Good morning. My name is Carol, and I will be your operator today. At this time, I would like to welcome everyone to the Valvoline Q4 2017 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Jason Thompson, Vice President, Finance and Treasurer.

Thank you, Carol. Good morning, and welcome to Valvoline's Fourth Quarter Fiscal 2017 Conference Call and Webcast. Valvoline released results for the quarter ended September 30, 2017, at approximately 5:00 p.m. Eastern Time yesterday, November 8, and this presentation and remarks should be viewed in conjunction with that earnings release, a copy of which is available on our Investor Relations website at investors.valvoline.com. These results are preliminary until we file our Form 10-K with the Securities and Exchange Commission. A copy of the news release has been furnished to the SEC in a Form 8-K. With me on the call today are Valvoline's Chief Executive Officer, Sam Mitchell; and Mary Meixelsperger, Chief Financial Officer. As shown on Slide 2, our remarks include forward-looking statements as such term is defined under U.S. securities law. We believe that these statements are based on reasonable assumptions but cannot assure that such expectations will be achieved. In this presentation and in our remarks, we will be discussing our results on an adjusted basis. Adjusted results exclude key items which are unusual, nonoperational or restructuring in nature. We believe this approach enhances understanding of our ongoing business. A reconciliation of our reported to adjusted results and a discussion of management's use of non-GAAP measures was included in our earnings release. As you can see on Slide 3, Valvoline delivered reported EPS of $0.52 in Q4 and $1.49 for fiscal 2017. Reported operating income was $191 million and $532 million and net income was $105 million and $304 million, for the quarter and full-year periods, respectively. As we have discussed on our earnings calls this year, a few items related to this separation are driving differences in our year-over-year comparisons. First is interest expense; this represents the cost of debt associated with the creation of Valvoline's…

Thanks, Jason, and good morning, everyone. Before I review our fourth quarter results, I want to highlight our accomplishments since the IPO as we closed our first year as a stand-alone public company. In 2017, we delivered on key promises to investors. We grew the strategic areas of the business, premium mix and branded volume growth in Core North America, broad-based volume growth in International and an exceptionally strong same-store sales performance in Quick Lubes. We supplemented the Quick Lubes growth by closing key acquisitions, building a base for further expansion of our retail presence. We took measures to significantly reduce the risk and cost related to the pension, which we assumed as part of the separation. Finally, we established a practice of returning capital to shareholders. We started a quarterly dividend and began a share repurchase program that together returned $90 million in cash. 2017 was a strong start for Valvoline. And I couldn't be more proud of the accomplishments of the entire Valvoline team in getting us to where we are today. I'm very pleased with the results for the quarter and the year, which are summarized on Slide 5. Q4 was another strong quarter of executing against our core priorities. Solid top line growth across the business drove EBITDA from operating segments of $111 million, up 5%. And we delivered these results while facing some disruptions from the recent hurricanes. Our team did a great job of implementing our standard contingency plans when it counted most, minimizing the impact to our customers. Our full year EBITDA from operating segments of $447 million, a new record, came in just as we expected and the $1.39 of adjusted EPS was at the higher end of our range. Free cash flow came in better than we expected at $196 million.…

Thanks, Sam. Our adjusted results for fiscal Q4 are summarized on Slide 10. Sales were up 11% and volume growth was 2%. EBITDA from the operating segments was $111 million. Adjusted EPS for the quarter was $0.33 and was impacted by higher incremental interest expense due to borrowing to fund the pension, which I'll discuss further in a few minutes. EBITDA from operating segments increased $5 million versus prior year with the main drivers shown on the bridge. Volume/mix increased EBITDA, and we made progress passing through pricing for higher raw material costs, which you can see in the favorable margin category. SG&A increased as planned, primarily due to our new public company infrastructure costs. Valvoline's total adjusted EBITDA in the quarter was $129 million, which includes the impact of non-service pension and OPEB income of roughly $18 million. Full year adjusted results are shown on Slide 11. Volume grew 3%. Volume growth in International, same-store sales of new stores in Quick Lubes, along with premium mix and pricing gains, were the key drivers of 8 -- the 8% increase in sales. Fiscal 2017 EBITDA from operating segments of $447 million was up $6 million from prior year. Volume/mix and acquisitions contributions increased EBITDA; more than offsetting rising raw material cost increases and planned investments in SG&A. Valvoline's full year adjusted EBITDA was $517 million, which includes the impact of non-service pension and OPEB income of $70 million. As outlined on Slide 12, we have taken actions this year to reduce the risk and volatility associated with the retirement-related obligations that we assumed during the separation from Ashland. In Q4, we made a nearly $400 million voluntary contribution to our U.S. qualified pension plan funded with new senior notes. Increasing the funded status of the pension reduces future volatility and…

Thanks, Mary. Our guidance reflects the confidence we have in our business model and the initiatives we have in place to drive growth. We are clearly focused on products, services and technology innovations that create real value for our customers. In Core North America, innovation from packaging and new products will lead to market share gains. We'll also take the next steps in our digital initiatives as our installer portal and e-commerce capabilities are rolled out. In Quick Lubes, we'll add new ground-up company stores as our development efforts begin to pay off and we'll continue to pursue regional acquisitions. As I've shared, our franchisees are fully committed to faster unit growth plans. Equally important, we continue to improve our store-level execution, and we are confident in our ability to deliver ongoing same-store sales growth. In International, execution of our market penetration efforts will continue to drive volume growth. And we'll look to further leverage our relationship with Cummins to capture new opportunities. Our growth acceleration begins in 2018, and we are committed to driving total shareholder returns through earnings growth and capital returns in 2018 and beyond. With that, I'll hand it over to Jason to open up the line for Q&A.

Thanks, Sam. With that, Carol, you can open the line.

[Operator Instructions] Our first question today comes from Olivia Tong from Bank of America Merrill Lynch.

This is Chris Carey on for Olivia. Just on the gross profit per gallon. Core North America came in a bit better than our outlook, but International is a fair bit worse. And I think you mentioned you expect some improvement in Q1. But maybe can you comment on go-forward expectations here and -- especially in the context of a Q1 EBITDA outlook, which is a bit light of our expectation and does imply an acceleration in EBITDA throughout the year? Then I have a follow-up.

Sure. Yes, let me first address then your question regarding the International margins because yes, in fact, they're a little bit soft in Q4. A decent improvement versus Q3 but in Q4, we really took a number of pricing actions, implemented pricing across different regions. And that's what gives us confidence that we're going to see a nice improvement as we start the new fiscal year here in Q1. But yes, Q4 compared to prior year, in '16 there was actually a positive lag effect, a little bit of negative lag effect still in Q4 of '17. So that's where you see that difference. But in the International business, our margins historically have been pretty stable and typically improving as we grow that business. They are lower than the balance of our business partly because it's a distributor-driven business. But nonetheless, there are opportunities to improve those margins over time as the premium mix improves. Regarding the overall outlook for EBITDA, and particularly the focus on Q1, we'll -- we're really forecasting that we're going to see strong improvement in Q2 through the balance of the fiscal year but starting a little bit soft in Q1. There's a couple of different factors with that, we have a modest impact from the hurricane effect. There's also a bit of a promotional timing impact that we're going to see in Q1; those are really the two biggest factors with regard to Q1 being a bit lighter in terms of profit growth versus the balance of the year.

Okay, that's helpful. And then just on the outlook as a whole, can you comment on the contribution from M&A to the various components in sales EBITDA and lubricant volumes? And I guess what I'm really trying to get at is, whether from an organic basis, you have more confidence in the ability to drive EBITDA growth maybe more in the high single-digit range, assuming a benign base oil environment.

Right. Yes, the biggest drivers for fiscal '18 are a combination of volume and mix improvements, the continued performance of the Quick Lube business. That's what's really going to drive our performance. And so we fully expect each of the operating segments to drive profit growth with again the strongest profit growth coming from both Quick Lubes and the International segment. In terms of the M&A that helps improve fiscal '18, what's included in our forecast are the carry forwards from the acquisitions that were made in '17. And that represents roughly about one-fourth of that profit growth in the forecast or roughly around that $9 million, $10 million range.

Yes. And I would just add to that, Chris, that, that also includes the impact of the recent Bluewater Henley acquisition that we closed at the beginning of the year in terms of the incremental EBITDA related to the Quick Lube M&A activity.

That's right.

Okay, good. And just from a sales perspective?

With regard to overall sales growth?

The contribution of M&A, yes.

Yes, I would say that the driving factors from an overall sales growth are more around the volume growth overall. There is some benefit coming from the M&A transactions. I don't have that specific number right at my fingertips here, Chris. But the majority of the sales growth is really related to the volume growth coming from the different segments.

Our next question comes from Mike Harrison from Seaport Global Securities.

This is Jacob [ph] on for Mike. Could you talk maybe a little bit more about the factors in 2018 that would move us towards the high or low end of the EBITDA guidance? Is it largely based on the variations in the SG&A spend that you were talking about? Or is it other factors that are going to the variation?

Well, first of all, regarding the range that we've laid out for our profit growth for next year. We think it's an appropriate range there. It does reflect again the confidence that we have in that business and the strength that we expect to see in each one of the operating segments. Regarding the range, there -- and the -- really, the SG&A investment that you noted, part of that is focused on adding talent in our organization, people additions in both the growth supporting International business. Also in the Quick Lube business, some of the SG&A increased part does come from the acquisitions that we're making, too. But a portion of that, of course, is part of the SG&A that is manageable that we can accelerate or pull back on if the business isn't progressing exactly as planned. So we have flexibility there. But we feel like we've got a very good plan in place that gives us a lot of confidence in supporting our initiatives, some of the marketing spends behind the new initiatives, for example, in the DIY business. Also I noted in the presentation that Valvoline Instant Oil Change is benefiting quite nicely from the incremental advertising support there. And so that is a continuation of that accelerated spend in the Quick Lube business to continue to win new customers to our stores. So the -- what will push us towards the top end of that guidance is just really outstanding execution over the course of the year in each one of our businesses. The one thing that we do have to make sure that we're keeping a close eye on is any -- is the inflationary environment that we're in right now. So some of our base oil suppliers have introduced price increases. And as I mentioned earlier, we'll take the appropriate actions to protect our margins but you can have a bit of a lag effect, just like we felt some in fiscal '17. If base oils accelerate in fiscal '18, we could have a lag effect that would push us towards the lower end of the guidance. But overall, in today's environment, as we forecast both the raw material environment, our pricing actions, but really the volume growth, the strength of the overall business gives us confidence in the guidance that we've provided today.

Our next question comes from Stephanie Benjamin from SunTrust.

I was just hoping if you could kind of frame the impact the hurricanes had to your cost structure during the quarter and really any impact going forward, kind of the need to take incremental pricing beyond what you took ahead of the fourth quarter.

Yes, that -- the hurricane impact was pretty modest and it had a lot to do with just the good work of our team and their ability to meet the needs of our customers while making sure that we had the materials necessary for our products. In terms of the dollar impact, we're talking about roughly a $2 million to $3 million impact from the hurricanes, about $1 million was in Q4 and we'll feel a little bit into Q1.

Great. And then lastly, for the last several quarters, you've actually seen volumes decline on your non-branded business in North America; any expectations for that to improve kind of in '18 as we lap some of that? Or is it kind of going to be an ongoing trend going forward?

No, it shouldn't be an ongoing trend. But as we had noted in earlier calls, we had lost a couple of accounts in this lower-margin non-branded business throughout 2017. But in terms of comps looking forward, we're expecting overall that non-branded and private-label business to be relatively stable. So we're not projecting further declines. Again, when we think about that business, while it doesn't have the importance -- strategic importance to the company as our branded volume, we look for attractive, long-term relationships with customers that we can bring real value and more stable business there. And the accounts that continue to do business with us, with our private-label business, have been long-term accounts for us. And it is good business but strategically, it's not an area of focus that we're really trying to drive significant growth. Our focus is really on the Valvoline brand, the higher margins and the innovations that can really drive growth in that side.

And Stephanie, I would just add to what Sam said. While we're expecting the non-branded business to be relatively flat in 2018, I do expect to see some quarterly variations based on the timing of promotional events. So I think you might see the non-branded business being down modestly in Q1, and having offsets to that later in the year. So you will see some quarter-to-quarter fluctuations.

That's true.

Our next question comes from Simeon Gutman from Morgan Stanley.

Just a quick question on the guidance, the 3% to 4% volume growth, lubricant volume; can you talk about the complexion of that? Among the Core North America business, you mentioned some rebranding of packaging, just any competitive implications. Are you expecting others to -- just to follow suit? Or are you doing that just to refresh the packaging?

Yes, in Core North America, we do have some important innovations that are hitting the market. The new packaging is a real significant breakthrough that I'm very bullish on. It is a far superior package to our competitors and also a huge upgrade versus what we've had in the past. So based on the reception from our trade customers, the support that they have for it, the research that we've done with consumers, we do believe that, that is going to really help us strengthen and continue the good momentum that we have in growing our DIY share. And that certainly helps us as the focus on driving premium mix become especially important, selling both our synthetic line and our high-mileage line. We've got some important innovations, too, on the installer side of the business within Core North America, too. We've talked a little bit about packaging in that arena but also some important product innovations, too. One of the interesting trends that's impacting the market today, the broader automotive aftermarket, is the push towards high-efficiency engines and reduced emissions. These new engines are called GDI or gasoline direct injection engines. And they -- while they drive nice improvements in fuel economy, they also can contribute to fairly significant deposit formation in the engines, too. And so Valvoline has been working hard on important product innovations that help address these problems in some of the new technology engines. And again, this is an area that we think further differentiates our product lineup and what we offer to our customers both on the installer side and on the DIY side. And it's those kinds of innovations that are really key for us to continue to drive volume growth and mix improvements in Core North America. So while Core North America is not our -- it doesn't have quite the growth opportunity that the Quick Lubes and the International businesses have, Core North America is a key part of the Valvoline business and we believe has significant opportunities for continued improvement and really steady growth in performance.

Our next question comes from Carolina Jolly from Gabelli.

One brief follow-up, you mentioned the $3 million impact from the hurricane. Can you talk about -- is that just on the top line? Or does that include the cost of rising base oil prices?

Yes, the impact has been less to the top line and more just in our cost structure. And there's a combination of 2 things, is that we did have to move as some of our base oil suppliers had fairly significant disruptions. Because of our broader relationships with a number of different suppliers in base oils, we were purchasing at slightly higher prices during the hurricane to mitigate that impact, so we could continue to supply our customers. That also involved some higher shipping costs, too, during this period, but -- so the impact has been primarily with our raw material costs impacting our gross profit margin, some minor impacts on the top line, too; but really the focus was on higher cost.

Great, it seems like you did a great job offsetting a lot of those costs. And then I guess, the second one, for the $480 million to $500 million EBITDA projection, can you talk about what you include in the premium expansion? I know it's about 540 basis points this quarter. Can you talk about what you're expecting going forward?

Yes, Carolina, it's -- we don't expect to -- I mean, we saw a 540 basis point improvement in Q4. And that was really a significant improvement. We do expect continued premiumization improvements. But it's probably in the 2% to 3% range.

That's right.

Our next question comes from Faiza Alwy from Deutsche Bank.

So just a quick question on base oil prices. Does your guidance assume that base oil prices stay at a current level this year? Or are you expecting a decline?

Yes. Based on the recent developments and particularly crude moving higher, that is impacting the base oil market. So we do expect a modest inflationary environment in fiscal '18. And our guidance does factor that in.

Okay. So -- and then is there going to be incremental pricing that you have to take from here? Or should we -- should just the current pricing follow through into '18?

Yes, I think based on the increases, 1 that had been announced and 2 that are expected, I believe that pricing actions will be important. And so we're in the process today of communicating price increases to our customers across channels.

Okay. So you don't expect like a -- do you expect a lag effect essentially? Or do you think like pricing is going to be -- those pricing actions will be in line with base oil inflation? I mean, it sounds like what you're saying is there might be a bit of a lag in the first quarter and then you'll catch up through the rest of the year. Is that right?

Yes, the way it looks like this will happen is the base oils -- base oil increases take hold. Truly not going to impact Q1 too much, it will be primarily in Q2. So the lag effect should be relatively small. Q1 will actually see improvement in our unit margins because of actions that we've taken during the summer months to offset the cost increases that we faced in the back half of the year in our base oils in our cost structure. So Q1 should show improvement. And we're really expecting the lag impact as we get into '18 to be small based on the impacts that the base oil increases that have been announced and taking the appropriate actions to offset that. So I feel it's very much in a manageable range.

Okay, Faiza, I would add that we continue to see good discipline in the industry. We've seen announced price increase from most of our major competitors over the last couple of weeks. So I think that our expectation is that we're continuing to compete in a real rational kind of competitive environment and expect that to continue.

Our next question comes from Chris Shaw from Monness, Crespi.

First question, just something you were talking about the first quarter being, on the sales side, a little weaker. And was that just a comment year-over-year? Because I know last year, definitely I think in Quick Lubes, you had a decent -- I think it was 9% maybe same-store sales. And I think there was some promotional activity on the Core North American. So does that comment more so year-over-year? Or is it just something slowing in the first quarter as well?

Yes. No, we're not concerned about any type of slowdown in our business. The business is very strong, very stable. The Quick Lube performance was exceptionally strong in Q1 of last year. And we expect to build off of that. So we are forecasting, of course, mid-single-digit same-store sales growth for the year for the Quick Lube business. And I fully expect to see good continued momentum in that business into Q1. So it -- really feel good about the growth that we expect to see across our business. The factors in Q1 have a little bit to do with margin. We talked about the hurricane impact. We've got a couple of million dollars there. A little bit on -- just some promotional timing within Core North America, too, that's a bit of a factor.

The other thing that we have going on there is in Q1 of last year was our lowest SG&A quarter last year as we were building but not complete with all of our public company infrastructure expenses. And so we are going to see a little bit higher SG&A growth in Q1 because of that year-over-year compare.

If I could just follow up on the promotional timing; is that a negative in the sense that you're spending more and you'll see some sales from it in the second quarter? Or is it more that you're not having this -- as much promotional activity this year, so you won't see the sales in the first quarter this year? I wasn't following.

Yes, it's more the latter. So yes, when we're -- where you see some -- you can see some fairly meaningful volume shifts is primarily in the DIY business because you have a number of large retailers and the timing of those promotions don't always land in the same month or the same quarter as the prior year. So we're seeing a bit of a shift just in the promotional timing. But we feel good about our promotional schedule and what we're committed to for the 2018 merchandising year with our key accounts.

If I could follow-up with a base oil question, I know in the past, there was -- there's some suspicion that the base oil would sort of divorce itself from following crude as much just because -- and I think there was some additional capacity coming on in base oil. That doesn't seem to have done that as much as I think maybe we had thought. Brings me to the question maybe that does it make sense at all to try to hedge out crude oil or hedge out your base oil exposure through crude oil?

Yes, it doesn't make sense to try to hedge the base oil market. There's no perfect way to do that. Just a couple of quick comments on the dynamics, is that base oil is a commodity. And base oils will follow crude because that, of course, is the primary input. It's just the timing of the base oil move relative to crude is somewhat -- it can vary from time to time. In general, Valvoline is benefited and will continue to benefit from a long base oil market. So the market in total is in good position. And what's happened or what happened in 2017 was that because of a number of turnarounds at the refineries that did create a bit of short-term tightness in the base oil market that resulted in a bit higher cost than we otherwise would have expected, given the dynamic between crude and base oil. So as we're entering into a period this fall that we expected would result in a more balanced market, of course, that was disrupted by the hurricanes. And so we didn't see any of the decreases that we might have expected. Now with crude moving back up, that is pushing the base oil prices up, and so we're seeing that impact. All these moves, and it's important to keep this in perspective, is that Valvoline has got a great model for how we manage those costs and how we manage our pricing to mitigate impact to our business by making sure that we're passing through pricing in a timely fashion, by doing all the things that we do to drive business growth and manage our costs, both in the short term and over the long term. And when you look at the results in 2017 and consider that base oil prices moved up about 20% between January and June, and yet Valvoline delivered good, solid performance through that window. So I think it's just important for investors to understand the strength of this business model and the ability to manage our business through both rising or falling base oil markets, crude. We have a lot of experience in executing our plans through different environments. And the fundamental approach for us is, make sure we're protecting those unit margins, growing them over time by improving the mix in our products and in our businesses. And this is what's going to help us really deliver strong profit growth year-over-year.

[Operator Instructions] And our next question comes from Jason English from Goldman Sachs.

I want to follow up on that last question, predominantly because I just got distracted in the forum multitasking over here. So I apologize if you kind of already answered this. But I think the last question touched on, and I heard you touch on, the idea that there was some transitory disruption in the base oil markets that created some tightness midway through this year. And I know when we sat here midway through, there was some anticipation, hope, expectation that it would get some slack and we could potentially get some relief in base oil regardless of where crude went. I understand the upward pressure on crude right now. But why haven't we seen any of that anticipated relief? And is your outlook for ongoing inflation, does it give any consideration to that? In other words, is there a degree of conservatism in terms of what you're expecting? Or does the potential for some of that, the easing of that tension, still exist?

Yes, the big impact was the hurricane. So while as we started this fall, there was a thought that we could see a possible base oil decrease based on that long-term relationship between crude and base oil prices. The impact of the hurricanes really kept the market relatively short in base oil supply. And as we noted, that did push our costs up while we went to the spot market and went to other suppliers to make sure we took care of our customers. And so now with the shift towards -- the shift that we've seen in the crude market as crude has moved up, the base oil suppliers are announcing increases. And so any plan for a base oil decrease is -- I don't see that in the cards. So we've got to take appropriate action in making sure we're adjusting prices to factor in higher base oil prices. So that is certainly part of our guidance that we've provided and factoring that in. And as we get into 2018, we'll obviously be keeping a close eye on what's happening in the -- in crude as an indication as to what might happen in base oil prices. But certainly, the market in base oil being disconnected from crude and all, that should not be a factor in 2018 as the disruption was -- in 2017 was first tied to the turnaround and secondly to the hurricanes this fall.

Also Jason, just keep in mind that the guidance that we put out already assumes a modest amount of inflation as we indicated in the prepared remarks. And then as Sam mentioned a moment ago, we've already begun executing another round of price increases to offset these anticipated cost increases. So we feel like we're in a pretty good position as we start out fiscal '18.

No, I totally got that. And it just sounded like we had one transitory issue followed by another transitory issues, and transitory issues fade but it sounds like you're saying, don't expect those things to fade. And so let me pivot real quick, you mentioned 2 core growth engines. The Quick Lube business, which is -- I mean, the momentum there is obvious, and congratulations on its success. The other growth engine was International; can you contextualize what your International business looks like today and where you see some of that growth, particularly in terms of mix of industrial versus consumer, and how the efforts to try to build out on more substantial consumer business, consumer-facing business, have progressed so far?

Sure. The business internationally is more balanced between heavy-duty lubricants supporting both trucking, fleet industry but also stationary equipment that includes power gen, mining, for example. We really have some good strengths both in heavy duty and in passenger car in certain markets, too. When we look at where we expect to see significant growth, I'd start with China. China is a huge market, second only to North America. And we have a developing business both on the consumer side in light-duty lubricants and on the heavy-duty side through our joint venture with Cummins. As I noted, we saw significant gains based on product innovation on the heavy-duty side. And product innovation is really key to continued growth and success in the heavy-duty markets really across the regions, working more closely with the OEMs. Cummins is a major player on a global basis. And that relationship, which is both a financial, but also importantly on the technical side enables us to develop products that have performance advantages versus the competitors. And so as we build our distribution network and leverage a great product lineup, we're seeing really good success on the heavy-duty front. In passenger car, we've got a growing business in a lot of the developing markets as we build our distribution. And Valvoline today is a relatively small player in these emerging markets. But we're making fast progress in developing our distribution network, having the right distributor partners to service the market. And as we develop that, that puts us in a strong position to bring some of the same tools that we have in the U.S. to the installers and garages in the developing markets. And so we have that same approach, that hands-on approach of how we can bring tools that help an installer improve the profitability of their shops that enables Valvoline to be successful. So the brand component is important. Overtime, consumer marketing efforts will become more and more important, too, in developing our brand, developing our business in markets like China, in Southeast Asia, India. India today is primarily a strong heavy-duty market, but we have a growing market first for the two-wheeler market, we call it. But as passenger cars begin to grow in India, Valvoline is going to be very well-positioned to take advantage of that. So the answer is Valvoline's International opportunities are significant across really all the regions. We've been working very hard in developing our teams and our supply chain capabilities in key markets like Asia, Latin America and even Europe, where we've made some really nice improvements recently.

And we have no further questions in queue at this time. We'd like to take time to thank you for attending today. And this concludes today's conference, and you may now disconnect.

All right. Thanks, everyone.