.
Extending the time to pass through.
Rice reduction, which we saw last year.
And that benefited us, though we work very hard at.
And get the forecasting that we do.
Most dependent and we can but there are some things within the overall mix and and.
And I'll say one of those things of course is the fact that brown LIFO accounting and <unk>.
And we see the impact of those up and down changes much more rapidly because of just the methodology of accounting practice.
From a LIFO perspective debt.
Net causes increases and those costs to impact us much more rapidly.
So I think what you can see from us and continuing to do our best and trying to get those forecast as accurate as we can while we're managing it to try to optimize our profitability and real time so.
And we'll keep you posted as we move forward and.
And and how we're performing relative to <unk>.
Our estimates.
Great. Thanks, and then just a follow up on quick lubes crack and.
<unk> of course, the volatility that's going on right now and.
With respect and at that time.
Same store sales and our content correct decelerating too I mean, that's that's quite a bit lower than it had been in the past.
Except for obviously the March and June quarters.
Of last year. So can you just talk about.
The move from there.
Just on.
The acceleration that you're expecting from your progressions and.
And.
And what Youre thinking about kind of long term how.
And companies sort of on a normalized 16%.
And then secondly, still on quick Lubes could you just talk a little bit about what Trump the gross margin down.
And so much isn't lines this quarter. Thank you.
First on same store sales performance.
We call that out debt.
And we did see that slowdown in November but it was really concentrated during that month.
And we've talked about those factors.
When you take a look at the momentum that we've had and quick lubes and how were performing.
Prior to November and how we performed in December 9th and and at how strong January was.
Same store sales are very strong and so our confidence and delivering same store sales growth.
<unk> is very high and and I think as.
As miles driven is a potential can turn from a headwind to a tailwind for us as the year progresses that would be additional upside from.
The performance that we're seeing right now and that business. So I couldn't feel better about the performance of same store sales and gets back to the execution of the team and the stores and.
And how well, they're delivering on the customer experience on the ticket opportunity.
And we had to eliminate a couple of services, Kevin or filters tire rotations for example, and.
And we've been Florida, and able to offset that with improved execution and the stores and then the digital marketing programs you are doing a nice job and when you consider that driving behavior has been impacted by COVID-19.
Has impacted our algorithms and how are some of our direct marketing programs work.
And yet we've been able to make adjustments that have kept the momentum and this business. So like I said, we saw a little bit of that debt and one month, but we're back on track to deliver very strong same store sales growth.
Yeah and on the.
And on the deleverage we saw at the gross margin line and quick lubes and the quarter virtually all of it was caused by new stores, both ground up and acquired stores our comp stores.
And we are relatively flat on a gross margin level, which really we expected.
And the absence of Covid, we would have expected leverage and I go back to some of the increase in expenses, we had debt where COVID-19 related.
Around labor and supplies and materials and cleaning debt caused expenses and the quarter to be higher than what they otherwise would have though.
Most of debt deleverage and the quarter was simply the impact of.
<unk>.
New stores, both ground up and acquired stores.
And my expectation is that we will see.
Margin leverage and through the balance of the year as the year progresses.
I would note debt at the EBITDA line, we actually we did see leverage we leveraged our EBITDA as a percentage of sales by about 80 basis points.
So.
A portion of the overall op income deleverage is coming from higher depreciation and amortization as well with the new ground ups and the acquired stores.
I understand thank you.
Your next question is from the line of Jason English of Goldman Sachs.
Hey, guys. Thanks for the follow up just two quick philosophical question to help us out with our model over the long term.
One is the 10 year historical spread between crude oil per gallon and base oil per down is about $1 93. However, it stands today and over 260 why has the relationship decoupled and do you expect the spread to structurally be higher moving forward.
Thank you.
So.
Base oils have.
Ben and a long market position.
And the market has.
And a substantially more capacity than it has.
Demand and in this environment with <unk>.
Declining miles, where we've seen the decline and miles driven and that.
And certainly as the case as well, but I think that one market.
And will allow for us.
And more broadly I did I think the recent increases that we've seen and data analysis and effort.
Some of those refineries too.
And improve those margins.
A little bit back toward their there three or five year trend.
But from where we are right now because of that capacity that's out there.
I think debt, it's unlikely that we'll see continued pressure now.
That certainly can change.
And I do think as miles driven.
Has improved more refining capacity will come online driven by the fuel side and we'll continue to see lengthened.
Lengthening of that market from a based on a perspective so.
Don't know that Theres anything really that unusual in terms of where where we are today and what we expect moving forward.
Great and then last question just the conversion between franchise and company owned stores is accelerating why is that is it because you are more aggressively bidding for the franchisee or are the franchise and just wanted to exit more if you could just provide any color that would be great. Thank you.
Yeah, the only real change here is that there and theres been a couple of our.
And franchise partners, who.
And approach retirement and.
And and a couple of them are and really key regions for us that were very attractive for us to add to our company store network. So.
It's not a major thrust of ours to acquire franchisees, but when there are opportunities and it strengthens.
Our network.
We look for those opportunities we will take action on those.
Very low risk acquisitions that still generate a very strong return on investment and.
And yet the thing to.
And remember like when when when we talk about this quickly business first and foremost we want to grow the number of stores and the system. So we are working with our franchise partners to help them and their growth plans and then of course to execute on the growth plans that we have for company stores through acquisitions and <unk>.
Ground ups and so first and foremost we have an opportunity to grow much faster and <unk>.
Very large and long term market opportunity for us.
And we're going to be aggressive there and.
And we feel really good about the levers that we have to keep driving that store growth. We continue to build our capabilities and are executing really well on both ground ups acquisitions.
Acquisitions, and working with the franchisees to help them on their growth too. So very excited about the progress there. So the mix. We don't think is critical both franchising boat and company store growth. These are high return investments that we're making and so.
The Big picture here at Valvoline is and we're taking a strong steady cash flow from the product side of our business and pulling that into growth and our service business. That's generated and returned to double the cost of capital. So we're very disciplined and how we're allocating capital, we're making great investments, they're strategic and and the strategy.
Very much working for us so that's how the model works, we're becoming much more service model driven in terms of our overall profit mix, but.
It's a great model, that's working very well for us.
Your next question is from the line of Chris Schott of monarch, Christy and heart.
Hey, good morning, everyone. How are you doing.
Hey, good line.
Private and around the couple of different calls on <unk>.
And anything and I apologize, but just quickly on your.
And your store acquisitions, I think you've already kind of met the guidance you had a free you're pretty close to it.
And that's true that debt.
Are you done and acquire anymore going on you did increase the guidance because the pipeline is just not that flow right now or just because you actually don't want to acquire anymore. This year that's enough for the full year.
Yes, so we.
And we guided to a higher number this year because of the full pipeline and our confidence on the deals that we were going to close and the first quarter.
Because those deals tend to be opportunistic we typically would only include.
Smaller number of acquired stores in our guidance.
And until we actually have the deals completed that because of the timing of guidance and.
The fact that we knew those deals were coming in the first quarter, we had a higher confidence and the guidance to give a much higher number we still have a robust pipeline of deals that we're working on.
A larger number of smaller mom and pop and stores are and the pipeline.
And so we likely will continue to work to.
Acquire more stores, but.
And in terms of where we set our guidance.
At the higher level of acquired stores that was really driven on our confidence and the deals that we were doing and Q1.
Got it and then just.
And according with America sequentially into <unk>, and all the puts and takes pricing cost and maybe some better miles driven and I mean do you expect profit per.
<unk> would be up sequentially or I mean, do you have any expectations at this point, if all things sort of stood and where they are today.
You're talking about.
EBITDA.
North America gross profit.
Hi.
And we guided to core North America being down year over year and.
And we certainly saw a good first quarter.
We were up modestly so if you look at our year over year for the balance of the year because of that price cost lag impact of those rising raw material cost and my expectation is debt for the balance of the year corn will be down year over year on a year over year basis.
Thanks, so much.
And that was our final question. This does conclude today's conference call you may now disconnect.