Ladies and gentlemen, thank you for joining us for the Valvoline Incorporated First Quarter 2021 Earnings Conference Call. I would now like to turn the call over to your speaker, Sean Cornett, Head of Investor Relations. Thank you. Please proceed.

Thanks, Stephanie. Good morning, and welcome to Valvoline’s first quarter fiscal 2021 conference call and webcast. Valvoline released results for the quarter ended December 31, 2020, at approximately 5:00 p.m. Eastern Time yesterday, February 3, and this presentation and remarks should be viewed in conjunction with that earnings release. A copy of which is available on our Investor Relations website at investors.valvoline.com. These results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission. A copy of the press release has been furnished to the SEC on a Form 8-K. With me on the call today are Valvoline’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 is included in the presentation appendix. The non-GAAP information provided is used by our management and may not be comparable to similar measures used by other companies. As we turn to Slide 3, let’s review our financial results for the quarter. For the fiscal first quarter, Valvoline delivered reported operating income of $124 million, net income of $87 million and EPS of $0.47. Year to date cash flow from operating activities was $79 million. The key items in the quarter were primarily nonservice pension and OPEB income of $10 million after tax. Excluding key items, results for the quarter included adjusted EBITDA of $145 million and adjusted EPS of $0.41. Year to date free cash flow was $44 million. Now as we turn to Slide 4, let me turn the call over to Sam to discuss the result and operations in more detail.

Thanks, Sean. Our results in Q1 were sales grew 8%, adjusted EBITDA grew 21% and adjusted EPS grew 17%, representing a great start to fiscal 2021 and puts us on track to meet our goals for the year. Our performance this quarter is clearly benefiting from the strategic actions we’ve taken to drive growth and profitability, even in the face of continuing impacts of the COVID-19 pandemic. The performance of the business gave us the confidence to raise our dividend and complete share repurchases in Q1, returning $81 million in cash to shareholders, while making substantial growth investments. Turning to the next slide. Profitability improved across segments. Quick Lubes EBITDA increased 21% driven by same-store sales growth and strong unit additions. Core North America segment EBITDA grew 2%, as favorable channel and product mix help offset modest volume declines. International segment EBITDA grew an exceptional 64% driven by top line growth and margin improvement. These segment results drove overall Q1 performance and delivered our best ever first quarter profitability, even with estimated miles driven down low double digits in the U.S. Let’s discuss Quick Lubes in more detail on the next slide. Quick Lubes began the fiscal year with outstanding top and bottom line growth. Compared to Q1 last year, sales grew 17% and adjusted EBITDA increased 21%. These results were driven by continued strong operations and in-store execution, which were made even more challenging by COVID-19 and its related impact on customers and our employees. We’re seeing some margin deleveraging due to unproductive labor and other costs related to COVID-19. Despite this increase in costs, we performed well and had strong profit growth. System-wide same-store sales grew 6% in Q1, continuing to run well ahead of miles driven. Same-store sales varied during the quarter with softer results in the middle of the period. This was likely related to a step up in restrictions, which negatively impacted miles driven, including holiday-related travel. And an echo effect of lower transactions from earlier in the spring. Since November, we have seen very strong same-store sales results that continued through January. Total sales in EBITDA on the quarter also benefited from strong unit growth of 126 stores or 9% versus last year. More than 40% of new stores added in the past year came from acquisitions that we closed in Q1. Most of the remaining unit growth came from newly built company-owned stores. Our franchisees are also investing in growing stores; the success of our franchise network and the strength of our partnership across the systems are key differentiators of our retail services business. Entrepreneurs Franchise 500 recently listed Valvoline Instant Oil Change as the number one automotive franchise system and in the top 20 overall franchise systems. Let’s turn to the next slide to discuss how data analytics and digital marketing continues to grow our customer base. Key components of our same-store sales performance include our ability to expand our customer base and gain share via retention of existing customers and acquisition of new ones. Let’s start with data analytics and digital marketing and how they grow our customer base. We capture an enormous amount of data on customer experience and vehicle service history, along with OEM recommendations. This data allows us to make appropriate service recommendations and incentive offers that drive both traffic and tickets. The predictive power of our data analytics allows us to reach the right customers at the right time to remind them to come in for the next service or acquire them from a competing service provider. This approach led to healthy growth in our active customer base and company-owned stores in Q1. Throughout COVID, our new customer acquisition continues to be strong. We’ve been able to retain these new customers at a higher rate than our historical average. Let’s look at how our superior customer service execution drives satisfaction and the retention of the broader customer base on the next slide. Our data-driven approach expands beyond marketing tactics. We take customer experience seriously and measure everything that we do, including customer satisfaction in every store with more than 250,000 customer responses annually. Our customers continually rate us with an overall satisfaction level of 4.6 out of 5 stars. We’ve even improved our top-box satisfaction scores during this challenging period. This is a key driver in retaining our loyal customer base. Talented and engaged employees lead to satisfied customers. Our talent strategy incorporates leading-edge technology to identify and hire a selective talent base that is focused on customer service skills. Opportunities for career development and advancement allow us to promote nearly 100% of store and market leadership from within supporting rapid growth across our Quick Lubes Business. In 2020, we were recognized by the Association for Talent Development with their number one best award, highlighting our commitment to developing top-rate leaders. Bottom line for us, we hire great people and we give them industry-leading business tools to deliver an outstanding customer experience at every store, every day. I’ve heard from a number of investors that they didn’t fully appreciate what makes Valvoline different until they experienced it firsthand. So I encourage you to visit one of our stores in the coming months. Let’s now review Core North America’s results on the next slide. Adjusted EBITDA on Core North America grew 2% in the quarter driven by improved gross margins, resulting from favorable channel and product mix and lower expenses. We saw another solid performance in the retail channel led by branded product sales. Year-over-year volume has grown in the past two quarters and our share in DIY has remained steady. We continue to optimize our promotional pricing and offers and support our merchandising plans with effective marketing, which are reflected in our recent results. While retail channel volume has been outperforming recently, installer volume has declined, not as severely as miles driven. This represents the ongoing impact of COVID-19 and the slower pace of recovery in the broader DIFM space. We have continued to add new business with our value-added approach by leveraging our investment in digital tools for direct-to-customer engagement interactions. This success in new business wins combined with the strength of our long-term customer relationships positions us well for recovery in the installer channel business as miles driven to rebound. Move to the next slide. While it's not unusual for base oil cost changes to occur during the fiscal year, we have seen an unusual swing over the past 12 months with sharp declines last year and offsetting increases happening this year. Most of which we anticipated in our outlook. We are in the process of executing price increases across channels that we expect will fully cover this increase in costs. Our strong brand and strategic relationships with our customers have allowed us to successfully manage the short-term impacts in the past. And we don't expect this year to be any different. While we anticipate unfavorable price costs lag over the next couple of quarters, unit margins are forecasted to be back near the $4 range in Q4, and we continue to anticipate a similar level of performance for the full year.

Thanks, Sam. Slide 13 shows our adjusted results for Q1. Quick Lubes and International drove the growth in sales in the quarter versus last year. In addition to favorable foreign exchange and benefits from acquisitions, which combined contributed nearly 300 basis points to the overall sales growth. Higher mix of retail volume in core North America and improved margins in International led to the increase in gross margin rates. SG&A increased modestly as ongoing travel-related expense reductions were offset by wage and benefit inflation and an increase in depreciation and amortization as well as acquisition costs. Volume growth, favorable mix benefits, and a higher contribution from unconsolidated joint ventures resulted in a 21% year-over-year increase in adjusted EBITDA to $145 million, a record for fiscal Q1, even as COVID-19 continues to unfavorably impact miles driven. Let's move to Slide 14 to discuss the balance sheet and cash flow. The strategic actions we've taken to drive growth are clearly visible in our profitability and cash flow. Cash flow from operating activities increased $20 million year-over-year driven by growth in adjusted EBITDA. We continue to make growth-related capital investments primarily in our Quick Lubes business with CapEx up $7 million in Q1, leading to free cash flow of $44 million, an increase of $13 million. There was only modest CapEx in the quarter related to the China plant. Production in the China plant began in early December and the plant remains on track to produce substantially all of the company's lubricant volume for the China market by the end of this fiscal year. We called our 2025 bonds and refinanced them in January using a combination of $312 million in cash and proceeds from issuing new 2031 bonds. The coupon on the new longer-term debt is 75 basis points lower than the 2025 series. This transaction lowered our gross debt to $1.7 billion as of the end of January while reducing our cost of capital. Since the initial impacts of COVID-19, business performance has improved and cash generation has remained strong. This gave us the confidence to reduce our gross leverage and normalize our liquidity. We continue to follow a disciplined approach to capital allocation. We focus first on deploying cash for growth, both organic and through acquisitions, where we deployed $218 million in Q1 by acquiring Quick Lubes stores, then returning cash to shareholders through our dividend, which we increased by 11% and $58 million in share repurchases. In total, we returned $81 million to shareholders while making growth investments during the quarter. Let's move to the next slide to discuss our outlook. We are reaffirming our full-year guidance, including same-store sales growth of 12% to 14% or 6% to 8% on a normalized basis, adjusted EBITDA of $560 million to $580 million, adjusted EPS of $1.57 to $1.67 and free cash flow of more than $200 million. Our guidance reflects full-year EBITDA growth in the 10% to 14% range. For Q2, we expect our business performance to remain strong, so our profitability will be roughly in line with last year due to the one-time reversal of incentive compensation accruals in the prior year. For the second half of the year, we remain confident in our business fundamentals and expect to be in line with our full-year outlook. As we've said previously, our guidance is dependent on current expectations, which could be significantly impacted by external factors surrounding the ongoing COVID-19 pandemic and its impacts to miles driven. Now, let me turn things back over to Sam to wrap up.

Thanks, Mary. Our strong results in Q1 and our expectations for 2021 demonstrate that we are driving growth despite macro headwinds, thanks to the strength of our model and dedication of our team. I expect improving consumer sentiment and the likely improvement in miles driven to provide tailwinds for Valvoline as the year progresses. Our broad portfolio of products and services is expected to continue generating growth with strong adjusted EBITDA margins in the 20% range. Strong momentum continued in the Quick Lube segment. We experienced a great quarter in our International business and saw continued performance in core North America. The investments made in Quick Lubes growth and the performance of the segment in Q1 represents our commitment to accelerate our shift to a service-driven business model. And with that, I'll hand it back to Sean to open the line for Q&A.

Thanks, Sam. Before we open the line, let me just remind everyone to limit your questions to one and maybe a follow-up or two so that we can get to everyone this morning. With that, Stephanie, please open the line for Q&A.

Thank you. Your first question is from Simeon Gutman of Morgan Stanley.

Thanks, everyone, good morning. I want to ask about – good morning. I wanted to ask you about the price increases. You mentioned that you started to enact them. Can you talk about the stickiness and can you talk about, do you expect any change in market share and have others in the industry followed? Have you seen that this is going to be the norm that everyone's going to be taking pricing up?

Yes. What we’ve seen is that competitors are also moving on price. We have seen a significant increase in our raw material costs, so it really puts everyone in a position to need to move on price. So we've begun those discussions and begun implementation across all of our channels both in the U.S. and internationally.

Got it. And as far as market share goes, I mean the installer channel, right? It's still under some pressure. So I guess, you may not see an impact in that channel one way or the other from price or you don't expect market share to change in any way as these price increases take hold?

No. We feel good about our business in the installer channel despite the impact that we pointed out from COVID-19. When we break down the installer business, our national accounts, which have always been a big part of our installer business, our larger accounts definitely are feeling the effects of the miles driven being off. And so that's where we see some of the toughest declines in our overall volume, but we're continuing to pick up new business. And so we believe we're growing overall share, obviously at a modest rate right now, but a good steady rate nonetheless. So the installer business is the one business that is underperforming for us right now, but it's really well positioned as miles driven begins to improve to see more of a recovery there. But we're certainly encouraged by the good steady performance in the DIY channel and steady share there too.

And Simeon, I would remind you that a substantial portion of our installer channel business operates under indexed contracts for pricing. So contractually, any change in underlying raw material costs, up or down, gets passed through to all of our national account customers and many of our other regional account customers through an index that's based off of those posted pricing for raw materials. So in terms of that business, we certainly have strong margin controls there through the contractual indexing.

Yes, that's a good reminder. And with those index pricing contracts, we see very little price lag effect on the installer side of the business with those large accounts. It's really more felt in the DIY business where we've got scheduled promotions in place through the next number of months. And so we've always had a bit longer price lag impact in DIY. And so we'll feel that primarily in Q3, but we expect to be in really good shape as we begin Q4.

And did you say what your outlook for oil prices for the rest of the year? Because I think you'd said that you still expect $4 gross profit per gallon as your scenario in your model, but does that assume prices don't go up further from here? And then this price increase helps get you there or what if prices continue to go higher?

Yes. Certainly, I think we've seen the biggest part of the move in raw material costs. As you know, of course, base oil follows crude over time. And base oil or crude has moved from the 20s back into the mid-50s. And so I think the major move has occurred, and those cost increases now we're coming through with base oils and additives, so we're taking the appropriate pricing action. Could we see additional modest increases? That's possible, but I don't think it's going to have a meaningful impact on how we have forecasted the balance of the year. I think we'll be in really good shape.

Okay. Thank you. Good luck.

Your next question is from the line of Jason English with Goldman Sachs. Your line is open.

Good morning folks. This is actually Cody on for Jason this morning. Thank you for taking our questions. I just wanted to unpack the drivers of the strength this quarter. It's actually quite surprising to us with Quick Lubes, a little weaker than we expected, and International, a little stronger. So you did about 6% same-store sales growth this quarter, you mentioned mobility restrictions likely weighed on same-store sales growth, but since November it's been stronger. Are they in line with same-store sales growth with what you did last quarter, meaning the September, and if so, who do you think you're taking share from? And then I have a follow-up.

Yes. First of all, for the overall strength of the Quick Lubes business, as I noted in my comments that we saw in the middle of the quarter, basically in November, a slowdown in same-store sales growth. And we do think that was because of some of the increased restrictions and reduced driving around the Thanksgiving holiday. And we also, our analytics team saw that we see a bit of an echo effect when we saw that dip back in the spring from the initial COVID-19 restrictions. Those customers that would have delayed service which you would have expected them in that November time period. And so, because it did happen, and that April-May time period, we felt that impact in November. But what was really encouraging is that we just bounced back very strong at the close of the quarter in December. And that strength has carried through into January. January was same-store sales in the low double-digit range. So we're really feeling good about the Quick Lube business and how we continue to take share. As far as where we're taking share from, we believe we're taking it from not just competing Quick Lubes, but again the broader DIFM market because of the convenience service model and the effectiveness of our marketing that I pointed out. So it's a little bit from multiple channels where that volume is coming from. But again, we're carrying some really good momentum into Q2 and feel really good about just the overall strength of that business. So again, when you step back and you take a look at Quick Lube performance, sales growth of 17% and 21% adjusted EBITDA growth, this is a great quarter. And really exciting for us given all the new stores that we're bringing online to a tremendous effort of our team continuing to deliver customer service in our existing stores, but onboarding these new stores is a ton of work, especially in this environment. And they just did an outstanding job. So again, we're really well positioned in the Quick Lube business and definitely taking share.

Great. That's very helpful color. I just want to pivot real quick to the strength in International, because this was really surprising given the choppiness in the past. Relative to your expectations, how did it perform? Can you discuss the main drivers of strength in a little bit greater detail? And did you mention that this could possibly just be a pull forward of demand out of Q2 into Q1?

Yes. It's important to break down the difference between the underlying strength of the business and then some of the one-time effects that we did see in Q1. And the magnitude of those were somewhat unanticipated. So first of all, we've been making some important investments in strengthening our team and investing in marketing and building our channels to market over the last few years. And we're really getting some good momentum in that business. And we had that in 2020 back half of 2019 and then going into 2020 before COVID hit. We are seeing some of the future of our investment. Obviously, it slowed dramatically with the COVID impacts, but then you started to see that recovery in Q4 of last year and then started this year, really gives us a lot of encouragement for what we can expect ongoing. So, this is a business that we feel now that like the underlying growth rate has been in that high single-digit range now for a while once you factor out the impact of COVID. And so we saw that in Q1. And so we have done a lot of work internally to understand, okay, what was the more of a one-time impact versus the underlying growth, because we were seeing growth across all regions. And we feel it was like close to half of the overall growth in International. And part of it was particularly in Latin America, in India, which were very hard hit by COVID and a little bit slower on the recovery when we go back to last summer. And so, as those markets began to pick up, we did see distributor restocking. And so that COVID recovery and distributor restocking was definitely part of the Q1 strength, but when we factor that out – nonetheless, so good underlying growth particularly in China on the passenger car side of the business. We had a really strong first quarter, very encouraging underlying growth and share building through channel building. And Latin America, I pointed out, the addition of a very important distributor in Mexico. That's a key market for us and one that we're investing in. But also saw good solid growth in our Europe branded business, Australia was particularly strong on the DIY side of the business, retail side. So when we see strength like that across regions, we know that we're making significant progress and building our capabilities, serving our customers and it allows us to invest back in the brand more aggressively. So International is a real highlight here for us, not just for the quarter, but the growing confidence that we have in the long-term potential of that business.

That's great to hear, and if I can sneak in one very quick clarifying question. When you said, you mentioned that competitors have followed your price increases in core North America, does that include private label? And then I'll pass it on. Thank you.

It does. We've seen announcements from the private label blenders in core North America too.

Your next question is from the line of Stephanie Benjamin from Truist.

Good morning. I wanted to, first as a clarification question on core North America unit margin. Can you – so in the first quarter, I'm assuming there was a bit of a benefit from or up from price cost benefit, and then that started to roll off? Or is that incorrect? And then as we think of the cadence, as we kind of focus on a $4 unit margin for the full year, well, should we expect the lag on that price increase benefit in the second quarter? And then start to see it kind of rebound a bit in the back half, just wanted to kind of think about the seasonality of that margin?

So, Stephanie, we did see some modest price costs lagging in Q1, primarily because of our accounting methods with LIFO causing a little bit of it. And that was, we saw a strong channel mix and customer mix performance in the quarter that helped keep those unit margins above well above $4 a gallon. Although we saw a sequential decline in unit margins, as we saw some of those costs start to come through. We expect a bigger cost impact of the raw material increases with that lag in pricing pass-through to be in the balance of the year. And as Sam mentioned, Q3 will be impacted. So I am expecting lower unit margins in Q2 and Q3 with the recovery of the unit margins toward the $4 gallon range in the fourth quarter and likely to be in that range for the full year as we see that recovery as we pass through those cost increases during the middle part of our fiscal year.

Got it. That's really helpful. And then I just wanted to switch gears a bit to the Quick Lubes segment, obviously, tremendous growth and continue through both acquisitions, as well as new store growth. Have you seen anything due to COVID or anything else that has impacted your ability to expand the store count? Or do you remain pretty on track for the targets that you laid out for the year? Does any color you can add to the store expansion that would be helpful? Thank you.

No. I think that's the good news, as COVID is not impacting our ability to add stores. This is true both on the acquisition side, and we look at our pipeline for acquisitions. If anything, I think it improves our position given the impacts of COVID and particularly on smaller operators. And then as far as our ability to execute our store build plan. Teams are doing an excellent job there, and we've got our pipeline in place to deliver against our targets for fiscal 2021, and doing an excellent job to have our pipeline in place for fiscal 2022 ground-up growth, so no real impacts from COVID on our ability to grow stores. It's really in the operational challenges. When we – if one of our employees comes down with COVID, then that affects the store in needing to quarantine and then reach that store, but that the operations team has done an excellent job with some dual staffing models and the ability to move the employees within the market to keep our stores open and operating. So you see that in the results, and I’m really proud of the work that they're doing.

And Stephanie, I would call out, we saw some higher costs in Q1 in Quick Lubes related first to the COVID impacts, where we had some labor inefficiencies because of what Sam talked about, as well as some incremental costs associated with the things that COVID is driving in the store. And in addition to that, we had about $1.5 million of acquisition-related expenses for the deals that we did in the first quarter that were impacted in the P&L. So in combination, those two things probably drove about $3 million – a little bit more than $3 million of higher expenses in Quick Lubes for the quarter.

Got it. Thank you so much for the color.

Your next question is from the line of Laurence Alexander of Jefferies.

Hi there. Most of my questions have been answered, but I guess, can we sort of dial back to a larger scale picture question. As you think about mix, how much do mix variations swing the results quarter-by-quarter, and how much is that predictable or under your control, and how much of it is sort of noise in the system that is sort of driven by factors that are at the consumer level?

So Laurence, you're getting at like the mix between the operating segments or mix between core North America or a little bit of both?

When you’re explaining the results you often sort of point to kind of mix contributing to the margin and profit progression. And I think just, it would be helpful to characterize just how much of that is a lever that you control? Or do you flex it when you see other trends not working in your favor? Or is it something which is kind of more noise in the system?

Yes. First of all, if you break it down by operating segment, the predictability in the Quick Lube segment is extremely high, and you don't see as much variation in any type of mix impact. The mix impact happens primarily in core North America. We see a little bit in the International. We mentioned that mix was a factor in the International business. Some of the strong growth that we had in International was with some of our more profitable product lines and regions skimming a little bit towards the passenger car side of the business. So the bigger impacts do happen in core North America. Within core North America, one of the strengths of this year and last year too was in the DIY side of the business. So our mix has shifted a bit to the higher margin DIY business versus installer due to the fact that the installer business has been soft in this COVID environment. But the promising thing, when you look at the profitability and stability of that business, as we look longer-term, is that as DIY has strengthened and our brand position is strengthened, we’re seeing stability in the price gaps and our merchandising plans. The distribution that we have in DIY, this all results in a steady share. And so that good news is driving a good solid mix in the performance of that business. In the past, on a quarter-to-quarter basis, you can see swings depending on the timing of certain merchandising events in DIY, which can impact it, but it’s not huge impacts. It’s just really this year, what we’re seeing is that DIY strengthening over installer because of the COVID impacts on installer. Now, we do hope that as COVID-19 – as we move beyond COVID-19 and miles driven begins to pick up, we fully expect that the installer business will begin to see improved volumes. Now, while that could have a modest negative impact on our unit margins, it will lift overall profitability because it’s not going to take away from profitability in DIY; instead, we’ll just be adding improved profitability coming from the installer side of the business. So, I hope that helps. Obviously, it’s been a really dynamic time in COVID and how that’s impacted the mix. But when I step back and take a look at what we were able to deliver last year through COVID, given the improving fundamentals that we see in the overall Core North America business. And then the confidence that we have in our guidance and what we’re going to deliver this year speaks a lot to just the improving durability of growth that we talk about in durable growth in this business model, and that continues to get better, and our ability to manage through volatility, whether it’s on the demand side or even on the product supply side. So feeling really good about the progression of this business and the strength across channels and segments.

Great. Thank you.

Your next question is from Olivia Tong of Bank of America Merrill Lynch.

Great. Thanks. Most of my questions have been asked, but one, if I could follow up on something you talked about earlier, just about TP per gallon getting back to $0.04 by year end. So far, you’ve been pretty good about coming in better than you have expected for quite a bit now. So can talk about that first, just relative to your expectations, what’s coming in better than you anticipated in the past? And then have you talked to retailers yet about the price actions that you plan to take to get back to above $4? And if you have any color in terms of what your peers are doing or have done, or discussions that are taking place that would be great as well. Thanks so much.

So I’m going to take the second half of the question and then Mary can address the forecasting process. With regard to retail price increases, yes, we have begun those discussions. And so, we – like I said earlier, we have a strong relationship with our key accounts. They understand the cost increases, and it’s really about how do you implement these increases in a way that doesn’t impact our merchandising plans that we have in place with our key retailers so that we execute well throughout this period. But the strength of the Valvoline brand, the investments that we’ve been making in the Valvoline brand and the partnership with the retailers is what gives us the confidence that we’ll be able to manage through this period and protect our margins and keep our business in a strong stable position. So with regards to exactly what competitors are doing, we know that they’re all taking price actions. We don’t know the status of their negotiations; that’s never true. But we do feel that the market is definitely moving, given the size of the cost increases that we’re managing through right now. So feel good about it. But like I said, there’ll be a lag impact; we’ll feel that in Q3. And I think we’ll be in much better position in Q4. With regards to forecast, Mary?

Yes. Olivia, we have seen some challenges in forecasting for the timing. Both in terms of – as those costs pass through, we’ve had success in delaying some of the price changes with our suppliers. And we’ve had success at different times with extending the time to pass through price reductions, which we saw last year that benefited us. So we worked very hard at trying to get the forecasting that we do as close to the pin as we can, but there are some things within the overall mix. And I’ll say, one of those things of course, is the fact that we’re on LIFO accounting. And so we see the impact of those up or down changes much more rapidly because it’s just the methodology of our accounting practice from a LIFO perspective that causes increases in those costs to impact us much more rapidly. So I think what you can see from us is continuing to do our best and trying to get those forecasts as accurate as we can while we’re managing it to try to optimize our profitability in real time. So we’ll keep you posted as we move forward on how we’re performing relative to our estimates.

Great. Thanks. And then just a follow-up on Quick Lubes recognizing, of course, the volatility that’s going on right now and with respect to that, but same-store sales growth decelerating to 6%. I mean, that’s quite a bit lower than it had been in the past except for obviously the March and June quarters of last year. So can you just talk about the move from there, just the acceleration that you expected in your progress is? And what you’re thinking about for the long-term, how the company is sort of in the normalized 16%. And then secondly, still on Quick Lubes, could you just talk a little bit about what drove the gross margin down as much as it was this quarter? Thank you.

First on same-store sales performance, I believe we called that out that we did see that slowdown in November. But it was really concentrated during that month. And we talked about those factors. But when you take a look at the momentum that we’ve had in Quick Lubes and how we were performing prior to November and how we performed in December, and I hinted at how strong January was, same-store sales is very strong. And so our confidence in delivering same-store sales growth is very high. And I think as miles driven is a potential – can turn from a headwind to a tailwind for us as the year progresses. That would be additional upside from the performance that we’re seeing right now in that business. So I couldn’t feel better about the performance of same-store sales. It gets back to the execution of the team in the stores and how well they are delivering on the customer experience, on the ticket opportunity. We had to eliminate a couple of services—air filters, tire rotations, for example—and we’ve been more than able to offset that with improved execution in the stores. And then the digital marketing programs too are doing a nice job. And when you consider that, driving behavior has been impacted by COVID, it has impacted our algorithms and how some of our direct marketing programs work. And yet we’ve been able to make adjustments that have kept the momentum in this business. So, like I said, we saw a little bit of that dip in one month but we’re back on track to delivering very strong same-store sales growth.

Yes. On the deleverage we saw at the gross margin line in Quick Lubes in the quarter, virtually all of it was caused by new stores both ground ups and acquired stores. Our comp stores were relatively flat on a gross margin level, which really we expected— in the absence of COVID we would have expected leverage. And I go back to some of the increases in expenses we had that were COVID-related around labor and supplies and materials and cleaning that caused expenses in the quarter to be higher than what they otherwise would have. So most of that deleverage in the quarter was simply the impact of new stores both ground ups and acquired stores. And my expectation is that we will see margin leverage through the balance of the year as the year progresses. I would note that, at the EBITDA line, we actually saw leverage. We leveraged our EBITDA as a percentage of sales by about 80 basis points. So a portion of the overall op income deleverage is coming from higher depreciation and amortization as well with the new ground ups, then the acquired stores.

Understood. Thank you.

Your next question is from the line of Jason English of Goldman Sachs.

Hey guys, thanks for the follow-up. Just two quick philosophical questions to help us out with our model over the long-term. One is the tenure historical spread between crude oil per gallon and base oil per gallon is about $1.93. However, it stands today at over $2.60. Why has the relationship decoupled? And do you expect the spread to structurally be higher moving forward?

So I think base oils have been in a long market position and the market has substantially more capacity than it has demand. And in this environment with declining miles—where we’ve seen the decline of miles driven that certainly is the case as well. But I think that long market will allow for us and more broadly, I think the recent increases that we’ve seen in base oils is an effort by some of those refineries to improve those margins a little bit back toward their three or five-year trend. But from where we are right now, because of that capacity that’s out there, I think that it’s unlikely that we’ll see continued pressure. Now that certainly can change. I do think as miles driven have improved, more refining capacity will come online driven by the fuel side. And we’ll continue to see lengthening of that market from a base oil perspective. So I don’t know that there’s anything really that unusual in terms of where we are today and what we expect moving forward.

Great. And then last question, just the conversion between franchise and company-owned stores is accelerating. Why is that? Is it because you’re more aggressively bidding for the franchises? Or are the franchises wanting to exit more? If you could just provide any color that would be great. Thank you.

Yes. The only real change there is that there’s been a couple of our franchise partners who had approached retirement and a couple of more in really key regions for us that were very attractive for us to add to our company store network. So it’s not a major thrust of ours to acquire franchisees, but when there are opportunities and it strengthens our network, we look for those opportunities. They’re very low-risk acquisitions that still generate a very strong return on investment. And yet the thing to remember, like when we talk about this Quick Lubes business, first and foremost, we want to grow the number of stores in the system. So we are working with our franchise partners to help them in their growth plans. And then of course, to execute on the growth plans that we have for company stores through acquisitions and ground-ups. And so first and foremost, we have an opportunity to grow much faster. It’s a very large and long-term market opportunity for us. And we’re going to be aggressive there. And we feel really good about the leverage that we have to keep driving that store growth. We continue to build our capabilities and are executing really well on both ground-ups acquisitions and working with the franchisees to help them on their growth too. So very excited about the progress there. So the mix we don’t think is critical; both franchising and both in company store growth. These are high-return investments that we’re making. And so the big picture here at Valvoline is, we’re taking strong steady cash flow from the product side of our business and pulling that into growth in our service business that’s generating returns to double the cost of capital. So we’re very disciplined in how we’re allocating capital. We’re making great investments, they’re strategic, and the strategy is very much working for us.

Your next question is from the line of Chris Shaw of Monness, Crespi and Hardt.

Good morning, everyone. How are you doing?

Fine.

So I have been around to a couple of different calls, so if I’m repeating anything, I apologize. But just quickly on your store acquisition, I think you’ve already kind of met the guidance you had for the year, pretty close to it. If that’s true, are you not inquiring anymore or don’t have any – you did increase the guidance because the pipeline is not the full right now, or just because you actually don’t want to acquire any more this year that that’s enough for the full year.

So we guided to a higher number this year because of the full pipeline and our confidence in the deals that we were going to close in the first quarter, because those deals tend to be opportunistic. We typically would only include a smaller number of acquired stores in our guidance until we actually have the deals completed. But because of the timing of guidance and the fact that we knew those deals were coming in, in the first quarter we had a higher confidence in the guidance to give a much higher number. We still had a robust pipeline of deals that we’re working on a larger number of smaller mom-and-pop stores that are in the pipeline. And so, we likely will continue to work to acquire more stores. But in terms of where we set our guidance at the higher level of acquired stores, that was really driven on our confidence in the deals that we were doing in Q1.

Got it. And then just on Core North America, sequentially into Q2, there’s all the puts and takes pricing costs, maybe some better miles driven. Do you expect top of the profits to be up sequentially or flat? I mean, do you have any expectations at this point if all things sort of stood where they are today?

You're talking about EBIT in Core North America?

Yes.

I guided to Core North America being down year-over-year. And we certainly saw a good first quarter where we were up modestly. So if you look at a year-over-year for the balance of the year, because of that price-cost lag impact of those rising raw material costs, my expectation is that for the balance of the year Core will be down year-over-year – on a year-over-year basis.

Great. Thanks so much.

And that was our final question. This does conclude today’s conference call. You may now disconnect.