LEXINGTON, Ky., July 31, 2019 /PRNewswire/ -- Valvoline Inc. (NYSE: VVV), a leading supplier of premium branded lubricants and automotive services, today reported financial results for its third fiscal quarter ended June 30, 2019.

"We are pleased with the 10 percent growth in adjusted EBITDA in the third quarter," CEO Sam Mitchell said. "Quick Lubes had another strong quarter, with ongoing unit additions and system-wide same-store sales growth of nearly 10 percent, while Core North America saw improved third-quarter performance, despite market dynamics that remain challenging, and International had improved profitability.

"At our recent investor day, we presented our long-term strategy to aggressively grow Quick Lubes, maintain Core North America and develop International. As our results in the third quarter show, Quick Lubes continues to grow, while we take actions designed to stabilize Core North America and build our market share in International."

Third-Quarter Results

Reported third-quarter 2019 net income and EPS were $65 million and $0.34, respectively, compared to reported third-quarter 2018 net income and EPS of $64 million and $0.33, respectively. Third-quarter 2019 adjusted net income and adjusted EPS were $70 million and $0.37, respectively, compared to adjusted net income of $62 million and adjusted EPS of $0.32 in the prior-year period.

Third-quarter 2019 adjusted results exclude $4 million ($0.02 per diluted share) of restructuring and related expenses recorded in selling, general and administrative (SG&A) expenses and $5 million ($0.02 per diluted share) of business interruption expenses recorded in cost of sales related to the recent temporary shutdown of Valvoline's Deer Park, Texas blending facility due to a fire and resulting chemical releases at a nearby third-party petrochemical terminal, as previously announced. (For a full reconciliation of adjusted results, see table 7.) Third-quarter adjusted EBITDA of $126 million increased 10 percent versus the prior-year period.

Effective Oct. 1, 2018, the company adopted the new revenue recognition accounting standard. The adoption primarily resulted in a reclassification of certain items within the company's income statement and for the third quarter had a $1 million unfavorable impact on net earnings, negatively affecting Core North America's volume and profitability, and had no impact on cash flow from operations. Third-quarter 2019 results compared to the prior-year period included increases of approximately $10 million in sales and $14 million in cost of sales, as well as decreases of $3 million in SG&A expenses and $1 million in equity and other income. Excluding these impacts, sales would have increased 5 percent, cost of sales would have increased 4 percent, and SG&A, excluding restructuring and related expenses, would have increased 5 percent.

Operating Segment Results

Quick Lubes

• SSS grew 9.7% system-wide, 9.2% for company-owned stores and 10.0% for franchised stores
• Operating income grew 26% to $48 million, and adjusted EBITDA grew 21% to $57 million
• Quick Lubes ended the quarter with 1,352 total company-owned and franchised stores, a net increase of 25 during the period and 198 versus the prior year

The Quick Lubes operating segment continued its strong performance in the third quarter. The growth in SSS was the result of an increase in both transactions and average ticket. Transactions continue to benefit from customer acquisition and retention programs. Premium mix, pricing and an increase in revenue from non-oil-change services led to improvement in average ticket.

Sales and segment EBITDA growth were driven by increased SSS and the addition of 198 net new company-owned and franchised stores, as compared to the prior year, with 25 net new stores added during the third quarter. The year-over-year increase in stores includes more than 100 franchised locations in Canada through the Great Canadian Oil Change (GCOC) and Oil Changers acquisitions, both of which are performing well in their transition to Valvoline's industry-leading quick lubes model. 

The 18 net new company-owned stores added in the third quarter included the previously announced acquisition of an independent, 12-store system in Las Vegas on April 12.

Core North America

• Operating income was $38 million and adjusted EBITDA was flat at $46 million
• Lubricant volume was 24.1 million gallons, down 5% versus the prior-year period
• Lubricant volume increased 8% sequentially versus second quarter 2019

Core North America's adjusted EBITDA was flat to the prior-year period -- and would have grown by $3 million, excluding the impacts of revenue recognition and the transfer of the GCOC product sales to the Quick Lubes segment. These results reflect progress made toward addressing the difficult DIY market dynamics in the retail channel.

Lubricant volume would have declined by 3%, excluding the transfer of the GCOC product sales and lower volume from a key account in reorganization proceedings. The year-over-year decline was primarily due to reductions in branded volume in the retail channel, though this branded volume was consistent on a sequential basis.

Ongoing softness and competitive pressures in the broader DIY retail automotive lubricant market are expected to continue going forward. In addition, recently announced raw material cost increases are expected to have a larger impact in the fourth quarter as they were only partially effective in the third quarter.

International

• Lubricant volume was flat versus the prior-year period at 14.3 million gallons
• Lubricant volume from unconsolidated joint ventures increased 5% to 10.9 million gallons
• Operating income was $20 million, and adjusted EBITDA was up 5% at $23 million

International had solid growth in the EMEA region, principally in Europe, offset by declines in Latin America and certain Asia-Pacific markets. Good performance by unconsolidated joint ventures contributed to the growth in adjusted EBITDA in the third quarter.

Operating results continued to be negatively affected by the strong U.S. dollar, with an unfavorable net foreign exchange impact of $1 million in the third quarter.

On July 1, the company completed its previously announced acquisition of an Eastern European lubricants business, which included a manufacturing facility and is expected to improve the company's supply chain capabilities and market access in the region. Modest integration costs related to the acquisition are anticipated in the fourth quarter.

Balance Sheet and Cash Flow

• Total debt of approximately $1.3 billion and net debt of approximately $1.2 billion
• Year-to-date cash flow from operations of $214 million; free cash flow of $141 million

Outlook

"Our performance in the third quarter gives us confidence in meeting our full-year outlook," Mitchell said. "We are narrowing our adjusted EBITDA guidance to the high end of the previous range at $465 million to $470 million and raising our same-store sales guidance to 9 percent to 10 percent.

"With the ongoing strong performance of the Quick Lubes segment, it now represents 45 percent of total Valvoline adjusted EBITDA for both the third quarter and year to date. We fully expect this momentum in our best-in-class quick lubes model to continue as we move into the next fiscal year, positioning the segment to be on track to meet the low-double digit to mid-teens EBITDA growth targets that we announced at our recent investor day.

"We also continue to execute against the broad-based restructuring and cost-savings program announced previously, and we expect to generate annualized operating expense savings of $40 million to $50 million by the end of the next fiscal year. This program gives us more flexibility to address the ongoing market dynamics in Core North America and to invest in growth opportunities."

Information regarding the company's outlook for fiscal 2019 is provided in the table below: 

The fiscal 2019 outlook, provided in the table above, includes the impact of the company's adoption of new revenue recognition accounting guidance, effective as of Oct. 1, 2018.

Valvoline's outlook for adjusted EBITDA, diluted adjusted EPS and the adjusted effective tax rate are non-GAAP financial measures that exclude or will otherwise be adjusted for items impacting comparability. Valvoline is unable to reconcile these forward-looking non-GAAP financial measures to GAAP net income and diluted EPS for 2019 without unreasonable efforts, as the company is currently unable to predict with a reasonable degree of certainty the type and extent of certain items that would be expected to impact GAAP net income and diluted EPS in 2019 but would not impact non-GAAP adjusted results.

Conference Call Webcast

Valvoline will host a live audio webcast of its fiscal third quarter 2019 conference call at 9 a.m. ET on Thursday, August 1, 2019. The webcast and supporting materials will be accessible through Valvoline's website at http://investors.valvoline.com. Following the live event, an archived version of the webcast and supporting materials will be available for 12 months.

Basis of Presentation

Certain prior-year amounts have been reclassified to conform to current-year presentation. In addition, the company adopted the new revenue recognition accounting standard, effective at the beginning of fiscal 2019, using the modified retrospective method; accordingly, Valvoline's consolidated and segment results for periods prior to this adoption were not adjusted. However, opening retained deficit was increased by $13 million, representing the cumulative effect of the changes, primarily related to the timing of certain sales made to distributors.

Use of Non-GAAP Measures

To aid in the understanding of Valvoline's ongoing business performance, certain items within this news release are presented on an adjusted basis. These non-GAAP measures, presented on both a consolidated and operating segment basis, which are not defined within U.S. GAAP and do not purport to be alternatives to net income/loss, earnings/loss per share or cash flows from operating activities as a measure of operating performance or cash flows. For a reconciliation of non-GAAP measures, refer to Tables 4, 7, 8 and 9 of this news release.

The following are the non-GAAP measures management has included and how management defines them:

• EBITDA, which management defines as net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;
• Adjusted EBITDA, which management defines as EBITDA adjusted for certain non-operational items, including net pension and other postretirement plan expense/income; impairment of equity investment; and other items (which can include costs related to the separation from Ashland, impact of significant acquisitions or divestitures, restructuring costs, or other non-operational income/costs not directly attributable to the underlying business);
• Free cash flow, which management defines as operating cash flows less capital expenditures and certain other adjustments, as applicable;
• Adjusted net income, which management defines as net income/loss adjusted for certain key items impacting comparability as noted in the definition of Adjusted EBITDA above, as well as the estimated net impact of the enactment of tax reform; and
• Adjusted EPS, which management defines as earnings per diluted share calculated using adjusted net income.

These measures are not prepared in accordance with U.S. GAAP and contain management's best estimates of cost allocations and shared resource costs. Management believes the use of non-GAAP measures on a consolidated and operating segment basis assists investors in understanding the ongoing operating performance of Valvoline's business by presenting comparable financial results between periods. The non-GAAP information provided is used by Valvoline's management and may not be comparable to similar measures disclosed by other companies, because of differing methods used by other companies in calculating EBITDA, Adjusted EBITDA, free cash flow, Adjusted net income, and Adjusted EPS. These non-GAAP measures provide a supplemental presentation of Valvoline's operating performance.

Due to depreciable assets associated with the nature of the Company's operations and interest costs related to Valvoline's capital structure, management believes EBITDA is an important supplemental measure to evaluate the Company's operating results between periods on a comparable basis

Adjusted EBITDA, Adjusted net income, and Adjusted EPS generally include adjustments for unusual, non-operational or restructuring-related activities, which impact the comparability of results between periods. Management believes these non-GAAP measures provide investors with a meaningful supplemental presentation of Valvoline's operating performance. These measures include adjustments for net pension and other postretirement plan expense/income, which includes several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets, as well as those that are predominantly legacy in nature and related to prior service to the company from employees (e.g., retirees, former employees, current employees with frozen benefits). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) actuarial gains/losses, and (iv) amortization of prior service cost/credit. Significant factors that can contribute to changes in these elements include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets, and other changes in actuarial assumptions, such as the life expectancy of plan participants. Accordingly, management considers that these elements are more reflective of changes in current conditions in global financial markets (in particular, interest rates) and are outside the operational performance of the business and are also primarily legacy amounts that are not directly related to the underlying business and do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees for current service. These measures will continue to include pension and other postretirement service costs related to current employee service as well as the costs of other benefits provided to employees for current service.

Management uses free cash flow as an additional non-GAAP metric of cash flow generation. By including capital expenditures and certain other adjustments, as applicable, management is able to provide an indication of the ongoing cash being generated that is ultimately available for both debt and equity holders as well as other investment opportunities. Unlike cash flow from operating activities, free cash flow includes the impact of capital expenditures, providing a more complete picture of cash generation. Free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments. The amount of mandatory versus discretionary expenditures can vary significantly between periods.

Valvoline's results of operations are presented based on Valvoline's management structure and internal accounting practices. The structure and practices are specific to Valvoline; therefore, Valvoline's financial results, EBITDA, Adjusted EBITDA, free cash flow, Adjusted net income and Adjusted EPS are not necessarily comparable with similar information for other comparable companies. EBITDA, Adjusted EBITDA, free cash flow, Adjusted net income and Adjusted EPS each have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, net income and cash flows from operating activities as determined in accordance with U.S. GAAP. Because of these limitations, you should rely primarily on net income and cash flows provided from operating activities as determined in accordance with U.S. GAAP and use EBITDA, Adjusted EBITDA, free cash flow, Adjusted net income and Adjusted EPS only as supplements. In evaluating EBITDA, Adjusted EBITDA, free cash flow, Adjusted net income and Adjusted EPS, you should be aware that in the future Valvoline may incur expenses/income similar to those for which adjustments are made in calculating EBITDA, Adjusted EBITDA, free cash flow, Adjusted net income and Adjusted EPS. Valvoline's presentation of EBITDA, Adjusted EBITDA, free cash flow, Adjusted net income and Adjusted EPS should not be construed as a basis to infer that Valvoline's future results will be unaffected by unusual or nonrecurring items.

About Valvoline™

Valvoline Inc. (NYSE: VVV) is a leading worldwide marketer and supplier of premium branded lubricants and automotive services, with sales in more than 140 countries. Established in 1866, the company's heritage spans more than 150 years, during which it has developed powerful brand recognition across multiple product and service channels. Valvoline ranks as the No. 3 passenger car motor oil brand in the DIY market by volume. It operates and franchises more than 1,300 quick-lube locations, and is the No. 2 chain by number of stores in the United States under the Valvoline Instant Oil Change^SM brand and the No. 3 chain by number of stores in Canada under the Great Canadian Oil Change brand. It also markets Valvoline lubricants and automotive chemicals, including the new Valvoline™ Modern Engine Full Synthetic Motor Oil, which is specifically engineered to protect against carbon build-up in Gasoline Direct Injection (GDI), turbo and other engines manufactured since 2012; Valvoline High Mileage with MaxLife technology motor oil for engines over 75,000 miles; Valvoline Synthetic motor oil; and Zerex™ antifreeze. To learn more, visit www.valvoline.com.

Forward-Looking Statements 

Certain statements in this news release, other than statements of historical fact, including estimates, projections and statements related to Valvoline's business plans and operating results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Valvoline has identified some of these forward-looking statements with words such as "anticipates," "believes," "expects," "estimates," "is likely," "predicts," "projects," "forecasts," "may," "will," "should" and "intends" and the negative of these words or other comparable terminology. These forward-looking statements are based on Valvoline's current expectations, estimates, projections and assumptions as of the date such statements are made and are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. Additional information regarding these risks and uncertainties are described in the company's filings with the Securities and Exchange Commission (the "SEC"), including in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk" sections of Valvoline's most recently filed periodic reports on Forms 10-K and Forms 10-Q, which are available on Valvoline's website at http://investors.valvoline.com/sec-filings or on the SEC's website at http://sec.gov. Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future, unless required by law.

™ Trademark, Valvoline or its subsidiaries, registered in various countries
^SM Service mark, Valvoline or its subsidiaries, registered in various countries

FOR FURTHER INFORMATION

Sean T. Cornett
Sr. Director, Investor Relations & Communications
+1 (859) 357-2798
scornett@valvoline.com

SOURCE Valvoline Inc.