Valvoline Inc. (VVV) Q1 2022 Earnings Report, Transcript and Summary

00:06 Hello, everyone, and welcome to the Valvoline Inc. First Quarter 2022 Earnings Conference Call. My name is Victoria and I'll be coordinating your call today. [Operator Instructions]. 00:29 I will now pass over to your host, Sean Cornett from Investor Relations to begin. Please go ahead.

00:37 Thanks. Victoria. Good morning and welcome to Valvoline's first quarter fiscal 2022 conference call and webcast. On February 8 at approximately 5:00 PM Eastern Time Valvoline released results for the first quarter ended December 31, 2021. This presentation should be viewed in conjunction with that earnings release. A copy of which is available on our Investor Relations website at investors.valvoline.com. Please note that these results are preliminary until we file our Form 10-K with the Securities and Exchange Commission. On this morning's call is Sam Mitchell, our CEO; and Mary Meixelsperger, our CFO. 01:13 As shown on slide 2 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. 01:36 In this presentation and in our remarks, we will be discussing our results on an adjusted non-GAAP basis unless otherwise noted. Non-GAAP results are adjusted for key items, which are unusual, non-operational or restructuring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our adjusted non-GAAP results to amounts reported under GAAP and a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix. The information provided is used by our management and may not be comparable to similar measures used by other companies. 02:12 Now, as we turn to slide 3, I'd like to turn the call over to Sam.

02:16 Thanks, Sean. And thank you everyone for joining us today. Our Q1 results were strong, headlined by 31% growth in total sales. Both segments contributed to this top line performance with retail services achieving 36% sales growth, including nearly 25% same store sales growth. Global Products sales increasing by 28%. Top line growth in both segments had continued strong demand for Valvoline’s products and services. Overall, we achieved 5% growth in adjusted EBITDA and 12% growth in adjusted EPS. We're pleased with how our business performed, given the supply chain challenges and increased raw material cost environment we have mentioned on recent calls. We believe we're well positioned to continue to gain share moving forward. 03:04 Let's turn to the next slide. We have 2 strong market leading segments that are each gaining share and delivering results. Based on our guidance this year we expect 14% revenue CAGAR and a 13% adjusted EBITDA CAGAR since 2019. We believe retail services and global products are each positioned exceptionally well with their unique abilities to bring value to our customers, leveraging the capabilities of our team. The separation we're pursuing is expected to support continued growth, success and ability to lead in the respective markets. 03:41 Moving into highlights. Let's discuss Retail Services on slide 6. Our Retail Services segment delivered outstanding top line growth with Q1 sales increasing 36% year-over-year and nearly 60% versus the pre-pandemic first quarter of fiscal 2020. System-wide store sales grew 31% over last year and continued to be driven by the combination of same-store sales and unit growth. Same-store sales growth was exceptional, increasing nearly 25% year-over-year, led by transactions and a solid contribution from average ticket. We expect our pace of same-store sales growth to moderate through the year as we compare against impressive growth that began in Q2 of fiscal ’21. 04:29 Based on our full year guidance of 9% to 12% same-store sales growth, we expect our [Technical Difficulty] years to be in the low 30% range. Top line growth -- top line results were also driven by the addition of new stores. We continue to aggressively add units and anticipate ending the fiscal year with well over 1,700 stores. I'm pleased with the strength of our acquisition and new store pipelines, as well as the work we're doing in partnership with our franchisees to increase their store base. Retail Services delivered tremendous growth and adjusted EBITDA versus last year and two years ago, outpacing sales growth in both periods and driving margin expansion. 05:14 Turning to the next slide, we will examine our exceptional transaction growth. Increased transactions have fueled our outstanding same store sales performance over the past 12 months. Since 2016, our Retail Services segment has nearly doubled its number of system-wide transactions, outpacing the growth of the DIFM oil change market. [indiscernible] of that broader market, which is in the low to mid-single digit range leaves us significant room for future growth. With the ongoing consumer spend into convenience our quick easy and trusted approach positions us well to gain share. 05:54 Our capabilities in data analytics continue to strengthen, allowing us to develop predictive models to drive ongoing customer acquisition. With a superior in-store experience, our teams deliver. We've done well retaining these new customers in addition to our existing customers. As we continue to add new stores we will reach more customers and drive more data. We can leverage this competitive advantage to market our current and future services, accelerating share gains. 06:26 Let's move to the next slide. As you may have seen in our press release earlier this week, we've begun piloting an electric vehicle service package. This experiment is our first to focus on consumers that own battery electric vehicles. The pilot will begin in a limited number of stores to develop our operational readiness and capabilities before expanding the company-owned markets as we evaluate additional service offerings. We're focused on delivering quick, easy and trusted services for both EV owners and as a partner to EV OEMs and fleets. We previously announced we named a service partner for arrival, an early entrant EV manufacturer. The in-store pilot we've announced now represents progress on both fronts. As we've always done with new services technology and programs. We're taking a disciplined approach to rolling out EV services as we continue to focus on delivering a superior experience for our customers. Ultimately, as our customers purchase EVs in the future, we'll be ready to serve them across our system of conveniently located stores. 07:36 Let's review results in Global Products on the next slide. The momentum in our Global Products business continued in Q1 with sales up 28% year-over-year and up 32% versus the pre-pandemic period of fiscal Q1 2020. We're seeing a solid contribution of sales growth across regions. We continue to gain share despite supply chain challenges as evidenced by volume growth. Demand signals for our lubricants products and solutions are strong. We believe we're well positioned to capture incremental opportunities as the supply chain normalizes. 08:14 Adjusted EBITDA declined versus last year, driven primarily by price cost lag, which impacted margins. Even with margin pressure, discretionary free cash flow was solid, and we expect the segment to deliver another year of steady cash generation. 08:31 Let's take a closer look at margins on the next slide. Like many other industries we are experiencing cost pressures from 2 main sources, raw materials and disruptions in the supply chain. After declining -- at the onset of the pandemic in 2020, raw material cost increases were primarily driven by the significant and rapid increases in base oil costs beginning in fiscal 2021. We have experienced more stable raw material costs over the past several months and continue to monitor market activity. We began to pass through raw material cost increases with pricing in the second half of fiscal ‘21 and continued in Q1 this year. 09:17 As you can see in the chart on slide 10, we've made good progress in passing through price increases and expect to continue these efforts to recover our costs moving forward. As a reminder, in a rising raw material environment we’re impacted by price cost lag, but in the following part of the cycle we've historically been able to structurally improve our unit margins. More recently, supply chain challenges have also led to increased costs and inefficiencies, including higher logistics costs and lower levels of inventory than we typically carry, resulted in manufacturing inefficiencies. 09:52 Our team has done an extraordinary job of managing through these challenges and meeting customer demand, although at temporarily higher costs than what we would normally experience. We have a long history of success in recovering cost increases with the pass through pricing, leveraging the strength of our brand and our focus on customer service. The pandemic induced volatility has extended our typical recovery cycle, but has not changed our confidence in recovering our cost over time. 10:22 As you can see on slide 11. Our Global Products business has been successful at gaining share globally. We've grown share in international markets, using our proved proven growth drivers. First, we build and optimize our routes to market, develop a robust platform of products and solutions to service our channels and then add marketing spend to drive brand equity and consumer demand. Our value-added selling approach enables us to win with mechanics, installers and fleet owners. As we've highlighted before, Mexico is a great example of where we've expanded our reach by adding and optimizing our distributor network. We've invested in digital marketing to increase brand awareness and expanded and relaunched our product portfolio. We're winning in Heavy Duty where our Mexico share has doubled over the last 5 years. We're also seeing share gains in other markets and regions such as India, China and Eastern Europe. 11:19 We have strengthened our position in the US DIY markets across our product portfolio. Winning additional shelf space at top retailers and picking up distribution and new channels like farm and convenience stores. Even with supply chain challenges, our team has done an outstanding job of supplying our customers, outperforming competitors. We recently launched a new product called Extended Protection that is proving successful in the market and leading to significant share gains in the premium synthetic category. We believe Global Products is well positioned to continue to gain share, recover cost and generate steady cash flow. 11:58 With that, I'll hand things over to Mary to discuss our financial results in more detail.

12:03 Thanks, Sam. Our Q1 results are summarized on slide 13. We continue to see exceptional top line growth, both year-over-year and versus the pre-pandemic period 2 years ago. Sales growth in the quarter was driven by both segments, highlighting the momentum in each business. Outstanding growth in retail services profitability was tempered by lingering price cost lag in supply chain related cost impacts in Global Products, as Sam discussed earlier. Our adjusted effective tax rate in Q1 came in lower than prior year which benefited adjusted EPS. 12:41 Let's take a closer look at the segment EBITDA margins on the next slide. EBITDA margin expansion in retail services was driven by stores open more than 3 years, where margins improved by 200 basis points to roughly 35%. The result of exceptional topline growth highlighting the anticipated runway for margin expansion as our newer stores mature. As expected Adjusted EBITDA declined in Global Products driven by short-term cost pressures impacting margins. Despite cost pressure, adjusted EBITDA was flat to pre-pandemic Q1 of fiscal ’20, reflecting strong volume growth. 13:21 Sales growth outpaced volumes -- excuse me, sales growth outpaced volumes highlighting continued progress in pass through pricing and setting the segment up for improved profitability and margins over time. Discretionary free cash flow generation in the segment remains healthy and on pace for a steady 200 plus million again this fiscal year. 13:46 As you can see on slide 15 maintenance capital in Q1 remained at roughly 1% of sales, while total CapEx was flat versus last year, highlighting our capital-light business model. A timing related increase in working capital driven primarily by our strong sales growth led to a year-over-year decline in operating cash flow and slightly negative free cash flow in the quarter. We still expect to generate strong free cash flow of more than $260 million this fiscal year. In Q1 we returned $54 million in cash to shareholders via dividends of $23 million and share repurchases of $21 million. We expect to continue our consistent share repurchase strategy that we previously outlined. 14:31 Let's review our fiscal ‘22 guidance on the next slide. We are reiterating our guidance across nearly all our key metrics. We anticipate total sales growth of roughly 20%, driven by continued volume growth and pass through pricing in Global Products and continued strength in same-store sales and retail services. We are encouraged by the ongoing strength of our pipeline for store additions, both ground ups and acquisitions on the company side and especially unit growth by our franchisees. We continue to expect overall adjusted EBITDA to be in the range of $675 million to $700 million, representing 6% to 10% year-over-year growth. We’re modestly lowering our tax rate outlook to 24% to 25%, which flows through to adjusted EPS, where we expect to be in the range of $2.07 to $2.20 per share. 15:27 Now, as we turn thing -- as we turn to slide 18. I'll turn things back over to Sam.

15:33 Thanks, Mary. Before we wrap-up the call today, I wanted to touch on our progress with the separation of our Global Products and retail services businesses. Both segments are performing well financially and operationally with strong demand tailwinds and ongoing share gains. Each segment is a leader in its markets and has significant scale with the solid foundation to successfully operate as independent businesses. 16:00 We are making great headway since we announced our decision to pursue a separation in October. Our teams have done significant work to prepare each business to operate independently and lay the groundwork for a smooth separation. We're working with our external advisors to ensure that each business has the right infrastructure and support to operate independently and to mitigate dis-synergies once the formal separation transaction is announced. We believe the separation will create significant and long-term value for our shareholders, employees and other stakeholders. We're on track and working with speed to capture this compelling opportunity. 16:41 Moving to the last slide of today's presentation. We have had a great first quarter across Valvoline. And I'd like to express my thanks to our teams around the world who have enabled this success. Both segments have driven significant topline results and continue to perform well. The results show that the demand for Valvoline’s leading products and differentiated services is robust. We look to leverage this early momentum as we execute over the rest of our fiscal year, given the growth opportunities we've identified and the trends we're seeing in the market, we are reiterating our strong outlook for fiscal 2022. 17:16 On the capital allocation side, we expect to continue to execute against our share repurchase authorization to support shareholder returns. 17:25 Now, I'll turn it back to Sean to open the line for Q&A.

17:28 Thanks, Sam. I'd like to remind everyone to limit your questions to one and maybe just a few follow-up so that we can make sure we get to everyone. With that, Victoria please open the line.

17:40 Thank you, Sean. We will now start the Q&A portion of the call. [Operator Instructions] And our first question comes from Simeon Gutman from Morgan Stanley Please go ahead. Your line is open.

18:05 Hey, good morning everyone. I have 2 questions. My first on the quarter and then second on the separation. The -- on the quarter, if it's possible, and I know you may not want to do this, but for North America, sales up 29%, are you able to separate price and volume for us?

18:25 Yes, Simeon, I can give you a little direction there. And I'll talk specifically across the total global products business. The volume benefit we saw in the global products business in total had a benefit of about $28 million. Where -- on price cost side, the price cost lag impact was about a negative $30 million, just under for the quarter. So that's the gap that we working. We've made real progress in passing pricing through. I think we've recovered a little bit better than 65% of our costs and we're continuing to work to recover costs for the remainder. So really that was about the size of the price cost lag across the overall Global Products business. About 2/3 of that was in the North America business, Simeon.

19:26 Thank you. That's helpful, Mary. And then my second question. I don't know if this is theoretical or if it’s answerable. But if you look at the retail services versus global products business and as you think about the separation. I guess, which side own the IP to the brand Valvoline? I’m thinking that -- how retail services will procure the oil? Is the brand belongs to one side or the other?

19:53 Yeah. So we haven't announced any specifics on the relationships with regard to how the brand will be essentially shared and executed for both the businesses or the product supply relationship, but I can add just some context and what we believe and are very confident we'll accomplish. And first is that, both sides of the business will have access to the brand name, and in that IP for what drive success in the business. The Valvoline brand brings a tremendous amount of value to our product side of the business and it helps us command that premium margin really across all channels from DIY to installer to heavy duty and around the world. 20:38 And of course, that [Big B] (ph) out in front of our stores. There’s a great symbol of quality and drives customers to our stores with the high expectation of excellent service and products. And so that also is important too is that the retail service side of the business will continue to use and source Valvoline products from global product. So what should be clear to investors and analysts is that, Global Products we'll now in the future own the supply chain. And then there will be a long-term supply contract between retail services and Global Products. So the Global Products can earn a fair margin on that business and retail services can benefit from the high levels of service and using the highest quality products in our service offering and all of our stores.

21:29 That's helpful. Sam. I guess maybe just a follow-up to that, is there -- so there will be a cost to procure the oil, is there a way to offset that or there is just a cost of business and that's what you expect?

21:42 Yeah, this is one of the important areas that we've been working on to minimize any dis-synergies. And so, with the arrangements that we're evaluating, again, not yet announced in terms of how exactly it will work, but we do not see a significant shift in profitability from one segment to the other segment. So more to come on that, but what's important I think for you and others is to understand that we've got a great plan in place to minimize any of those dissynergies synergies.

22:18 Okay.Thanks, Sam.

22:24 Thank you for your question. And our next question comes from Mike Harrison from Seaport Research Partners. Please go ahead, your line is open.

22:35 Hi, good morning. Congratulations on a nice start to the year.

22:39 Thanks, Mike.

22:40 I was wondering if you could talk -- maybe talk a little bit about what you're seeing in terms of gross margin. There were a couple of 100 basis points of sequential gross margin decline. We watch base oil prices and I think you mentioned that you've seen some stability in base oil pricing, maybe talk a little bit more about what you're seeing in terms of additives and other raw materials outside of base oil? And also what kind of impact you saw from -- I know you mentioned some supply chain disruption and the lower inventory levels leading to some inefficiencies. Just looking for a little bit more color on the sequential gross margin declined and as we've seen a bottom in terms of kind of the price cost impact on gross margin. Thank you.

23:33 Yeah. Why don't I cover big picture and Mary can add some color to it if necessary. So while we have seen some stabilization in recent months, we have also seen crude move up more recently into the $90 range. And so, I think we're nearing the top of the inflationary cycle, but maybe not quite fully out of it. So it's been a challenging period that we've been in, because these are some of the most significant increases in cost that we've seen in over a longer duration than in the past, I think we've seen roughly 7 base oil market increases over the last 9 months. And those base oil costs in the range of plus 80% from when we started the cycle. So pretty significant. 24:23 So nonetheless we've been making moves appropriately in adjusting our finished lube pricing to the market to help us cover those costs. As we've explained in the past, we have a good portion of our business in the US on quarterly contracts or long-term contracts that adjust pricing on a quarterly basis. And so, that's able to help us mitigate price cost lag effects for some of those large national installer accounts for example. But we do tend to have a larger lag impact in the DIY market where it's more of a negotiated price increase. And what happens for us, again, is we have scheduled promotions throughout the year, our merchandising events at our big retailers. And so we're kind of locked into when we can adjust prices, when it's appropriate to adjust prices. So we look both at our merchandising schedule, our competitors to make the appropriate moves at the right time. 25:25 So definitely feeling some lag there in the current quarter. And I would say in the upcoming quarter. But over the course of 2022 we will be taking the appropriate pricing actions to recover those costs. So again, confident that we'll get back to where we need to be. And if you go back to, I think it was Page 10 in the presentation, it kind of lays out that trend in pricing and how we are adjusting pricing appropriately to cover those costs, but it is widespread, it's not just base oil, it's the additive market, packaging, logistics, there is inflationary pressures across the board. And so the pricing actions that we take are meant to recover all those costs as we move through this this period. 26:18 And then we're optimistic as we think about the strength of the business long-term, because as we peak in this inflationary period then we catch up. If you look at the strength of our demand right now, and I think we're outperforming the category in general, both here in the US and in international markets. And I think we're really well positioned to benefit from that driving share growth and driving increased profitability over the long term. So again, a challenging period, team is doing an amazing job. I think outperforming competitors and our ability to supply our existing customers, but it's -- we're not out of the woods yet. I mentioned in the presentation that our inventories are pretty tight. And so, we'll hope we work in our tails off to continue to keep up with customer demand for Valvoline products. And then hopefully put ourselves in a great position to benefit from longer term share gains.

27:16 And Sam, it is not only our inventories that are tight, it's all the way through the supply chain. So our customer inventories are running at very low levels as well. So the safety stock that's been kind of take depleted from the end-to-end from the inventory perspective has been pretty significant. And that creates a future opportunity for us as well. Those inventories as the supply chain kind of normalizes will get replenished and there'll be some demand benefits that will be coming at us from that as well. But the one thing that Sam didn't mentioned, Mike, is that, because of the lower inventory levels we are seeing, we mentioned in our remarks some manufacturing challenges related -- and higher -- modestly higher costs associated with more frequent production runs, more over time, just overall demand that are being placed on our manufacturing operations to be able to meet demands in this environment where there are lower inventories. And so that's creating some incremental costs that we're dealing with as well. 28:25 But Sam is right. We are seeing cost increases in additives and cost increases in logistics in particular, that are also driving some of the sequential decline in margins that we saw relative to fourth quarter.

28:48 All right. Thanks. I appreciate all the color there. I wanted to ask also about the announcement on the pilot program for electric vehicle services at your VIOC locations. Maybe talk a little bit more broadly about all of the steps that you're taking to expand your EV customer base? And can you also provide some sense of how the revenue from EV services that they need in a year or in some period compares to the revenue that you would see for maintenance on an internal combustion engine vehicles?

29:27 Yeah, Mike. As we presented, we're going to be focused on our service offering for those EV vehicles and those owners and passenger car market. But we'll also be working with OEMs in making sure that we're pursuing strong relationships there that are also supplemented by some of the product work we're doing with EV OEMs in heat transfer fluids, for example. But on the OEM side, partnerships like Arrival, not only can help position us for incremental sales to our stores, with fleet customers like Arrival, but also help us learn and strengthen our offering in our stores and where we need to make additional investments, say, in our technical capabilities in the stores. 30:16 So I think it's going to be a great partnership to be learning and growing with them. So we're really pursuing and on both sides, fleets, passenger cars. It's going to take some time for the EV market to be significant in size, but what we're doing now is to prepare for that future and to make sure, one, we do the job with excellence and that's what we're known to do, that our teams are highly trained and qualified to provide any of those preventive maintenance services. 30:49 And then regarding the longer term, we want to make sure our Valvoline customers know well in advance of making that EV purchase. When they do make that purchase if they decide to go that route, let they know that that car can be serviced at Valvoline . And we know our big advantages being quick easy trusted, we're a heck of a lot more convenient than going back to a dealership location. Consumers look for that convenience in their preventive maintenance and we're going to continue to strengthen our advantage there, no matter how that car is powered. 31:29 Going back to your -- the second part of your question around the revenue per vehicle on an annual basis. And that's a really important question. And that's one that we're working on and that's part of this pilot program is to better understand what that revenue per vehicle looks like, the frequency of service and then modify our service offerings appropriately too. I would say based on some of our insights as we've been studying EV's over the last few years is that, it could be that frequency might be a bit less versus an internal combustion engine, but the service offering and the revenue from that transaction might be very attractive for us to. But we'll learn in the coming year and years. So they were positioning Valvoline to continue to grow and thrive. No matter how those vehicles are powered. And that's our approach to EVs, the hybrid market, combustion engine and the opportunities that we have in the fleet market, et cetera.

32:37 All right. Thanks very much.

32:41 You bet.

32:44 Perfect. Thank you, Mike for your question. Our next question comes from Jeffrey Zekauskas from JP Morgan. Please go ahead.

32:55 Thanks very much. In the retail business you are operating income was very strong year-over-year, but really was down from the second and third quarters of last year -- I'm sorry, from the third and fourth and kind of flat with the second quarter. Do you have to increase prices in retail? It looks like your margins are getting squeezed there, but what are you going to do about that?

33:27 Yeah. Mary can add some color with regard to detail on the margin, but pricing is an important part of the equation, Jeff. And the inflationary pressures hit our retail services too. They are twofold and that product prices are going up and we need to reflect that in our pricing for our services. And labor costs are moving up too. And so everyone is very familiar with some of the labor challenges and we want to be on top of that. We're adjusting our entry-level wages appropriately and making sure that we're competitive. We typically pay above other retailers on entry-level wages. And so pricing actions do you have to cover those investments that we're making in our team. 34:21 We have a very disciplined approach to adjusting prices where we're evaluating different price points in pilot markets around the country. We separate markets too in terms of some of their competitive dynamics and also locations. But I can tell you that we've taken some pricing action, some of those take effect in fact this month. Some of them will take place a little bit later this year, but it allows us to make sure that we're protecting our margins on the way up when we've got some of these inflationary pressures. Mary, specifically anything else to add on the margins themselves.

35:02 Yeah, I would tell you Jeff that our adjusted EBITDA for the business for the quarter at $98 million was, I think, a record for us and substantially better than any quarter that we saw last year. In fact if you look at it compared to 2 years ago, our adjusted EBITDA is up 72%, relative to the first quarter 2 years ago. So we're continuing to see great momentum there. Our EBITDA margins were down a little bit and that's really a factor of just higher product costs being passed through to our franchisees. Our franchisees operate under similar type of indexed arrangements that we do with our other installer channel customers. 35:53 And so from a unit margin perspective, there is a little bit of a lag. We pass that through on a quarterly basis. But if you look at the absolute margin from a rate perspective, it causes some deflationary impact on the margin rate, but if you look at the unit margin perspective that stays whole. So you are -- I think when you're looking at those margins you are seeing some impact of that pass-through pricing on the product side of our product sales to our franchisees.

36:25 Okay. So your adjusted EBITDA in the quarter was $156 million. So if we annualize that, that's about $635 million. And so to get to your guidance you need, I don't know, $50 million to $75 million more in EBITDA. Where are you going to get that from? Is that mostly price recovery that you think you can capture in the course of 2022?

36:53 Jeff, Q1 tends to be our lowest quarter at times of volume, both in Global Products and retail services. So you have -- I mean, there's not a lot of cyclical effect, but Q1 is lower than the other 3 quarters. That's your biggest driver right there. So we expect to see stronger profitability in the balance of the year.

37:16 Okay. And then lastly, do you think you'll separate your businesses this year? And in terms of talking to your investor base, will we know what you're going to do before you do it? Or will we find that, I mean, one of the businesses are sold or something happens to it or what you're going to do with, say, this is our plan and then you're going to execute it? So sort of 2 parts. What is it that we're going to know, do we know it before you do it or after? And does it get done this year as a base case?

37:53 Great questions. As I said earlier, we feel very good about the progress that we're making. It’s a discipline process that you go through when you're separating the business and of course, we've had some experience when we separate it from Ashland 5 years ago. So we're working through that process. Our Board is working with us too to make sure we're evaluating different ways to accomplish the separation. And so, I think we've been pretty clear on that too that we're looking to drive shareholder value and making a separation as effective as possible. We're excited about what it means for the future of each of these 2 businesses. But we're going to do it in a way that drive shareholder value. 38:37 And there's different ways to accomplish that. And there is not one answer that we can give you today. And to be clear, when we are able to share news on it we will be very forthright and be clear on it, but it's unlikely that we'll be indicating the net debt of separation prior to an important announcement for -- to the market for how we'll be accomplishing that. And as far as the timing goes, I think it's important for us to move quickly. And so we've got a, like a very disciplined schedule that we're following. And we've got 2 amazing businesses that we're very bullish on. And so, I expect good outcomes in a timely fashion. And so, yes, I would expect that in this fiscal year.

39:28 Okay. Great. Thank you so much.

39:33 Perfect. Thank you Jeffrey for your questions. Our next question comes from Laurence Alexander from Jefferies. Please go ahead.

39:41 Hi. This is Maria Milina for Laurence. I just have one question. Based on the guidance that you gave in the range, I'm wondering what has to happen that you land on the high end of the guidance or what has to happen for the lower end?

40:02 I think margins will have a big impact on it. It will be the biggest driver. Again, what you heard in our presentation today is, we're really bullish on the strength of demand for both sides of the businesses, but there is real margin pressure and we may still have some inflationary cost issues that we will deal with during the balance of the year and we have pricing to execute. So it's the timing of those cost increases and price increases that will determine where we are in that guidance range.

40:41 And Sam, the continued stability of the underlying raw material environment as well. If we see more inflation coming at us in base oils or additives or logistics, I think that could push us to the bottom of the range.

41:00 Okay. Great. Thanks.

41:07 Perfect. Thank you so much. We will now move on to Jason English question from Goldman Sachs. Please go ahead.

41:15 Hey, good morning folks. Thanks for slotting me in. Two questions. It seems -- it seems like your retail services business may have faced a number of headwinds so far this quarter between Omicron, margins in those payments, weather disruptions, et cetera. So in that context, can you give us some more real-time color on how the business is performing quarter to date?

41:37 Yeah, we're seeing good momentum continue into the second quarter. Definitely in January feeling the effects of Omicron with staffing in the stores and yet our team has done a great job in terms of being able to move resources around within market to keep our store staffed, to be opening on time and providing the services necessary for our customers. And I think that's true for the industry. So big kudos to our ops team and our ability to handle this level of disruption in January. 42:18 One of the things we do is keep a close eye on our customer satisfaction scores as it’s impacting the service quality and just really pleased with that too. Over the past quarter our overall satisfaction scores have even ticked up. So I'm excited about moving forward and we are moving past, say, that tremendous disruption in the first part of January with Omicron, impacts on the stores. And now it's back to like the efforts to increase the staffing in our stores and stability, reducing turnover and we've got a good plan in place to do that. Our success long term is going to be dependent on our ability to be an employer of choice and to have stability in the stores. And one of the ways in which we win is the quality of people that we hire and the tools that we give them, the training that they go through in their first 6 months on the job to get up to speed quickly. 43:19 And when we do that, not only are they providing better service, but we've got fully engaged employees who begin to see the opportunities with Valvoline for a great career too. So that's our formula, we've got more work to do there, but couldn't be more pleased with the progress that we're making.

43:37 Yeah. And Jason, the other thing I would just call out for you is, if you look at last year's cadence of our comp store sales increases by quarter. The first quarter was the relatively smallest comp at 6% last year. So when you take our almost 25% this year, the 2-year stack is just over 30%. And then as we’ve mentioned in our script, in our remarks, the full year we expect that 2-year stack to be better than 30%. So I think if you think about the cadence of our future comps, you need to take that into account as we're up against much stronger comps in the remainder of the year, because those quarters were up against significantly weaker comps 2 years ago. So it's just kind of an odd phenomenon because of the pandemic. And so I think if you're thinking about your models, if you're thinking about better than 30% on a 2 year stack, you’d be thinking about it right.

44:42 Got it. Yeah, that makes sense. I think you mentioned that in the release of it too. The next question is on global product. You spend a lot more time talking in more detail than usual on global products. So I want to come back to it quick and really in context of your long-term targets. I guess the numerator denominator impact of price and cost and I appreciate that your long-term EBITDA margin targets as a percentage rate probably a bit antiquated at this point, but from a penny profit perspective, last 5 years your EBITDA per gallon has been, on average sort of mid to high 80s. Is that the right way to think about what you're going to get back to? How long does it take to get back there? 45:20 And then second part of the question, I apologize, I'm loading a lot in here. Is the revenue target you guys put out there. Sam, most people I talk to look at this piece of your business and say, goodness, it's a secondly declining business. The TAM just doesn't have much growth. Now obviously contrast substantially with the larger targets you have out there. When people make those statements, what do you think they're missing? What gives you the confidence that this business has inherently much more growth characteristics than many of the skeptics would argue?

45:58 Yeah. First part of your question, we can go in more details, but on -- your right. And to look at it on a profit per unit basis, we do look at it that way. And again, we've always been able to get back to our profit per unit at the end of the inflationary cycle. This one is a little bit longer and deeper, but it doesn't change our confidence and our ability to get there. It does impact the EBITDA margin on a percentage basis. So you're right, our -- that longer-term target will have to adjust with these elevated prices for the EBITDA margins for the business. But the profitability we expect has got a really bright future for growth and that's based on some of the momentum that we're seeing in the business. And we saw it before this quarter 2, we saw it even going back a couple of years, disrupted by COVID, but we saw the fruits of our labors internationally with really solid volume growth across all of our key regions. And so we've been investing in our teams and our capabilities from China to India to Europe to Latin America. And as a result, we're seeing much -- very significant and steady volume growth, share growth in those markets as we really become a more global company. And when we think about our product portfolio, how we manage pricing, the marketing plans, it's exciting to see the excellent progress that we're making as our international regions increase their capabilities and increase their penetration in the markets. That number one is one of our biggest drivers. 47:45 And then back here in the US market. We're seeing some new sprouts of growth. You're very familiar with the product side of the business, and even some of the challenges that we had in the DIY market back in ‘18 and ’19. We’ve made some changes to strengthen that business to make sure we're managing the price gap appropriately versus private label to invest in synthetic category. And again, we're seeing the fruits of our labor and have just an excellent plan for developing that business steadily over time so that the share gains that we're now seeing with incremental distribution are sustainable. And the confidence that we have that they are sustainable has to do with, again, those relationships with the key accounts, building plans that are working for them that are driving results for our retailers for some of the new distribution that we're picking up where we're bringing on some of this new C-store and farm business. 48:45 We know from our customers business that we're improving their volumes and their margins in the categories with the Valvoline product lineup. So, you should sense like a new sense of confidence about the strength of the DIY business. And then the other big component is, of course, our capabilities with independent installers. And we operate very differently from our competitors. We have a full line of products, not just lubricants, but coolants, chemical products, a broader product line up and a much more developed suite of marketing programs and how we work with those installers. We made a heavy investment in our digital platforms for how we communicate with that installed base, how we execute their plans, how we train their teams out of their stores to help them drive ticket and performance. And today we've moved the vast majority of that business, 80% plus of our volume onto a digital platform that is driving increased loyalty amount that is dollar based. And so, very confident about the future of that business too. 49:56 Again, DIY and installer, the way I look at it is slow, steady growth, low single-digit growth rates, but solid margin performance because of how we compete, how we do business there. And then accelerated growth, really strong growth, high single-digit growth rates in international business. And so this is a business that we're bullish on. Where we can go with this business and not just the next year, but the next decade.

50:28 Good stuff on all the incremental color. Thanks a lot. I'll pass it on.

50:31 You bet.

50:35 Thank you so much Jason for your question. [Operator Instructions] And our next question comes from Stephanie Moore from Truist. Please go ahead.

50:55 Hi, good morning. Thank you.

50:58 Hi, Steff.

51:00 Hi, everybody. My first question is actually is a follow-up to Jason's here, but maybe you could expand or give a little bit more color on the strength you're seeing in international. You noted in your prepared remarks, continuing to see strong momentum, continuing to gain share. And maybe just kind of like what's the North America color, just a little bit more incremental substance there would be helpful. Thank you.

51:27 Yes. So some of the tools in the -- how we bring value to our US customers, particularly we're talking about our installer and fleet business too. What we're doing is globalizing that strategy, so that we're moving faster to bring the service support that goes along with our products. And so, in the international business like one of the characteristics of the international business is first, you have to have strong channel to market. And that means having really strong distributor partners. And what we've been able to do over the last 5 years is better penetrate the markets to have stronger distribution networks to reach more of those installer customers and more of those car owners and fleet owners. And so that's like step one for us. It’s building the channels to market. 52:28 Mexico is an example, we like to call out because 5 years ago we were probably reaching at best half of the market. And today we're closer to 90% penetration to get our products to where they need to be, where we can provide excellent customer service to installers across the country. And then, the second step, our tools for the installers to help them improve their business. And international installers tend to be smaller and -- both in terms of like the number of units that they have. So in the US we do have some very large national accounts that we service that make up a big part of our business. 53:09 In the international markets they tend to be smaller, more mom and pop locations or a smaller regional players with a handful of stores. And so, what we're doing is, we bring the sophistication to them with the marketing programs, the training programs that other competitors are not providing to them. And then even now the digital platform that we've built in the US, there's real synergy for us to now leverage that into new markets. There are still some investments to make there, but we'll be bringing those digital tools for our international customers that again drive that loyalty and then better penetrate our product lineup internationally. 53:50 And so these are some of the things that are giving us momentum in each of these markets. And our local teams, the regional teams that we have, and what's unique about Valvoline’s business internationally too or what gives me confidence in the future is that, each of our regions are solidly profitable, have good solid profit margins, very clear strategies on how they're going to continue to grow share, penetrate the market and then strengthen the product lineup, particularly as the international markets also rely more heavily on synthetic based lubricants products. So it's a very -- it's a clear formula for us. And what we're seeing in the growth in international, we're not talking about a quarter, we're looking at over the last couple of years, we're seeing solid penetration with some disruptions of COVID along the way, managing through that. But as we move beyond some of those disruptions and of course, the supply chain disruptions that we've talked about. Those are impacting the international markets too. We're very bullish on the long-term prospects for that business.

55:01 Got it. And then lastly just shifting over of the retail segment. Maybe you could just give us a brief update on the progress of some of those non-oil change services. You comment on the EV pilot, but some of those other services that are – that’s part of your long-term growth algorithm? Thanks.

55:17 Yeah. As a reminder to everyone, close to 25% of our ticket is coming from non-oil change revenues. And so we expect that to grow in the years ahead. And we do that by improving, one, our presentation to our customers to help them understand what their car needs. And this is back to like leveraging that database. So in addition to having the history of that customer services with Valvoline, we have a great services that have been done elsewhere. And also the owner's manual for what services are required. So when we're talking to our customer, we're able to make recommendations to them on the services that are recommended by their -- the cars manufacturer and what Valvoline sees as necessary too. 56:06 So, our focus is on training our teams to be prepared for those conversations so that our customers are confident they're making good choices and how they're maintaining their vehicle. And that's where we see a lot of upside still. We've made incremental progress as we strengthen our training programs and help customers understand what their car needs, but we still know we have a ways to go there. And to be honest, like some of the changes -- some of the disruptions that we've had with COVID and the staffing in our stores, that does impact our ability to make those consistent presentations. We're doing well, but what I'm trying to get across is that, there is a lot of upside here as we get better at it. One program that we've highlighted over the last year is our battery program, so replacing those 12 volt batteries making sure we're testing every battery that comes in to allow our customers know what kind of life the battery has left in it enable us to increase our sales of our Valvoline batteries. And we've seen our sales essentially double over the last year in our company stores and that program has now rolled out through our franchise stores. And there is still quite a bit of upside to as we get better and better at both testing the batteries and helping our customers understand battery life and battery performance and why Valvoline is a great place to have that service performed, because again we can do it more conveniently than any other option that they have in the marketplace. 57:46 So, you expect us to continue to talk about the non-oil change revenue opportunity as we think about penetrating the services that we offer today and very capable with and then considering adding to that offering over time. Again, with the focus on remaining fast, quick easy trusted.

58:12 Great. Thank you guys so much.

58:18 Thank you, Stephanie for the questions. And at this time there are no further questions. I'd like to thank everybody for joining today's call, and you may now disconnect your lines.