Good morning. My name is Carol and I will be your operator today. At this time, I would like to welcome everyone to Valvoline's Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question-and-answer session.

[Operator Instructions] At this time, I would like to turn the call over to Sean Cornett, Investor Relations. Mr. Cornett please go ahead..

Thank you, Carol. Good morning and welcome to Valvoline's second quarter fiscal 2019 conference call and webcast. Valvoline released results for the quarter ended March 31, 2019 at approximately 5:00 P.M. Eastern time yesterday May 1st.

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 news 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.

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, non-operational, 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 was included in our earnings release. 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, we can review our reported results for the quarter. For the fiscal second quarter, Valvoline delivered reported operating income of $96 million, net income of $63 million, and EPS of $0.33. Year-to-date cash flow from operating activities was $134 million.

Beginning this fiscal year, Valvoline adopted the new revenue recognition accounting standard. The impact of the standard is essentially a reclassification of certain items in the income statement, primarily impacting sales, cost of sales, and SG&A.

For Q2, the changes amounted to a roughly $2 million after-tax expense impacting Core North America's profitability. In Q2 this year there were four key items. Restructuring and related expenses tied to the program we announced last quarter were $7 million after-tax. Non-service pension and OPEB income was $2 million after-tax.

The finalization of Kentucky tax reform was a $2 million benefit in tax expense. One of our plants was temporarily shut down due to a fire at a nearby major third-party petrochemical terminal. The associated business interruption costs were $1 million after-tax.

In Q2 of fiscal 2018, key items were $7 million of pension and OPEB after-tax income, $6 million of after-tax expense for legacy and separation related cost, and $2 million of after-tax expense related to U.S. tax reform. Now, as we move to slide 4, let's review our adjusted results.

Our adjusted operating income was $108 million, adjusted EBITDA was $122 million, and adjusted EPS was $0.35. Versus Q1 our overall sequential results in Q2 were notably better across all business segments, particularly in Core North America where we are taking actions to stabilize the business.

Our best-in-class Quick Lubes business delivered another excellent quarter with very strong same-store sales growth and solid unit addition. In International, volume softness in emerging markets and negative foreign exchange impact continued in Q2. Overall, our adjusted EBITDA is in line with Q2 last year and our adjusted EPS grew 3%.

Now, let me turn it over to Sam to review our segment results..

Thanks Sean. In Quick Lubes, we delivered same-store sales growth of nearly 11%. Our two-year stack growth in the quarter was more than 20%. Year-to-date same-store sales growth was just over 10% and two-year stack growth just over 19%.

The same-store sales growth results are far better than the broader automotive aftermarket and reflect our competitive advantage. Overall, sales growth of 27% was driven by same-store sales and the addition of 186 net new stores.

EBITDA grew 15% in the quarter and would've grown more than 20% excluding the gain on sale of stores to one of our franchisees recorded last year in Q2.

In Core North America the actions we implemented in response to market dynamics in DIY helped drive a significant sequential improvement in our branded volume in the retail channel leading to better sequential performance for the segment. However, challenges in the DIY market remain.

The year-over-year volume decline for Core North America was primarily attributed to several factors in the installer channel which I'll discuss in a few minutes. In International, volume growth in mature markets was offset by continuing soft volumes in emerging markets. Including unconsolidated joint ventures, volume grew 1%.

Sales and EBITDA declines year-over-year were driven by foreign exchange impacts. Let's take a closer look at performance in Quick Lubes on the next slide. Q2 same-store sales growth was 10.8% system-wide. Company stores grew 10.2%, the franchise stores grew 11.2%.

Overall same-store sales growth was balanced between transaction and average ticket increases. The exceptional service experience that we deliver every day in our stores continues to grow our customer base while keeping our retention rates high.

Fueling average ticket growth are the benefits of pricing and premium mix in growing non-oil-change revenue which is a key focus as we drive further penetration of our full menu of services. We continued our steady pace of unit growth across the system, opening 12 company stores and 14 franchise stores during Q2.

Store growth was primarily driven by newly built stores including our investment in new company stores that began last year. Our franchisees also continue to show a commitment to growth.

In the last 12 months, we've added 186 new stores with more than 100 of those being franchise stores in Canada through our recent acquisition of Great Canadian Oil Change and Oil Changers which are both off to good starts in their transitions. During the quarter, we announced a joint venture in China with a local Quick Lubes services provider.

The JV opened its first store in February 2018 and now has three pilot stores operating in China's most populous province. Soon after the end of Q2, we completed the acquisition of an independent Quick Lubes system in Las Vegas, marking a significant expansion of our company store presence in an important market.

Based on our strong year-to-date performance, we are raising our full year same-store sales guidance to 8% to 9%. This represents a modest slowdown in same-store sales growth for the second half of this year, due largely to lapping some significant pricing actions we implemented late last year. Let's turn to the next slide.

We were encouraged by the sequential improvement in Core North America's EBITDA driven by better branded DIY volume in the retail channel. As a reminder, our Q1 DIY volume was particularly weak due to both timing-related items and heightened competitive dynamics in the category.

We have moved past the timing items and we're addressing new competitive dynamics with improved promotional positioning. For instance, we worked with key retailers to optimize promoted price points especially in the conventional end of our motor oil product line.

The increase in our promotional effectiveness from these actions helped drive a substantial sequential improvement in DIY branded volume though still down on a year-over-year basis.

In Q2, we also benefited from the short-term impact of lower raw material cost which combined with the improved retail channel volume led to Core North America's EBITDA increase of 29% versus Q1. We've also strengthened our consumer communications to focus on the value of the Valvoline brand compared to other offerings.

For instance, in late April a new bilingual ad campaign debuted on digital and broadcast media that highlights our unique commitment to product quality that sets us apart from our competitors. In addition, the restructuring and cost savings program that we announced last quarter is expected to help stabilize Core North America's results over time.

Overall volume declined 9% year-over-year with most of the decrease concentrated in the installer channel.

More than two-thirds of that decline was attributed to timing of sales to distributors, including the impact of adoption of new revenue-recognition accounting standard along with the shift of Great Canadian product sales to Quick Lubes and lower volume from a key account in reorganization proceedings.

Let's turn to the next slide to look at our International results. Volume grew a solid 8% in the Europe Middle East and Africa region. The channel development actions that we implemented in prior periods are driving this growth. Soft volume in other regions offset these gains.

We expect volume to improve in the second half of the year bolstered by a stronger promotional events calendar in Latin America and new distributors across key markets in Asia-Pacific. In Q2, we signed a definitive agreement to acquire a plant in a small regional lubricants brand in Serbia.

We expect this investment in our European supply chain to enhance our access to the Eastern European market and to continue our share gains in the region adding to the continued volume growth we expect in EMEA in the back half of this year. Sales in segment EBITDA declined $10 million and $2 million respectively due to foreign exchange impacts.

Now let me pass it over to Mary to review our financial results..

Thanks Sam. Our adjusted results for Q2 are summarized on slide 9. Beginning this fiscal 2019, we adopted the new revenue-recognition standard, which primarily reclassified certain items between sales, cost of sales and SG&A.

Reported sales increased 4% with a 2% or $9 million increase from revenue recognition impacts offset by a foreign exchange headwind of 2%. Pricing and favorable mix were the primary drivers of organic sales increases.

The adoption of revenue recognition also increased cost of sales by $13 million and accounted for roughly 120 basis points of the decline in gross margin. Excluding revenue recognition and restructuring charges SG&A declined 5% year-over-year.

Adjusted EBITDA was flat with the benefits of mix and lower SG&A offset by unfavorable revenue recognition and FX impacts and the year-over-year effect of the gain on sales of company's stores last fiscal year. The overall impact of revenue recognition in Q2 was $2 million unfavorable to net income primarily affecting profit in Core North America.

The year-to-date impact was $1 million unfavorable. Let's move to slide 10 to discuss corporate items. Our reported effective tax rate for the quarter was 21.3% benefiting from the finalization of Kentucky tax reform. Adjusted for key items our effective tax rate was 24.7%. For the full year, we continue to expect our adjusted rate to be 25% to 26%.

Year-to-date cash flow from operating activities was $134 million. Year-to-date capital expenditures were $48 million, leading to free cash flow of $86 million. Net debt was flat to last quarter at $1.2 billion. We amended and extended our credit facilities through 2024 increasing our liquidity and modestly lowering our borrowing costs.

Let's turn to the next slide. Our plant in Deer Park, Texas is our second largest in the U.S. and is near a third-party petrochemical terminal that recently experienced a fire and related fuel and chemical releases. Our facility was not damaged, but was shut down beginning March 18 following the start of the fire.

It has reopened and restarted operations. Our teams led by supply chain did an excellent job of managing through the shutdown, acting quickly to shift production to our other blending facilities. We expect little to no impact to customers. We are in the process of determining the total cost related to the shutdown, which lasted about five weeks.

$1 million of shutdown related cost was recorded in Q2 with the balance impacting reported results in Q3. We are treating these costs as a non-recurring key item and excluding them from adjusted earnings. We have insurance against the loss, and expect to recover the majority of these business interruption costs.

Now let's turn to the next slide for an update on our restructuring program. Last quarter we announced a restructuring and cost saving program designed to drive efficiencies and reduce our overall operating costs.

We also expect the program to drive organizational and process simplification to support the stabilization of our Core North America business. During Q2, we completed the organizational design phase of the program.

We expect to record $13 million to $17 million of pre-tax restructuring related charges for the full year, of which $8 million was recorded in SG&A in Q2.

We are on track to achieve broad-based annualized operating expense savings in the range of $40 million to $50 million on a run rate basis by the end of next fiscal year, with modest benefits realized this year. We expect some portion of these savings to be reinvested in the business. Now let's turn to the next slide and look at guidance.

We are modestly lowering our total volume and sales growth expectations, while raising same-store sales guidance based on first half performance. With the recent posted increases in raw material costs, we anticipate negative price cost lag impacts in the back half of the fiscal year.

We are reducing adjusted EBITDA guidance to $460 million to $470 million as a result of these cost increases. We are maintaining our anticipated capital expenditure budget and reducing our free cash flow guidance to $180 million to $200 million to reflect our updated EBITDA expectations. Now let me turn it back over to Sam to wrap up..

Thanks Mary. We recognize there are challenges particularly in Core North America. We have a plan in place to address these as we work to stabilize that business. We made good progress in Q2, including progress on our restructuring and cost savings programs that should generate significant savings starting next year.

Quick Lubes continues to perform at a very high level, driving operational improvements and adding units. The importance of the performance and growth here could not be overstated. In fact, we will be talking more about the significance of this and our long-term vision for the company at our upcoming Investor Day on May 16 in New York.

And with that, I hand it over to Sean for Q&A..

Thanks Sam. Before we open the line for Q&A, just a quick reminder, that if you could limit your questions to one and one follow-up, so that we can get to everyone. That would be appreciated. Carol, please open the line..

Thank you. Our first question this morning comes from Simeon Gutman from Morgan Stanley. Please go ahead..

Good morning, Simeon..

Sorry, moving on. Our next question comes from Dmitry Silverstein from Buckingham Research..

Good morning. Thank you for taking my call. Quick question, you talked about the slowdown in growth of Quick Lubes in the second half of the year.

Can you provide a little bit more detail, why the outlook is what it is? Is it just the more difficult comps? Or do you expect some other headwind?.

No. We're expecting continued momentum into the second half of the year. We had some very strong comps that we're up against in the second half of the year, particularly on the ticket side where we were taking pricing adjustments last year that benefited us.

But we're seeing really good momentum into the second half as our marketing programs in driving new trial in our stores and then the continued execution within the store, continue to be strong in driving customer retention and solid ticket improvements too.

One of that highlights that we were pointing out this quarter was just a good balance between both traffic and ticket improvements -- in ticket this past quarter too was more than just pricing. We also saw improved progress on our non-oil change revenue. In other words, a better penetration to some of our non-oil change services..

Okay. That's helpful. So basically, it's good momentum just getting -- going against more difficult comps. On the International side of the business, you talked about emerging market maybe needing to change some distributors and how you go to market.

Is that in the process of being done? Is that done? And then I guess as a follow-up to that, did there -- did the distributor performance kind of fell off the table for some reason? Or has it always been a little bit below your expectations, but it just wasn't bothering you before, because they were still delivering growth? So just trying to understand the dynamics around the distributor changes in the emerging markets?.

Sure. Actually the one significant change that we made about a year ago was in our Brazilian business and that's where we went from a distributor and transferred it to a licensee. So in other words, we reduced our risk and exposure in Brazil significantly. It had a negative impact on our volume throughout a good part of last year then into Q1.

No significant impact in Q2. So regarding our distributor network in emerging markets, we're still in the process of developing our broader network. In other words still adding distributors. But we also work to strengthen our existing distributor base too.

And we've made some really good progress in recent years in markets like China, markets in Southeast Asia is absolutely work-in-progress. Really good progress in Mexico. That's been a market of focus for us in recent years too. So no significant change there.

What we do see in distributor-driven markets, particularly when there is changes in raw material costs, you do get some timing effects and we did feel like that was part of our results in the first half of the year. And in Q2 where if distributors are expecting price decreases they tend to hold back on the purchases.

And going into the quarter, we were looking at potentially lower prices. However, that has of course reversed and we're now seeing base oils move up with crude. And so we are expecting a more normalized ordering pattern from our distributors in those emerging markets.

So still -- with the International business you do get a little bit of that lumpiness, because of this -- the distributor-driven nature of the business. But we're continuing to make good progress in building our capabilities, in building our distribution network beginning to work on more of the value-driving brand-building programs too.

And we are set up we think for a good solid year in the International business on the second half. The first half certainly was disappointing. But I think we're going to see some real good progress in the second half..

Okay. Thank you very much..

You bet..

Our next question comes from Jason English from Goldman Sachs. Please go ahead..

Good morning everyone. This is actually Cody Ross on for Jason this morning. Thank you for taking our questions. Core North America organic volume was down nearly 8% for the second straight quarter. You cited onetime transitory issues such as the timing of revenue recognition to distributors who are to blame for the shortfall this quarter.

Why are you confident that this was indeed a onetime issue? And has this occurred in the past? And why were you not able to foresee this the last time we spoke in early February?.

Yes. The -- first of all to review some of the dynamics on volume in Core North America. Q1 the major factor was some significant softness in the DIY business and some of that was onetime. Just to reiterate one of the biggest issues that we're dealing with in Q1 in DIY was weaker performance in Q4 coming into the first quarter.

And so, we had some inventory, excess inventory at the retail level that impacted Q1. The promotion dynamics continue to be challenging to Q1. But as we communicated in February that we were adjusting those with our merchandising plan. And as a result we saw some really nice improvement as expected the DIY business in Q2.

Now in Q2 the volume softness in Core North America was driven by the installer channel side of the business. And that does have to do with a number of different factors and revenue recognition is part of it. The impact of the business shift that includes Great Canadian obviously that's going over to the Oil Change business.

And then one of our larger national accounts in reorganization that was part of our decline too. And then lastly, there were some timing effects with our distributor business in Q2 also. So I mean it was a combination of factors as we get into the back half of the year. We are seeing some stabilization in the installer side of the business.

We're seeing some progress in our teams winning new business. So I feel really good about where installer and the heavy duty business is headed for Core North America. We are still challenged in the DIY segment where the competitive dynamics are slightly shifted where there was more pressure from private label than in previous years.

But as I said, we've made some important changes with our merchandising plan that we saw some good benefit in Q2. So while I'm feeling better about the actions that we're taking and some impact on our results in DIY market, we'll continue to be challenged in the DIY market during the second half of the year..

Okay, great. Thank you for the color. And one other question. You guys had a nice improvement in Core North America profitability this quarter. Previously you guided gross profit per gallon in this segment to be $3.60 to $3.70 including the revenue recognition change.

Given your higher outlook for base oil now, can you provide us your updated outlook? Thank you..

Yes. The -- as Mary shared with you, we have adjusted our full year guidance for our adjusted EBITDA downwards of roughly $10 million. And that has to do with the higher base oil environment that we're moving into. So there's been a couple significant meaningful base oil increases in the last quarter.

So while we had some modest benefit of lower base oil cost in Q2, we're actually going to begin to feel a bit of a lag effect in Q3 and into Q4 particularly in the DIY business. And so the rising base oil market is something that we're dealing with but we do expect that lag effect will be a negative factor for us in the second half.

Regarding pricing dynamics, we are announcing price -- we have announced price increases. Our competitors have also announced price increases. So we do expect to recover much of the cost increases that are coming at us.

But we do -- we are especially cautious with the DIY market right now and we do expect a little bit longer lag impact there because of the current pricing dynamics. And really doing a better job and making sure that our promoted price points are where they need to be to keep that business healthy..

So, overall Cody our expectation for the full year is to be at the very bottom of the range we gave. But we do expect some slippage in Q3 with some improvement then in Q4. So -- but overall, like I said we expect to be at the low end of the range we had provided, which was $3.60 to $3.70 a gallon for Core North America..

Got you. And if I can just sneak in one more, a very quick one. You told us last quarter that you felt the market was down 3% to 4%. Is that still the case? And I will pass it with that one. Thank you..

Yeah. Specifically I was speaking about the DIY market in Core North America and recent results show a little bit of improvement there. And so when we look at the back half of the year, we're expecting decreases in what we're seeing in current trends of 2.5% to -- down 2.5% to 3%. On the DIFM side, we feel like there's a bit of softness.

We don't have real accurate data there. But we feel that the DIFM market's probably down low single-digit probably in the 1% to 2% range..

Our next question comes from Mike Harrison from Seaport Global Securities. Please go ahead..

Hi, good morning..

Good morning, Mike..

The Quick Lubes business, obviously, a very strong first half in terms of the sales growth. But just looking at the margin performance, it looks like it's going to track in a couple hundred basis points below what we've seen in the first half if you look back at 2016, 2017 and 2018.

Can you give us a better sense Sam of why we're seeing margin pressure there? And maybe what needs to happen in order to realize better operating leverage with that strong same-store sales growth that we're seeing?.

Sure. As we pointed out in the earlier part of the presentation there was an impact in Q1 -- or I'm sorry in Q2 relative to last year. And so the EBITDA growth was actually very close to the overall revenue growth that we saw in the quarter.

And the only difference then is with the newer stores coming online a ramped-up SG&A and lower profit margin on newer stores. So it does have a little bit of a negative effect. Over time we, obviously, should see excellent leverage in this business as the stores continue to perform at a high level.

But just to speak a little bit more on those new stores and we've shared this in the past with regard to how they perform. But usually year one as they come out of the ground are pretty close to breakeven and -- or maybe slightly above.

And then Q2 good solid profit contribution, but maybe half of where they're going to perform by the time to get to Q3 and where the margins are very close to what we see in our more mature stores. So as we've really ramped up the new stores, you do get a bit of a negative effect there.

As we make acquisitions, we also tend to ramp-up the advertising spend. Our competitors don't spend at the same levels that we do. And the marketing spend has been a real key factor for driving new trial and driving those customer accounts. So those are really the key differences between the sales growth and the EBITDA performance on a margin basis.

We're -- we get asked quite a bit around just cost of labor. And there has been pressure on labor inflation. But at the same time with our pricing actions, we've been able to keep up with that. And the team's actually done an excellent job with our hiring plans and success there in driving down our turnover in the business too. Go ahead..

So the other piece that really impacted the Quick Lubes year-over-year operating margin comparison with last year we sold a few stores to one of our franchisees. And that gain on sale that was a gain that was recognized in other income with no revenue impact.

So that accounted for about 190 basis points of the decline in the operating margin year-over-year as well. So if you try to do it on -- the operating margin on an apples-to-apples basis there was a modest decline related to those things that Sam talked about. But a big component of it was that gain on sale last year that won't repeat..

All right. Thanks. I appreciate that detail. And then also wondering if you can provide a little bit of additional color of the DIY volumes. It sounds like they were down a little bit.

Could you maybe breakout what you saw in premium versus conventional and private label within DIY?.

Well, so the overall dynamics in DIY was definitely significant improvement in our overall volume performance and also our share performance, so a real substantial improvement in share growth across our business.

Our difference is like in comparing the conventional versus synthetic, it's really been on the conventional and in the high mileage segment, the lower price segments where we've had the greatest share pressure and that's where adjusting our price points and oil-change special down to 24.99 has had a very meaningful impact.

On the synthetic side Valvoline's share has been solid for us and we've been growing synthetic share modestly over the last number of years as we've continued to focus on that. So even in this current environment where we've got that competitive pressure vis-à-vis product label, our synthetic progress continues to grow.

But I guess, if I could add one more thing, Mike on the -- just on the dynamics in DIY is that the conventional segment has been particularly soft. So we talked about the category being off 2.5%, 3%. But the conventional segment has been off in the 20% range. So really significant declines in conventional.

And that's been offset by very significant growth in the full-synthetic segment. So really interesting dynamic there. It just shows how important it is for us long term to really focus on that synthetic portfolio and in growth and driving our synthetic product line.

But at the same time, there is this delicate balance in not letting share decline impact us too much on the conventional front. And so making sure our price points are where they need to be is really key for us, and Q2 really proved that out..

All right. Thanks very much..

Our next question comes from Chris Bottiglieri from Wolfe research. Please go ahead..

Hi. Thanks for taking my question. I was hoping you can give us a greater appreciation for the difference in profitability of DIY versus DIFM as we think about mix. So last quarter a 2.1 million volume decline drove a $15 million gross profit headwind. But this quarter a 2.2 million headwind drove a $4 million headwind.

So it seems like pretty outsized difference of profitability. But is there anything about like the quality of the volume loss this quarter relative to last quarter so that would maybe explain some of that variance? Thank you..

Yes. Chris, the difference is the impact of the higher gross profits that is generated in the DIY business relative to the installer heavy-duty side of the business. And so losing volume in DIY has a bigger impact than a volume loss on the installer side of the business.

And so it just kind of reinforces the importance of -- making sure that the DIY business, even though it's under pressure right now that we're taking action to address that so that our brand stays strong, our business stays strong. So as you think about Core North America, I feel like we're taking the right actions to stabilize this business.

And as I mentioned earlier, on the installer side, we're seeing – even though we had a weak quarter, we're seeing some good progress when it comes to our ability to win new business, and maintain our margins. And I'm optimistic about our long-term progress.

We've been able to see some steady although low single-digit-type growth on the installer heavy-duty side of the business. The DIY business is the one that has really got our attention with the dynamics that really became evident last summer.

And to review, a little bit of that is that private-label over this last 12 months, really replaced what were on the shelf before, which were some of the mid-tier brands so private label is growing in its shelf presence, and it's replaced the mid-tier brands that were a significant competitor for Valvoline.

And so essentially, a relatively small gap versus the mid-tier brands has now grown into a larger gap versus the value offering with private label. And so that is the reason for the share decline that we felt over this past period. And so we've got to adjust to that and we are making changes.

The first that I mentioned was that, we've reduced our promoted price points on the conventional high mileage segment and with that we've seen a nice rebound in our business. In addition to that, brand strength has a lot to do not just with your price gap versus the value offering it has a lot to do with your consumer promotion, consumer marketing.

And we've taken some real steps to address that. And I'm encouraged by what I see as a much stronger advertising and consumer plan that is going into effect now. The relationship with the trade and the brand support that you get from key accounts is really key to our brand success too.

And that's where we continue to work very closely with our trade partners. And they want to help the DIY category too and they understand that it's not just being competitive on the value end the private label end, but it's also the importance of having strong brands like Valvoline that drive traffic to the stores.

And so those relationships are solid. And so while we've seen some share loss over the last 12 months, I think we'll begin to see some stabilization there as we lap this period as we get into Q3 and Q4.

So while we won't see volume progress so much in Q3, Q4 I think as we prepare ourselves for fiscal 2020, we'll be closer to that stabilization that I hope to see in DIY.

But the last aspect, I'd like to emphasize is the importance of that cost-restructuring program that we put in place, because this gives us the room to make the adjustments to make the right investments and to keep the Core North America business healthy for us for years to come. That is a really important part of our strategy.

So, as the Quick Lubes business becomes more important to our long-term success and our growth in the company obviously that should be very evident to investors. The Core North American business has been a consistent profit generator, cash generator for us and we're working to make sure that that continues to be the case in the long term.

And this – the cost restructuring program is certainly going to help us do that.

So, again, we're taking aggressive action on how we're approaching the business focused on the stabilization of Core North America and then continuing to pour investment and drive growth both in our Quick Lubes operations, but also adding units, building units, working with our franchisees on various growth plans, and continuing to make acquisitions.

The environment for continued growth there is very encouraging and we're really hitting the sweet spot where the consumer is demanding that quick easy trusted experience that Valvoline and its oil changers offers better than anybody else. And so that is going to be a key part of our strategy.

And as I mentioned earlier, we've got an Investor Day coming up in a couple of weeks and we look forward to sharing more about what that means for the long-term plans for the business..

Chris, there's one other thing I would add to that, which is in Q1 we didn't see any reductions in our base oil raw material costs. And so we did have a more negative margin environment across the Core North America business in Q1, which became more favorable in Q2.

And because we did see some of those raw material costs decline, beginning with the first month in our second quarter. So that does make up for some of that margin differential between Q1 and Q2 as well. Just wanted to point that out..

That's really helpful. Then just one quick follow-up on the restructuring.

Like big picture what is it about the restructuring that I guess addresses some of these secular issues that are a little bit out of your control? Is it that you are going to stream onto manufacturing process and lower your acquisition or product manufacturing cost to be more price competitive? Or is it that you were able to like – I don’t know – adapt more easily as – like maybe just walk us through how you think the restructuring will solve some of these issues? That will be helpful..

Yeah. The restructuring effort and cost savings effort is really attacking all aspects of our broader cost structure, as it affects particularly our business here in the U.S. And so, it's addressing our corporate cost structure. Cost structure within Core North America.

It is working on the cost of goods side of the business, which includes both manufacturing efficiency, but also leveraging our global purchasing power and optimizing formulations. And so, it's just a very disciplined effort that cuts across all aspects of our cost structure, both cost of goods and operating expense to get us to a better place.

And it's work that is obviously very timely and it's necessary. And it will improve our competitiveness. It will improve our margin performance. And, I now believe it will make us a more effective operating company too.

So we've been through a lot of change with all the efforts of separation from Ashland and the IPO process and operating as an independent company. I'm really pleased with a lot of the progress. But driving process improvements and how we operate and continue to strengthen our leadership team across all of our businesses.

This is an important effort that we're going through. And I'm really encouraged by how our team is making these adjustments and continuing to stay focused on delivering the customer value.

So it's -- like I said, it's really important to our long-term success, and particularly giving us the ability and the flexibility to make sure that the Core North America business continues to be a healthy business for us for years to come..

Great. Thank you both for thorough responses..

Our next question comes from Olivia Tong from Bank of America Merrill Lynch. Please go ahead..

Thank you. Good morning. I guess we've talked a lot about Core North America, and a couple of the dynamics in Q1 versus Q2, lots of moving pieces in both of them. So, I guess if you could just break it down a little bit in terms of just the market shares.

If you have the detail, where does private label market share stand now? Where does your share in a couple of the other competitors stand? And now that commodity prices are starting to move in the opposite direction are you seeing any signs of some of the pressures curtailing? And your view in terms of your ability to, sort of, price given to the commodities environment now? Thank you..

Olivia, is your question primarily focused on the DIY segment?.

Right..

Okay. Good. Yeah, so as I mentioned before that, the major dynamic has been the mid-tier brands losing distribution and private label taking their place. And as a result, the private label share has grown roughly 500, 600 basis points from right around 20% to 25% to 26% of the overall DIY category.

And so, you've had very significant share growth in a relatively short period of time. So, while most of that share growth, especially last year came at the expense of the mid-tier brands like the Mobil Super that has lost distribution.

That price gap versus the premium brands and the value offering in private label has had an impact on the premium brands of Castrol Pennzoil and Valvoline. And so, with the two years of cost increases that we went through in 2017 and 2018, and pushing our prices up while at the same time private label became more of the chief value competitor.

That dynamic, that gap, that had grown is what needed to be adjusted, and that what we had to respond to. And so, as we've done that, we've seen much better share performance in the second quarter, as we've changed our promotional plan, promotional pricing, particularly on the conventional high mileage segment.

So for Valvoline share we've had some modest share losses. And then the key thing for us is -- as we move forward is to continue to strengthen the brand, and that's merchandising plan, but again it's the consumer marketing that goes behind that too.

And so while the DIY segment is still not quite settled with the new dynamics, we are taking the action to address it.

But, -- yeah, so any follow-up question to that?.

No. That was great. And I guess on the Quick Lubes, if I could switch to that. Obviously the comps driver continues really strong there above what's going into the year expectation for your offsetting there.

And so, I guess just trying to understand when does this get saturated? Jiffy hasn't actually come back with a lot in terms of competitive response? Would have to assume that eventually they're sick and tired of losing share to you guys.

So are you seeing anything that would suggest that there is any change to that? How do you view the market and your ability to continue to grow well ahead of the market?.

Yes. The -- in the quick lube market obviously we are taking share. And what's exciting from my perspective is that, now that we're taking share from competitive quick lubes we're also growing and attracting customers from other channels on the DIFM front.

And so it kind of gets back to the consumer dynamic and what consumers are looking for and what Valvoline's able to deliver. Our biggest competitor in the quick lubes space is Shell's, Jiffy Lube unit a 100% franchise group. And they're taking a little bit different tact to the market.

Their strategy is to add additional services and try to go after more ticket in response to some of the challenges that they've had with traffic. So they have a different strategy for how they want to take their business. Our focus is really on continuing to deliver that quick and easy trusted customer experience.

And so we're not looking to add services. We're looking to execute against those services even better into the future. So we feel like we've got some strong tailwinds behind us in terms of the consumer dynamics in the category.

And then we're continuing to learn more effective ways to market to the DIFM consumer to attract into our store and we're continuing to learn in terms of how to leverage technology to provide a better customer experience and that includes the speed of service reducing wait times and communicating clearly with customers on the services that they need when they visit our stores.

So it's really -- that the commitments that we made long ago to strengthening our team, to giving them the tools, focus on process improvements, developing our point of sale, leveraging technology and the database that we’ve build.

And all three of those investments are really paying-off and continuing to drive operational improvements and drive marketing improvements. And so, as we continue to learn and get better, we fully expect that we will continue to drive growth in ticket and growth in car count.

So your question in terms of saturation we're nowhere near any levels of saturation in the opportunity that's in front of us..

Thank you, Sam..

Our next question comes from Laurence Alexander from Jefferies. Please go ahead. Your line is open..

This is Nick Cecero on for Laurence. So, on the International side of things volumes were up 8% in EMEA. And I guess just based on general company commentary Europe's been sort of a weak point.

So I was wondering if you could provide a bit of color to what you're seeing in the region and to what you're doing there a bit differently?.

In Europe, we’ve definitely had a strong focus on strengthening our distribution network and good focus too on some of the basic marketing plans that we have in place that help our installers improve their performance.

The coordination with Cummins on the heavy-duty front has also been improving too and that's been a factor for growing our European business. So good solid efforts across different fronts in Europe. The investment that I mentioned in the Serbia plant acquisition is also going to help us in Europe.

And one of the things that we've been very focused on over the last few years has been improving our service levels and reducing our lead times between order and ship getting product to our customers in timely fashion.

And strengthening our supply chain with this acquisition is going to help us not just strengthening our business in Eastern Europe, but by balancing production between our facility and in Northern Europe and Dordrecht is also going to help us with our service levels. So I feel very good about the progress that team is making..

Great. And then maybe just a question on the free cash flow guide.

I guess how should we think about overall working capital to the back half of the year? And I guess for the full year should we think about it running similar to what it did in 2018? Or improvement there?.

Yes. On the working capital side for the back half of the year we're actually forecasting a modest benefit from working capital in the back half. So it should be better than what we saw in terms of where we were last year..

Great. Thank you very much..

Our next question comes from Chris Shaw from Monness Crespi & Hardt..

Hey good morning everyone. How are you doing? Just another one on Core North America, you talked a lot about stabilizing the business. And it was obviously much improved in 2Q.

But I remember in the past sometimes these -- an improvement in one quarter would lead to competitive response from someone else, the next quarter maybe on marketing or discounting.

Is it something that is sustainable the recent improvement? Or is there potential for competitors to come back with more promotions and take back some share over the share gains mostly from private label?.

Yes. Regarding the DIY market and the level of competition, and what's happening in the overall market, I would say that it's not yet stabilized. It's -- the competitors in Valvoline are adjusting to some of the new dynamics as it relates to increased pressure from private label.

So that includes what they might do with regard their own merchandising plan. So we have to keep a close eye on those dynamics in addition to the private label gaps. And so we're going to continue to make adjustments. We're -- we would like to see stabilization in this business.

And we're going to respond to any competitive activity that could keep us from that. So as I said in our comments earlier, my comments earlier is, that we are investing on the consumer front and particularly in our messaging and making sure the message is getting to the right consumers in addition to making sure that our merchandising plan is strong.

So we saw a good progress in Q2. And we'll look to the balance of the year and learn to make those adjustments in Q3 and Q4. So we're not declaring that we've stabilized that business just yet, but what I am communicating is that we are very much focused on it and I think taking the appropriate actions.

So we'll continue to share insights as we learn and execute our plan. And the -- it does get back to the importance of our restructuring plan as a way to make sure that our Core North America business stays solid that we've got to be efficient as we do this too.

Our focus is on really driving growth and investing in the Quick Lubes business, and continue to see growth on the International front. But we want to make sure that we take the appropriate steps so that our Core North American business both on the DIY and installer side stay healthy for us..

And once the market kind of achieves that stabilization for a while, do you think margins going to return to sort of where they were historically sort of net -- ex of any sort of, I guess, apples-to-apples on base oil side?.

Yes. That's a good question and we don't yet have the answer to that. So the unit margins have -- while they've been really solid for us over the years with the current dynamics right now, we're feeling pressure on that in the back half of 2018 and into 2019.

So that's where we stand right now is that we have to make sure that we've got the right price points. And we got to be smart about how we pass through pricing and then adjust our merchandising plan moving forward. So that's just the nature of the business that we're going through right now.

The thing I would emphasize though is that the Valvoline brand continues to be very solid, and we've lost a little bit of market share, but nothing that's been significant. It's just that we have to make sure that it doesn't go further with -- that we've begun to stabilize that brand share in light of the new dynamics with private label..

We'll continue to have the benefits of the faster growing synthetic business that carries with it a higher margin rate that will help with some of the strategic pricing and the positioning that we're doing in the conventional parts of the business as well.

But I agree with Sam that it's -- we really need to see how this plays out here over the next few quarters before we can give you better guidance in terms of where we expect those unit margins to be longer-term..

Great. Appreciate the insights..

Our next question comes from Simeon Gutman from Morgan Stanley. Please go ahead..

Hey, thanks.

Can you hear me now?.

Yes. Simeon, we can hear you..

Okay, great. Just a follow-up on North America again. Whether it's DIY or do-it-for-me, has some of the market share loss or some of the decline been consistent with largest customers? Or it's been broad-based? I forget in DIFM how concentrated you are. And then the other question is Sam mentioned some reinvesting back into the business.

Has -- have you just missed the market pivot here? Or was it also under-investment?.

Simeon separating your questions if I could restate your first question, it sounds like you're asking about the overall health of the DIFM market.

Is that right?.

Yes.

Also going in -- has some of the decline that you've seen whether it is in DIY or DIFM, has it been consistent among size of customer or has it been one or two customers in particular where there's been some pain?.

Okay. In the DIFM market, there's -- what we've seen is we have direct customers both with our large national accounts, but also in some of our direct markets where we're not selling through distributors, but through Valvoline distribution in direct relationships with smaller accounts too. We have seen some market softness on the lubricant front.

So I think what we're seeing is just the impact of extended drain intervals. And so as synthetic mix improves, you do get a little bit longer drain interval with that. So in general, we've seen some softness there. There has been a difference between the best operators.

So some of our accounts -- national accounts some of our regional accounts that are really strong operators with a focus on the customer are doing better than the broader market. So operational excellence is still key to success on the DIFM front.

But I would say, based on what we see in overall results that the lubricant demand is probably down in the 1% to 2% range on the DIFM side..

And Sam on that in terms of specific accounting impacts, the large account that went into bankruptcy proceedings that we took the bad debt write-off on, their volume is -- we expect their volume to be down on a year-over-year basis by a little over one million gallons.

So they were certainly a big impact for us as was the shift of the volume from the GCOC business that we acquired and moved over to Quick Lubes. That's also a significant volume impact in the DIFM business on a comp basis..

Yes. To Mary's point then the -- what we see as our ongoing business on the installer front, for us it's been more stable in that we've seen some nice progress, particularly when you do business with some of the large regional accounts. And so, I feel like we've got the right platform for growth.

And it's about just driving better execution across our sales and marketing teams..

Great. Thanks..

Our next question comes from Stephanie Benjamin from SunTrust. Please go ahead..

Hi, good morning. I just wanted to talk a little bit further on the Quick Lubes side and just the M&A environment, obviously made some pretty significant moves over the last year and some new store additions.

Kind of wanted to hear more about your capacity just further grow through M&A, not so much from a funding standpoint, but just on integration, meaning having enough employees and store managers that really set that Valvoline customer-focused model.

So how should we think about kind of the M&A approach going forward? And just what the overall environment looks like? Thanks..

Yes. Stephanie the environment still remains very positive for M&A for us. From a capacity standpoint, certainly capital's not a limiting factor. Talent is a really important issue to pay attention to because in integrating the systems, we need to have talent ready for that. In other word, talent at area manager, market manager level.

When we make acquisition, one of the first things we evaluate is their talent at the store level too. And if it's an acquisition where the store level talent isn't strong as it needs to be, it means that we'll be moving service center managers from existing stores into those acquired stores.

And so our talent development is really key to making sure we have the capacity for these acquisitions. And the good news here is that we continue to be ready to make these acquisitions and to move talent around and integrate acquisitions effectively.

And that's because of this investment that we continue to make in our people in developing top talent within the stores so that we have service center managers that are ready to go as we continue to expand the system.

I think it's one of the reasons why that -- we're making some progress in driving down our turnover among the hourly staff too is that they see the growth in the system, they see real career opportunities. And then of course, we're investing in them too to develop their leadership skills and getting them ready for new responsibilities..

Got it. Thanks so much for the color..

You bet..

We would like to thank everyone for attending today. This concludes today's event and you may now disconnect..

Thank you..