Ladies and gentlemen, thank you for standing by, and welcome to the Valvoline, Inc. 2Q 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sean Cornett. Thank you. Please go ahead, sir.

Thanks, Christy. Good morning, and welcome to Valvoline's second quarter fiscal 2021 conference call and webcast. Valvoline released results for the quarter ended March 31, 2021, at approximately 5:00 p.m. Eastern Time yesterday, April 28. 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. If you turn to Slide 3, let's review our financial results for the quarter. For the fiscal second quarter, Valvoline delivered reported operating income of $131 million, net income of $68 million, and EPS of $0.37. Year-to-date cash flow from operating activities was $190 million. The key items in the quarter were $27 million of after-tax expenses related to a new debt issuance and retiring our 2025 senior notes, Non-service pension and OPEB income of $10 million after-tax and business interruption insurance recovery of $2 million. Excluding key items, results for the quarter included adjusted EBITDA of $152 million and adjusted EPS of $0.46. Year-to-date free cash flow was $116 million. Now as we turn to Slide 4, let me turn the call over to Sam to discuss our results and operations in more detail.

Thanks, Sean. Our results in Q2 were outstanding, exceeding our expectations and part of an exceptional performance in the first half of the fiscal year. Sales grew 21% in the quarter, and adjusted EBITDA increased by 38%, excluding large unfavorable changes in variable compensation and LIFO inventory accounting. We continue to benefit from decisions that we've made to drive growth. Q2 was the first quarter where Quick Lubes contributed more than half of our total adjusted EBITDA as our strategy of shifting to a more service-driven business model takes hold, supported by the strong cash generation of our products business. We're also benefiting from an improved macro environment, including stimulus and broader economic reopening. Our strong top and bottom line growth and outperformance so far this year gives us the confidence to raise our 2021 guidance. We now expect adjusted EBITDA to be $590 million to $610 million, representing high-teens growth at the midpoint, and free cash flow to be roughly $260 million. Turning to the next slide, the top-line improved across all segments in Q2. Quick Lubes and International each saw sales growth in the mid-30% range and adjusted EBITDA growth of roughly 60%. Core North America had solid top-line growth and had a 4% decline in adjusted EBITDA due to price/cost lag, excluding the LIFO inventory accounting impact. Let's discuss Quick Lubes in more detail on the next slide. Quick Lubes had an outstanding quarter. Same-store sales growth was more than 20% with a balanced contribution from transactions and average ticket. Some of this growth is related to the onset of COVID-19 impact in the second half of last March. However, our normalized same-store sales grew more than 10% driven by our strong digital marketing performance and excellent in-store execution of our preventive maintenance model. Same-store sales growth, combined with unit growth of 9%, drove a 34% increase in overall revenue. Top-line growth and improved margins generated a nearly 60% increase in adjusted EBITDA, a truly impressive performance. Throughout the pandemic, our Quick Lubes business has produced impressive results due to our convenient, safety-focused stay-in-your-car service model, an exceptional performance by our team. Let's turn to the next slide to discuss how our broader menu of preventive maintenance services drives store sales. A key component of driving same-store sales growth is ticket. One aspect of ticket that we pay particular attention to is non-oil change revenue or NOCR from our wider array of service offerings. These include OEM scheduled maintenance services, fuel system cleaning, battery changes, tire rotations, and ancillary items like cabinet filters and wiper blades. It is important to note that these services tend to carry exceptionally strong margin contribution. We continue to focus on ways of growing NOCR. As an example, last year, we relaunched our battery change program. We moved to a different supplier and branded the batteries as Valvoline, matching the branding across the product lineup we use in our stores. This also gave us access to improve testing equipment for our store employees and better understanding of battery health for our customers. We invested in our supply chain capabilities to make sure that we have the right inventory in place at the right time. The result has been a near doubling of battery change service penetration in the first year. We completed the rollout at company stores in December and are in the process of expanding to our franchisees. As a result, we expect this service to be an important growth driver of NOCR in 2022. As a safety precaution, we suspended cabin air filter services in the early stages of COVID-19. We've begun reintroducing them and expect a solid contribution to ticket in the second half of the year. Non-oil change revenue continues to steadily grow over time and currently makes up nearly 25% of average ticket. We have a tremendous opportunity to expand NOCR and increase penetration rates of these important services to drive ticket growth while expanding our customer base. Let's look at the other drivers of same-store sales on the next slide. Both transactions and average ticket drive same-store sales. We leverage our strength in digital marketing and data analytics to attract new customers and retain our current ones. We've grown our oil changes per day, a measure of transactions, at a healthy 3% CAGR over the last several years. This reflects the success that we've had growing our customer traffic and gaining share. In contrast to an upsell approach, we focus on educating our guests on what services their vehicles need based on the vehicle service history and OEM recommendations. This builds trust with our customers and, combined with the competitive advantages of our model, allows us to have pricing power, capture the shift to synthetics through premium mix and grow non-oil change revenue. The multiple levers that we have to drive same-store sales give us confidence in the sustainability of strong, long-term same-store growth. Let's review Core North America's results on the next slide. Progress in Core North America continued in Q2. We have passed through raw material cost increases to our index-based accounts. We have also successfully completed the first phase of pricing to negotiated accounts. Raw material costs have increased significantly since our Q1 earnings call. While we will execute price increases in Q3 and Q4, we also expect short-term margin pressure from the price cost lag. Unfavorable price/cost lag caused a decline in segment EBITDA. A significant component of the decrease was the impact of LIFO inventory accounting. Excluding the LIFO impacts, year-over-year gross profit was up slightly, and adjusted EBITDA was down modestly. Overall volume was up 7% year-over-year despite significant cost and pricing pass-through pressure. We saw growth in both channels. DIY retail channel volume continues to outpace miles driven. Growth is coming from continued progress in traditional DIY outlets and from new distribution, where we've been underpenetrated historically. We're making good progress in gaining more shelf space in farm stores, C-stores, hardware, and online. Our focus in the DIY category is on working with our retail partners to market and merchandise our brand. Innovation, particularly in synthetics, is a key part of that strategy. For example, we recently introduced FlexFill packaging for our synthetic gear oil. We have received great feedback from consumers and customers, and early sales results are strong. Valvoline is the number one brand in transmission fluids and gear oil, and FlexFill further strengthens our position. In the DIFM space, demand is recovering more slowly than in DIY. Our focus remains on helping our installer customers drive value. Our success is demonstrated by the fact that we have extended or renewed long-term agreements with many of our key installer customers. We also continue to win new business, and our volumes continue to outpace miles driven. We are well positioned to see the benefits as the market recovers. Let's review International results on the next slide. The International segment delivered another impressive quarter of growth across all regions in Q2. Sales and volume were up in the mid-to-high 30% range, led by Asia Pacific and particularly China, which had the largest COVID-19 impact in Q2 last year. Top-line volume growth was driven by our marketing programs and new distribution, which led to market share gains. We continue to add new distributors in all regions, building channels and expanding market coverage. In general, we saw improving market conditions and some distributor restocking impacts. We're closely monitoring the impacts of rising COVID-19 cases in India and other parts of Asia. Adjusted EBITDA growth of 63% was driven by strong volume growth in both affiliates and JVs. Raw material cost increases impacted Q2 and are expected to continue across all regions. We expect margin pressure to increase in the near term as we work to pass through these increases. On the next slide, let's take a closer look at one of our marketing programs that helped drive brand awareness and strong volume growth in the quarter. Along with channel building and service platforms, building our brand is a key element of our international growth model. A key pillar of our brand building efforts is our global mechanics month program, which took place across more than 50 countries, including the U.S. and Canada in March. Valvoline has proudly supported mechanics with a variety of programs, including training and professional development throughout our history. The 2021 campaign focused on recognizing the work mechanics have done to keep our economies going. Their critical efforts kept essential service workers moving to help those in need as the world manages through COVID-19. The program saw significant engagement across multiple channels, as well as direct retail activations with signage and promotional materials in mechanic shops. In the end, all elements of the event were focused on recognizing mechanics and driving customer visits, helping deliver a record volume month in international in March. Now let me turn it over to Mary to review our financials.

Thanks, Sam. Our adjusted results for Q2 are shown on Slide 12. Year-over-year growth in sales of 21% was led by International and Quick Lubes. Acquisitions and favorable foreign exchange added 500 basis points to sales growth. The 60 basis point decline in gross margin was primarily the result of year-over-year changes in LIFO inventory accounting driven by raw material cost changes, which were declining last year and have risen this year, primarily due to impacts from the global pandemic. Most comparable peers use a FIFO accounting approach. We believe excluding the non-cash LIFO impact is important to better understand the underlying business performance and for better comparability. The increase in SG&A was primarily related to changes in variable compensation as we significantly reduced variable comp accruals in Q2 last year due to the pandemic, driving a $21 million year-over-year change. The remaining increase in SG&A was driven by acquisitions, inflation, increases in advertising and marketing, and foreign exchange impacts. In Q2, Quick Lubes made up just over half of our adjusted EBITDA for the first time. This favorable segment mix, along with top-line growth and a higher contribution from unconsolidated joint ventures, resulted in a 13% year-over-year increase in adjusted EBITDA to $152 million. Excluding the unusual LIFO impact and variable compensation changes, adjusted EBITDA grew 38% and adjusted EPS grew 49%. Let's move to Slide 13 to discuss the balance sheet and cash flow. We continue to generate strong cash flow with year-to-date cash flow from operating activities of $190 million. CapEx totaled $74 million, leading to free cash flow of $116 million. Our discretionary cash flow, defined as operating cash less maintenance CapEx, was $175 million. 80% of our year-to-date capital expenditures were growth-related investments, which is our highest priority for allocating capital. The cash-generative nature of the business and its capital-light maintenance needs allow us to focus on and self-fund our growth while also returning cash to shareholders. In Q2, we returned $65 million in the form of dividends and share repurchases. Interest expense was $55 million in the quarter, including $36 million of costs related to calling our 2025 senior notes and issuing new longer-term notes, part of our efforts to reduce gross leverage and lower interest expense. We had debt redemption costs in Q2 last year as well. Net interest expense, excluding the costs associated with these bond refinancing transactions, would have been $19 million in each quarter. Let's move to the next slide to review our updated outlook. We are raising our guidance. Based on our outstanding performance in Q2, we now expect same-store sales growth of 18% to 20% and normalized growth of 9% to 11%. This projected same-store sales performance, combined with anticipated strong store additions and ongoing strength in International, is expected to generate overall sales growth in the low to mid-20% range. Strong first half results and the flow-through of higher top-line growth to profitability are anticipated to generate adjusted EBITDA of $590 million to $610 million and adjusted EPS of $1.72 to $1.82, which would translate to year-over-year increases for both metrics in the mid-teens to 20% range. The increase in earnings, improved cash conversion, and lower-than-anticipated cash taxes are expected to drive free cash flow of $250 million to $270 million. Now let me turn things back over to Sam to wrap up.

When we first gave our outlook for fiscal 2021, we anticipated this year to be an inflection point for growth. Based on our progress so far and our updated guidance, we remain convinced of that expectation. Quick Lubes should make up half or more of our adjusted EBITDA as our investments in store growth and improved operations continue to deliver benefits. Importantly, Quick Lubes' high-margin, high-growth profile continues as it becomes the biggest segment in the company. At the same time, supply chain enhancements and investments in brand building are generating growth in International. And we continue to generate strong cash flow in Core North America as well. The Valvoline team is working incredibly well across businesses and functions to drive growth and bring innovative solutions to our customers. This gives us the confidence that we have the right plans and capabilities to deliver high-return growth in the years ahead. With that, I'll turn it back over to Sean to open the line for Q&A.

Thanks, Sam. And with that, Christy, please open the line.

Your first question comes from the line of Laurence Alexander with Jefferies.

Good morning. I have two quick questions. Can you provide some information on the raw material pass-throughs in both your core business and the international joint ventures? Where would EBITDA be at the current run rate if you fully accounted for the known pass-throughs? Additionally, could you share some perspective on the long-term target for the mix of non-oil change revenue per tech head? Do you anticipate that the compound annual growth rate will slow down after reaching a certain point, or will it become more challenging to introduce additional services?

Yes. First, Laurence, with regard to the cost increases, as I noted, they have been quite significant. We've had particularly base oil cost increases over each of the last four to five months. And so what we see as we progress through the fiscal year is that we'll be taking a series of price increases to the negotiated accounts, both in the U.S. and International. And so while we expect to recover those costs over time, we will feel a price lag impact in the business, in particular, more in the DIY retail channel, where we've got scheduled promotions throughout the spring and summer period. So we have to have a balance between how hard we push on price, the timing of those price increases with protecting those promotions, which are important to continuing the volume momentum that we have in DIY right now. So we will feel some lag impact. But nonetheless, when we take a look at our forecasted unit margins in Core North America and International, we'll see certainly some pressure in Q3 and Q4, but we do expect to be in pretty good shape as we start the new fiscal year. As you know, a lot of our volume, particularly on the installer side of the business, is based on negotiated index pricing. And so that pricing adjusts automatically every quarter. So you really get very little lag impact on that side of the business. So that's where we stand from a margin perspective. We'll feel some pressure there. Last year, of course, we had the opposite effect where we had tailwinds of falling raw material costs. This year, we're seeing that shift back in part of rising crude. Also, the weather impacts from February have had some disruption effects in the base oil and additive supply chain, which has put additional pricing pressure, cost pressure on us. So hopefully, as we progress towards the end of the year, we'll see some of those pressures subside. With regard to the Quick Lube business and non-oil change revenue, calling that out because it is a really important lever for driving same-store sales growth. It's one of many levers that we have to drive same-store sales growth, and it's one that we're very much focused on. We see a lot of opportunity for growth in the years ahead. And so while we've seen some nice progression, especially in the last couple of years, I've been really pleased with that, there's still quite a bit of upside. I highlighted the battery service, which we're paying particular attention to. We've made some investments there. We're seeing some really strong early results. But we're really teeing that up for a big contribution in fiscal 2022. But it's not just battery service. I mean what we found is that our customers, when we present our services and the OEM recommendations properly, because of that trust that we have with our customers, we're able to capture more of those services that are truly needed on those vehicles. And so this is really key to our long-term strategy, better penetrating the service opportunities that we have with our existing customer base, leveraging the technology, leveraging the investments that we've made in understanding vehicle maintenance history, combined with the OEM recommendations, combined with effective presentations; it's a powerful lever for driving that ticket growth over time.

Your next question is from the line of Simeon Gutman with Morgan Stanley.

Hey guys. This is Michael Kessler on for Simeon. Thank you for taking the questions.

Hey, Michael.

First, I wanted to ask about the guidance, the raised guidance. Just, I guess, relative to our expectations for the industry to the increase in guidance still trails a little bit the magnitude of how much you guys outperformed in Q1 and Q2. So I just want to ask about that, the puts and takes as far as your expectations for the back half. It seems like Quick Lubes kind of outperforming should probably continue to trend maybe better than expectations earlier in the year. But you have some profitability, a little bit more uncertainty on the Core North America side. So just if you could talk through that, I guess? Is that kind of the right way to think about the back half? Is there an implication as far as how those are going to offset going forward? Thank you.

Yes, we are pleased to raise our guidance, largely due to the strong performance we experienced in the first half of the year, particularly in the Quick Lube business, which we expect to perform very well in the second half. The same-store sales growth from the second quarter, even when adjusted for normalization, was in the double digits, and we see that momentum continuing into early Q3. This area is our primary profit driver. It's also important to highlight that our International business has shown significant growth over the last few quarters, and we are enthusiastic about this as it indicates that our investments in supply chain capabilities, market channels, distribution, and team enhancements are paving the way for sustainable future growth. However, while the top-line growth has been exceptional, we believe there has been some benefit from the COVID recovery, particularly with inventory levels rebounding. Thus, we anticipate continued growth in the International business in the latter half of the year, albeit at a slower pace than its contribution in the first half. In terms of guidance, we expect robust performance from Quick Lubes, consistent performance from International, although we will be facing some pricing lag due to rising raw material costs across our product line. Core North America might encounter more challenges as we implement pricing, which will also contribute to a lag effect in the second half of the year. Overall, this adds up to an outstanding year for the company.

Yes. The other thing I would add to that, Sam, is we are monitoring carefully some of the increased incidence of COVID that we're seeing in India, where we operate a joint venture with Cummins, as well as in some parts of Asia, where we have strong business within the International segment. And we expect that to create some additional pressure in the back half of the year. So we are concerned about our teams in India and certainly hopeful that they'll be able to get ahead of this rise in their COVID incidents and be able to see some of the improvements that we've seen here and experienced in the U.S. and other parts of the world. And that also has a little bit of a negative outlook for us in relationship to the back half of the year in terms of our guidance.

Yes, I was about to inquire about India, so I appreciate you addressing that. I have another question regarding Quick Lubes, looking at the bigger picture and considering the long-term mix of where EBITDA is generated. It seems that Quick Lubes have been the primary source for revenue generation for a couple of years now, and I wonder about the expectations for the next two to three years. Has there been any change in perspective, especially after witnessing a record high in the mix of Quick Lubes this quarter?

Yes. The good news is that the trends that we see in Quick Lubes, we definitely feel that they're sustainable. And so we're bullish on the long-term performance of the business as it relates both to the same-store sales growth, where there's just tremendous leverage and value in how we care for our customers and how we capture more of the service opportunities with those customers and continue to build market share. That's number one. We're also building market share by adding more stores. And we've got three important levers for adding stores. We've been investing in new store growth. And they're beginning to contribute significantly this year and even an expanded contribution in fiscal 2022, making acquisitions, and then working with our franchisees on their growth programs, too, to make sure that they're adding stores. And we're positioning ourselves to reach more and more households. So long-term growth looks good, and we're very confident in that. We are looking at those long-term forecasts. And we look forward to providing updates on that in the near future. So hopefully, that helps.

Yes, it does. Thank you very much and good luck toward the year.

Your next question comes from the line of Stephanie Benjamin with Truist.

I have a quick follow-up on a previous question. Sam, you discussed your unit margin expectations for Core North America, and I wanted to confirm your views regarding unit margins for the latter half of the year. Given the increase in base oil prices and the impact of price lag, we likely won't see a return to your target, which is around high threes to low fours in terms of margin, until early next year, or rather, early fiscal 2022. Is that the correct way to interpret this?

Yes. Stephanie, in terms of the margin compression, we'll see short-term from the price/cost lag in the Core North America business. We do expect it to be a more significant impact on margins in the back half of the year, given the recent increases that we've seen in base oil costs. Having said that, if you look at our forecast for the back half, excluding the impact of the LIFO changes, we actually think that we're going to be in the high 3s. And yes, we'll see a full recovery into the first half of next year as we're able to get our pricing through over time here in the next six months. But with the impact of LIFO, it will be lower than that. But without the non-cash LIFO impact, which had a significant difference this year versus last year, given the shorter term decline in costs last year with the increases that we're seeing this year, excluding that LIFO impact, we expect to be in the high 3s.

Great. And that's really helpful. And then switching gears, I'd love to hear your thoughts on some of the underlying industry growth that you're seeing, both in Quick Lubes and North America. So if you could kind of frame how you think your Quick Lube business has performed? You called out a low double-digit sort of normalized basis? With Quick Lubes, how do you think that compares to what's going on in the overall market? And then also on Core North America, particularly looking at the DIY channel, I think another quarter of unit growth. Where do you think the industry is at the moment? Was there a more favorable comp in March just as you lap the pandemic? And kind of what's your outlook going forward just from industry growth in Core North America as well as how you're outperforming with Quick Lubes? Thanks.

I will start with Core North America and then address Quick Lubes. Over the past year, DIY has remained steady, and overall category demand has remained solid, which is encouraging based on our results. On the installer side of the business, demand has dropped significantly, likely in correlation with miles driven. Comparing the last 12 months to 2019, miles driven has decreased by about 10%. The industry and segment have definitely felt this impact. While we have been outperforming the overall industry in volume, we anticipate that as miles driven in the U.S. improve, the installer channel will benefit from increased traffic, leading to more consistent growth in the second half of the year and into 2022. The outlook for Core North America is largely tied to miles driven. DIY has held up well, while the installer segment has suffered more. Regarding Quick Lubes, we have consistently gained market share. Despite miles driven being down 10% over the past year, our same-store sales continue to rise, indicating our share growth. Our Quick Lubes business model outperforms competitors significantly, with our stores being around 50% more productive than the industry average. This productivity stems from our investments in people, customer experience, and digital marketing, which have improved through data analytics. This past year, we have successfully attracted new customers and maintained strong loyalty. This combination allows us to grow market share within our existing footprint while also opening new stores. The performance of Quick Lubes positions us well to attract customers seeking convenience. Our new customer growth includes not just those from competing Quick Lubes, but also from the broader DIFM industry, including tire and repair services and customers shifting from car dealers. We have noted that our market share is only about 4% of the do-it-for-me oil changes available, making it a key part of our strategy to expand this share and reach more households. Additionally, we are excited about the potential for non-oil change services to drive growth. Overall, the dynamics look promising for our business.

Your next question comes from the line of Jeff Secaucus.

Thanks very much. It looks like base oil prices went up $0.40 a gallon this week, not at Motiva, but at everybody else. Is that incorporated in your guidance? Or how do you read the current movement in base oil prices?

Hi Jeff, good morning. Yes, we did see an increase in base oil costs ranging from 30% to 40% depending on the grade. And we've considered that in relationship to our guidance. And we believe that our guidance is still appropriate with the raise that we provided, even with the impact that we might see from that recent change. So it's likely to have an impact more toward the end of our fourth quarter. And as Sam mentioned, it might take us a little longer to get all of our pricing through into the first quarter of next year, but that is fully considered in terms of our updated guidance, Jeff.

Okay. And then when I look at your waterfall charts, I don't see a raw material element where you say raw materials did this or that? Maybe in the future, you might include that. But my last question is you bought 16 stores in Texas. What did you pay for that? And what was the multiple of EBITDA?

Sure. We recently announced a transaction to convert 16 franchise stores to company-owned in a market where we've been investing in building a strong company-owned presence. It was the last kind of outlier. And we believe there's substantial opportunities for us to leverage our field sales force and our marketing across company-owned stores by concentrating that market in company-owned stores. We typically see a really strong mid-teens return outlook. And we typically pay a price multiple across most deals that we do in the high-single-digit range before synergies that we can bring to the business. So that's consistent with this most recent acquisition as well. And on your first question on the waterfalls, we breakdown volume mix from margin, and we started to breakout the LIFO impact as well in those waterfalls. That margin impact is primarily related to the price cost lag on the waterfalls, Jeff.

Your next question comes from the line of Chris Shaw with Monness, Crespi.

I want to clarify if you have insights on the higher ticket items, the non-oil change segment, and the sequential improvement in same-store sales. Do you have an idea of how much you've gained from stimulus checks? I was thinking that the non-oil change sales might indicate that people are spending a bit more because they have more money. Have you looked into this at all? I'm curious if you have any way of determining that.

Yes, that's a great question. We try to understand the various impacts and the benefits we've observed. Regarding non-oil change revenue, we've seen consistent growth, but there hasn't been a significant jump in performance linked to the ticket, suggesting that customers felt they could afford more services. Instead, we believe it's more about our consistency and effectiveness in presenting the services that our customers need. Additionally, the stimulus checks in January and April did provide a boost to our overall traffic, which has been very helpful. Considering the current state of consumer health and the gradual improvement in miles driven—over the past year we've been down about 10%—if you look at the last month, fuel sales have declined by only 3% to 5% compared to 2019. We’re close to seeing miles driven return to normal, and as people prepare to travel this summer, I anticipate a surge in demand. Historically, we are always busy during the driving holidays of Memorial Day and July 4, so it will be particularly exciting and challenging for our stores to manage the increased volume this summer. I feel optimistic about it.

Yes. Chris, the other thing I would add is we certainly do think we saw benefits from stimulus. But even as we move further out from consumers receiving those checks, we continue to see really strong momentum. So I do think there's the miles driven impact and the reopening, combined with our incredibly effective marketing and customer satisfaction with our service levels when convenience is continuing to drive really strong demand.

Thanks. Sam mentioned that the upcoming driving season looks promising. I wanted to ask if you are still experiencing wait times at your retail locations on the app?

Yes. So the app, which provides consumers the opportunity to see what the expected wait time would be before they come to the store, that is a program that's in place for all of our company stores. It has been for the past year now. And now it has rolled to our franchisees. So now, fortunately, across all of our markets, consumers can download the app and see what those wait times are before they get to the store. There's a lot of benefit of course to the consumer there, they can target their timing of their trips to the store or even decide that if they're the store closest to them has a 20-minute wait time, but a store that might be a couple of miles down the road in another direction has no wait time, they may decide to go to that store. So it actually works to our benefit, too, in helping spread out the demand, particularly during the busiest times of day. So there's a real nice benefit there. We're excited about the fact that it's now rolled across the whole system. And so this app, we're still in the process of bringing more and more customers on the app as we bring more value to the app for the consumers to use that as a way for convenient transactions with traveling. So it's an exciting new tool for us, and we hope to report on some really good progress in the years ahead.

What's your strategy? If you get really busy in a location or in a market and wait times are up a lot, is it easier for you? Or what's the strategy? Do you add days at a certain location? Or would you just add another location if you could, either through a franchisee or yourself?

Yes, it's interesting that some of our top-performing stores demonstrate that we have significant capacity within our existing locations to accommodate more customers. When we examine the top quartile of our stores, they manage around 60 oil changes per day, offering a higher number of transactions compared to the overall system-wide average of just under 50. There is ample capacity in these stores. Additionally, some of our best-performing outlets excel in both transactions and ticket sales, indicating that we do not prioritize one over the other. We can effectively manage both aspects. We are also looking to expand and add stores where opportunities arise. Typically, in areas where stores are performing at the higher end of transactions, there is potential for adding another store nearby, especially in expanding markets. Our goal is to continue adding stores and enhance our market penetration. Currently, we hold only a four percent share of the overall market for oil changes. We possess the best business model, and the key is determining where and how to add stores to steadily grow and reach more households. To this end, we have developed a sophisticated real estate model that assures us that any new store we add will have above-average growth potential. As we enter new markets, and as mentioned, particularly in Texas, we are also exploring historical corporate markets for additional opportunities and collaborating with franchisees on their growth, which remains significant. Therefore, the potential for store growth is a long-term goal for us. This year, we anticipate adding between 140 to 160 new stores, inclusive of new builds, franchise growth, and acquisitions we've made. Our aim is to add over 100 stores annually.

Our next question comes from the line of Wendy Nicholson with Citi.

Hi, good morning. A couple of questions. Mary, just a follow-up on India. Can you remind us how big India is for you and given the joint venture structure? Is it disproportionately profitable for you? So if things get worse there, how much should we worry about that? That's my first question.

Sure. We don't provide detailed specific disclosure. But if you look at the overall international business, we're talking about historically India providing mid-teens to 20% of the overall profit contribution. So International overall contributes 20% or so to the overall business. And so it's a smaller percent, but it can be a few million dollars if we continue to see degradation there because of the shutdowns with the rise of the incidence of the pandemic there. So it could have a small impact but not material.

Perfect. Okay, Mary, this question is for you. Regarding the VIOC business, how much are you still spending on PPE and the elevated COVID-related costs? I know you prioritize keeping people safe, but are you starting to see that diminish now that more people are vaccinated? I'm curious about how this might affect your margin trends as we move towards a normalized basis. Your margin trends are positive, but could they improve further as some of that additional spending potentially decreases?

We've seen notable improvements in labor costs associated with quarantining due to a significant decrease in COVID incidents. We previously had unproductive labor, which we mentioned in the first quarter and throughout last year, as we took extra precautions for our team members. We ensured that any employees who were potentially exposed to someone who tested positive for COVID were compensated during their quarantine, and adjustments were made to staffing. This situation has greatly improved. However, we believe it is important to keep investing in personal protective equipment for our team. I anticipate that this will continue to be a part of our operating expenses as long as COVID incidents remain. Ensuring the safety of our employees and customers is a top priority for us. Fortunately, the costs associated with unproductive labor have significantly decreased.

Terrific. And then if I can, sorry for asking so many. But Sam, on the NOCR business, I mean I know, historically, part of your strategy from a marketing perspective has been to email people, 'Hey, it's been six months,' or, 'Hey, we think you've probably driven 10,000 miles. Come back in.' So the marketing has been really heavily oriented toward the oil change side of things. Do you think there's an opportunity to broaden that or expand that? Or is there a risk in walking too far away from the historical oil change heritage? Just from a marketing perspective, how you get the message out that like, 'Hey, we offer so much more'?

Yes. Marketing to our existing customer base is very sophisticated because we have a lot of data. We have access to their service history, their travel mileage, and typical timelines for oil changes. With our loyal customers, we specifically promote the other services they need, which helps prepare them for their visit. They might not realize that their vehicle manufacturer recommends cooling system service every 40,000 to 50,000 miles, but we send email reminders explaining the service and its importance. When they're in-store, they'll receive information about it as part of our marketing strategy. We also offer discounts, which encourages them to agree to the service and complete it at Valvoline, where they generally save money compared to going back to a dealership. This method of marketing contributes to our overall strategy. For attracting new customers, our marketing focuses on initial savings to entice them to try Valvoline, highlighting the convenience of our stay-in-your-car service.

Your next question comes from Mike Harrison with Seaport Global Securities.

Hi, good morning. Congrats on the strong quarter. Going back to this battery change offering, I think of that as being a service that's relatively expensive compared to a filter change or a light bulb change or something like that. Does that service still bring the more attractive margin that you suggested? Should we think of it maybe more as good margin on a dollar basis but maybe more dilutive on a percentage basis for that specific service?

No, it's really strong margin, both in terms of percentage and dollar contribution. As you pointed out, people do understand their battery but don’t pay much attention to it. We are working on ensuring that our customers know we offer battery services. The investment we made in upgraded testing equipment, which is exclusive to Valvoline stores, allows our customers to monitor the condition of their battery over time. We believe this will lead to more transactions when their battery changes from green to yellow to red. Batteries typically need to be replaced every four to five years, and we aim to seize this significant service opportunity that offers excellent margins.

I can tell you it's something I pay attention to, living in a Northern climate. You don't want to have a battery die when it's super cold out. Other question I had is about the marketing efforts. Obviously, the digital marketing has been very effective in bringing in new customers and helping with retention. Are you going to be increasing your marketing spend in either the Core North America or Quick Lube segments, given the strength that you've seen in your overall earnings in the first half of the year?

On the Quick Lubes front, we are executing the plans we established at the beginning of the year. We do not anticipate an increase in expenditures compared to our initial plans. Historically, our spending on a per store basis has increased as we have identified new marketing programs to drive traffic. However, on a percentage of revenue basis, our investments have not been rising, and we are in a solid position with our marketing spend, which we expect to maintain. While we might see small incremental increases in dollars per store, we do not expect significant growth as a percentage of revenue. We are aiming to gain leverage from these programs, which we anticipate will yield a high return on investment. In the Quick Lubes sector, those additional funds typically yield returns within the year, unlike traditional advertising expenses that take multiple years to pay off. This is due to the new traffic we are generating. We are continuously learning and investing wisely in this area. The marketing spend in Core North America is especially vital for the DIY segment and our long-term brand health. While we've remained steady with our spend, we have increased it compared to the lows experienced during the COVID impact, returning to a normalized level in fiscal 2021. We are pleased with our progress and believe our consumer marketing strategies have contributed positively to performance in the DIY channel over the past year.

And Mike, I'd like to remind you that last year, during our third quarter, we significantly reduced spending across all three segments because we didn’t believe marketing during a largely shut down global economy would be effective. As a result, year-over-year, we will see considerable increases in our marketing, returning to more normalized levels as a percentage of sales, according to what Sam indicated. However, just to point out, if you look at the rest of the year and year-over-year comparisons, our advertising will definitely be up for the remainder of the year.

Ladies and gentlemen, this does conclude today's Valvoline Incorporated 2Q 2021 earnings conference call. You may now disconnect.

Thank you.