Good morning. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2018 Earnings Conference Call. [Operator Instructions] Thank you. Sean Cornett, Director of Investor Relations, you may begin your conference.

Thanks Casey. Good morning and welcome to Valvoline’s first quarter fiscal 2018 conference call and webcast. Valvoline released results for the quarter ended December 31, 2017 at approximately 5.00 PM Eastern Time yesterday, February 7 and this presentation and remarks should be viewed used 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-Q with the Securities and Exchange Commission. A copy of the news release has been furnished to the SEC on 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 a reminder, 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. 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, non-operational or restructuring in nature. We believe this approach enhances understanding of our ongoing business. A reconciliation of our adjusted results to amounts reported under GAAP any discussion with management's use of non-GAAP measures was included in our earnings release. As you can see on slide 3, Valvoline delivered reported operating income of $880 million in Q1 and a net loss of $10 million or $0.05 per share. Our reported net loss was driven by the estimated impact of the recently enacted U.S. tax reform. There are a few items related to pension that we want to call your attention…

Thanks Sean and good morning everyone. Q1 was a good start to fiscal 2018. Our adjusted EBITDA of $108 million was in line with our expectations, despite modestly higher costs from the hurricanes late last year and from the launch of our new easy pour bottle. Our unit margins improved sequentially in most areas as we expected. We anticipate further improvements to unit margins in Q2. Quick Lubes performance was excellent and looks even better coming off the strong quarter we had in Q1 last year. We also had premium mix gains in every segment and overall volume growth. Finally, in Q1 we returned cash to shareholders. We raised our dividend by more than 50% and repurchased 1.6 million shares. In addition, we established a new $300 million share repurchase authorization. The business is healthy and we're on track to meet our goals for the year. Let's take a closer look at each segment's results starting with Core North America on slide 5. As you can see, branded premium mix was another good story in Q1 moving up 400 basis points to 47.8%. We're maintaining our momentum in this important measure for the business. Branded volume was up slightly, but due to changes in promotional timing our non-branded volume decreased year-over-year leading to the modest volume decline for the segment overall. As we expected, unit margins improved sequentially. We anticipate further improvements in Q2. Hurricane impact on raw material costs and transition costs for our new packaging were higher than anticipated and drove the year-over-year decline in unit margins in Q1. These cost increases and our planned investments in SG&A were the primary drivers for the decline in segment EBITDA versus last year. The recent trend in crude prices is driving inflation in base oil. As we look out to…

Thanks, Sam. Our adjusted results for fiscal Q1 are summarized on slide 11. Sales were up 11% and volume growth was 2%. Adjusted EBITDA was $108 million and adjusted EPS $0.29. Both of these items now exclude pension and OPEB income. Adjusted EBITDA decreased $1 million versus prior year with favorable volume mix offset by planned increases in SG&A. As we said last quarter, we expect full year SG&A to grow roughly in the high single digit range versus last year. SG&A grew at a higher rate in Q1 due the full year affecting our public company infrastructure costs, which phased in during the year in 2017. The majority of our remaining SG&A increases are related to investments that will drive both our top and bottom lines, including sales and marketing. Marketing is in support of our product and packaging launches in DIY and incremental advertising is related to our ad campaign in VIOC. Sales force investment was primarily at international to drive both top line volume and sales. Overall, we're making smart, prudent investment in support of our growth plans and over time we expect to be able to leverage these investments in SG&A. As outlined on slide 12, we expect to be a net beneficiary of tax reform. In fiscal 2018, we expect to see a federal tax rate of 24.5%. This is a blend of three quarters of the new lower rate of 21% and one quarter at the prior 35% rate. We anticipate tax reform will result in a consolidated adjusted effective tax rate of 27% to 28% for fiscal 2018 and 25% to 26% in 2019 and beyond. The higher effective tax rate in Q1 was driven by the one-time charge associated with tax reform. Our Q1 adjusted effective tax rate was 28.9%, benefiting from…

Thanks, Mary. With the performance we had in Q1, we’re on track to meet our goals for 2018. In Core North America, branded volume was solid in our historically slowest quarter. The improved premium mix made sequential progress on our unit margins and launched innovative new products to give us confidence in the future. In Quick Lubes, we had a strong start to same-store sales growth and added 12 new stores to the system. In international, we continue to grow volume and expect to see improved unit margins in Q2. Our strong business model combined with our growing dividend and new share repurchase authorization is a compelling formula for driving total shareholder returns. With that, I’ll hand it over to Sean to open the line for Q&A.

Thanks Sam. Before we move to Q&A, let me ask that you limit your questions to one, plus the follow-up we have enough time to get there. With that, Casey, please open the lines.

[Operator Instructions] Your first question comes from Stephanie Benjamin with SunTrust. Please go ahead, your line is open.

Hi, good morning. I just have a question on really just the higher of raw material costs you saw during the quarter, and then just your commodity outlook for the year. Sam you mentioned that you'll see some price lag affect in the second half. But I was just looking to get more color on that and what we can expect from the quarterly basis going forward. Thanks.

Yeah, in the first quarter, we had as noted, higher raw material costs, that impacted us from the hurricane impact and also from the new packaging that we're launching in the DIY channels. So, we felt the impact of that in our unit margins in Core North America were modestly lower than our expectations going into the quarter. Coming out of it, we're in good shape and that's why we’re projecting that our Q2 unit margins will improve. That said we're in a period of inflation where certainly we've seen crude make a significant move up into the mid 60s when you look at WTI and that, of course, influences where based oil prices will be. And there have been announced base oil increases and those increases will begin to flow through to our P&L, primarily in Q3. Fortunately, we've been able to move prices and announce price increases and begin to implement those price increases that will take hold in Q2 and into Q3. And so we feel we’ll be in good shape with what I consider to be a very manageable price cost lag effect.

Great. Thanks so much.

Your next question comes from Simeon Gutman with Morgan Stanley. Please go ahead, your line is open.

Good morning, guys. Can you just first remind us the mix of group two versus group three as a just a percent of input? Can you talk about, are there any structural changes that are happening in the refining area that could have implication good or bad on input costs. Or is there just more capacity chasing either of those groups something different than where we were let's say a year ago.

Okay. Yeah, in terms of the mix of group twos and group threes. Group two is still our largest input, group three is our used in the growing synthetic segments. And so, group threes are becoming more and more important to our mix. But group twos are – I haven’t looked at the mix recently, but well over two-thirds of the overall mix. In terms of base oil production, there's been a lot of capacity additions in group twos, so the market continues to be fairly long there. Group three production, continues to increase, capacity increases as the shift to synthetics happen, we see that as more of a balanced market.

Okay. And then my second question is more on guidance. The first quarter was more or less consistent with your expectations, but the absolutely EBITDA did decline and the midpoint of the guidance is 4 mid-ish to high single digits for the remainder of the year, which means it's got to be above average for that. I guess, that was all contemplated, but what sort of changes in the model and what gives you confidence that those run rates are achievable?

Yeah, most importantly is our ability to adjust prices to protect our unit margins, so when you look at our results in Q1 and also when we look at the balance of our fiscal year, the initiatives that we have in place to continue to drive solid volume performance, branded volume performance in Core North America, certainly in our Quick Lube business and also the growth that we see in the international regions, we feel really good about just the core strength of the business and the initiatives we have in place to drive that growth. So, what's key for us is, we've got to protect those unit margins and we've got to be able to implement those price increases to offset the base oil increases that will be flowing through later this year. Based on the work that we've been doing to work those price increases through to our customer base, really in all segments, we feel very good about our ability to protect those margins. So, when you put the two together, that gives us confidence in the EBITDA performance that we're projecting for the balance over the year. So, but certainly it is a step up versus where we were in Q1. Q1 is lower seasonally versus the rest of the quarters, it's really in the balance of the year where volume picks up is at a higher level and EBITDA picks up and that's been consistent over the years for quite some time.

Okay, thank you Sam.

Your next question comes from Carolina Jolly with Gabelli Research. Please go ahead, your line is open.

Hi, thanks for taking my question. Just to start, I guess, can you kind of talk about at the North American segment and anything you're seeing within that end market. I know that the big four distributors are large customers of yours, are you seeing anything there? Given some of their recent results, do you see any issues with passing price through in that segment?

Sure. So, yeah when we focus on the DIY business and Core North America so significant contributor to our performance in Core North America. Those relationships with the large retail accounts are very important to us. We have really strong merchandising plans in place for 2018, so I feel very good about the distribution of our products, how they’ll be promoted and our ability to – capacity of pricing has a lot to do with the strength of the brand, the strength of those relationships, working with the retailers, so that they're taking the appropriate actions that allows them to protect their margins too. And so we're well into the implementation plans of these price increases. The other positive thing that we’re seeing beyond our own actions is that competitors have also announced, they are implementing price increases too. So, I feel very confident about where we stand in Core North America. Certainly with important DIY business. As I mentioned in the presentation, we've got some exciting growth initiatives too that are in place. This new easy pour package is far superior package to our competitors. The consumer research that we did behind it indicates that and the support that we're getting from our retail partners and the enthusiasm that they have for this initiative is quite strong.

Perfect. Thanks a lot.

Your next question comes from Wendy Nicholson with Citi Research. Please go ahead, your line is open.

Hi, good morning. I just wanted to follow-up, focus the conversation on the international business where the margins were a little bit weaker and I think the press release called out sort of a negative mix shift. But I wondered if that was and I know you're looking for an improvement there, but is that just temporary, was that a sort of something specific to this quarter? Or is there some sort of underlying shift? So, how should we think about the margins in the international segment over the longer term? Thanks.

Yeah, great question. We do see it as a short-term impact that was within the quarter. Our business in Australia, which is one of our larger, mature markets, very profitable for us, had a relatively weak quarter. So, that did have a mix impact relative to the strong margins that we have in a mature market versus some of the lower margins that we have in developing markets. But we look at the plan in Australia. We think they'll be back on track for the balance of the year. Then we’re seeing some really good growth, continuing to see that in Latin America and China. Our joint ventures I mentioned to were quite strong and Europe continues to show some really nice growth too. So, I feel very confident about the performance of the international business and our ability to grow. The other impact that we did call out was that higher raw material costs were flowing through in the international business in our first quarter. We'll see the impact of our price increases in our second quarter that we've implemented this quarter as we’re in Q2 now. That will show that unit margin improvement when we report Q2 results. We’re confident that we’ll be in good shape with our margins overall in the international business.

Got it. Okay, terrific. And then my second question was on the share repurchase program that's terrific, thrilled about that. But is there any – and I'm sorry if you made a comment on this and I missed it, it’s a busy morning, but just regarding sort of your appetite and on the outlook for acquisition activity, does it still seem that there are opportunities for you to acquire new smaller chains, does this reflect sort of a shift in capital allocation priority or just a reflection of sort of a strong cash flow out? Thank you.

Yeah, it does not reflect any change in our confidence and ability to make some Quick Lube acquisitions that we think will be strong additions to the overall Valvoline Instant Oil Change business. It really reflects the strong cash generation of the business model itself. So, throughout if you look over the last 18 months, we started with the dividend, we increased our dividend in last fall. We started with the share repurchase program. We completed that early and now we’re – or will be completing it on the early side. Then we're putting a new share repurchase authorization in place because we believe that not only can we invest in the business. As I noted, we've got some important capital investments to strengthen our digital infrastructure, our supply chain infrastructure. But also making Quick Lube acquisitions that's all part of our investment for growth, investing in high return projects, that's first and foremost, always going to be our priority. But even beyond that this business is going to continue to generate cash beyond those growth needs and that gives us confidence in returning cash to shareholders via a higher dividend, but also then this higher share repurchase authorization.

Okay. Makes sense. Thank you so much.

Your next question comes from Dmitry Silversteyn with Longbow Research. Please go ahead, your line is open.

Hey, good morning guys. This is actually Casey [ph] filling in for Dimitri. On the volume side was there any kind of surprises that you saw on the quarter on a geographic basis, either positive or negative?

No, there really weren’t any surprises.

Okay. And then you know as you look to some of the impact of the price increase in the quarter is that a little bit slower than the flow through in the North American business on the international? Could you give a little more color on that?

The timing of the cost increases can be a little bit different in international markets and in this case it was really the international business that that felt those higher cost increases in Q1. Whereas some of the increases that we felt in Core North America earlier in fiscal 2017 were covered by price increases there. So, this is really a kind of a shift where we saw higher cost in certain markets in the international business that now our resulting in price increases being implemented.

And Casey there was very little price cost lag in the Core North America business for the quarter. Most of the margin impact that we saw was really caused by those one-time costs associated with the hurricane and bottle lines that Sam mentioned.

Okay. Thanks guys.

Your next question comes from Jeff Zekauskas with JPMorgan. Please go ahead, your line is open.

Thanks very much. I understand that you make more – you have a higher margin on semi synthetics and synthetics than you do on conventional oils and that your mix is moving up. But there's been some industry surveys done said that semi synthetic oil change prices have come down about 20% in the core since 2017. If that's true, are semi synthetic prices down year-over-year? And if they are, why is that?

Yeah, so when you talk first of all, just talk a little bit about the product line up. You've got conventional oils, semi synthetic as you mentioned, we call them, the high mileage segments, predominately high mileage segment and then the full synthetic segment. And Wal-Mart's been a bit more aggressive on the high mileage segment, where they’re pricing at close at shelf or on top of conventional pricing. So, they have put pressure on retail prices as it relates to the high mileage segment. But on the positive note, it's also contributed to good volume growth in that segment too. So, the shift that we're seeing to high mileage and then the full synthetic continues to be strong. But it hasn't been – for us it's a net positive because of our strong share in the high mileage segment and that's a segment that we expect to continue to grow, not just in DIY, but across all the channels. It's significant contributor in the installer channels and in Valvoline Instant Oil Change where it carries much higher margin than the conventional segment. So, growth in high mileage segment continues to be a real positive for us. And then in addition of that you've got the growth in the synthetic segment, which continues to be to be very strong.

For my follow-up, what's the relative size of your high mileage versus your full synthetic, which one is bigger or which one is smaller and materially different? For Mary, what's the cash tax benefit, if there is any, in 2019 from the tax changes?

I might have to follow-up with the specifics around the split in high mileage versus synthetic, but for us the high mileage segment is bigger than the synthetic segment right now. Yet you've got faster growth rates in the synthetic segment. So, particularly we have good share data as it relates to the DIY business and the do-it-for-me side of the business. We don't have good share tracking data that helps us understand exactly what's going on competitively. But we like our trends for both high mileage and full synthetic with the installer DIFM side. On the DIY side though that's where we've done a nice job, increasing our shares year-over-year. And in particular, we're strongly focused on strengthening our full synthetic market share with some of the growth initiatives that we have in place. I think not only will the new packaging help us, but the launch of modern engine is going to help us continue to penetrate the full synthetic segment first is DIY and then across channels, as this new product takes hold.

And Jeff, on your cash tax question in 2019, we expect just the rate benefit from the lower effective tax rate to be in the $40 million range. Its 8% on our profit before tax, 800 basis points, and then we do expect incremental benefits from the 100% expensing provisions of the new law that will diminish over time is that, that will [indiscernible], I think from 2022 or 2023. So, but it’s a significant cash tax benefit for us.

Your next question comes from Mike Harrison with Seaport Global Securities. Please go ahead, your line is open.

Good morning. This is Jacob [ph] on for Mike. Just a clarification question. The higher raw material costs associated with the new packaging launch. We assume that that was more the packaging design with new [indiscernible] kind of cost more than the just packaging and so that’s what's causing the uptick in costs. But a previous comment more of a [ph] one-time impact, so just trying to figure out if that headwind goes away for the rest of the year or …?

Yes. It's a good question to ask because there are two elements of the costs increase, the cost impact of the new package. And the one that we're highlighting is really the temporary cost of making those plant conversions. And so as we convert our lines to the new packaging, there's some logistic challenges with that. Those higher costs of logistics and conversion are what we're reflecting as a negative impact in Q1. And those begin to subside as we move into full production of the packaging line up across the line. There is, however an ongoing higher cost of the new package design that is reflected in our forecast. And yet we believe the higher cost is a very smart investment for us because of the value that it brings to DIY consumer and what it does to strengthen the brand. So, it's really an investment in marketing in the important DIY channel for us.

All right. Thank you.

[Operator Instructions] You do have a question that has come through from Olivia Tong with Bank of America Merrill Lynch. Please go ahead, your line is open.

Good morning. Thanks. Sorry, we're having a little bit of technical difficulty here. But want to ask you a little bit about same-store sales, which continues to be pretty strong. But obviously your outlook didn’t really change and still implies a fair amount of deceleration in the back half. So, can you talk to the expectation for the deceleration maybe how you think about driving frequency in a higher gas pricing environment?

Yeah, I mean, first of all we're really excited about the results that we’re seeing in Valvoline Instant Oil Change and the same-store sales performance, particularly that's been driven by our continued growth in transactions, so we’re continuing to win new customers to the business. And what we're seeing is that while we’re attracting new customers, we’re also doing a good job retaining new customers too and that's where we're seeing some nice year-over-year comp growth. And so when we look at the sustainability, first of all, of the same-store sales growth, we’re bullish for the future because we continue to learn from our digital marketing campaigns and to sharpen, not only the messaging, but the delivery and the targeting around those campaigns that helps bring in those new customers. With regard to the outlook, I mean, Q2 last year was relatively weak same-store sales performance, so we're going to have a very strong Q2 when it comes to same-store sales growth. As we get into the back half of the year, we did have quite good performance in both Q3 and Q4 in same-store sales performance. So, we'll be lapping tougher comps. We did see a really nice pick up, when we launched the new digital advertising campaign that took place kind of halfway through our Q3. But we'll still see some good solid growth in same-store sales, I believe in Q3. I think it's really in Q4 where we were in full spend mode on the new campaign and saw excellent results last year that our comps, that we should expect those to be a bit lower. So, that that's really the drivers behind you know why we don't expect to see say, 8% comps for the whole year, it's that we’re likely to see a little bit of deceleration in the back half of the year. But in terms of just strength of the overall business and the ability to continue to win more customers through our store because of the consistency of execution in the stores, delivering on what consumers are looking for that quick easy trusted experience. Our company stores, our franchise partners are just doing an excellent job on execution. And so we're confident that we've got a great business here, that's going to continue to grow for us. First in same-store sales performance, that organic growth and then on top of that its going to be exciting to see some of our first new stores come out of the ground. We’re going to see good company store growth in the back half of the year as our new store program takes hold. As I mentioned earlier in the call, we're continuing to pursue those conversations with our regional Quick Lube operators and that continues to present an opportunity for us. The key is developing those relationships and finding those high quality operators that would be good fits with our system.

Great. Thank you.

Your next question comes from Chris Shaw with Monness, Crespi, Hardt. Please go ahead, you line is open.

Hi, good morning everyone. I just want to piggyback a little bit on that last question. Historically, have you found an inflationary environment, I guess, the duration between oil changes, does that extend at all or do customers typically, what incentive to the actual price of either oil change or motor oil itself.

Yeah. We have not seen an impact on oil change intervals based on inflation. It's one of the great things about our business is that that demand is really steady and that's because whether the economy is super strong or relatively weak, people are going to take care of their vehicles, their investments, their engines. So, even as gas prices move up, we don't expect a difference in oil change intervals. The growth in oil change interval tends to be driven more by the shift toward synthetic. But that's at a manageable rate for us and with the higher margins on synthetics that's a very positive element of our overall business. So, the outlook is still very positive. And over the last few years, we’ve seen increases in miles driven too, and that’s been a tailwind for the business, that’s moderated a little bit this past year, where I think the growth rate has been closer to 1% versus 2% in the previous couple of years, but still a positive move.

And then just a quick one, on the new packaging on the new bottle. Are you charging a premium for that or is that more of just gain in some volume and some share as a advantage?

Yeah, we’re not increasing our prices to support the new bottle, so it’s really a marketing investment and another way for us to grow market share in the DIY segment and like I said, we’re bullish on this move for us. Really when you think about that Valvoline business and how we’re going to drive growth in Core North America, it’s going to come from innovations like this, where Valvoline is putting in place a significant competitive advantage in our product, in our packaging, in marketing programs, that our partners can use to help drive their business. This is how Valvoline wins in a relatively flat demand environment, is that we’re going to grow market share and we’re going to improve our premium mix.

Great. Thanks a lot.

And there are no further questions at this time. Ladies and gentlemen, thank you very much for joining today. This concludes today’s conference call and you may now disconnect.