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Monday, February 12, 2018VOLUME 14 ISSUE 7
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Valvoline Posts Fiscal 1Q Loss

Valvoline Inc. last Wednesday reported financial results for its fiscal first quarter ended Dec. 31, 2017. The company reported a first-quarter 2018 net loss of $10 million compared to a profit of $72 million in last year's similar quarter. These results include a provisional charge of $75 million related to recently enacted U.S. tax reform, after-tax income of $7 million related to non-service pension and other post-employment benefit (OPEB) income that is now classified as non-operating under early adopted new accounting guidance, and an after-tax charge of $1 million (negligible EPS impact) of separation-related expenses. Reported net income for first quarter 2017 of $72 million, which includes after-tax income of $16 million related to non-operating pension and OPEB non-service income and remeasurement  adjustments and an after-tax charge of $4 million of separation-related expenses. Adjusted first-quarter net income, excluding the impact of tax reform, pension income and separation costs, was $59 million, compared to $60 million of adjusted net income in the prior year.

First-quarter results were driven by strong SSS in VIOC, growth in premium product mix across all segments and continued volume gains in international markets. Adjusted EBITDA of $108 million declined modestly compared to the prior year with overall favorable volume and mix, offset primarily by planned investments in SG&A.

Lubricant volume increased 2 percent to 43.8 million gallons.

Revenue for the most recent quarter was $545 million compared to $489 million in the similar quarter in 2016.

Operating Segment Results for the First Quarter:

- Core North America
• Lubricant volume declined 1% to 23.8 million gallons, branded volume up slightly
• Branded premium mix increased 400 basis points to 47.8%
• Operating income declined 16% to $43 million, EBITDA declined 13% to $47 million

Core North America branded volumes grew slightly in the quarter. These gains were offset by a decline in non-branded volume, primarily driven by the timing of promotions. Core North America realized benefits of its strategy to grow premium product sales, with premium mix increasing 400 basis points to 47.8 percent of branded volume. Overall favorable mix was offset by planned investments in SG&A and higher-than-expected raw material costs, due to the hurricanes and new packaging launch, which led to the decline in segment EBITDA. Unit margins improved sequentially, the result of pricing actions taken during the latter part of fiscal 2017, and are expected to improve further in the second quarter.

- Quick Lubes
• VIOC SSS increased 7.9% overall, 8.2% for company-owned stores and 7.7% for franchised stores
• Operating income and EBITDA grew 21%, to $35 million and $41 million, respectively 3
• VIOC ended the quarter with 1,139 total stores, an increase of 12 during the period and 63 over prior year

The Quick Lubes operating segment had another strong quarter, building from its exceptional quarter in the prior year and demonstrating the momentum of the company's retail operations. Growth in SSS was the result of both increased transactions and average ticket. Transactions benefited from the strength of VIOC's ongoing customer acquisition programs, while pricing and effective store execution were the drivers of improvements in average ticket. Sales and segment EBITDA growth were driven by SSS and the addition of 63 net new stores as compared to the prior year, as well as the previously-announced acquisition of 56 Henley Bluewater franchise locations. As part of Valvoline's strategy to expand its retail presence, VIOC added 12 net new stores to the system during the quarter, two company-owned and 10 franchised locations.

- International
• Lubricant volume grew 4% to 14.3 million gallons, 9% including unconsolidated joint ventures
• Lubricant volume from unconsolidated joint ventures grew 16%, to a record 10.8 million gallons
• Operating income and EBITDA each declined $1 million, or 5%, to $19 million and $20 million, respectively

The International operating segment again reported broad-based volume growth across emerging and mature markets, the result of ongoing market penetration efforts that build on the strong volume base from the prior year. Equity and royalty income from unconsolidated joint ventures grew 17 percent, due primarily to strong results in India and China. Volume growth, improved joint venture results and foreign exchange benefits were offset by planned investments in SG&A and modestly lower unit margins, impacted by the lower contribution from higher-margin geographies and higher raw material and supply chain costs in some markets. Unit margins are expected to improve in the second quarter.

"As we said last quarter, we are focused on accelerating our growth," Mitchell said. "We are on track to deliver full-year adjusted EBITDA of $480 to $500 million and expect to see top- and bottom-line growth in each of our operating segments."

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