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

Cody Tranbarger - Goldman Sachs Faiza Alwy - Deutsche Bank Chris Bottiglieri - Wolfe Research Simeon Gutman - Morgan Stanley Chris Shaw - Monness, Crespi, Hardt Stephanie Benjamin - SunTrust Olivia Tong - Bank of America Merrill Lynch Jacob Schowalter - Seaport Global

Thanks, Krista. Good morning, and welcome to Valvoline's Third Quarter Fiscal 2018 Conference Call and Webcast.

Valvoline released results for the quarter ended June 30, 2018, at approximately 5:00 p.m. Eastern Time yesterday, August 1, 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, nonoperational 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. Please turn to Slide 3 for a review of our reported third quarter results.

Valvoline delivered reported operating income of $102 million in Q3 and net income of $64 million or $0.33 per share. Year-to-date, cash flow from operating activities was $181 million.

As mentioned in previous quarterly earnings calls, Valvoline early adopted new accounting guidance in the first fiscal quarter of 2018 that reclassified nonservice pension and OPEB income as nonoperating. As a result, our adjusted EBITDA and adjusted EPS now exclude pension and OPEB income.

In total, Valvoline had 3 key items netting to after-tax income of $2 million in reported net earnings: First is nonservice pension and OPEB income, which was $7 million after tax; second key item is a $2 million after-tax expense related to a foreign currency adjustment associated with the acquisition of Great Canadian Oil Change; the third item is a $3 million after-tax expense primarily related to Kentucky state tax reform. In the prior year period, Valvoline had $3 million of after-tax expenses and reported net earnings related to key items.

Now as we move to Slide 4, let me turn things over to Sam to cover more details of our results. Sam?

Thanks Sean. Valvoline delivered against a number of our key metrics in the third quarter.

Same-store sales growth at our Valvoline Instant Oil Change stores remains strong at 7.9% system-wide. Premium mix continues to grow, supported by solid gains in Core North America and Quick Lubes.

Our overall volume in International, including our unconsolidated JVs, grew only 1%. Volumes in high-growth markets, such as China and India, grew 9% in the quarter.

Furthermore, we again delivered against our goal of returning cash to shareholders through share repurchases and dividends totaling $113 million in Q3. Adjusted EPS for the quarter grew 10% year-over-year, and adjusted EBITDA grew a modest 3%.

These results did not meet our expectations as gains in Quick Lubes and International were partially offset by a decline in Core North America. Core North America had good volume gains in the DIY channel versus last year, but this volume came in lower than our expectations.

That, combined with higher raw material cost and soft DIFM installer volumes, resulted in weaker-than-expected Core North America performance. Let's turn to Slide 5 and take a more detailed look at Core North America's performance for the quarter.

In Q3, volume grew 2% in the DIY channel versus last year. This growth was offset by softer volumes in the DIFM installer channel, leading to a 1% volume decline for the segment.

Within branded volume led by DIY, premium mix continued to improve, increasing 470 basis points to just under 50%. EBITDA declined $6 million from last year, driven by lower total volume and unfavorable price-cost lag, which we expected due to the timing of raw material cost increases this fiscal year.

Overall, Core North America segment volumes for the quarter were lower than we anticipated. Within the DIY channel, we had a number of promotions during the quarter and expected strong volume gains as a result.

However, tightened promotional activity across the category impacted the effectiveness of our events. Volumes sold through the DIFM installer channels also came in below our expectations, which we believe to be primarily timing related.

We had a good rebound in volumes sold through these channels in the month of July and expect an improved level of activity for the rest of Q4. As for unit margins, we indicated on our last call that we expected raw material cost increases to impact us this quarter, and those expectations came to fruition.

Over the last 2 years, we've experienced a dramatic increase in raw material cost. This alone, by far, our largest cost driver is up roughly 40%, yet our Core North America team has managed to maintain our annual segment unit margins during the same time, including the first half of this fiscal year.

Despite the decline in unit margins in Q3, we expect that the pricing actions to be realized in Q4 will position us well as we enter the next fiscal year. While I'm confident that we are making the right long-term investments for the success and stability of Core North America from product and packaging improvements to digital initiatives, we are making some adjustments to address the current business dynamics.

Specifically, this includes how we use our promotional dollars to drive value for our trade partners and consumers. Now let's turn to the next slide to discuss Quick Lubes.

Our industry-leading quick-lube model continued to deliver strong results in Q3. Same-store sales across the VIOC system were up 7.9% from prior year.

Company-owned stores were up 8.7%, and franchise stores grew 7.4%. Year-to-date system-wide same-store sales are up 8.5%.

We continue to drive strong transaction growth as a result of the ongoing success of our customer retention and marketing programs, which we enhanced with the new ad campaign launched last summer. Average ticket also remained strong, driven by both pricing and favorable premium mix.

We expect this balanced contribution from transactions and average ticket growth to continue moving forward. We anticipate our same-store sales growth will moderate slightly beginning in Q4 toward our longer-term expectation of mid-single digits.

Sales and EBITDA growth also benefited from both acquired and new stores. We added 13 stores to the VIOC network in the third quarter and 27 stores year-to-date.

In Q4, we are on track to add approximately 100 stores, including the 73 Great Canadian Oil Change stores. We expect to end 2018 with close to 130 net store additions.

Let's turn to the next slide. As we recently announced, we completed the Great Canadian Oil Change acquisition on July 13.

At 73 stores, Great Canadian Oil Change is the third-largest quick-lube system in Canada. This system has a large and experienced franchise owner base that is performing well, and we look forward to working with them to help them grow their business.

With a 40-year history, established brand recognition and strong customer loyalty, we plan to maintain the Great Canadian Oil Change brand while operating the stores with a signage that represents the strong partnership with Valvoline. We believe the Canada quick-lube market has significant opportunity for growth.

Relative to the U.S., the quick-lube market in Canada is underpenetrated. In fact, store-to-car ratios are about 20% lower.

We expect to accelerate the growth of the Great Canadian Oil Change system through the support of both franchise and company store expansion in addition to strengthening organic revenue growth by leveraging our SuperPro in-store service model, training and marketing programs. This is an excellent acquisition for us, and I'm excited to have the Great Canadian franchisees join the Valvoline team.

Let's move to Slide 8 and look at International's Q3 performance. The International segment continued to deliver strong results in the fast-growing markets of China and India.

Including unconsolidated joint ventures, combined volume in these 2 markets grew over 9%. These two markets currently account for approximately 45% of total volume in International, including JVs.

To provide perspective on this strong growth, 3 years ago, these 2 markets represented roughly 38%. This strong performance was partially offset by softer volumes in other regions, including transitory impacts in Europe and Latin America.

Results in Europe were impacted by an unanticipated temporary facility disruption at one of our third-party warehouse providers, which affected our ability to deliver product to customers. The facility is back online, and our operations are now running normally.

In Latin America, volumes declined primarily due to lower volume in Brazil, where we recently elected to transition the business to a licensee distributor model. The remaining volume softness in International is driven primarily by the loss of a lower-margin industrial account.

Despite only a modest increase in volumes, including JVs, EBITDA grew 10% from the prior year to $22 million. A little more than half of the EBITDA growth was driven by pricing actions and strong JV performance, which offset raw material inflation, lower volumes and planned increases in SG&A.

The remainder came from favorable foreign currency exchange. We anticipate solid volume gains in Q4, both year-over-year and sequentially, and we expect margins to remain strong for the quarter.

However, with the soft volume performance in Q3, we now anticipate full year volume growth in the low single digits this year. For our longer-term expectations, we still anticipate mid- to high single-digit volume growth in International.

With that, let me turn it over to Mary for a closer look at our Q3 financial results.

Thanks Sam. Our adjusted results for fiscal Q3 are summarized on Slide 9.

Sales were up 8% on flat volume. FX-adjusted, sales grew 7%.

More than one-third of the growth in sales is attributable to pricing actions, reflecting the continued pass-through of raw material cost increases. Adjusted EBITDA increased 3% to $115 million.

Favorable volume mix, along with acquisition and foreign exchange benefits as well as higher equity and other income, were partially offset by planned increases in SG&A and lower unit margins. The impact of the acquisitions and FX represents about half of the growth in SG&A.

Adjusted EPS grew 10% from prior year to $0.32. A lower effective tax rate, a lower share count and higher EBITDA offset higher interest costs, leading to the year-over-year growth in EPS.

Let's move to Slide 10 to discuss some corporate items. Net interest and other financing expense was $15 million in the quarter compared to $10 million in the prior year period.

The increase is primarily driven by higher borrowings, which is largely attributable to the pension borrow-to-fund transaction that we executed in the fourth quarter of fiscal 2017. Our reported effective tax rate for the quarter was 34%.

Adjusted for key items, our effective tax rate was 27.9%. Year-to-date, our adjusted effective rate was 27.6%, in line with our full year guidance of 27% to 28%.

Year-to-date cash flow from operating activities was $181 million, up $24 million versus the same 9-month period last year, primarily due to lower cash taxes. Year-to-date capital expenditures were $51 million, and free cash flow was $130 million.

Net debt increased slightly from last quarter to $1.2 billion. We continued returning cash to shareholders in the quarter, repurchasing $98 million in Valvoline stock and paying a dividend of $15 million.

Year-to-date, we have repurchased $224 million of Valvoline stock and paid $45 million in dividends, returning a total of $269 million to shareholders. Now let's turn to the next slide and look at our revised outlook.

The volume improvement for the second half of the year is not materializing as we anticipated. As a result, we are lowering our guidance.

We now expect lubricant volume growth of 1% to 2%. Revenue is now anticipated to grow 9% to 11%, down from 10% to 12% growth previously.

We expect continued strong Valvoline Instant Oil Change performance within Quick Lubes and as a result, are raising our same-store sales guidance to the high end of our previous range and now expects 7% to 7.5% growth. This comes on top of system-wide same-store sales growth of 7.4% in fiscal 2017, resulting in an expected 2-year growth of over 14%.

We're also raising our outlook for new franchise store additions to the high end of our previous guidance as we now expect to add 30 to 35 new stores. While still expecting good year-over-year EBITDA and EPS growth, we are lowering our guidance on both, primarily to reflect the roll-forward of our Q3 results and our updated volume outlook.

We now anticipate adjusted EBITDA to be in the range of $465 million to $470 million and EPS of $1.26 to $1.31. As for cash flow items, we expect CapEx to come in at the lower end of our prior guidance at $85 million to $90 million.

We're reducing our free cash flow guidance and now expect free cash flow in the range of $245 million to $255 million, an increase of 25% to 30% from fiscal 2017. Now let me turn it back over to Sam to wrap up.

Thanks Mary. While the current quarter performance did not meet our expectations, I remain confident in the long-term outlook for the business.

We've experienced significant cost inflation this year primarily impacting core North America, and we continue to manage through it. We have taken additional pricing actions and anticipate improved unit margins for Q4, putting us in a stronger position for fiscal 2019.

We also continue to focus on sales, marketing and promotional effectiveness to drive improved volume performance in Core North America. Quick Lubes continues to excel, and we believe there's a very long runway for growth as we accelerate our store expansion.

Within International, we continue to expect solid gains in key regions and are confident about the growth opportunities outside the U.S. With that, I'll hand it over to Sean for Q&A.

Thanks Sam. As a reminder, before we open the line for Q&A, we ask that you limit your questions to one and a follow-up so that we can get to everyone.

With that reminder, Krista, please open the line for Q&A.

This is actually Cody on for Jason. In the prepared remarks, you guys called out third-party installers as a source of weakness in Core North America.

Is the entire channel soft? Or were your issues more idiosyncratic?

And why does DIFM carry higher margins than DIY given it is less branded?

First, regarding the softness that we had in our installer channel business within Core North America, we do believe the category was off some. We don't have perfect data on that, but we saw softness in some of our larger accounts across the market.

But primarily, our biggest issue was with our distributor business where -- more of a timing issue. We saw softer volumes in the month of June.

And as I noted, we saw a nice recovery during the month of July. So we think it was largely at a timing issue.

The DIY market has been relatively soft this past year in that kind of down 2% to 2.5%. That's really been consistent with the long-term trends in the DIY business.

With regard to your question on margins, yes, the DIY business has always had a higher gross profit margin compared to the installer business. That has to do with the nature of that business being more of a consumer packaged goods business, consumer-driven.

In the installer business, we're selling bulk oils. There's just more of price competition with the installer business in a bit of a B2B model.

So hopefully, that helps. But that's nothing new.

That's been the history of that market and how it's structured.

So I was wondering if you could give us some more color on the Core North America volume declines. I mean, are you -- do you think you lost share in the category?

And how do you expect to move forward from here? I know you talked about July volumes doing better.

If you could just give us more color around -- you talked about -- thinking about how you use promotional dollars going forward, sort of what's the expectation there? And how should we think about it going forward?

Yes. In the quarter, as we noted, we had DIY branded growth of 2%, but that did come in less than our expectations.

We were bullish on the number of promotions that we had planned and that we executed with our key retail partners. But what we saw is that the promotional lift was less than expected.

This was particularly true in the conventional segment. So while we held our own in the synthetic segment, the conventional segment, we did feel that we had some share losses there.

And we believe that was primarily due to just the amount of promotional activity during the quarter. So there was definitely a step-up in terms of the number of brands that were being promoted at the same time.

And so we saw some change in the market, where instead of the retailers focusing primarily on one brand -- one premium brand during a given month, there were more competing offers during that month. And so that impacted the lift that we would expect off of our typical promotions.

So as I said, it tended to affect us mostly on the conventional side, and so that's something that we're going to need to address as we develop our promotional tactics moving forward. And so that's something the team is working on and also working closely with the retailers to make sure that we're making the right adjustments to our tactics to make sure we're getting the lift that we need off of their promotional plans or promotional strategies.

So did you do anything different in July? Sort of what do you think drove the -- like what do you think impacted the timing?

And if July was much stronger than June, like what do you think was behind that?

Faiza, the timing issue is only regarding the installer channels' side of the business and not a DIY factor. So the DIY factor was, as I explained, more to do with the amount of promotional activity and not getting quite the volume gains that we expected with those promotions.

In the installer side of the business, with some of our larger distributors, we just saw a shift from June to July in their ordering pattern. So we believe that was more of a timing issue.

I had a question on increased intervals. Have you seen any impact as oil prices go up to demand?

Like any signs that customers could be prolonging their oil change intervals to maybe acquiesce to the higher pricing environment?

Chris, we haven't ever seen that correlation, that the higher price results in a longer drain interval. The -- in some respects, in a higher price environment, consumers may be focused on even maintaining their vehicle better.

But the drain interval impact that we've seen -- and that is one of the major factors in why we don't see growth in the lubricants category, is that as there's more cars driven, more miles driven, it's being offset by a longer drain interval. That's been a long-term trend, and it continues because of primarily the shift to synthetics.

And so we know from our data that synthetic users, their drain interval tends to be roughly 800 miles longer between oil changes than a conventional user. And so I think that's one of the factors that we're seeing with the significant increase in synthetics, both in the DIY and installer channels.

Because of the newer cars on the road requiring synthetics, that does impact the drain interval and the overall category demand. Again, from our standpoint, the shift is a net positive for us because of the higher profitability that synthetic oils carry in each of the channels.

Actually that makes sense. As a quick follow-up, what do you think is driving currently then the increased promotional activity?

And how should we be thinking about that $4 per gallon North America at a gross profit level? Is that still in the table, do you think, a couple quarters from now?

Or do you think it's something we should push out further?

First of all, let me address that in that with the pricing actions that we're taking that take effect in Q4, you should expect to see a significant improvement in that unit margin for Core North America back towards $4 -- that $4 -- what I would consider as the baseline range. So that's good news, that we're getting back to where we need to be as we start the new fiscal year.

With regard to what are the drivers, what are the motivations behind the higher promotional activity in Q3, now that's a difficult one to answer. I think when you see a period of significant price increases, you tend to get more promotional activity.

And it's important for us to evaluate what is happening and then adjust our plans accordingly. And the key is for Valvoline to ensure that with each of our major accounts, that we're receiving our fair share -- or greater than our fair share of merchandising support with the product that we have on the shelf and then also how those products are promoted.

And then we have a category management team that analyzes the retail data mostly to then work with the retailers to make sure that their strategies are effective and driving the business over the long term. The motor oil category is a key driver for retailers in terms of driving traffic into the stores.

And so from time to time, they'll experiment with different strategies. But what's key for us and what gives us confidence in the long run is that Valvoline share and the Valvoline brand has continued to be effective in driving traffic for our retailers and trading people up to the more premium products.

So those are really the key things that we're looking at. There was -- we feel it was an unusual quarter.

It's something that we got to keep a close eye on and make sure we've got the right plans moving forward.

I missed some of the prepared remarks and maybe even -- maybe some of the early Q&A. I wanted to ask a follow-up on the price-cost lag.

Are we -- it looks like Group 2, Group 3, they haven't spiked more in the last several months. And it feels like when we get to January of '19, we should really start to lap the first big move up.

Not fully until we get into the middle part of next year, but is that about -- is that a fair diagnosis and that means your pricing at the shelf or to customers should largely be caught up at this point?

Yes. So the timing of our increases and the cost increases as they're falling through, we have -- definitely the biggest impact has been here in Q3, where about a couple of the base oil increases that are moving through our P&L.

The price increase that will offset that will be effective across all channels during Q4. And that's what's going to get us to -- back to good solid baseline as we start the next fiscal year.

Regarding when we lap the -- during -- we've really had 2 straight years now of pretty consistent period of base oil increases that we've had to manage through. So I'd have to take a closer look at the timing question that you're asking regarding the January effect.

Simeon, this is Mary. The first increase we had was in October, and then we had a larger increase in January, another one in February, and then in April was the most recent one.

So the largest components of the increases that we've experienced were in the February and April time frame, and those are the increases that Sam mentioned that we're passing through our pricing for in Q3 and Q4. So I think when we come into Q1 of next fiscal year, you'll see us pretty well lapping that and seeing those price increases get pushed through.

So our belief is that we'll have accomplished that and that price-cost lag should be behind us.

And just following up to the last question, Sam. I don't know if you would sort of endorse this idea that the competitiveness either to the installer or at the shelf is greater during these times of price movement, especially going up.

Because it is tricky on how the competitor is pricing and then however one reacts. Where I'm going at is what shifted in the last -- has anything really changed in the last 6 months to - months in the space?

Or is it just a consequence of some of the extreme movement in price?

Yes. No, it's a good observation, and I believe that is true.

That in a period where you've seen significant increases in price, you just - you tend to get more activity. And for us, it's something that you have to manage with each account, both on the DIY side and the installer side, to make sure that you're taking the right actions to both defend your business and then recover your margin in the right time.

And on the DIY business, just the big question would be, is there something that's changed? Or has the discipline changed at all in the DIY channel?

And I don't believe it has. There was one branded competitor that certainly has lost some share over the last year, that we saw them being pretty aggressive with their promotional activity.

But at the same time, we know that our competitors are also moving on price to recover cost. So I really don't see any fundamental changes going on there.

The question is, are there tactical adjustments that we need to make to our promotional plan as the retailers think about their strategies for 2019? And so again, I'm confident with our teams and the relationships that we have with each one of our accounts, that we'll develop the right merchandising plan to make sure that the DIY business remains very healthy.

On the installer side, it's -- I mean, it's business as usual. It's always a price-competitive business.

And the way you win in -- on the installer side is for Valvoline to command the premium price because of the value that we bring with our product portfolio, our marketing plans, et cetera. So we're constantly working on how do we strengthen that value because it's all about helping that installer improve their results, improve their profitability with their customers.

So our strategy has been to take advantage of some of the expertise that we have as a company in operating stores and knowing how to drive traffic and profitability. Obviously, you see the success in Valvoline Instant Oil Change and bringing some of those tools in a simplified manner to the installer customer, too.

The digital initiative, we're going to see some real progress in 2019. That is also geared towards helping drive performance in the installer business.

So big picture, looking at Core North America, certainly, it's been a challenging -- really a challenging 2 years with the inflation that we've managed through. I'm really pleased with how we're coming through it.

And now it's a matter of getting back to business as we get ready for '19 and doing the things that are going to help us grow market share.

You mentioned for the DI - do-it-for-me sector, you actually felt the category was off. And I wasn't sure if you're specifically referring to the distributor part but, I guess, what I was trying to figure out is if that category is off and you're disappointed in how you did in DIY, but we're still up 2%, I can't figure out how like those 2 different categories are moving in different direction.

I mean, I would think those are -- the underlying trends would be the same. Could you help me figure that out?

Historically, the DIY category has always been softer than the DIFM side. So in DIY, we've had a long-term trend of being down roughly 2%, 2% to 3% over the last decade, and that primarily has to do with the long-term shift of DIY behavior to DIFM.

And there are a number of factors that are driving -- that are behind that. So it's always been our strategy within DIY to strengthen our market share and improve our mix to offset that category decline, and we've been very successful at doing that over the years.

In the DIFM side of the business, it's been more of a flattish demand environment, flat to down 1%. Based on the results that we saw in the quarter, it looked like there is some softness in a lot of our key accounts where they just didn't have the traffic.

And I think you have a long-term factor of the longer drain interval with the shift to synthetics. Certainly, that's a factor with slightly higher prices at the pump.

The miles driven, the growth has slowed, so that's been more flattish. But certainly, we're keeping a close eye on to just that overall demand in the DIFM business.

But it's -- for us, a category decline of 1%, even 2%, that's not our obsession. Our focus is on growing our market share and improving our mix and selling more of our product portfolio to our existing customers, particularly on the installer side of the business.

So we have -- we just have tremendous opportunity, and a lot of it has to do with our sales and marketing execution to keep this business healthy and growing. We don't have a dominant market share in installer.

So it's - we're not focused on the category trend and that impact. We're focused on how successful are we being in growing our market share and penetrating our accounts.

Is it likely or possible in any one period there's a -- the shift back and forth between the DIY and the DIFM? Or are those customers just 2 different customers?

It's unlikely that once a DIY customer becomes a DIFM customer that they go back climb underneath the car. So I do think that we're probably getting close to an equilibrium, where you still have -- DIY will -- DIY is not going away.

There are certainly a lot of DIYers who really enjoy the work of getting underneath their car and working on their car, maintaining their vehicle. And then we've got certain segments within DIY that are growing, and that's an area of focus for us.

An example of that would be the Hispanic segment, which is very robust, that we've got a lot of our marketing focus in helping grow our share within that segment. So a lot of ways in which we keep DIY healthy.

Again, it's not going away. It's an important profitable business, not only for us but for our retail partners, too.

So I feel good about the long-term health of the DIY business. But again, for us, our focus is on growing the market share -- protecting our unit margins, first and foremost, in a rising cost environment, and we've done a good job doing that.

And then growing our market share and driving our premium mix. Those are the things that are going to keep this Core North American business very healthy.

And if can I just ask one on Quick Lubes, too. You mentioned that you expect same-store sales growth to moderate in the fourth quarter based on the full year guidance.

That would probably somewhere maybe 5% to 6%. I'm just thinking more, though, for, say, 2019 or going forward.

I know you did a lot this year, I think, on sort of, I guess, marketing through tech and things like that. But what would you conceivably see as a same-store sales rate for, I guess, longer term?

I mean, is the 7.5% something you could do going forward? Or is this going to be more sort of what the fourth quarter looks like?

Yes. I think longer term, we're still guiding towards mid-single digits and hopefully strong mid-single digit.

As we think about it, we've outperformed our own expectations. I mean, the strength of this businesses is really impressive.

And some of the marketing initiatives that we put in place have been very effective in driving car count. And so while that might moderate a bit, we've also seen a nice pick-up in -- and also in understanding ways in which we can improve that help drive the transaction or ticket performance.

And so we've got some pilots that we've been executing, and we're seeing ways in which we can -- how do we simplify our operations and communicate more effectively to our customers when they're in our base, so that we're meeting the needs and the vehicle requirements while they're there. So the point is that we remain confident in how well this business is positioned because of delivering on that quick, easy, trusted promise, where consumers more and more want that convenience and are finding it in Valvoline Instant Oil Change.

But we're also seeing opportunities with -- on the ticket front, where they're going to trust us with more and more of those services. So the business is in a really good place, and so I'm very confident based on the insights and the pilot work that we're doing that we're going to continue to see same-store sales improvement.

It's just to say we're going to be able to continue it with high single-digit comps is probably a bit unrealistic. I think we're probably going to moderate and be very consistent.

But not just in '19 and '20 and beyond because of the opportunities that we see in front of us and the opportunity to get better and just how well the business is positioned, where the consumer is finding Valvoline to really meet their needs. So excited about the business.

And obviously, the focus is on keeping the store level business model healthy while, at the same time, adding units more aggressively. So whether it's the move into Canada, which I said earlier presents tremendous opportunity, or our store build plan that is really taking hold here in the U.S., where we'll see a number of new stores come out of the ground, to also our franchise partners who are stepping up and being more aggressive, too, because of the success that they're having.

So we're seeing growth and planned growth in '19, '20 and beyond in both our company stores, our franchise stores, the new market of Canada for us and obviously, working hard on the acquisition front, too.

Could you just speak to kind of how the promotional activity in the DIY space progressed in July? Kind of any changes from the second quarter or in response to your own kind of changes in promotional tactics?

And then also quickly, if you could just kind of speak to the consumer response to your new package launch during the quarter, that would be great.

Yes. Regarding July, there's - I don't have any new insights to share with regard to DIY promotion activity or effectiveness.

So I think if you could just be patient with us there, we're going to learn more throughout Q4, both in terms of our promotion performance and as we build our plans and commit to those plans with the retailers for fiscal '19. We'll have more to share next quarter on that.

I'm sorry. And your second question was?

Just on...

Bottling, yes. So we remain bullish on the new model being something that's going to really help us differentiate the brand, and we do have good penetration on the shelf now with the new bottle.

We're not seeing an impact at this point in time, and I think that does have to do with the level of promotion activity that we saw during Q3 that's mitigating the potential positive impact from that package. But we know from the research that the DIY consumer loves the functionality of the new package, and so I'm hoping as we settle down and make sure we've got the right merchandising plan going forward, that we'll begin to see some of the impact of that new package.

But in large part, the full distribution of the package, the new package across the line really hit late in the quarter. So Q4 is going to be an opportunity for us to get a better read on it, too.

I just wanted to follow up on the promotion. I guess what's the risk, in your view, that this is the start of higher promotions over a more prolonged period ahead?

And if you don't believe that, that this is a meaningful step change and instead fairly temporary, what -- why do you believe that that's the case?

Olivia, I think it's too early to say that it's going to be a 1-quarter impact or a 2-quarter impact or whether we could see change in promotion activity going forward. So I guess the most important thing to understand, from my perspective, is that we have a number of levers and tactics in which we can utilize to make sure that Valvoline is getting its fair share.

It's -- the motor oil category, we think DIY is always heavily promoted. And so the consumer is trained to look for value when they come to the store.

And so for us to make sure that our brand remains strong, that we're growing our share, it means that we have to win in the short term with those merchandising tactics, to make sure we're hitting the right price points. I mentioned we saw some softness on the conventional side of the business.

So we've got to make sure we're hitting the right price points to make sure that conventional business is staying strong, that we're not giving up share there while, at the same time, making those long-term investments through the packaging product improvements, marketing improvements are going to drive long-term brand success with the consumer. So I think one of the positive things that I've seen with category or competitive activity is that our competitors are executing price increases.

And so we're seeing those moves take place in Q4, and we're also seeing private label prices adjust, too. And private-label prices were slower to adjust up during this inflationary environment, but we're now starting to see movement there, too.

And that's where, in the conventional segment, you get most of that price competition. So again, we're tracking it closely.

And as we have more insight, we'll share with everyone our progress on that. But I'm confident that given that, one, we're able to take price need, adjust our prices appropriately to cover our cost with the promotional funds and the strategies that we have in place, it gives us the flexibility to make the adjustments that are going to keep our brand healthy and in front of the consumer in fiscal '19.

And then just a follow-up. When you say $4 gross profit per gallon, is that your expectation by Q4?

Or this is just sort of a -- that's where you hope to get over the next couple of quarters? Because there's obviously going to be a fairly large step-up from Q3.

Yes, that's right. And we do expect to be there for Q4.

And so as we start the new fiscal year, we'll be in that $4 range. And that primarily has to do with the price changes that are taking effect during the quarter -- in early part of the quarter.

So it's -- when you look at our unit margins over time in Core North America, we've been tracking in this $4 range going all the way back to '16. So as we've moved through the inflation of '17 and '18, we've been able to take -- to manage back to that $4 range despite some of those pressures.

And I think the key for us is, longer term, is being able to see improvement over time with that unit margin as we drive our mix moving forward. We've really seen -- event though we've made premium mix improvements, that's -- the effect of that has been muted by this price-cost lag effect that we've been battling for a couple years.

So hopefully as that stabilizes, we begin to see improvements over time in that unit margin in Core North America through premium mix, also through better penetration of our product line in the installer channel, too. We've got some really nice opportunities to make that happen.

Olivia, this is Mary. We have seen this phenomena before.

We saw it back about 7 quarters ago, where price-cost lag caused a dip in the Core North America GP per gallon. So we saw almost a 50% improvement in the following quarter, where we saw the pricing catch up.

So while it's a challenge in the -- while you're going through it, we have seen the recovery and have been -- have demonstrated our success in getting that pricing pass-through.

This is Jacob on for Mike. A clarification question on guidance.

So relative to your prior expectations, the reduction in volume, was that entirely accounted for by this weaker-than-expected Q3? Or is there some sort of residual impacts in Q4 that you guys are sort of baking in there?

That's really largely the Q3 impact. And so the forecast for Q4 across our businesses, Core North America, Quick Lubes, International, where we expect a solid Q4, and it's really the Q3 impact that is resulting in the volume adjustment.

And then could you maybe walk through your International growth strategy within Quick Lubes? So now that you have Canada, it's just going to be building that out?

Or are you looking for maybe other countries or continents like Europe or Australia? Just your thoughts there.

Yes. The International opportunities for the Quick Lube business were -- the Canada market, first of all, is so close to U.S.

market dynamics. And so it's a move that we're making with a lot of confidence that the Quick Lube stores in Canada and with the Great Canadian Oil Change business, they're doing excellent car counts.

And so the customer loyalty and the strength of the Quick Lube segment is really strong there. It's established, and yet it's still underdeveloped.

There's still an opportunity for growth. So that move is different.

When we're thinking about Canada, we think about it as a market very close to the U.S. market, we think, to North American market.

Regarding other markets internationally where -- the quick-lube market, the quick-lube model may be successful, I don't think there's any other markets that are obvious in terms of those market dynamics and how it would fit specifically without modifying the model somewhat. The market that is most intriguing for us is the fast-growing China market.

And the China market is undergoing a lot of change because you have so many new car owners. And when the car is relatively new, the owner's typically taking the car back to the dealership for service.

And I believe that we're going to see the market change. We're going to see more national accounts in China, which will create opportunities for Valvoline growth.

And I believe a form of the quick-lube business could be an opportunity in China in the long term, too. So it's a market that is very interesting to us, one that we're studying and one that we hope to be piloting different approaches for growing our business in China.

We've got a really nice base of business in China today with a strengthening distribution network, strong heavy-duty business, plans to build a plant there. So obviously, it's a market that we're going to be investing in and building out our capabilities.

So first and foremost, when we think about the Quick Lube growth opportunity in front of us, it's going to be closer to home, where we have the tremendous opportunity to add many stores through store builds, acquisitions and franchise development in the U.S. and in Canada.

Thanks, Krista. Thanks, everyone, for joining.

Appreciate your time today.

All right. Thank you.