Ladies and gentlemen, thank you for standing by, and welcome to Valvoline's First Quarter 2020 Earnings Conference Call. Operator instructions. I would now like to turn the call over to Sean Cornett, Head of Investor Relations. Mr. Cornett, please go ahead.

Thanks, Carol. Good morning, and welcome to Valvoline's First Quarter Fiscal 2020 Conference Call and Webcast. Valvoline released results for the quarter ended December 31, 2019, at approximately 5:00 p.m. Eastern Time yesterday, February 3. 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-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 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. In this presentation and in our remarks, we will be discussing our results on an adjusted basis, unless otherwise noted. Adjusted results exclude key items which are unusual, nonoperational or restructuring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our adjusted results to amounts reported under GAAP and a discussion of management's use of non-GAAP measures was included in our earnings release. The non-GAAP information provided is used by our management and may not be comparable to similar measures used by other companies. As we turn to Slide 3, let's review our reported financial results for the quarter. For the fiscal first quarter, Valvoline delivered reported operating income of $104 million, net income of $73 million and EPS of $0.39. Cash flow from operating activities was $59 million. Beginning this fiscal year, Valvoline adopted the new lease accounting standard. The impact of the standard resulted in roughly $220 million of incremental lease-related assets and liabilities on the balance sheet and had a negative $1 million impact to EBITDA and cash flow from operations in the quarter. Non-service pension and OPEB income of $7 million after-tax was the primary key item in the current quarter, with legacy and separation impacts offsetting restructuring. In Q1 of fiscal 2019, non-service pension and OPEB income of $2 million after-tax was the one key item. Now as we move to Slide 4, we can review our adjusted results. Our adjusted EBITDA in Q1 was $120 million, growing 19%. Adjusted EPS for the quarter grew 30% to $0.35. The strong start to the year was driven by a robust contribution from Core North America, ongoing strength in same-store sales and top line growth in Quick Lubes and profitable volume growth in International. Now let me turn it over to Sam to discuss our segment results.

Thanks, Sean. Quick Lubes had a good start to 2020 with strong system-wide same-store sales growth of 8.3% and solid unit additions in the quarter. The 106 net new stores added since last year helped drive overall sales growth of 15%. EBITDA growth was limited due to the impact of these ramping new stores, short-term labor cost increases and higher SG&A. Core North America had a very strong quarter, building off a weak Q1 last year. Branded retail volume grew year-over-year, but was offset by weaker volume in the installer channel. This favorable channel mix and increased sales of premium products, along with the benefits of our operating expense reduction program contributed to the significant growth in EBITDA. We saw a return to volume growth in International, primarily from our Eastern European acquisition completed last year. The 7% growth in volume, improved margins and solid contributions from our JVs drove 10% growth in EBITDA. Let's take a closer look at performance in Quick Lubes on the next slide. System-wide same-store sales grew 8.3% in Q1, company stores grew 6.2% in the quarter and franchise growth was 9.8%. Our superior in-store experience continues to resonate with customers and drive growth in transactions. Increases in premium oil changes and penetration of non-oil-change services are contributing to growth in average ticket. EBITDA growth of 4% in Q1 lagged year-over-year top line increases of 15%. We saw some temporary labor deleveraging in the quarter with an increase in labor hours versus traffic. We have taken actions to address these temporary labor impacts and expect they will subside in Q2. Continuing to grow our retail services business is a key focus of the company and so more of our corporate resources are allocated to the segment, increasing its share of indirect SG&A versus last year as planned. Mary will talk more about this in a few minutes. We continue to expect Quick Lubes EBITDA growth for the year to be in the low- to mid-teens. The steady pace of unit additions continued with 22 stores added in Q1, primarily in franchise markets. We've added 106 stores since last year as we remain on track to add roughly 100 stores per year over the next few years. Let's turn to the next slide to look at the new store impacts. We opened 44 newly built company stores over the past two fiscal years. Most of these newly built stores are still in or just completing their first year of operations when profitability is breakeven or marginally negative, creating a drag on margins. In Q1, these new stores drove 170 basis points of gross margin deleveraging at the Quick Lubes overall segment level. Excluding this impact, gross margin rates would have only decreased modestly year-over-year in the quarter. Based on our estimates for newly built stores, we expect to see an EBITDA contribution of between $4 million and $7 million this year and between $29 million and $32 million in fiscal '22. This impressive contribution to earnings demonstrates the compounding benefits of our store growth. We are executing on three significant levers that drive Quick Lubes' profitability. First is to continue to drive operational excellence and same-store sales growth. Second is to aggressively add newly constructed units. And third, to pursue incremental high return acquisitions. We believe that this approach will allow the Quick Lubes segment to deliver strong double-digit EBITDA growth for years to come. Let's take a look at Core North America's results on the next slide. Core North America's EBITDA improved $15 million in Q1 versus last year, driven by growth in branded volume in the retail channel and favorable margins, resulting in unit margin growth of more than 20%. There are 3 key things to look at to understand the year-over-year performance this quarter and our full year outlook. First, volume softness in our DIY channel and a higher level of inventory at certain customers drove lower results in the first quarter of fiscal 2019. Actions taken since last year to better position our brand, including a stronger promotional schedule this quarter resulted in a partial recovery in branded retail volume. The favorable mix from this volume growth substantially benefited unit margins. Second, benefits from the broad-based operating expense reduction program that we announced a year ago along with favorable true-ups of our trade and promotion cost estimates contributed to the significant improvement in unit margins and therefore, segment profitability. Finally, for the balance of the year, we expect our DIY retail volume to be consistent with Q1, but down year-over-year due to expanded price gaps versus private label offerings. We also expect minimal impacts from recently announced base oil price increases. Our unit margin outlook for the full year is now $3.75 to $3.85, lower than our results in Q1, but an improvement on our previous guidance of $3.50 to $3.60. Performance this quarter has improved our EBITDA outlook for the full year to modest growth for the segment. Let's take a closer look at the DIY category on the next slide. Coming off macro declines in 2018, DIY category demand was more stable in 2019. Demand continues to shift towards higher value synthetic products, which now make up almost half of DIY volume. The premium brands are playing an important role in this evolution. Private label continues to make inroads in the category. Retailers are supporting this growth with ongoing and aggressive promotions. Near the end of last fiscal year, most retailers initiated the higher promoted price points across all the premium brands, increasing price gaps versus private label offerings. While our Q1 results reflected a partial rebound in branded retail volumes, our results remain below prior trends, which we largely attribute to these pricing actions. For the balance of the year, we expect our year-over-year volumes to continue to be impacted until we lap these changes. We anticipate our retail DIY volume to remain relatively flat sequentially, a sign of improving stability. We continue to focus on our consumer messaging and product portfolio, while working with our retail partners on the optimal merchandising and promotion plans for their business and for our brand. Let's take a look at the International results on the next slide. International had a good start to the year with volume growth of 7%, driven primarily by growth in EMEA. Our recent acquisition in Eastern Europe drove the majority of this increase. We also saw solid volume growth in key parts of Asia, including a return to growth in China from our strengthening passenger car aftermarket business. This growth offset temporary weakness in Latin America, impacted by the recent closure of two of our distributors and a shift to promotion timing from Q1 to the current quarter. EBITDA grew 10% on higher volumes. Year-over-year stability in raw materials led to improved margins. Our joint ventures also provided solid contributions to profitability. We expect contributions from our acquisition, along with our ongoing channel development and brand building efforts to drive increased volume throughout the year in most regions. We're also expanding a successful program in Asia to be more global. Our new mechanics month campaign will launch in our International markets in March. We're carefully monitoring the coronavirus situation as it could have an impact on our operations in China. Barring these risks, we expect to meet our guidance for fiscal 2020, including volume growth of 6% to 8% and roughly flat year-over-year EBITDA. Now let me pass it over to Mary to review our financial results.

Thanks, Sam. Our adjusted results for Q1 are summarized on Slide 11. Sales grew 9% on volume growth of 3%. Overall favorable volume and mix were the primary drivers of the sales increases. Mix and benefits from our operating expense reduction program helped to drive growth in our gross margin rate. We also had favorable true-ups to our promotion-related cost estimates, totaling roughly $4 million in the quarter, primarily in the Core North America segment. Roughly half of the increase in SG&A was due to higher incentive and deferred comp expense. The transition to the new lease accounting standard increased rent expense in SG&A by approximately $1 million. Investments in the Quick Lubes and International businesses made up the remainder of the increase. Our shared corporate expenses are fully allocated to the operating segments. As Sam mentioned earlier, Quick Lubes is growing significantly as a percentage of our business, which is driving a higher expense allocation to the segment. In Q1, this was a $5 million year-over-year increase to Quick Lubes SG&A, which was partially offset by a lower allocation of roughly $1 million to Core North America. Let's move to Slide 12 to discuss corporate items. Our reported effective tax rate for the quarter was 24.7%. Adjusted for key items, our effective tax rate was 25%. Cash flow from operating activities was $59 million, down $26 million versus last year, primarily due to an increase in working capital. Capital expenditures were $28 million, leading to free cash flow of $31 million for the quarter. Net debt was flat to last quarter at $1.2 billion. We increased our cash dividend per share by roughly 7%, consistent with our approach to grow the dividend in line with earnings as we discussed at our Investor Day last year. Now let's turn to the next slide and take a closer look at guidance. We are raising our full year guidance for adjusted EBITDA and EPS based on better-than-anticipated results in Q1. We now expect EBITDA in the range of $495 million to $515 million and EPS of $1.40 to $1.51. Our expectations for Core North America have improved based on performance this quarter, and we now expect full year EBITDA to be in the low- to mid-single-digit range. We are working to mitigate the impact of rising raw material costs through pricing actions and negotiations with our suppliers. We expect Quick Lubes to continue its strong pace of same-store sales growth within our guidance of 6% to 8% for the year, and that EBITDA growth will improve more in line with top line growth beginning in Q2. Excluding the evolving macro risks in China, we anticipate volume growth in International to continue. We are maintaining our guidance for our overall volume and revenue growth as well as Capex. We are raising our free cash flow outlook to $160 million to $180 million. Now let me turn it back over to Sam to wrap up.

Thanks, Mary. We're pleased with our start to the year. The Quick Lubes team is still driving same-store sales growth at a high rate, while also focusing on delivering new stores. Our operating expense reduction program is taking hold, strengthening our margins and helping to drive stability in Core North America. International returned to profitable growth this quarter. We're executing on our strategic initiatives, aggressively growing our retail services business, maintaining healthy cash generation in Core North America and developing our opportunities in International. This keeps us on track to become a more service-driven business, fueled by products and enabled by technology. And with that, I'll hand it over to Sean for Q&A.

Thanks, Sam. Before we open the line for Q&A, I'd like to remind everyone to limit your questions to one and a follow-up so that we can get to everyone. Carol, please open the line.

Operator instructions. Our first question today comes from Simeon Gutman from Morgan Stanley.

This is Joshua Kamboj for Simeon. Can you talk about the wider gap between the owned and the franchise comps in Quick Lubes in the quarter? Should we expect that to persist throughout the year as your stores lap your price increases or do you maybe have some other pricing actions that you might have in the pipeline that could narrow the gap sooner?

Yes, good question. We had talked about this at our last call, too, that early in the fiscal year, we expect to see a little bit of a separation because of pricing actions that we took a year ago in our first quarter of fiscal '19. Not having those same increases in our first quarter resulted in the company stores being less than what we delivered last year and that also is the difference between the company stores and franchise stores because they were taking pricing actions in Q1. To the second part of your question, there are a number of services that we're adjusting prices on during Q2, and that will help in terms of narrowing the gap, but as we look throughout the balance of the year, we do expect company stores and franchise stores to be performing more closely to each other.

All right. And then just as a quick follow-up, Mary, could you maybe quantify the benefit of the cost reduction program between gross margin and SG&A in Core North America for the quarter? You might have said it, I might have missed it, I apologize.

Yes, we have talked about the overall benefits of the program on an annualized basis to be in the $40 million to $50 million range. We still believe that we're tracking well in terms of that target. We haven't disclosed specifically how those benefits break out by segment, but they are primarily benefiting the Core North America and Quick Lubes business, and the majority of the benefit is certainly within the Core North America business.

Our next question comes from Olivia Tong from Bank of America Merrill Lynch.

Can you talk a little bit about how long you expect the cost pressures to last in Quick Lubes, putting aside the change to the allocation of corporate expense? If your store base is increasing, is it fair to assume that there will be continued pressure on margins as those businesses get to a steady state? And then on the labor issues, what exactly happened there? Did you just have higher expectations and staffed accordingly? Or was there a disruption of some sort?

Yes. So breaking down the increase in our cost in the Quick Lubes business: first was the increase in indirect allocation of some of the corporate expenses. That's a significant factor, but importantly, in those costs that we're managing within the Quick Lubes business, we called out some labor deleveraging in our stores. What that was, was a change in our labor model, which helps our stores plan their labor, and this was a change that we had made late in Q4. As we dug into it, our model was overestimating labor needs in our stores and so on a per-store basis, it resulted in over-scheduling, costing us about $1,600 per store. Even a small adjustment across the company store system had a fairly significant impact. As we discovered this, we were able to make the adjustment by the December month. We feel like we've addressed the issue with regard to making sure our labor model is working as accurately as possible as we enter Q2. So we feel good about that aspect. We do have some increases in our advertising expense as the store base continues to grow. Ultimately, we still continue to feel very good about the leverage that exists in our company stores and same-store sales performance as we continue to grow that. That does create excellent leverage in our profitability. That said, the new stores that we're adding do create a drag on overall segment performance. We're calling that out to make sure investors and analysts understand that there is some deleveraging with the store growth. We're trying to be transparent in sharing both the difference in the company stores and then the impact that the new stores will have on overall margin performance.

The only other thing I'd like to add is we expect the new store deleveraging from the newly constructed stores to have about a three-year ramp. Once we are building 50-plus new stores a year consistently, we should see that fully baked into our operating margins and have that deleverage level out, but it'll be a couple more years before we get to that consistent run rate. I expect that we'll continue to see some deleverage from those newly built stores over the next couple of years.

Got it. If I could ask one on Core North America. Can you talk a little bit about the sustainability of that improvement? Comps were fairly favorable in Q1, so as we look to Q2 to Q4, I think you talked about volume potentially being a little bit lighter relative to Q1. Also, just wondering if the milder winter so far has helped you in any way.

First, with regard to the volume trends, the DIY retail volume was up significantly versus last year, where we had a very weak quarter due to some promotional issues and inventory issues at certain large retail accounts. We're certainly comparing versus a weak Q1 last year, but nonetheless, we did see better promotion scheduling that helped drive the performance improvement in Q1 in retail for us, but not to the levels of previous trends, if you look back to prior fiscal years, and this has to do with the growing price gap that we've seen with private label. The expanded price gap versus private label for the premium brands is having a negative impact on our business, and that's built into our forecast as we look out for Q2 through Q4. It's really going to take us this fiscal year before we lap these changes in the pricing strategy at the major retail accounts.

As it relates to cost, Olivia, the cost benefits from the operating expense reduction program are solid, and we expect to see those continue through the balance of the year. We mentioned some true-ups of promotional costs that occurred in Q1 that will not repeat. In the balance of the year, we've got some negative impact of a more normalized mix between installer channels and our DIY retail channel as well as some pressure from recently announced base oil cost increases that we factored into the balance of the year. For the full year in Core North America, as Sam mentioned, we're expecting to see a full year unit margin in the $3.75 to $3.85 a gallon range.

Got it. That's helpful. If I could just add one last one on International. Could you give us a little bit more color on China? How big is it? Whether you have manufacturing in affected areas and sort of what the game plan is there. I know it's still very fluid.

First, in terms of potential impact on our business, while China is a very profitable region for us in contribution terms, it's still in the low-single-digit range of total Valvoline. So it shouldn't have a measurable impact on overall Valvoline results. That said, we're concerned about a potential slowdown in the economy and how long it will take to return to normal business. We're going to keep a close eye on it. We're in the process of constructing our blending and packaging facility, which was originally scheduled to open this fall, so there's a chance we could see a delay in construction. We'll keep everyone up-to-date as the situation develops.

Our next question comes from Jason English from Goldman Sachs.

This is Cody on for Jason. I appreciate the detail that you guys gave on the Core North America gross profit per gallon. One thing that did surprise us was the premium sales in Core North America. You had a significant jump. What drove that? And how sustainable do you think that is? I have one follow-up after that.

The premium sales have been a source of strength in Core North America, as they continue to grow both on the DIY side and on the installer side. Continued penetration of new vehicles, which are requiring synthetics, is the big driver. In 2020, we expect roughly 75% of new car production to require full synthetic. So that's why this trend is sustainable. We'll continue to see growth in synthetics, particularly on the installer side. The DIY side is a bit ahead of where we might expect, but that's because retailers see the profit benefit of selling more synthetic too. Our strategy is focused on innovation and defending our share in the synthetic category. Our share losses in DIY to private label have been more concentrated in the conventional high mileage segment. While any share loss is painful, we're pleased with progress in the synthetic side and will continue to focus there.

Great. That's helpful. So it sounds like you guys expect to be in the mid-50s to high 50s for the rest of the year in that segment, if I'm not misunderstanding?

That's right.

Okay, great. And then last follow-up question. Just drilling into the International segment. You said that the Eastern acquisition drove a lot of the volume gains there. Can you quantify that for us? How much gallons does the Serbia acquisition do on a quarterly or annual basis? How much of the 6.5% lubricant volume growth did it actually add this quarter?

The business we acquired is just over 0.5 million gallons a quarter, so it was probably 70% of the growth overall. We did see nice growth in Asia and China and a few other regions, but it was offset somewhat by weakness in Latin America. Over 50% of the volume growth did come from the Eastern European business we acquired last year.

To add to Mary's comments, we feel good about the acquisition; it's helping us in Eastern Europe. Overall, for the international business, we feel good about trends in the majority of our regions, with the one exception of Australia, which is being impacted by the fires and has slowed down business there. Latin America is picking up and will be a significant contributor for the balance of the year. We're also seeing good progress in Asia and Europe, Middle East and Africa. We're developing our channels to market, working with distributors, and increasing marketing support for the brand. We're also seeing opportunities with higher-level specifications required on the heavy-duty side across regions, and that should help our heavy-duty business and our co-branded product line with Cummins heading into 2021.

Our next question comes from Laurence Alexander from Jefferies.

This is Kevin Estok on for Laurence. My first question has to do with the timing issues that you mentioned in the installer channel in North America. Could you talk a little bit more about that? Also, how much of the shift in orders may benefit the balance of the year?

Within the installer channel, a little over half of the volume decline related to the timing of when we recognize orders within our distributor business, what we call our channel partners business. That impact was largely related to having higher deliveries last year versus this year, primarily related to deliveries that channel partners make to our Quick Lubes stores and national accounts. We think there was some inventory rebalancing going on, along with broader growth in both Quick Lubes and the national account business that drove higher volumes, resulting in a higher deferral under revenue recognition month-to-month. That was the primary driver of the timing differences.

On the installer side, there's both challenges and opportunities. We've seen some volume softness and lost a couple of accounts, mainly due to pricing, and those tend to be lower-margin accounts. We won't pursue volume at all costs; we'll focus on business that's profitable and where we bring value to installers and fleets. We're seeing positive trends where our operations team is working with customers in the field, online training is improving store-level performance, and marketing is helping drive traffic. Overall, Core North America remains a challenging environment, but we're focused on earnings stabilization and strengthening the foundation, and we feel we're making solid progress reflected in our forecast.

Okay, great. That's really helpful. And then my follow-up has to do with the International segment, specifically Asia. What drove that volume growth?

Volume growth in Asia was a combination of improved results in China, where we've made solid progress working with distributors, primarily on the passenger car side. Beyond China, we saw good results across a number of countries where we're in the channel building phase, developing distributors to broaden distribution. We've also made leadership changes and have a stronger focus on marketing. Mechanics week is a grassroots marketing strategy targeting installers directly through training programs focused on lubricant education and automotive maintenance and technology trends. These programs are expanding and improving our effectiveness in developing markets like Asia.

Our next question comes from Jeffrey Zekauskas from JP Morgan.

Recently, base oil prices have gone up, but crude oil prices like WTI have come down. What do you make of the recent base oil lift? What do you think the sources of that were? And how do you see it going forward in such a weak oil price environment?

There has been discussion with base oil producers as they've announced increases because the market is implementing increases despite crude coming down. Producers are focused on what they see as a tightening base oil market due to planned turnarounds this spring, which could tighten supply. How it plays out over the balance of the year depends on how base oil trades later. The impact on Valvoline is modest headwinds that we will manage. Based on our team's negotiations with suppliers and finished lube market actions, with many competitors announcing price increases, we feel this is manageable and it's built into our forecast and our confidence in raising guidance.

As a follow-up, can you compare the performance of the branded business in North America sequentially? If you take out the true-ups and the cost reduction, was there an incremental positive change? Or did it stay the same? I'm trying to figure out the difference in performance year-over-year versus a depressed result and versus the fourth quarter, which may have been more normal.

Particularly on margins, it's more stable. When you factor out the one-time benefits in Q1 related to channel mix and promotion true-ups on a unit basis, unit margins are relatively stable across channels. The cost reduction program is also helping unit margins. For the full year guidance of $3.75 to $3.85, if you factor out the Q1 bump, we expect Q2 through Q4 unit margins to be in the $3.60 to $3.70 range. That reflects an improvement versus our earlier guidance of $3.50 to $3.60 and is largely due to the operating expense reduction program.

Okay. Lastly, in 2019, how much of your cost reduction program did you accomplish? And how much do you expect to accomplish incrementally in 2020?

In Q4 we outperformed relative to expectations on the cost reduction program. If you think about what we saw in Q4, I estimate we saw $5 million to $10 million of cost reduction benefits in the quarter relative to the full year run rate of the $40 million to $50 million target. Initially, we thought it would be more modest in Q4, probably less than $5 million, but we were able to accelerate implementation of several efforts that resulted in better results. We'll start lapping some of those benefits in Q4.

Operator instructions. Our next question comes from Stephanie Benjamin from SunTrust.

I wanted to follow up on the base oil environment. Can you dig a little deeper in terms of how much flexibility there is in the guidance? If it gets more volatile, can you bracket the range you expect for the year that's incorporated in the earnings outlook? That would be helpful.

Given where crude is trading, I don't see the base oil environment getting more volatile; if anything, it may be relatively stable. We do have an increase we need to manage through, and our guidance reflects our confidence in our ability to do that. It's a modest headwind of probably a few million dollars, and that's built into the back half of the year. We will manage it with cost savings, supplier negotiations, and pricing actions in line with the market. We don't see it as a major issue based on current market dynamics, though we need to monitor short-term effects from turnarounds.

Got it. That's helpful. My real question is about the DIY channel. When we spoke for the fiscal Q4 results, you talked about being comfortable with shelf placements and working on merchandising strategy. Can you update us on both initiatives? Do you still remain comfortable with shelf placements? And could you walk through any variability in promotional schedules overlapping from last year that could cause outperformance or underperformance in a given quarter, so we have some idea on quarterly fluctuations?

In the DIY channel, because of promotional timing, you can see shifts from one quarter to the next, but we have a solid understanding of our promotional schedule at major retailers between now and the end of the fiscal year, and our ability to forecast that is reflected in our guidance. We know our shelf placement and promotional schedule, and we're also dealing with an expanded price gap versus last year, which is the challenge. We're expecting promotional lifts to be less than in 2019 given the expanded gap, and so we expect DIY volume to be down year-over-year through the balance of the year. That's built into our guidance. The improvements in our cost structure for Core North America are helping maintain earnings stability. As we prepare for 2021, there's opportunity for continued improvements with digital marketing, a new agency for targeted media spend, and stronger messaging around product performance and claims. We're also working on optimizing our product portfolio for the benefit of both Valvoline and our retailers. That work is taking place and positions us to defend and strengthen the core of our business.

Operator instructions. Our next question comes from Christopher Bottiglieri from Wolfe Research.

This is Sid Dandekar on for Chris. Given the Core North America gross profit per gallon this quarter and other segments on track to at least meet profitability targets despite the raw material increase, raising full year EBITDA guidance by just $5 million at the midpoint seems conservative. Can you help us understand the puts and takes for this updated guidance?

Yes, it was a conservative adjustment to guidance given the strong quarter. We're executing into the fiscal year and will reassess as we execute Q2. Core North America's outperformance in Q1 is a positive development and supports full year EBITDA growth for the segment. Quick Lubes profit growth was slower in Q1 for reasons we've called out, but we're bullish on the back half for Quick Lubes in terms of same-store sales and getting expenses right with the labor model. We have pricing initiatives on additional services, and an initiative targeting diesel trucks with new services and a stronger battery program that's rolling out. There's a lot of operational development and continued commitments to building stores and acquisitions that support our confidence in Quick Lubes. That underpins our conservative but improving guidance.

That's helpful. Related to that, for the impact to the second half from raw material cost increases, is that across all segments? What does that imply for pricing in the back half of the year?

The base oil increase is a North American increase that will have a modest impact on Core North America and Quick Lubes. We mitigate through price adjustments and supplier negotiations. Our pricing for Quick Lubes and portions of our installer channel adjust off index on a quarterly basis, so cost impacts are offset by pricing impacts. Overall, we don't see this as a major factor for performance during the balance of the year.

We would like to thank everyone for attending today. This concludes today's event, and you may now disconnect.

All right. Thank you.