Valvoline Inc (VVV) 2016 Q4 法說會逐字稿

Good morning. My name is Sean and I will be your conference operator today. At this time, I would like to welcome everyone to the Valvoline fourth-quarter fiscal 2016 conference call and webcast. (Operator Instructions)

I'd now like to turn the conference over to Jason Thompson, investor relations officer. Please go ahead, sir.

Thank you, Sean. Good morning and welcome to Valvoline's fourth-quarter fiscal 2016 conference call and webcast. We released preliminary results for the quarter ended September 30, 2016, at approximately 5 PM Eastern Time yesterday, November 8, and this presentation should be viewed in conjunction with the earnings release.

In addition, we posted slides to our website under the investor relations section. On the call today are Valvoline's Chief Executive Officer, Sam Mitchell; and Mary Meixelsperger, Chief Financial Officer.

As shown on slide 2, our remarks include forward-looking statements as such term is defined under US securities law. We believe any such statements are based on reasonable assumptions, but cannot assure that such expectations will be achieved.

Please also note that we will be discussing adjusted results as well as using non-GAAP measures in this presentation. We believe this enhances understanding of our performance by more accurately reflecting our ongoing business.

Now I will hand the presentation over to Sam and Mary. Sam?

Thank you, Jason, and good morning, everyone. I appreciate everyone joining us for this early morning call after what was probably a late night for many. The good news is that our consumer-driven business model is built to generate growing and consistent results in any economic environment.

Well, this is certainly a very exciting time at Valvoline. As you are aware, on September 22, 2015, Ashland announced its plan to separate into two great independent public companies, each with unique market opportunities and distinct business identities: Ashland Global Holdings, Inc. and Valvoline, Inc.

The rationale for the separation included realizing different drivers of value creation, a more efficient allocation of capital, enhanced focus, and distinct investment identities of the new companies with different shareholder bases.

Teams from all over the world worked for 10 months getting us into position to operate separately, which we began doing on August 1. In a little more than one year after the initial announcement, on September 28, 2016, we completed an initial public offering of 34.5 million shares of Valvoline's common stock, taking the first step in the separation from Ashland. We are pleased with the overall separation process and the outcome of the IPO and we feel Valvoline has achieved its objectives.

In summary, we successfully separated Valvoline from Ashland operationally with no negative impact to our day-to-day business. We raised $759 million in equity capital through the IPO as well as $750 million in debt capital.

The combination of the two helped enable us to achieve our target BB credit rating. And lastly, we established a natural shareholder base for a brand-new consumer-products company.

With that, let's turn to the next slide and I'll turn the call over to Mary to briefly discuss our fourth-quarter and fiscal 2016 results.

Thanks, Sam. Before I discuss our fourth-quarter and fiscal 2016 results, I'd like to open with a few comments. I've been with the Company now for almost five months and I've been very impressed with the talent we have across the business.

I arrived at a very demanding time for the Company. Executing an operational separation and an initial public offering is no small feat, but Valvoline was able to successfully transition to a public company while also reporting strong fourth-quarter and record fiscal-year results.

As you can see on slide 4, Valvoline was able to maintain the strong performance needed to position the Company for success. In looking at our fourth-quarter results, Valvoline posted strong volumes, driven by gains in both the quick lubes and international segments, which was partially offset by a slight volume decline in core North America.

Premium mix was positive in the quarter in both core North America and quick lubes. We saw a modest decline in premium mix within the international segment, which was driven by a strong growth in emerging markets where engine technology lags that of developed economies.

Margins in the fourth quarter were strong compared to prior year, driven by favorable mix, good volume growth, and lower SG&A expenses. During the quarter, base oil costs increased negatively, affecting our results modestly as we work to pass those cost increases to our selling prices. Valvoline's subsequent price increases will be fully executed across all of our business segments by the end of Q1.

When looking at our full-year results, strong volume and favorable price over cost, partially driven by the decline in base oil costs, drove a 230-basis-point increase to EBITDA margin. Valvoline Instant Oil Change had another solid year, posting strong same-store sales growth.

The Oil Can Henry's acquisition in February was also a solid contributor to our results, adding $34 million to sales for the year and $8 million to EBITDA. Currency had a negative effect to sales of $31 million and adjusted EBITDA of $4 million.

Valvoline's balance sheet finished the year with total debt of $749 million and $172 million of cash and cash equivalents, yielding a net debt position of $557 million. Our cash position was enhanced by the underwriters' execution of the overallotment option of the initial public offering, which generated $94 million of net proceeds. The Company generated $245 million in free cash flow in 2016 while making $66 million in capital investments.

During the fourth quarter, we completed a retiree annuity purchase program, transferring approximately $375 million of pension liabilities and a comparable amount of assets from the US-qualified pension plan to a third-party insurer. Not only did the project reduce the size of the growth obligation, it was also a strong NPV-positive project, as we have reduced our administrative costs associated with the plan. We will continue to evaluate projects such as this one with the aim of reducing planned related costs as well as mitigating potential volatility of the net pension and OPEB obligations.

Overall, Valvoline's balance sheet and free cash flow profile remains strong, giving the Company flexibility to invest organically, pursue opportunistic bolt-on acquisitions, and evaluate additional returns of capital to shareholders.

Before I hand it back to Sam, I want to make sure that you are aware in yesterday's release, we inadvertently provided inaccurate EBITDA margin and EPS guidance. We mistakenly stated our EBITDA margin for the full year would be 24% to 25% of sales and EPS of $1.28 to $1.38, whereas our internal forecasts are for EBITDA margin to be 24.5% to 25.5% and EPS of $1.31 to $1.41.

Our Q1 guidance provided in the release is accurate and remains unchanged. Sam will be discussing additional guidance measures in a few moments.

With that, I will hand the presentation back to Sam to discuss the fiscal 2016 accomplishments and expectations for 2017.

Thanks, Mary. As you just heard, Valvoline had another outstanding year financially; a record year, as a matter of fact. Overall, the Company posted a 4% lubricant volume increase as compared to fiscal 2015, a 9% increase to adjusted EBITDA, and adjusted EPS growth of 6% for fiscal 2016. Evidence that the separation from Ashland had no adverse impact on business operations.

Our input costs were down year over year, leading to a slight benefit to earnings. Our sales declined 2% as we adjusted our selling prices to reflect the lower raw material costs.

Each of our business segments reported strong fiscal-year results. Core North America posted a 6% increase in operating income, driven by share growth in the do-it-yourself market, higher sales of our premium products, and growth in our heavy-duty platform. We also renewed multi-year contracts with two of our largest national installer accounts.

Our quick lubes segment reported outstanding fiscal-year results. Quick lubes contributed the largest Valvoline acquisition ever: Oil Can Henry's. And Valvoline Instant Oil Change posted exceptionally strong same-store sales growth in both Company and franchise operations.

In fact, this was our 10th consecutive year of growing comp store sales, with good momentum going into 2017. These successes in the segment led to an impressive year and numbers: a 16% increase in volume and sales and a 23% increase in operating income.

Valvoline's international business segment reported a 6% increase in volume, driven by strength in core emerging markets, posting an 8% growth rate. While results in mature markets were soft during Q4, for the full year, our team generated volume growth of 4% in these markets, which include Europe and Australia. The international team grew with key OEM partners and renewed two key global contracts.

Now let's take a look at our 2017 objectives outlined on slide 6. As I just mentioned, 2016 was a strong here for us financially. It was also a year where we made some key investments, particularly when it comes to our teams. We added our own IT function, finance, and HR departments, and have bolstered our commercial and marketing teams with new talent.

In addition, we have a dedicated Board that has a wealth of consumer products, retail, and global industrial experience that we plan to leverage for greater growth.

So while 2016 was a demanding year with respect to the separation, 2017 is the year for us to build a foundation for faster growth. We will be making important investments into the business, such as in digital marketing and infrastructure, and continuing to invest in our teams and their capabilities.

So while this will lead to increased SG&A in 2017, we are confident the higher spend will generate growth for years to come. We are confident these investments will generate very strong returns.

We have four core priorities for 2017. One: drive business results in each segment, growing our market share, premium mix, and unit margins. We will do this by investing in our brand through new innovations and product packaging, marketing, and services. And being a value-added partner to our customers, assisting them in growing their businesses and improving their profitability.

We will continue to deliver on our promise of providing a quick, easy, trusted customer experience at all Valvoline Instant Oil Change stores. And we'll be investing in channel development and marketing programs to grow our share in international markets.

Two: we'll grow our retail presence, both organically and inorganically. And we'll do this by growing our store base across each of our three quick lube platforms. We will be pursuing high-return acquisition opportunities to supplement our growth.

Three: we'll make investments in digital marketing and infrastructure in order to engage directly with the consumer and to strengthen the relationship we have with our installer customers around the world. And four: establish a culture of creating value for our shareholders.

While Valvoline has a strong culture of bringing hands-on expertise for the benefit of our customers, we now have the added responsibility of delivering value for our Valvoline shareholders. This means embracing a strong focus on managing our costs, ensuring we are investing in high-return projects, managing our balance sheet and capital allocation effectively. By executing against these core priorities, we believe we will generate strong financial results and returns for our shareholders.

On the slide, you'll see a list of metrics and our outlook for fiscal 2017. Valvoline anticipates delivering 2% to 3% volume growth in fiscal 2017. At current base oil costs, we expect this level of volume growth would generate -- would result in revenues growing in the 3% to 5% range.

In our quick lube segment, we anticipate between 25 and 35 new organic units added to our Valvoline Instant Oil Change platform. This comprises 15 to 25 Valvoline Instant Oil Change franchise stores, which is consistent with growth we've seen in the past few years.

For Valvoline Instant Oil Change Company-owned stores, we expect to only open a handful of stores in fiscal 2017 as we continue to develop our capabilities to increase new store openings at a faster pace. We expect the rate of new store growth for Company-owned operations to accelerate beginning in 2018, with approximately 25 new stores opening per year. And of course, we are pursuing acquisitions of regional operators to further grow our store count.

Driven by our proven in-store operating model, we expect same-store sales growth of 3% to 5% from 2016. While we anticipate modest ticket growth, we expect an increased number of transactions to be the primary driver to same-store sales growth.

Netting all these factors, as Mary noted, we expect diluted adjusted earnings per share to be in the range of $1.31 to $1.41. This includes income generated from pension of $66 million, but excludes $25 million to $30 million of anticipated one-time separation-related costs.

To fuel our long-term growth plans, we are investing in digital marketing and new store development. As a result, we expect to increase CapEx from $66 million in 2016 to between $70 million and $80 million in 2017.

We expect continued robust free cash flow generation from the business of $90 million to $100 million. Keep in mind that this includes an estimated $30 million of one-time cash costs related to the separation.

This free cash flow will afford us the flexibility to invest organically in incremental growth projects, such as new stores, to look for opportunistic acquisitions in the quick lube space and to build out our non-lubricant product portfolio, to assess debt reduction opportunities that are value creative, and evaluate incremental returns of capital to shareholders above our current dividend.

As you can see, we are expecting another year of strong performances from teams across our businesses. 2017 is an exciting year for Valvoline as it will be our first year as a standalone public company. Being part of the Ashland portfolio has provided many benefits, but we are excited to move forward as a separate company, building and executing our growth strategies and creating lasting value for our shareholders.

With that, I'll hand it over to Jason to open the line for Q&A.

Thanks, Sam. Sean, before we open it up, I just want to ask everybody to keep their line of questioning to just one question and one follow-up. With that, Sean, please open it up.

(Operator Instructions) Olivia Tong, Bank of America Merrill Lynch.

First question is just around your base oil expectations. What are you embedding into your outlook? And if you are looking for volume of 2% to 3% in sales plus 3% to 5%, I'm assuming you do it -- embedded in that is an expectation for improvement in profit per gallon. So is that primarily coming from price or do you expect other changes as well?

First, with regard to the base oil markets, we did see increases in base oils that impacted us in our fourth quarter. And as a result, Valvoline put in place price increases, executing price increases across all the business segments. So an example of Valvoline's ability to adjust pricing appropriately to protect our unit margins in a rising base oil environment.

As far as the future goes, we are very confident that any subsequent changes in the base oil market -- again, we'll be able to make the appropriate moves to manage our margins.

The next question with regard to our growth rates in our premium mix, we had an outstanding year of premium mix improvements in 2016. And we continue to see nice momentum behind our initiatives to drive that premium mix in our different business segments, particularly in core North America and in our quick lube business.

So this is where we really have opportunities to further our unit margin improvements by that focus on driving market share and growth in our premium product lines.

Thanks, that's helpful. And then just on the store count, can you talk through some of the capacity constraints to expand your store count this year? And what you are putting in place to allow for an acceleration starting in fiscal 2018?

Yes. The real work of the team this past year has been to put in place market-specific plans for store growth for Valvoline Instant Oil Change. And we have mapped out the country; we see tremendous opportunity for store growth over the long term.

It is a process where this first year, because it's roughly an 18-month development cycle from start to finish for a new store that that is really the reason why you're not going to see significant ground-up store improvements in 2017. But our capacity will be greatly improved and we'll be in position to add closer to that 25-store range in 2018 and beyond.

So building that capacity has been a key component of ours. We've added to our team. We've also engaged a third party that is helping us with our store growth plans.

In addition to the ground-up store growth, as I mentioned in my comments, that we are very focused on looking for solid regional acquisitions that could accelerate our store growth. And so I'm pleased with the progress that the team is making there. We are in discussions with multiple operators. But what we look for are good quality systems with good real estate that could be a good fit for Valvoline Instant Oil Change.

Great. Thanks, Sam.

Simeon Gutman, Morgan Stanley.

Thanks. Good morning, guys. I guess simple question, because there's a lot of moving pieces, and I guess the guidance is a little different from what the release is. But if we look at the business maybe on an ex-pension basis, ex-pension income, what is the assumption for EBITDA growth, the core assumption for EBITDA growth, year over year in 2017 versus 2016?

Excluding pension income, our expectation is for EBITDA to grow -- gosh -- at the midpoint, the growth is just modestly positive to upward of in the 5% to 6% range at the high end of the guidance.

Okay, okay. That's kind of what our numbers are getting. And then if I hear correctly -- and hopefully this is not my follow-up yet -- the reason -- I think Sam discussed some higher SG&A spending as being the reason for why that's maybe not stronger? And if that's right, can you talk about what's changed?

Yes, you are right. The SG&A spend is an important investment that we are making, and so it is up versus certainly 2016. The new corporate cost is roughly about $20 million of increased SG&A expense.

There was also an accounting change that's affecting us negatively of about $5 million, software-as-a-service accounting change. And then we've got -- basically what's left there is an increase in the $10 million range of investment in the business through the direct -- the digital infrastructure initiative and in some of the investments that we've made in the team.

So our baseline SG&A has certainly increased. But the way I look at it is one is that we've established strong teams in finance, in IT. And we are very well positioned with this new baseline spend to deliver I think outstanding results over the long term.

The other thing I would call out, if I could, is that we did have an accounting change from our model's perspective where we had approximately $6 million of SG&A costs that shifted from our CapEx in 2017 into operating expense related to how we're accounting for costs associated with the implementation of our digital transformation, which is primarily software-as-a-service. And that $6 million shift has affected the increase in our SG&A expenses as well.

Right. That's helpful, okay. And then my follow-up -- I guess back to I guess a Group 2 question. Can you give an assessment of just the overall supply and capacity in the Group 2 oil world? And then in general, how should we think about the relationship between WTI and base oil prices?

Yes, we've shared before that the Group 2 market continues to be long. A lot of capacity additions have been made over recent years that have outstripped demand growth. So we got a long market and that has benefited Valvoline in our contracts with Group 2 suppliers.

With regard to the correlation to crude, Group 2 is highly correlated -- base oil is highly correlated to movements in WTI. And so that's something we have to keep an eye on. Because of the longer market, it's not as volatile, so it's typically when crude makes a sustained move to a new level that we'll start to see adjustments in base oil pricing. But as we've shared, too, our model is strong in terms of how we are able to capture any cost increases through price adjustments.

Okay, thank you.

Bill Schmitz, Deutsche Bank.

Can you guys bridge the gross margin expansion, which was much better than our model and I think much better than the consensus was expecting? So can you bridge it in the quarter what drove the year-over-year change and then what your outlook is for 2017?

You're talking about the fourth-quarter 2016 margin versus 2015 margin?

Exactly. Like the 700-basis-points plus or minus increase in gross margin. And then so what drove that? Then how you see that progressing in 2017?

The primary drivers within the fourth-quarter margin, we certainly saw some improvements in margin in terms of the underlying volume growth as well as the strength that we had in our quick lube business. And we had some modest change as well in terms of the overall business mix impacting margins. And we can get into a little more detail for you on that later on.

But generally, the margin improvement was driven by our core North America business as well as our quick lube business. We did see a little bit of margin contraction from rising base oil prices that we experienced in the fourth quarter where our price increases weren't fully passed through. I mentioned in my comments that we expect to see those pricing get fully passed through and completed in Q1 of 2017.

Okay.

In terms of the price increases.

Okay. Can you give us the broad strokes on how you think gross margin is going to progress next year?

Sure. In terms of gross margin progressing next year, we expect to see some modest improvement in gross margin as we see our price increases get fully passed through. And again, we expect to see our premiumization -- premium penetration continue to grow that will also help us to drive gross margin improvement next year.

Okay, great. And then just a follow-up. On the DIY business, I knew there was some sort of friction with some customers in terms of pricing, where you are going to do a high-low or everyday low price in the promotional cadence. Has a lot of that stuff blowing over or are you still seeing some potential headwinds from that?

We are in good shape as we start the new fiscal year and prepare for the 2017 calendar. We've got an outstanding merchandising schedule across our key accounts. And so I'm very pleased with the coordination that we've had with the key retailers, both in terms of executing pricing, but also in establishing a strong promotional calendar for next year.

Got you. So Sam, do think the category still stays on high-low, at least for the foreseeable future?

Well, yes. And if you look at retail auto parts, it's certainly been a high-low approach to the business. I don't see any evidence of that changing. It's a promotion-driven category. But Valvoline's strong market position as a strong premium player, that works well for us because the Valvoline Brand is promoted often and is featured prominently in the stores.

So the one account -- the one significant DIY account that is more of an EDLP approach is Walmart. So a little bit different strategy there. And it's important for Valvoline to win at Walmart stores, too, but it's just a different promotional strategy at Walmart versus, say, the retail auto parts stores.

Okay, great. Thanks, very helpful.

Jeffrey Zekauskas, JPMorgan.

Thanks very much. What was your SG&A before pension income?

That's detailed -- you can get to that, Jeff. We've added a table within our press release that provide some information that could hopefully help you to arrive at that number.

Table 8 in our press release shows all the different components of pension income. And if you look at the quarter for 2016, pension income in total for the quarter was a net of $25 million, net of the service costs. The breakout for that between cost of sales and SG&A, we'll have to get you. I don't have the specific breakout between COGS and SG&A.

Okay. So did some of the pension income filter into the gross profit margin?

In 2016, in Q4? Yes. In Q4. Beginning in 2017, all pension income will be in operated -- OpEx and SG&A. But in Q4, there was some pension income within the cost of sales.

Okay, maybe I can follow up on the extent of that. And then lastly, haven't base oil prices come down in October? And so I know that you were trying to push prices up, but is there resistance from customers who are saying that raw materials are going the other way?

There was a modest decrease in base oil from Motiva. So it's not substantial enough to make any impact to our pricing plans.

Okay, great. Thank you so much.

Bill Chappell, SunTrust.

This is actually Stephanie on for Bill. We just have a quick question on your international performance. Maybe if you could just go into more detail on some of the weakness you saw in the more mature markets. Is this new or it's been a sequential trend? Just a little bit more color there would be great. Thanks.

Haven't seen anything significant in the international markets. I mentioned that Q4 was a little bit softer in the mature market regions of Europe and Australia, where we have good strong brand presence. But I don't think there's anything long term there that we are concerned about.

So I would expect that our international mature markets can grow in that low-single-digit rate, whereas our emerging market focus is expected to deliver in the high-single-digit rate in terms of overall growth.

Great, thanks for the color.

Dmitry Silversteyn, Longbow Research.

Congratulations on your first conference call, and a very exciting day for a new company. Question on international part of the business. Can you talk a little bit about -- you just mentioned your growth expectations for the developed part of the world.

But if you can just sort of take a look at what happened in the quarter and what your outlook is for the next, I don't know, three to six months or so between Australia and some of the growthier parts of Asia as well as various parts of Europe?

Yes. In terms of the international business and what we saw in 2016 and what we expect to continue to see in 2017 is in markets like China, in India, parts of Southeast Asia, we've been making tremendous progress continuing to develop our brand and develop our distribution network channels to market adding stronger distributors, more distributors.

In each of those markets, we are seeing growth rates in the high-single-digit to even double-digit range. The India business, I believe, was up 11% in volume in fiscal 2016.

We've also noted Mexico is an important growth market for us, too. We've been able to substantially improve our distribution network in Mexico.

And each of these regions we are beginning to accelerate our consumer marketing efforts, too, to grow our brand there. And so I feel very bullish on our opportunity in front of us to see that international business continue to grow and perform as we really become a much more global company in 2017.

So we've invested significantly over the years in building strong team and capabilities in each one of these regions and we are well positioned to do so. As far as the mature regions of Australia and Europe, while we'll have lower growth rates there, they are both well positioned to deliver strong profits in fiscal 2017.

Okay. All right, thanks for that run down. And then to follow-up on your raw material question, we can see what's going on with base oil and we can make our own conclusions about what that means going forward for profitability and pricing and whatnot.

But can you address the other part of the raw material basket? What's going on with the, I don't know, additive packages or packaging cost? If you can take a look at the raw material basket outside of base oil, are there any trends that we can project into 2017 that would help us think about that margin and the pricing opportunity for Valvoline?

We are projecting it to be pretty steady with regard to costs in both additives and packaging.

Okay. So you are not expecting any price increases in additives, given that base oil has moved up and you've raised your own pricing. And the environment for pricing on plastics and metals that you guys use in packaging basically flattish year over year? Is that what I'm hearing?

That's right. Over time, base oils tend to -- base oils will follow crude. The additive package is influenced by crude, but it's not as strong a correlation. So again, it's something that we manage very closely, but we're not expecting any significant change in additive pricing.

Okay, fair enough. Thank you.

Mike Harrison, Seaport Global Securities.

Good morning. Sam, I was wondering if you could talk a little bit about -- you mentioned your expectation that in the quick lube space, you would expect increasing number of transactions to be the key driver of same-store sales growth.

How much capacity do you have at the store level to handle additional car counts? At some point, one would think that you would see diminishing returns if you have too many cars there and customers have to wait longer.

Yes, it's a good question, Mike. And yet, we feel we have plenty of capacity in our stores to handle more cars. So there are certain times of the day where the stores can get particularly busy. And our biggest challenge there is to make sure that we're making full presentations to our customers and not missing out on ticket opportunities with other services that the customer may need as those teams feel a bit of pressure.

So we continue to refine our model to make sure that we are delivering that consistency of service, even when those stores get busy. But overall, we've got stores in the system that do well above the average.

And so the focus that we have on speed, convenience, trust is really working well for us and we don't see that changing at all. Instead, our teams are just getting better and better at consistently delivering that. But as far as capacity constraints in our stores, we just don't see those.

All right. And then you mentioned that you're going to continue to look for acquisitions. I was just hoping that you could walk through Oil Can Henry's and talk a little bit about your criteria for acquisitions. And what boxes the OCH acquisition checks and what you are looking for in future acquisitions going forward.

Certainly. The Oil Can Henry's acquisition checked all the boxes. It was a perfect fit for us. And then I want to say our teams have done a phenomenal job integrating that acquisition, too.

So with Oil Can Henry's, number one, we moved into a new region of the country where we had minimal presence. So having 89 stores in the Pacific Northwest now has been a great addition to our overall footprint and a great base to grow from as we now have strong operations there.

The Oil Can Henry business was well run. They took care of their customers, the stores were well located, and so that really checked a couple more boxes, too, as it wasn't a complete turnaround situation. And yet we were able to model the real estate and know that they had potential for increased car counts.

So what we are able to do is we implemented the Valvoline model. In other words, we have our proprietary SuperPro operational model that we trained our teams in that coincides with our custom point-of-sale system. And as we trained the store personnel at Oil Can Henry's, they learned it very quickly and executed it well.

So we saw no drop-off in customers. In fact, we saw the opposite, that we immediately began to provide greater speed of service and we saw increases in our car counts.

From there, we converted the brand to Valvoline. And then we turned on some of our marketing programs. Digital marketing has become a key tool for us to attract new customers to the stores. All those initiatives were put in place through the summer months. And as a result, we've far exceeded even our own lofty expectations for the first year of Oil Can Henry's performance.

So when we were looking at acquisitions, we'd love to find more Oil Can Henry's. I don't know how many there are out there. Certainly they were one of the bigger well-run regional operators.

Typically, we're going to be looking at some smaller regional chains. But the key for us is to make sure that the real estate is solid. We can model the real estate quite accurately in terms of what its potential is in terms of customer accounts and revenue for the store. Ideally, the stores -- the best fit for us are stores that are fairly well run and that makes for a much smoother transition.

So a lot of leverage when we make acquisitions, particularly if the quick lube operator is not using Valvoline products. There's tremendous energy in making an acquisition to bring in the Valvoline Brand to drive car counts, our operational system to improve operations, and then of course our products that significantly improve the overall returns on an acquisition. So acquisitions can really make sense for us if, again, the real estate is in the right places and fits our model for where we are going to be growing.

All right. Thank you very much.

Carolina Jolly, Gabelli.

Thanks for taking my call. Can you discuss a little about the seasonality across the different business segments? And if that's one of the reasons that your first-quarter 2017 results are looking stronger than full year?

First of all, with regard to seasonality, there's some modest seasonality in the business, but it's not all that significant. The first quarter actually tends to be our lowest quarter in terms of overall lubricant volume moving into the winter months.

So in core North America, for example, you see a little bit of a drop-off in DIY behavior during the winter months. And then that quickly picks up as you approach spring.

So Q2, we typically see a nice rebound as in core North America a nice pickup. But what we are talking about terms of seasonality is roughly an index of 95 for the first quarter and then that picking up in Q2 and Q3 and then moderating a bit in Q4.

Okay. And so --

With regard to your question, you were comparing our Q1 forecast guidance versus prior year. And prior year was a bit on the soft side, as I recall.

And then just to -- could you outlay some of the factors of your cash flow? I have 2016 at around $245 million in free cash, but it looks like your guidance is $80 million to $100 million for 2017. Can you discuss any factors outside of just the slight increase in CapEx and the extra separation costs?

Sure. The big drivers of the delta, as you mentioned: separation cost is $30 million to $35 million of the change. Our cash interest expense is another $28 million to $32 million of the delta.

And then pension funding for the plans that we assumed -- this is primarily the other post-retirement benefit obligations as well as our non-US plans -- will have funding requirements in the $25 million range. And then we are assuming some increase in working capital investments as well, which is -- in total gets you to the revised -- the current guidance in terms of our cash flow.

All right. Thank you.

Jason English, Goldman Sachs.

Thank you for the question. A couple of quick questions. Sam, one for you. You clearly really saw momentum on quick lubes overall. Yet, not a lot of upfront investment plans to accelerate some of that growth.

I know you are talking about laying the foundation to really try to invest more heavily for ramp of footprint in units into 2018? But why not sooner? Why not faster? You guys have been preparing for the separation for a while. It seems like you've got momentum on your side. It looks like the opportunity is there. Why not spend more up front to really drive that faster?

Jason, we are going to be looking for all opportunities to drive it faster because the only thing that's holding us back is just our ability to execute on the ground-up strategy. As I shared earlier, it does take some time, so that's frustratingly long.

But we have teams in place in multiple markets. Our priority markets will be moving into new regions of the country, new markets where we see significant growth opportunities where we want to establish strong Company operations. So the teams are working hard to accelerate that work.

This first year is going to take some time. This past year, a lot of our effort has been focused on the Oil Can Henry acquisition and integration. So that's been just, again, a tremendous effort and a huge success for us. So that gives us great confidences that we find other regional acquisitions to bring in that we'll be very successful in this transition plans and executing those.

So 2017, the way to think about it is certainly a year where we hope to accelerate store growth. As I mentioned, franchisees are in good position to continue to add stores in 2017 at that plus-25 store rate. And then we are going to be looking for hopefully be able to close on a couple regional acquisitions in 2017.

And then we'll be ramping up as fast we can on the ground-up. It's just that's the one that's taking a bit longer than we'd like. But certainly by the time we start 2018, should be hitting on all cylinders there.

But we've got three important avenues to grow: acquisition, franchise growth, and the ground-ups. And it's very a high-priority focus for us, as I laid that out in our top four priorities.

That's helpful, thank you. And then one quick follow-up, a housekeeping item. Mary, Jason, can you give us your outlook for the corporate expense line as we go into next year? And then also, what's the clean number for the fourth quarter? Because I know pension income is a big chunk of that?

And the release is a little bit confusing, because there's a footnote saying you've got $28 million of pension income. Then you pointed to the table that says $25 million of pension income. But $23 million is one-time gain. So only $2 million dollars underlying. Net-net, we walk away a little bit confused in terms of what exactly is the right underlying number to plug into that. So maybe you could help shed some light on that.

Jason, I can -- quickly, on the first part of your question on just the corporate piece of the SG&A bucket, we expect that to be around $100 million dollars or slightly north of that, kind of $102 million-ish.

And then on the quarter?

And then on the quarter, it's pretty standard at about $25 million a quarter.

No, but for the fourth quarter, the clean number? Because you're backing out -- in the reconciliation, you are backing out the $23 million as a one-time gain. So if we back that out, we are left with a pretty small corporate number, which is what I think drives the headline EBITDA miss. But I'm not sure that's really the right way to be cutting it.

Yes, so for the fourth quarter -- for this year for each of the quarters, it was closer to $20 million.

Okay.

Just that corporate piece.

Okay. I'll follow up later to try to cut through some of the details on that one. Thank you.

Sure.

Chris Shaw, Monness, Crespi, Hardt.

Ask another question on the first-quarter guidance of 4.5% to 6% top line. I assume there's some pricing in there from what you were saying earlier, but have we now lapped the price -- the headwinds? It looked like in the fourth quarter, pricing was a headwind for the top line, but have we lapped that now?

It will be fully lapped in Q1 of 2017.

Is the --

After Q1.

Is the 4.5% to 6%, does that have an element -- can you break that between volume and price?

It certainly does have an element of price inside of it. I don't have the breakout between volume and price.

Okay. I have a follow-up on another --

I was just going to say -- yes, it's mostly volume -- there's a fair amount of volume in there. Like Mary said, we are still implementing some of those price increases. So there's a touch of price in there, but it is mostly volume.

Okay. I just want to follow-up, just curious almost on the -- you were talking about the Oil Can Henry and how you got the car growth up. But it sounded like -- did you get the car growth up even before you switched the brand to Valvoline?

We did. We saw some early momentum just from implementing our SuperPro operational system and our point-of-sale. So that was real encouraging. We inherited a strong store level team out at Oil Can Henry's, so they were able to learn our system quickly.

So we sent teams of our operational folks to work side-by-side with them. And their ability to execute quickly enabled us to pick up cars from the very beginning. And then as the brand change was made and the marketing program started this summer, we saw continued momentum in that car count growth. So it's been tremendous.

And is that typical when you take over a non-Valvoline-branded store? Change it to Valvoline, you'll see an uptick in the car counts?

It is. It can be hard to distinguish between what's brand versus the operational system versus the marketing program versus how we develop a very strong culture of customer service at our team. All these things contribute to improved performance.

But we are confident we have the best model in the industry and the best execution in the industry. And so when we look at an acquisition, we're always looking to say, okay, what can we do with that real estate and how should it perform with our approach to running that store.

Okay, great. Thanks.

And there are no further questions at this time. I turn the conference back to the presenters.

Thanks, Sean, and thank you, everyone, for your interest in Valvoline. I will be taking calls later this morning, so if you have any additional follow-up, please give me a call. Thank you.

Thanks, everyone.

And this concludes today's conference. You may now disconnect.