Sean Cornett - IR Sam Mitchell - CEO Mary Meixelsperger - CFO

Josh Kamboj - Morgan Stanley Jacob Schowalter - Seaport Global Securities Chris Carey - Bank of America Merrill Lynch Chris Shaw - Monness, Crespi, Hardt Casey McDonald - Longbow Research Stephanie Benjamin - SunTrust Faiza Alwy - Deutsche Bank Chris Bottiglieri - Wolfe Research

Thanks, Denise. Good morning and welcome to Valvoline's second quarter fiscal 2018 conference call and webcast.

Valvoline released results for the quarter ended March 31, 2018 at approximately 5.00 PM Eastern Time yesterday, May 2nd, and this presentation and remarks should be viewed used in conjunction with that earnings release, a copy of which is available on our investor relations Web site 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 a reminder, 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 with management's use of non-GAAP measures was included in our earnings release. As you can see on slide 3, Valvoline delivered reported operating income of $100 million in Q2, and net income of $67 million or $0.33 per share.

Year-to-date cash flow from operating activities was $108 million. There are a few items related to pension that we want to call your attention to.

First, is pension and OPEB income. Valvoline early adopted new accounting guidance in the first fiscal quarter of 2018 that we classify as non-service pension in OPEB income as non-operating.

As a result, our adjusted EBITDA and adjusted EPS now exclude pension and OPEB income. Also related to pension is interest expense, which is higher this year than it was in the prior year period due to the borrow to fund [ph] transaction that we executed in late fiscal 2017.

Key items netted to a small expense in reported net income. Pension and OPEB income was $7 million after tax in Q2 this year compared to $10 million last year.

Legacy and other separation-related costs were $6 million after tax in the current quarter, and $4 million in the prior year period. A modest update to our provisions related to U.S.

tax reform added $2 million of tax expense. Now, as we move to slide four, let me turn things over to Sam to cover more details of our results.

Sam?

Thanks, Sean, and good morning everyone. Overall results in Q2 were solid.

Our adjusted EBITDA and adjusted EPS each grew 6%. We had strong profitability in Quick Lubes and International.

This was partially offset by Core North America where short-term pressures impacted margins, which I'll address in more detail shortly. Keeping our commitment to return cash to shareholders, in Q2 we returned just over $100 million through our dividend and by repurchasing 3.7 million shares.

Let's take a closer look at segment results, starting with Core North America on slide five. Branded volume declined modestly due primarily due to some weather-related softness in the DIY category which hampered the effectiveness of some of our promotions.

Within Branded volume premium mix was strong, at just under 50%, an increase of 320 basis points. Our overall market share in DIY remains healthy, and grew modestly in Q2 driven by gains in synthetics.

Non-branded volume grew in Q2 improving on recent trends. Segment EBITDA came in below our expectations.

The underperformance was concentrated in the DIY channel and driven by three short-term items. First, our transition costs related to our new packaging.

These are the costs associated with converting the lines at our plants to the bottle which is a bit more complex and taken longer than planned. Second, the timing of promotional expenses has a negative impact year-over-year in Q2.

And third, our results reflect a modest negative price-cost lag. Importantly, we continue to successfully adjust prices to pass through raw material cost increases.

Looking out to the second-half of 2018, we're optimistic that Core North America's performance can improve. We expect better overall volume and more favorable channel mix.

Our DIY promotional calendar is stronger in the second-half, and we expect our promotional expenses to normalize. The transition costs to our new packaging are largely behind us.

We're excited that our innovative Easy Pour Bottle is now shipping across our full lineup of motor oil products through all of our DIY retailers, and is expected to reach nearly 100% shelf penetration by the end of Q3. As I mentioned, our results this quarter included a modest negative price-cost lag impact due to the timing of raw material cost increases and our pass-through pricing actions during the first-half of the year.

More recently, it appears that raw material cost pressures may continue into the second-half. We have already announced additional pricing actions, and are confident that these will cover anticipated raw material cost increases.

Nonetheless, while we expect modest variation quarter-to-quarter in unit margins, for the fiscal year unit margins should remain fairly consistent with the past two years despite significant raw material inflation. Moving on to the Quick Lubes results for Q2.

You can see on slide six that the segment delivered impressive system-wide same-store sales growth of 9.6% in Valvoline Instant Oil Change. Company-owned stores were up 11.2%, and the franchise stores up 8.5%.

Same-store sales growth was again driven by gains in transactions and in average ticket. The increase in transactions is due to the performance of our customer retention and marketing programs.

Pricing and premium mix drove our average ticket improvement. Total sales and EBITDA growth also benefited from acquisitions including the 56-store franchise acquisition which closed in Q1, and two single store acquisitions in Q2.

We continued our geographic alignment between company and franchise growth opportunities with the sale of two company stores and purchase of three franchise locations during the quarter. During the first-half of the year, we've added 14 net new stores to the VIOC network.

In the second-half we plan to add roughly 40 more stores with a nearly even split between franchise and company additions. On the next slide you'll get a good picture of where we expect these new stores to open in the second-half of 2018.

The map shows our current VIOC, company-owned and franchise locations as of the end of March. We've highlighted the areas where we expect to add stores before the end of the fiscal year.

We are expanding into new markets like Houston, Texas and multiple locations in Virginia, while also penetrating existing markets. We continue to fill the new store pipeline for fiscal 2019 and beyond.

As shown in slide eight, profit growth in International was very strong in Q2, with segment EBITDA up 37% versus prior year. Previously implemented pricing actions across regions helped drive unit margin expansion.

Foreign exchange benefits also contributed. Improved unit margins and strong performance from our JVs in India and China largely drove segment EBITDA growth.

Our volume growth in International also continued although at a modest pace coming off the double-digit growth we saw in Q2 last year. We anticipate volume growth to accelerate in the second-half of the year, and expect full-year growth to be in the mid single-digit range.

Beyond the results for the second quarter, we also announced yesterday an investment in our International business, as outlined on slide nine, with plans to build a plant in China where demand for premium branded lubricants and coolants is growing. Investing in our international supply chain is expected to help us capture opportunities and drive growth.

We've experienced the success of adding a plant in a growing market with our India JV four years ago. The key benefits are gaining efficiencies with local production, improved customer service, and enhanced credibility with our distributors and OEM partners, all of which helped to grow volume and improve margin.

We expect similar benefits from our China plant, generating a strong return on our capital investment. The plant should be online by the end of calendar year 2020, with an annual capacity exceeding 30 million lubricant gallons.

And we're excited to get started with the construction. With that, let me pass it over to Mary for a deeper look at our Q2 financial results.

Thanks, Sam. Our adjusted results for Q2 are summarized on slide 10.

Sales were up 11% and volume growth was 1%. More than one-third of the growth in sales was attributable to pricing actions reflecting our success in passing through raw material cost increases.

Adjusted EBITDA was $122 million, and adjusted EPS was $0.34. Adjusted EBITDA increased $7 million versus prior year.

Favorable volume mix along with acquisition and foreign exchange benefits, as well as higher equity and other income including the gain on sale of assets were partially offset by planned increases in SG&A. Corporate items are outlined on slide 11.

Our reported effective cash rate was 28.7% in Q2, while our adjusted effective tax rate was 26.1%. Year-to-date, our adjusted effective rate was 27.4%, in line with our full-year guidance of 27% to 28%.

Year-to-date cash flow from operating activities was $108 million, up $38 million year-over-year primarily due to lower cash taxes. Year-to-date capital expenditures were $30 million and free cash flow was $78 million.

Total and net debts were unchanged from last quarter, at $1.2 billion and $1.1 billion respectively. Our commitment to returning cash to shareholders is clear as we've completed $126 million in share repurchases, and paid $30 million in dividends year-to-date.

Turning to guidance, on slide 12, we continue to expect strong revenue growth of 10% to 12% driven by volume growth and pricing actions. In addition, we are raising our estimate for system-wide same-store sales growth to 6.5% to 7.5% based on first-half performance.

We've narrowed our range on adjusted EBITDA to $480 million to $490 million reflecting short-term pressure from rising raw material costs. At the midpoint of our updated adjusted EBITDA guidance our full-year growth is expected to be in the high single digits, a strong performance considering raw material inflation, SG&A investments, and other transitory items impacting 2018.

Based on actual and anticipated share repurchase activity, we're narrowing our adjusted EPS guidance to $1.31 to $1.38 per share. Our investment in the China plant is expected to increase our CapEx for the year by $5 million to $10 million.

We've updated free cash flow guidance to reflect this investment in our narrowed adjusted EBITDA range. Now, let me turn it back over to Sam to wrap up.

Thanks, Mary. Our overall results in Q2 were in line with our expectations, and we expect solid growth in adjusted EBITDA and EPS for the year.

The first-half underperformance in our DIY channel was due to shorter-term issues. We expect improvement in the second-half of the year.

These pressures in Core North America were more than offset by the performance in Quick Lubes and International demonstrating the strength of our multi-channel business model. We continue to be encouraged by the momentum in these growth engines of the company.

We returned significant cash to shareholders in the quarter, slightly more than $100 million. Raw material headwinds look to continue in the second-half of the year, but we remain confident in our ability to pass through these cost increases.

The business model remains strong, demonstrated by the growth in cash generation we expect this year. We believe that we're making the right investments to make it even stronger, innovating in product and packaging, strengthening our digital infrastructure, expanding our retail presence, and enhancing our international supply chain capabilities.

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

Thanks, Sam. Before we open the line for Q&A, just want to remind everyone to limit your questions to one, plus one follow-up so that we can get to everyone.

Denise, please open the line.

Hi, this is Josh Kamboj on for Simeon Gutman. Thank you for taking our question.

You narrowed but didn't lower your EBITDA guidance. Can you talk more about the factors which you expect to improve or just dive a little bit deeper into them and how they'll change in the second-half if you can share, for example, what kind of gross profit per gallon improvement may you be expecting?

Sure. As we looked at the second-half of the year, first we are confident in the continued momentum in the Quick Lubes business and the International business too, as you saw during the quarter Q2 margins were up.

And while volume was a little bit on the soft side given the initiatives we have in place for growth in the international markets we expect to see very good performance in the back half of the year for the International business. The key for us is improving the results in Core North America.

And as we look at our plan for Q2 -- I'm sorry, for the second-half of the year, we expect some solid volume growth coming from Core North America. We've got a very strong promotional schedule with our DIY retailers.

And we're seeing some nice improvements in volume, both in our installer business and our heavy-duty business where we've been winning some new accounts. And regarding the margin, we did feel some pressure -- some one-time pressures in the DIY business in particular during Q2.

But as we move into the back-half of the year some of the margin pressure that we have from an inflationary environment that will continue to persist. Yet I expect our overall margins in Core North America to be relatively stable with where they've been during the first-half of the year.

So overall we'll see some nice gross profit growth driven primarily by volume in the second-half of the year as opposed to unit margin improvement. And then as we get through this inflationary period I expect that we'll be in excellent shape towards the end of the fiscal year.

But overall, obviously we're feeling very confident about our ability to continue to pass through pricing to protect those unit margins, and to deliver a very solid year overall.

Great. Thank you very much.

Good morning. This is Jacob on for Mike.

Good morning, Jacob.

Good morning. Could you comment maybe on what channel inventory looks like in branded DIY after Q2?

Is it sort of at normal levels now or is it maybe a little elevated or a little lean?

We're not seeing any inventory-related issues in the DIY channel now, not a factor.

Okay. And then for my follow-up, maybe wanted to get an update on Australia, I know in Q1 it was a little softer.

Did it see a nice rebound in Q2?

Not yet. Australia has been a little bit soft this year.

It is an important international market for us. But I'm confident the team is making good progress with their plan as they prepare for the second-half of the year.

And they're doing a good job managing expenses and still being able to deliver a good solid year. Some of the softness that's been seen in Australia, it's the one market besides the U.S.

that has a DIY market. And it's primarily been softness in that DIY channel.

But our growth in DIFM and some of the momentum that we have in the heavy-duty markets are solid to help offset that.

Okay. Thank you for answering my questions.

Sure.

Olivia?

This is a Chris Carey on for Olivia. Can you guys hear me?

Yes, go ahead, Chris.

Sorry about that, I'm not sure what was going on there. So just a quick modeling question and then a couple of follow-ups, can you just quantify the impact of sales -- to sales and EBITDA from M&A during the quarter?

Yes, it was about $10 million of revenue and about $2 million of EBITDA in the quarter.

Okay, thanks. So just on the plans to take pricing actions to offset cost inflation, I guess, can you provide some perspective on how much incremental pricing, relative to your original plans, you envision taking?

And kind of how that compares to the cost inflation that you've seen?

Sure. Yes, as far as original plans go, when we put together the plan last year we didn't necessarily plan for a significant inflation at the beginning of our fiscal year.

But yes, that's what we've been managing through. With the latest round of base oil prices that have just recently been announced, our base oil prices are up roughly 21%.

We've seen inflation in our additive cost and in other costs too. So it's actually a fairly similar year to what we managed through in fiscal '17, when we took and executed three separate price increases.

And we've executed two increases year-to-date. And we're now in the process of executing a third increase, again, to really protect those unit margins.

And the -- when you look historically at our success in passing through pricing you can see that we've always done a nice job in protecting the margins in an inflationary environment, and we continue to be confident in our ability to continue to do that through fiscal '18. When you're in a period like this it does create some pressure on -- some short-term pressure on margin that we have to manage through.

That's because, in certain channels, there tends to be a little bit longer lag effect and that's primarily in the DIY channel, working with our DIY retail partners. But we've also done a nice job with our model over the last few years in mitigating that lag impact, and that's why you don't see any significant degradation in our unit margins.

So when you look back at Core North America and you look at those margins in, like fiscal '17, first of all, versus '16, we were able to manage through and deliver a successful year in protecting those margins. And we're doing the very same thing in fiscal '18.

So in the business overall, we feel very good about our ability to protect those margins. And then the key is, as we come out of an inflationary period, is then benefit from the improving mix that we see across our businesses, and to be taking market share.

To drive market share is key for driving that top line and bottom line growth. So hopefully that helps you with some confidence in how we manage those margins.

We have a laser-like focus on it. And what we've seen too this year is pretty good discipline in the market, with some of our competitors also adjusting price, so it's not that Valvoline is moving alone on price either.

Okay, yes, that makes sense. So I think you mentioned on unit margins, correct me if I'm wrong, that you expect flat for the remainder of the year, is that flat sequentially?

Flat year-over-year? And really, I guess, on a gross profit for gallon basis, is that the right way to look at it?

Yes. Well, first, yes.

Look at it on a gross profit per gallon basis. And yes, overall for the year, I believe we'll be roughly flat with where we were in fiscal '17 for Core North America.

We'll always see some quarter-to-quarter variation, but over the course of the year we -- you see that stability in our margins. So if you were to look at where they are today and where they've been over the last couple of years, Core North America has been roughly in that $4 dollar per gallon range, and so that's -- I think it's a good number to think about, like as our base level right now.

And the full expectation is, is that we manage through an inflationary period and hold it stable is that coming out of a period like this, with 20%-plus inflation, we expect to see some nice progress in those unit margins because of the drive towards the premium mix and in other improvements that we're making in our structural costs.

Right. And that actually is a good segue to just the last question, if I could.

So assuming crude or your base oil kind of stabilize here, and you're seeing over 300 basis points of improvement in mix from a premiumization standpoint in your Core North America segment, and you've been able to take the prices that you have and they'll all start to flow through. I mean, how does this set you up going -- and I know it's early, but how does this set you up going into fiscal '19, when you think about where the unit margins and the gross profit per gallon specifically in Core North America could potentially go, if indeed we do see a stabilization in the commodity backdrop?

Sure. Yes, I expect us to be in very good shape as we prepare for fiscal '19, and that's because our unit margins will be in good shape and we'll start to see that benefit to the bottom line when it comes to the impact of premium mix.

Roughly every 100 basis points that we see in premium mix improvement, drives roughly another couple of million dollars in GP improvement. So it gives you a sense for what a powerful profit driver that can be.

And so when we add low single-digit volume growth on top of that, because of our share improvement, and when we think about Core North America too, and we should begin to see some leverage in our SG&A too as we tightly manage SG&A, because it is a slower growth business for us. But with better managed -- tightly managed SG&A with the volume growth and the premium mix improvements, we can deliver solid profit growth for this large, slower growing business.

And then of course you benefit from the significant growth engines of the Quick Lube business and also the International business, which have a potential for very, very high growth.

Understood. Thank you very much.

Good morning everyone. I jumped on late, so I apologize if I repeat something or make you repeat something.

But as the $10 million year-over-year drop in EBITDA for Core North America, did you breakout how much the three sort of pieces you highlighted, the cost price, the promotions, and the new packaging kind of cost. Was it sort of equal around the a third, a third, a third, or was one more than the other?

Chris, this is Mary. It's about a third, a third, a third.

In terms of those transitory costs in total, we're about $6 million of it, with about $3 million of that came from the new bottle costs. And then we had the promotional expenses were about -- right around just over $3 million as well, and then the price cost lag was the balance of it.

So, when you're thinking about it, that's a good way to think about it.

Okay. That's very helpful.

And then I don't think I saw anything in the release or the slides, but were there weather impacts like typically in a year-over-year the -- given where your stores are too, I was just looking at the map again. Given how much more snow there was in the first quarter, or calendar first quarter, I would think that you might have had some impact from the weather.

Did you not register any of that or?

I did mention weather in our comments, particularly in the DIY business, so it was a bit of a factor. First of all, if we ever used weather as an excuse over the course of a year you can call me out on that, because weather isn't that much of a factor to our business.

We can see some variation in the short term in our Quick Lubes business due to weather impacts. In the DIY business, it's the other area that can be impacted by it.

And we did see an impact during Q2 where some of our significant promotions or oil change specials, we call them, with some of our major retailers. The promotional lift on that support from the retailer was a bit less than what we've seen in the past, and that was primarily due to difficult weather conditions during Q2.

And we can identify the weather impact by looking at -- oil change specials typically last for the course of a month, and so you're not going to get bad weather for the full month, but you can identify what your volume, your POS movement through the part of that oil change special that was impacted by difficult weather versus how does it perform as the weather normalizes. And we really identified that that DIY volume was impacted by the tough weather conditions.

But again, it was a quarterly impact. As we go into the back half of the year we've got excellent relationships with the key retailers, and plans in place to more than make up for that.

Great. Then on base oil, I remember there was a few years back when you guys were still at Ashland the -- there was talk about new capacity coming online that would help maybe sort of soften up the industry a bit.

But when I read the reports from the lube report and all I feel like they're often talking about market tightness and -- can't remember now, did that capacity end up coming on? Or is it just demand has crept up enough where it's kept the market tight and you're not seeing sort of benefit from looser the market at all?

Yes, the good news is that in terms of the capacity in the marketplace, the market continues to be long. We expect it to continue to be long because of the new capacity that both has been brought online and still to come online, in group two and group three productions.

There was discussion about tightness in the market as a factor in fiscal '17, and that was a real issue because a number of the lube facilities and refineries were in turnaround and so -- and then there were a couple producers -- base stock producers that had fairly significant production issues. So it created a short-term tightness in the marketplace, and that was due to short-term supply issues.

So we're not seeing any of that in the marketplace today. Therefore, the base oil increases that we're seeing are relative to the changes that we're seeing in the price of crude.

As crude moves up, ultimately base oil will follow that. The price increase that has been recently announced from the base oil suppliers is tied to crude being in that 65% to 70% range.

So it wasn't fully unexpected, but again, it's manageable with the pricing adjustments that we're making. So again, as we look forward, it can be difficult to predict the movements in crude, but I think Valvoline is in very good shape as it relates to protecting those margins and putting ourselves in good position to benefit from solid margin and then driving growth in the business.

Great. Thank you for the color.

Actually, Casey in for Dimitri. Just wanted to ask on the international premium lubricant mix, just wondering how you guys are looking at that going forward?

And how you were going to try and move that higher?

Sure. Overall, there's a long-term move to more premiums around the world, both in passenger car and in heavy-duty lubricants.

It's that the movement isn't necessarily as fast as it is in the U.S, but it's nonetheless real. We're going to take advantage of that.

Valvoline's well-positioned to benefit from the move towards the premiums because of how we positioned the brand internationally. But the growth rate typically and the mix improvements is going to be slower in the International business than it is in the Core North American business.

We're still developing our channels to market in developing regions in Southeast Asia where you might be selling more entry-level lubricants, which carry a little bit lower margin to build the business, build our presence, and then benefit from the shift to premium. But the investment that we're making in the China plant is a great example of our confidence in the market move towards the more premium brands and also the premium specs.

And so Valvoline is positioned towards that side of the market. And we're very confident that that plant is going to support continued growth -- double-digit growth in China in both the heavy-duty and passenger car markets.

Okay, perfect. And then just one follow-up, any difference that you guys are seeing on the premium versus the conventional price movement?

No. When we adjust prices we're adjusting across the line.

Sometimes there's nuances where there's slight differences between conventional versus synthetic. But overall, we're looking to move prices across our lines.

Okay, perfect. Thanks guys.

Sure.

Hi, good morning. If you could just speak to your performance in the Core North America Do-It-For-Me channel, I think you have some just initiatives on the new product front as well as on IP side.

So, just more color on those, and if you're seeing any change in either volume growth or share in this channel from those? Thanks.

Yes. In the Do-It-For-Me side of the market for Core North America business has been solid.

Haven't been setting the world on fire, but the new initiatives that we have in our product lineup -- I mentioned recently our new GDI fuel system service, we're bullish on the potential of that non-lubricant product. We're also seeing some good progress from our sales teams in winning new accounts.

In the short term, over the past quarter, we had some weakness with some of our larger national accounts where they had some traffic-related issues. But overall, that DIFM side of the business with our platform and the focus that we have on it, we expect to see some solid growth there.

We've got some real share growth opportunities, both with the independent installer and also with our heavy-duty business, where our U.S. heavy-duty business has been growing at double-digit rates this year.

And we've got a renewed focus there, and we've also had some excellent product breakthroughs too that give us some leverage and momentum with our customers. So I feel good about our potential to really see some good, solid growth on the DIFM side of Core North America.

Great. Thanks so much.

Sure.

Yes, hi, good morning.

Good morning, Faiza.

So, first of all, I just wanted to talk a little bit more about Core North America. First of all, it seems like branded volumes were down and non-branded volumes were better.

So I guess, can you sort of talk about what factors led to that? And are you concerned that as you take pricing in the back half that you'll have a negative mix impact and you'll see sort of more growth in the -- on the non-branded side?

Okay. Yes.

First, again commenting on the branded versus non-branded, when you look at the total volume in Core North America about 25% is in non-branded or private-label business, and that's been a good, solid stable business for us over the years, and we expect that to continue to be the case. It does carry a lower margin than the brand side of the business.

And it's really our focus on the branded side where we expect to see growth and nice improvements in that premium mix, because that is really where our innovation efforts are focused. So the comments regarding the bit of softness that we saw in Core North America on the branding side was really tied to that DIY business.

And we do feel that was primarily due to the weather-related impacts on our promotions with the key retailers. So that's short term in nature.

We also, of course, are tracking our market share closely in DIY. And despite the softness in shipments in DIY during the quarter, our market share remains strong and even saw some modest improvement.

But as we look to the back half of the year, that's where we're confident we're going to see some solid DIY growth, because of the merchandising schedule that we have in place with those retailers. And as I mentioned too with this new package, while it did take us longer and cost us a bit more to get it out to the market, we're seeing that now hit the shelves across the full product line.

And while I don't expect that to dramatically improve market share in the short term, I do think it is a powerful differentiator for the Valvoline brand that will help us grow share over time as more and more DIY consumers discover the improved package.

Okay. And then just to follow up on that, as you were talking about raw material cost increases, are we talking about like just the base oil?

Or are there other costs? Like are there any freight logistics cost?

Or other, sort of, I don't know, like bottle packaging cost? And how easy is it for you to take pricing to the extent that the increases related to those other raw materials versus base oil?

And I guess, part two of the question is, like have you seen -- you mentioned sort of the -- there's often a lag, as we know, between these cost increases and the pricing. Have you seen any change in that lag?

Like, are you getting some pushback from retailers especially in the DIY channel, more so than you have before?

Yes, breaking down the cost, the base oil is one of our more significant costs in the makeup of our product, so that's the one that we tend to talk about the most. I did mention too that our -- we had an additive increase that we absorbed this year too.

And so those are the key drivers in our cost structure. There's been modest inflation in packaging.

And then in logistics too, in transportation, but those are very manageable. The real focus is on making sure that we're adjusting prices that cover base oil and additive increases and, again, we've been successful doing that.

We haven't seen any change in terms of the timing of lag in any of the channels. So the teams are doing a good job in implementing the appropriate price increases to mitigate any impact of the business.

And the key for us is maintaining very strong brand position, and that's what gives us the strength and ability to work with our retail partners and channel partners to execute those increases and keep the business on track. I would remind you too that on the installer side of the business in the Core North America channel, we do have a number of our large accounts that are index pricing, similar to our pricing through our Quick Lube network, our national accounts are adjusting prices on a quarterly basis.

So there's really no lag impact as it relates to the index pricing accounts that -- which makes up a large portion of the DIFM side of Core North America.

Okay, great. Thank you so much.

Hi. Thanks for taking the question.

Wondering if the corporate finance perspective on the Chinese blending facility, I guess, one, how does it affect your CapEx relative to what you did last year, or this year? However you want to frame that.

And then kind of like what do you expect the payback to be? How do sales and margins benefit from having your own blending facility in the market?

I know there's a lot here, sorry. I mean just kind of -- what are the other impacts of adjacent international markets or from your JV?

Yes, so as it relates to CapEx, this year it'll impact our CapEx by $5 million to $10 million. We did raise our guidance for CapEx as a result of that.

Next year, the balance of the spend related to the plant will be spread out over a couple year period in our fiscal '19 and '20. So I do expect our CapEx next year to be slightly higher than the run rate where it has been, given that we do intend to continue aggressively opening new Quick Lube stores, which is a significant amount of our total CapEx, and we expect that to continue.

So the plant would certainly be over and above that kind of baseline run rate over a couple of years. So if we're going to spend $90 million this year, if you think about $120 million for a couple of years to absorb that plant capital, that'd be a good way to think about it.

In terms of the assessments we did on the returns, we feel -- we believe that the plant is going to have a very strong return profile. That's really coming through lower manufacturing costs so that we can capture the margin that we pay today to unrelated tollers that we do the business within China.

And we also believe that the supply chain advantages it provides to us will help us to drive higher-margin volume in terms of our overall mix, in terms of capturing more business with that stable supply chain. And that in fact is what we've seen in our joint venture in India with that new plant.

So we're very bullish in terms of the overall return and a risk-adjusted return relative to our cost of capital, and believe it's a really solid investment for us.

Got you. That's great.

And then just the follow-up, wanted to step back, get your perspective on the Chinese market. What are you seeing kind of in terms of the growth?

And what makes you excited about making this investment relative to government mandates on BEVs? And then separately, have you thought of any other initiatives to maybe accelerate growth in China if you are seeing good momentum, such as maybe like an instant oil change type model over there?

Thank you.

Yes, China, we're spending a lot of time on the market because it is such an attractive market. It's growing very quickly, both in the total market demand, but also Valvoline's performance has been quite strong too in China, where we've seen consistent growth, and we've really made some nice additions to the team in our -- in building our capabilities in China too.

China, what makes it particularly attractive for Valvoline is that we participate in a significant way in both passenger car and the heavy-duty markets. We've got a joint venture with Cummins that has been particularly strong over the last couple of years.

I think our volume is up about 38% this fiscal year, on top of great growth last year. That's because of strong working relationships; we're developing products that meet market needs.

As we've talked about, new engine technology, Valvoline is at the forefront of developing lubricants for the newer engines. So that growth on heavy-duty is going to continue to be strong.

And then we're making very good progress on the passenger car side. And certainly we're looking at the different segments, different channels in the passenger car side as we think about how the consumer market will evolve, and how car maintenance is done today.

So today, when we look at China, there's plenty of mechanic garages and car dealerships, but what's really missing is that service, the high-quality service model that is a nice alternative to having you take your car back to the dealership. And so that's an area of focus for us that we're working on and talking to different partners that could help us grow that business more aggressively.

So, main point to take away is that we're bullish on China. We see there some very good long-term growth opportunities, and we're going to continue to build our capabilities.

Sure, we're definitely -- we'll see more EVs in China, and probably it'll be a leading market when it comes to EV adoption, but still going to take some time. And a lot of the EVs are also hybrids too, which use lubricants.

But even as we see better penetration of a new technology in China, we'll continue to see growth in fuel-efficient internal combustion engines. There's over 25 million cars sold per year in China and they're predominantly ICEs.

That's extremely helpful. Thank you, Sam.

Sure.