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Valvoline Reports 4th Quarter And Fiscal Year 2019 Results

Reported fourth-quarter 2019 net income and EPS were $27 million and $0.14, respectively, compared to reported fourth-quarter 2018 net income and EPS of $45 million and $0.23, respectively.

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Valvoline Inc., a leading supplier of premium branded lubricants and automotive services, recently reported financial results for its fourth quarter and fiscal year ended Sept. 30, 2019.

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“We are pleased with the strong results in the fourth quarter, which exceeded our expectations,” CEO Sam Mitchell said. “Quick Lubes’ momentum continued, highlighted by 10 percent system-wide same-store sales growth. Core North America saw its highest quarterly EBITDA results of the year, benefiting from lower than anticipated costs and operating expenses.”

Fourth-Quarter Results

Reported fourth-quarter 2019 net income and EPS were $27 million and $0.14, respectively, compared to reported fourth-quarter 2018 net income and EPS of $45 million and $0.23, respectively. Fourth-quarter 2019 adjusted net income and adjusted EPS were $75 million and $0.40, respectively, compared to adjusted net income of $65 million and adjusted EPS of $0.34 in the prior-year period. Reported and adjusted net income and EPS for the current quarter and the year included a discrete tax benefit of approximately $4 million or $0.02 per diluted share.

Fourth-quarter 2019 adjusted, after-tax results exclude $50 million ($0.27 per diluted share) related to mark-to-market pension and other post-employment (OPEB) remeasurement impacts and $2 million ($0.01 per diluted share) of restructuring and related expenses partially offset by a $4 million ($0.02 per diluted share) acquisition-related bargain purchase gain. Fourth-quarter adjusted EBITDA of $129 million increased 7 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 fourth quarter had no impact on net earnings or on cash flow from operations. Fourth-quarter 2019 results compared to the prior-year period included increases of approximately $16 million in sales and $17 million in cost of sales, as well as decreases of $1 million in SG&A expenses. Excluding these impacts, sales would have increased 3 percent, cost of sales would have increased 1 percent, and SG&A, excluding restructuring and related expenses, would have increased 12 percent.

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Operating Segment Results

Quick Lubes

  • SSS grew 10.0% system-wide, 9.5% for company-owned stores and 10.4% for franchised stores
  • Operating income and adjusted EBITDA each grew 14% to $48 million and $58 million, respectively
  • Quick Lubes ended the quarter with 1,385 total company-owned and franchised stores, a net increase of 33 during the period and 143 versus the prior year

The Quick Lubes operating segment finished the fiscal year with another strong quarter. The exceptional 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 143 net new company-owned and franchised stores, as compared to the prior year, with 33 net new stores added during the fourth quarter. The year-over-year increase in stores includes 57 company-owned stores, with 29 acquired and 28 newly-opened locations, and 86 franchised locations, with 31 stores from the Oil Changers acquisition in Canada.

The 33 net new stores added in the fourth quarter included the first four company-owned stores in Canada as part of the previously announced acquisition of an independent system in Alberta.

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Core Nort h America

  • Operating income and adjusted EBITDA each grew 2% to $43 million and $48 million, respectively
  • Lubricant volume was 23.9 million gallons, down 4% versus the prior-year period

Lower than anticipated costs and expenses in the current quarter, due primarily to progress in the previously announced operating expense reduction program, drove modest year-over-year growth in Core North America’s adjusted EBITDA despite lower volume.

The year-over-year decline in lubricant volume was primarily due to reductions in branded volume in the retail channel, though this volume was relatively flat on a sequential basis.

International

  • Lubricant volume was flat versus the prior-year period at 15.1 million gallons
  • Lubricant volume from unconsolidated joint ventures increased 4% to 9.6 million gallons
  • Operating income was $24 million, and adjusted EBITDA was flat at $23 million

International had volume growth in Latin America, certain Asia-Pacific markets and Europe (driven by the previously announced Eastern European acquisition) offset by declines in other regions. Solid volume and profit growth in unconsolidated joint ventures contributed to adjusted EBITDA in the quarter.

Reported operating income of $24 million included an acquisition-related bargain purchase gain of $4 million. Results continued to be negatively affected by the strong U.S. dollar, with an unfavorable net foreign exchange impact of $1 million in the fourth quarter.

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Balance Sheet, Cash Flow and Effective Tax Rate

  • Total debt of approximately $1.3 billion and net debt of approximately $1.2 billion
  • Full-year cash flow from operations of $325 million; free cash flow of $217 million
  • Effective tax rate of 3.6% and 21.5% for the quarter and full-year, respectively, benefiting from favorable discrete tax items

Fiscal 2019 Review and 2020 Outlook

  • Adjusted EBITDA grew 3% to $478 million, despite significant market headwinds, particularly in Core North America
  • Record SSS growth of 10.1%, reflecting the 13th consecutive year of increases
  • Added 143 net new stores, including 28 newly-opened company-owned stores
  • Strong free cash flow of $217 million, despite a $15 million increase in capital expenditures

“Our performance in the fourth quarter contributed to modest growth in adjusted EBITDA for 2019,” Mitchell said. “Quick Lubes’ strong growth trajectory continued this year with record same-store sales growth and adjusted EBITDA growth of 16 percent. The segment now represents 45 percent of total Valvoline adjusted EBITDA.”

The outlook for fiscal 2020 includes the following:

  • Quick Lubes anticipates continued unit growth through a combination of newly built company-owned stores, acquisitions and franchise store additions. Competitive advantages including a superior in-store customer experience are expected to drive a 14th consecutive year of SSS growth.  
  • Core North America will continue working to stabilize the business in the face of ongoing DIY category dynamics by engaging closely with key retailers. Installer channel is anticipated to grow modestly, by leveraging opportunities in heavy duty and continuing to strengthen the customer value proposition.
  • International anticipates a return to volume growth across most regions. Investments in channel development, brand building and start-up costs for a previously announced plant in China are expected to offset gross profit improvements leading to roughly flat segment profitability.
  • Capital investment in the China plant is anticipated to peak at $40 million to $50 million, impacting the outlook for free cash flow.

“We expect to make significant progress in 2020 to accelerate our growth in Quick Lubes, maintain Core North America and develop International, as we presented at our investor day earlier this year,” Mitchell said.

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