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Valvoline Inc. (VVV) Q1 2021 Earnings Call Transcript

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VVV earnings call for the period ending December 31, 2020.

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Valvoline Inc. (VVV 1.92%)
Q1 2021 Earnings Call
Feb 4, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Valvoline Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand today's conference over to your speaker, Sean Cornett, Head of Investor Relations. Thank you. Please go ahead.

Sean T. Cornett -- Director, Investor Relations

Thanks, Stephanie. Good morning, and welcome to Valvoline's first quarter fiscal 2021 conference call and webcast. Valvoline released results for the quarter ended December 31, 2020, at approximately 5:00 p.m. Eastern Time yesterday, February 3, 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 press 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 two, 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, unless required by law. 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 is included in the presentation appendix. The non-GAAP information provided is used by our management and may not be comparable to similar measures used by other companies. As we turn to slide three, let's review our financial results for the quarter. For the fiscal first quarter, Valvoline delivered reported operating income of $124 million, net income of $87 million and EPS of $0.47. Year-to-date cash flow from operating activities was $79 million. The key items in the quarter were primarily non-service pension and OPEB income of $10 million after tax. Excluding key items, results for the quarter included adjusted EBITDA of $145 million and adjusted EPS of $0.41. Year-to-date free cash flow was $44 million.

Now as we turn to slide four, let me turn the call over to Sam to discuss our results and operations in more detail.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Thanks, Sean. Our results in Q1, where sales grew 8%, adjusted EBITDA grew 21% and adjusted EPS grew 17%, represent a great start to fiscal 2021 and puts us on track to meet our goals for the year. Our performance this quarter is clearly benefiting from the strategic actions we've taken to drive growth and profitability, even in the face of continuing impacts of the COVID-19 pandemic. The performance of the business gave us the confidence to raise our dividend and complete share repurchases in Q1, returning $81 million in cash to shareholders while making substantial growth investments. Turning to the next slide. Profitability improved across segments. Quick Lubes' EBITDA increased 21%, driven by same-store sales growth and strong unit additions as favorable channel and product mix helped offset modest volume declines. International segment, EBITDA grew an exceptional 64%, driven by top line growth and margin improvement. These segment results drove overall Q1 performance that delivered our best ever first quarter profitability, even with estimated miles driven down low double digits in the U.S. Let's discuss Quick Lubes in more detail on the next slide. Quick Lubes began the fiscal year with outstanding top and bottom line growth. Compared to Q1 last year, sales grew 17% and adjusted EBITDA increased 21%. These results were driven by continued strong operations and in-store execution, which were made even more challenging by COVID-19 and its related impact on customers and our employees. We're seeing some margin de-leveraging due to unproductive labor and other costs related to COVID-19. Despite this increase in cost, we performed well and had strong profit growth. Systemwide same-store sales grew 6% in Q1, continuing to run well ahead of miles driven. Same-store sales varied during the quarter with softer results in the middle of the period.

This was likely related to a step-up in restrictions, which negatively impacted miles driven, including holiday-related travel and an echo effect of lower transactions from earlier in the spring. Since November, we have seen very strong same-store sales results that continued through January. Total sales and EBITDA in the quarter also benefited from strong unit growth of 126 stores or 9% versus last year. More than 40% of the new stores added in the past year came from acquisitions that we closed in Q1. Most of the remaining unit growth came from newly built company-owned stores. Our franchisees are also investing in growing stores. The success of our franchise network and the strength of our partnership across the system are key differentiators of our retail services business. Entrepreneurs Franchise 500 recently listed Valvoline Instant Oil Change as the number one automotive franchise system and in the top 20 overall franchise systems. Let's turn to the next slide to discuss how data analytics and digital marketing continues to grow our customer base. Key components of our same-store sales performance is our ability to expand our customer base and gain share via retention of existing customers and acquisition of new ones. Let's start with the analytics and digital marketing and how they grow our customer base. We captured an enormous amount of data on customer experience in vehicle service history, along with OEM recommendations. This data allows us to make the appropriate service recommendations and incentive offers that drive both traffic and ticket, but the predictive power of our data analytics allows us to reach the right customers at the right time to remind them to come in for their next service or acquire them from a competing service provider. This approach led to healthy growth in our active customer base in company-owned stores in Q1.

Throughout COVID, our new customer acquisition continues to be strong. We've been able to retain these new customers at a higher rate than our historical average. Let's look at how our superior customer service execution drives satisfaction and the retention of the broader customer base on the next slide. Our data-driven approach expands beyond marketing tactics. We take customer experience seriously and measure everything that we do, including customer satisfaction in every store. With more than 250,000 customer responses annually, our customers continually rate us with an overall satisfaction level of 4.6 out of five stars. We've even improved our top box satisfaction scores during this challenging period. This is a key driver in retaining our loyal customer base. Talented and engaged employees lead to satisfied customers. Our talent strategy incorporates leading-edge technology to identify and hire a selective talent base that is focused on customer service skills. Opportunities for career development and advancement allow us to promote nearly 100% of store and market leadership from within, supporting rapid growth across our Quick Lubes business. In 2020, we were recognized by the Association for Talent Development with their number one best award, highlighting our commitment to develop top-grade leaders. Bottom line for us, we hire great people, and we give them industry-leading business and outstanding customer experience at every store every day. I've heard from a number of investors that they didn't fully appreciate what makes Valvoline different until they experienced it first-hand. So I encourage you to visit one of our stores in the coming months. Let's now review Core North America's results on the next slide. Adjusted EBITDA in Core North America grew 2% in the quarter, driven by improved gross margins, resulting from favorable shifts. We saw another solid performance in the retail channel, led by branded product sales. Year-over-year volume has grown in the past two quarters, and our share in DIY has remained steady.

We continue to optimize our promotional pricing and offers and support our merchandising plans with effective marketing, which are reflected in our recent results. While retail channel volume has been outperforming recently, installer volume has declined, though not as severely as miles driven. This represents the ongoing impact of COVID-19 and a slower pace of recovery in the broader DIFM space. We have continued to add new business with our value-added approach by leveraging our investment in digital tools for direct customer engagement interactions. This success in new business wins, combined with the strength of our long-term customer relationships, position us well for recovery in the installer channel business as miles driven rebounds. Let's move to the next slide. While it's not unusual for base oil cost changes to occur during the fiscal year, we have seen an unusual swing over the past 12 months, with sharp declines last year and offsetting increases happening this year, most of which we anticipated in our outlook. We are in the process of executing price increases across channels that we expect will fully cover this increase in cost. Our strong brand and strategic relationships with our customers have allowed us to successfully manage these short-term impacts in the past, and we don't expect this year to be any different. While we anticipate unfavorable price cost lag over the next couple of quarters, unit margins are forecasted to be back near the $4 range in Q4. And we continue to anticipate a similar level of performance for the full year. Let's look at International's performance on the next slide. The International segment delivered impressive growth across all regions in Q1. Sales and volume were up in the mid- to high teens range. This performance was driven by a combination of organic growth and onetime benefits. We've won new business and growing our existing customers across regions.

In China, we continue to see growth in the passenger car segment with our key national accounts and benefits of our optimized product line. Ongoing recovery from COVID-19 impacts led to some distributor restocking in the quarter, particularly in Latin America and within our India JV. Growth in volume, coupled with improved margins from mix benefits and increased contributions from JVs, led to an exceptional 64% growth in adjusted EBITDA. We expect International segment profitability to continue to demonstrate meaningful year-over-year growth, but at a lower rate than experienced in Q1 as inventory restocking, short-term margin pressure from increasing raw material costs and certain promotional events that occur in Q1 will not repeat. Let's take a look at the growth drivers in International on the next slide. We have an established growth model in International with three key components of developing channels, delivering value through our service platform and building the brand. Let me give you three examples of this modeling action from Q1. First, we added a significant new distributor in Mexico, which we expect to meaningfully increase our presence in key markets throughout the country. We also added new distributors in EMEA and Asia and continue to improve our network in China into India JV. Second, during the pandemic, we focused on staying connected to our current and prospective customers by leveraging digital tools and virtual connections. In our India JV, we increased customer connections by more than 40% versus Q1 last year. This focus on customer service resulted in key new account wins and share growth 3rd, we continue to build on the original mode oil campaigns launched last summer in our partnership with the severe Football Club to enhance our market presence and strengthen our brand equity. Continuing to focus on these core strategies is putting the International segment in a position for sustainable and profitable growth.

Now let me turn it over to Mary to review our financials.

Mary Meixelsperger -- Chief Financial Officer

Thanks, Sam. Slide 13 shows our adjusted results for Q1 Quick Lubes and International drove the growth in sales in the quarter versus last year. In addition, in addition to favorable foreign exchange in benefits from acquisitions, which combined contributed nearly 300 basis points to the overall sales growth, higher mix of retail volume in Core North America and improved margins in International led to the increase in gross margin rates. SG&A increased modestly as ongoing travel related expense reductions were offset by wage and benefit inflation an increase in depreciation and amortization as well as acquisition costs volume growth favorable mix benefits in a higher contribution from unconsolidated joint ventures resulted in a 21% year-over-year increase in adjusted EBITDA 245 million, a record for fiscal Q1 even as covered 19 continues to unfavorably impact miles driven. Let's move to slide 14 to discuss the balance sheet and cash flow. The strategic actions we've taken to drive growth are clearly visible in our profitability and cash flow. Cash flow from operating activities increased $20 million year-over-year, driven by growth in adjusted EBITDA. We continue to make growth-related capital investments, primarily in our Quick Lubes business, with capex up $7 million in Q1, leading to free cash flow of $44 million, an increase of $13 million. There was only modest capex in the quarter related to the China plant. Production in the China plant began in early December, and the plant remains on track to produce substantially all of the company in cash and proceeds from issuing new 2031 bonds. The coupon on the new longer-term debt is 75 basis points lower than the 2025 series. This transaction lowered our gross debt to $1.7 billion as of the end of January while reducing our cost of capital.

Since the initial impacts of COVID-19, business performance has improved, and cash generation has remained strong. This gave us the confidence to reduce our gross leverage and normalize our liquidity. We continue to follow a disciplined approach to capital allocation. We focus first on deploying cash for growth, both organic and through acquisitions, where we deployed $218 million in Q1 by acquiring Quick Lube stores, then returning cash to shareholders through our dividend, which we increased by 11% and $58 million in share repurchases. In total, we returned $81 million to shareholders while making growth investments during the quarter. Let's move to the next slide to discuss our outlook. We are reaffirming our full year guidance, including same-store sales growth of 12% to 14% or 6% to 8% on a normalized basis; adjusted EBITDA of $560 million to $580 million; adjusted EPS of $1.57 to $1.67; and free cash flow of more than $200 million. Our guidance reflects full year EBITDA growth in the 10% to 14% range. For Q2, we expect our business performance to remain strong, though our profitability will be roughly in line with last year due to the onetime reversal of incentive compensation accruals in the prior year. For the second half of the year, we remain confident in our business fundamentals and expect to be in line with our full year outlook. As we've said previously, our guidance is dependent on current expectations, which could be significantly impacted by external factors surrounding the ongoing COVID-19 pandemic and its impact to miles driven.

Now let me turn things back over to Sam to wrap up.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Thanks, Mary. Our strong results in Q1 and our expectations for 2021 demonstrate that we are driving growth despite macro headwinds, thanks to the strength of our model and dedication of our team. I expect improving consumer sentiment and the likely improvement in miles driven to provide tailwinds for Valvoline as the year progresses. Our broad portfolio of products and services is expected to continue generating growth with strong adjusted EBITDA margins in the 20% range. Strong momentum continued in the Quick Lubes segment. We experienced a great quarter in our international business and saw continued performance in Core North America. The investments made in Quick Lubes growth in the performance of the segment in Q1 represent our commitment to accelerating our shift to a service-driven business model.

And with that, I'll hand it back to Sean to open the line for Q&A.

Sean T. Cornett -- Director, Investor Relations

Thanks, Sam. [Operator Instructions] With that, Stephanie, please open the line for Q&A.

Questions and Answers:

Operator

[Operator Instructions] And your first question is from the line of Simeon Gutman of Morgan Stanley.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks, everyone. Good morning. I wanted to ask about the price increases. You mentioned that you started to enact them. Can you talk about the stickiness? And can you talk about, do you expect any change in market share? And have others in the industry followed, have you seen that this is going to be the norm that everyone's going to be taking pricing up?

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Yes. So what we've seen is that competitors are also moving on price. We have seen a significant increase in raw material costs. So it really puts everyone in position to need to move on price. So we've begun those discussions and begun implementation across all of our channels, both in the U.S. and in International.

Simeon Gutman -- Morgan Stanley -- Analyst

Got it. And as far as market share goes, I mean, the installer channel, right, it's still under some pressure. So I guess, you may not see an impact in that channel, one way or the other from price? Or you don't expect market share to change in any way as these price increases take hold?

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

No. We feel good about our business in the installer channel despite the impact that we point out from COVID-19. When we break down the installer business, our national accounts, which has always been a big part of our installer business, our larger accounts, definitely are feeling the effects of the miles driven being off. And so that's where we see some of the toughest declines in our overall volume. But we're continuing to pick up new business. And so we believe we're growing overall share, obviously, at a modest rate right now, but a good steady rate nonetheless. So the installer business is the one business that is underperforming for us right now, but is really well positioned as miles driven begins to improve to see more of a recovery there. But we're certainly encouraged by the good, steady performance in the DIY channel and steady share there, too.

Mary Meixelsperger -- Chief Financial Officer

And Simeon, I would remind you that a substantial portion of our installer channel business operates under-indexed contracts for pricing. So contractually, any change in underlying raw material costs, up or down, get passed through to all of our national account customers and many of our other regional account customers through an index that's based on those posted pricing for raw materials. So in terms of that business, we certainly have strong margin controls there through the contractual indexing.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Yes. That's a good reminder and that with those index pricing contracts, we see very little price lag effect on the installer side of the business with those large accounts. It's really more felt in the DIY business where we've got scheduled promotions in place through the next number of months. And so we've always had a bit longer price lag impact in DIY. And so we'll feel that in -- primarily in Q3, but we expect to be in really good shape as we begin Q4.

Simeon Gutman -- Morgan Stanley -- Analyst

And did you say what your outlook for oil prices for the rest of the year? Because I think you said that you still expect $4 gross profit per gallon as your scenario in your model. But does that assume prices don't go up further from here? And this price increase helps get you there? Or what if prices continue to go higher?

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Yes. We -- certainly, I think we've seen the biggest part of the move in raw material costs as, of course, base oils follow crude over time. And base oil or crude has moved from the 20s back into the mid-50s. And so I think the major move has occurred, and those cost increases now are coming through with base oils and additives. So we're taking the appropriate pricing action. Now could we see additional modest increases? That's possible. But I don't think it's going to have a meaningful impact on how we have forecasted the balance of the year, I think we'll be in really good shape.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. Thanks. Good luck.

Operator

Your next question from the line of Jason English with Goldman Sachs.

Cody Ross -- Goldman Sachs -- Analyst

Good morning, folks. This is actually Cody Ross for Jason this morning. I just wanted to unpack the drivers of the strength this quarter. It's actually quite surprising to us with Quick Lubes a little weaker than we expected and International a little stronger. So you did about 6% same-store sales growth this quarter. You mentioned mobility restrictions likely weighed on same-store sales growth. But since November, it's been stronger. Are they in line, same-store sales growth with what you did last quarter, meaning the September? And if so, who do you think you're taking share from? And then I have a follow-up.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Yes, yes. First of all, for the overall strength in the Quick Lube business. And as I noted in my comments that we saw in the middle of the quarter, basically in November, slowdown in same-store sales growth. And we do think that was because of some of the increased restrictions and reduced driving around the Thanksgiving holiday. And we also -- our analytics team saw that we see a bit of an echo effect. When we saw that dip back in the spring from the initial COVID-19 restrictions, those customers that would have delayed service we're -- you have -- you would have expected them in that November time period, and that -- and so because it did happen in that April, May time period, we felt that impact in November. But what was really encouraging is that we just bounced back very strong at the close of the quarter in December. And that strength has carried through into January. Now January has seen same-store sales in the double-digit -- low double-digit range. So we're really feeling good about the Quick Lube business and how we're continuing to take share. As far as where we're taking share from, we believe we're taking it from not just competing Quick Lubes, but again, the broader DFM market because of the convenience service model and the effectiveness of our marketing that I pointed out. And so it's a little bit of multiple channels is where that volume is coming from. But we're -- again, we're carrying some really good momentum into Q2 and feel really good about just the overall strength of that business. So again, when you step back and you take a look at Quick Lube performance, sales of growth of 17% and 21% adjusted EBITDA growth, this is a great quarter, and really exciting for us, given all the new stores that we were bringing online, too. Tremendous effort of our team, continuing to deliver the customer service in our existing stores by onboarding these new stores is a ton of work, especially in this environment, and they just did an outstanding job. So again, we're really well positioned in the Quick Lube business and definitely taking share.

Cody Ross -- Goldman Sachs -- Analyst

Great. That's very helpful color. I just want to pivot real quick to the strength in International because this is really surprising, given the choppiness in the past. Relative to your expectations how did that perform? Can you discuss the main drivers of strength in a little bit greater detail? And did you mention that this could possibly just be a pull forward of demand out of 2Q into 1Q? Thank you.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Yes. It's important to break down the difference between the underlying length of the business and then some of the onetime effects that we did see in Q1. And the magnitude of those were somewhat unanticipated. So first of all, we've been making some important investments and strengthening our team and investing in marketing and building our channels to market over the last few years, and we're really getting some good momentum in that business. And we had that in 2020, back half of '19 and going into '20 before COVID hit, we are seeing some of the fruits of our invest in Q4 of last year. And then the start of this year, really gives us a lot of encouragement for what we can expect ongoing. So this is a business that we feel now that like the underlying growth rate has been in that high single-digit range now for a while once you factor out the impact of COVID. And so we saw that in Q1. And so we have done a lot of work internally to understand, OK, what was more of a one-time impact versus the underlying growth because we were seeing growth across all the regions. And we feel it was like close to half of the overall growth in international. And part of it was particularly in Latin America and India, which were very hard hit by COVID and a little bit slower on the recovery when we go back to last summer.

And so as those market distributors restocking, and so that COVID recovery and distributor restocking was definitely part of the Q1 strength. But when we factor that out, we nonetheless saw good underlying growth particularly in China, on the passenger car side of the business, we had a really strong first quarter, very encouraging. Underlying growth and share building through channel building in Latin America, I pointed out the addition of a very important distributor in Mexico. That's a key market for us and one that we're investing in. But also saw good, solid growth in our Europe branded business. Australia was particularly strong on the DIY side of the business, retail side. So when we see strength like that across regions, we know that we're making significant progress in building our capabilities, serving our customers and it allows us to invest back in the brand more aggressively. So International is a real highlight here for us, not just for the quarter, but the growing confidence that we have and the long-term potential of that business.

Cody Ross -- Goldman Sachs -- Analyst

That's great to hear. And if I can sneak in one very quick clarifying question. When you said -- you mentioned that competitors have followed your price increases in Core North America. Does that include private label? And then I'll pass it on. Thank you.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

It does. We've seen announcements from the private label blenders in Core North America, too.

Cody Ross -- Goldman Sachs -- Analyst

Great. Thank you very much.

Operator

Your next question is from the line of Stephanie Benjamin, Truist.

Stephanie Benjamin -- Truist -- Analyst

Hi. Good morning.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Good morning, Stephanie.

Stephanie Benjamin -- Truist -- Analyst

I wanted to, first, just a clarification question on Core North American unit margin. Can you -- so in the first quarter, I'm assuming there was a bit of a benefit from price-cost benefit and then that started to roll off? Or is that incorrect? And then as we think of the cadence and as we kind of focus on a $4 unit margin for the full year, should we expect a lag on that price increase benefit in the second quarter and then start to see it kind of rebound a bit in the back half? Just wanted to kind of think about the seasonality of that margin.

Mary Meixelsperger -- Chief Financial Officer

Yes. So Stephanie, we did see some modest price-cost lagging in Q1, primarily because of our accounting method with LIFO causing a little bit of it. And that was -- we saw a strong channel mix and customer mix performance in the quarter, that helped keep those unit margins above -- well above $4 a gallon, although we saw a sequential decline in unit margins as we saw some of those costs start to come through. We expect the bigger cost impact of the raw material increases with the lag in pricing pass-through to be in the balance of the year. And as Sam mentioned, Q3 will be impacted. So I am expecting lower unit margins in Q2 and Q3 with a recovery in the unit margins toward the $4 a gallon range in the fourth quarter and likely to be in that range for the full year as we see that recovery of -- as we pass-through those cost increases during the middle part of our fiscal year.

Stephanie Benjamin -- Truist -- Analyst

Got it. That's really helpful. And then I just wanted to switch gears a bit to the Quick Lubes segment. Obviously, tremendous growth and continue through both acquisitions as well as new store growth. Have you seen anything due to COVID or anything else that has kind of impeded your ability to expand the store count? Or do you remain pretty on track for the targets that you've laid out for the year? Just any color you can add to the store expansion would be helpful. Thank you.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

No, I think that's the good news is that COVID is not impacting our ability to add stores, and this is true both on the acquisition side and when we look at our pipeline for acquisitions. If anything, I think it improves our position, given the impacts of COVID and particularly on smaller operators. And then as far as our ability to execute our store build plan, the team is doing an excellent job there, and we've got our pipeline in place to deliver against our targets for fiscal '21 and doing excellent job to have our pipeline in place for fiscal '22 ground-up growth. So no real impact from COVID on our ability to grow stores. It's really in the operational challenges. When we -- if one of our employees comes down with COVID, then that affects the store in -- with meeting in quarantine and then restaff that store. But the operations team has done an excellent job with some dual staffing models and ability to move employees within market to keep our stores open and operating. So you see that in the results, and really, really proud of the work that they're doing.

Mary Meixelsperger -- Chief Financial Officer

And Stephanie, I would call out, we saw some higher costs in Q1 in Quick Lubes related first to the COVID impact, where we had some labor inefficiencies because of what Sam talked about as well as some cost increment. And in addition to that, we had about $1.5 million of acquisition-related expenses for the deals that we did in the first quarter that were impacted in the P&L. So in combination, those two things probably drove about $3 million -- a little bit more than $3 million of higher expenses in Quick Lubes for the quarter.

Stephanie Benjamin -- Truist -- Analyst

Got it. Thank you so much for the color.

Operator

Your next question is from the line of Laurence Alexander of Jefferies.

Laurence Alexander -- Jefferies -- Analyst

Hi there. Most of the questions have been answered. But I guess, can we sort of dial back to a larger scale picture question at predictable or under your control? And how much of it is sort of noise in the system that is sort of driven by factors that are at the consumer level?

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

So Laurence, are you getting at like the mix between the operating segments or mix between Core North America or a little bit of both?

Laurence Alexander -- Jefferies -- Analyst

Well, when you're explaining the results, you often sort of point to kind of mix contributing to the margins and profit progression. And I think just, it would be helpful to characterize just how much of that is the lever that you control? Or do you flex it when you see other trends not working in your favor? Or is it a -- or is it something which is kind of more noise in the system?

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Yes. So first of all, if you break it down by operating segment, the predictability in Care North America, we see a little bit in International. We mentioned that mix was a factor in the International business, and some of the strong growth that we had in International was with some of our more profitable product lines and regions, skewing a little bit toward the passenger car side of the business. But the bigger impacts do happen in Core North America. Within Core North America and one of the strengths this year, and last year, too, was in the DIY side of the business. So our mix has shifted a bit to the higher-margin DIY business versus installer due to the fact that the installer business has been soft in this COVID environment. But the promising thing in -- when you look at the profitability and stability of that business as we look longer term, is that as DIY has strengthened and our brand position has strengthened, we're seeing stability in the price gaps and our merchandising plans, the distribution that we have in DIY, this all results in steady share. And so that's good news, and that's driving good, solid mix in the performance of that business. In the past, on a quarter-to-quarter basis, you can see swings depending on the timing of certain merchandising events in DIY, which can impact it, but it's not huge impacts. It's just really this year, what we're seeing is DIY being stronger than installer because of the COVID impacts on installer now.

We do hope that as COVID-19, as we move beyond COVID-19 and miles driven begins to pick up, we fully expect that the installer business will begin to see improved volumes. Now while that could have a modest impact -- negative impact on our unit margins, it will lift overall profitability because it's not going to take away from profitability in DIY. Instead, we'll just be adding improved profitability business. So I hope that helps. It's -- obviously, it's been a really dynamic time in COVID and how that's impacted the mix. But when I step back and take a look at what we're able to deliver last year through COVID, given the improving fundamentals that we see in the overall Core North America business. And then -- or the confidence that we have in our guidance and what we're going to deliver this year, it speaks a lot to just the improving durability of growth. We talk about durable growth in this business model, and that continues to get better in our ability to manage through volatility, whether it's on the demand side or even on the product supply side. So feeling really good about the progression of this business and the strength across channels and segments.

Laurence Alexander -- Jefferies -- Analyst

That's great. Thank you.

Operator

[Operator Instructions] And your next question is from Olivia Tong of Bank of America Merrill Lynch.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Hi. Thanks. Most of my questions have been asked. But, I wonder if I could follow up to getting back on the year end. So far, you've been pretty good about coming in better than you have expected for quite a bit now. So can you talk about that first, just relative to your expectations, what's come in better than you had anticipated in the past? And then have you talked to retailers yet about the price actions that you plan to take to get back to above $4? And if you have any color in terms of what your peers are doing or have done or discussions that are taking place? That would be great as well.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Yes. Why don't I take the second half of the question, and then Mary can address the forecasting process. But with regard to retail price increases, yes, we have begun those discussions. And so we -- like I said earlier, we have a strong relationship with our key accounts. They understand the cost increases. And it's really about how do you implement these increases in a way that doesn't impact our merchandising plans that we have in place with our key retailers so that we execute well throughout this period. But the strength of the Valvoline brand, the investments that we've been making in the Valvoline brand and the partnership with the retailers is what gives us the confidence that we'll be able to manage through this period and protect our margins and keep our business in a strong stable position. So with regard to exactly what competitors are doing, we know that they're all taking price actions. We don't know the status of their negotiations. That's never true, but we do feel that the market is definitely moving, given the size of the cost increases that we're managing through right now. So I feel good about it. But like I said, there'll be a lag impact. We'll feel that in Q3, and I think we'll be in a much better position in Q4. With regard to forecast, Mary?

Mary Meixelsperger -- Chief Financial Officer

Yes, it will be I. We have seen some challenges in forecasting for the timing, both in terms of -- as those cost pass-through, we've had success in delaying some of the price -- the cost changes with our suppliers, and we've had success at different times with extending the time to pass-through price reductions, which we saw last year that benefited us. So we work very hard at trying to get the forecasting that we do as close to the pin as we can, but there are some things within the overall mix. And I'll say one of those things, of course, is the fact that we're on LIFO accounting, and so we see the impact of those up or down changes much more rapidly because it's just the methodology of our accounting practice from a LIFO perspective that causes increases in those costs to impact us much more rapidly. So I think what you can see from us is continuing to do our best in trying to get those forecasts as accurate as we can, while we're managing it to try to optimize our profitability in real-time. So we'll keep you posted as we move forward in how performing relative to our estimates.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Great. Thanks And then just a follow-up on Quick Lubes. Recognizing, of course, the volatility that's going on right now and with respect to that. But same-store sales or comp growth decelerating to 6%. I mean that's quite a bit lower than it had been in the past, except for obviously the margin during quarters of last year. So can you just talk about the move from there, the -- just the acceleration that you expect as the year progresses? And what you're thinking about for the long term, how confident sort of in the [normalized 16%]? And then secondly, still on Quick Lubes, can you just talk a little bit about what drove the gross margin down as much as it was this quarter? Thank you.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

First, on same-store sales performance, I believe we called that out that we did see that slowdown in November, but it was really concentrated during that month. And we talked about those factors. But when you take a look at the momentum that we've had in Quick Lubes and how we're performing prior to November and how we performed in December, and I into that how strong January was, same-store sales is very strong. And so our confidence in delivering same-store sales growth is very high. And I think as miles driven is a potential can turn from a headwind to a tailwind for us as the year progresses, that would be additional upside from the performance that we're seeing right now in that business. So I couldn't feel better about the performance of same-store sales. It gets back to the execution of the team and the stores and How well they're delivering on the customer experience, on the ticket opportunity. We had to eliminate a couple of services, having their filters, tire rotations, for example, and we've been more than able to offset that with improved execution in the stores. And then the digital marketing programs, too, are doing a nice job. And when you consider that driving behavior has been impacted by COVID, it has impacted our algorithms and how are some of our direct marketing programs work, and yet we've been able to make adjustments that have kept the momentum in this business. So like I said, we saw a little bit of that dip in one month, but we're back on track to delivering very strong same-store sales growth.

Mary Meixelsperger -- Chief Financial Officer

Yes. And on the deleverage we saw at the gross margin line in Quick Lubes in the quarter, virtually all of it was caused by new stores, both ground ups and acquired stores. Our comp stores were relatively flat on a gross margin level, which really we expected -- in the absence of COVID, we would have expected leverage. And I go back to some of the increase in expenses we had that were COVID-related around labor and supplies and materials and cleaning that caused expenses in the quarter to be higher than what they otherwise would have. So most of that deleverage in the quarter was simply the impact of new stores, both ground ups and acquired stores and my expectation is that we will see margin leverage through the balance of the year as the year progresses. I would note that at the EBITDA line, we actually -- we did see leverage. We leveraged our EBITDA as a percentage of sales by about 80 basis points. So a portion of the overall op income deleverage is coming from higher depreciation and amortization as well with the new ground ups and the acquired stores.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Understandable. Thank you.

Operator

Your next question is from the line of Jason English of Goldman Sachs.

Cody Ross -- Goldman Sachs -- Analyst

Hey guys. Thanks for the follow up. Just two quick philosophical questions to help us out with our model over the long term. One is the 10-year historical spread between crude oil per gallon and base oil per gallon, is about $1.93. However, it stands today at over $2.60. Why has the relationship decoupled? And do you expect the spread to structurally be higher moving forward?

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Take it.

Mary Meixelsperger -- Chief Financial Officer

So base oils have been in a long market position. The market has substantially more capacity than it has demand. And in this environment with declining miles -- where we've seen the decline in miles driven, that certainly is the case as well. But I think that long market will allow for us. And more broadly, I just -- I think the recent increases that we've seen in base oils is an effort by some of those refineries to improve those margins a little bit back toward their 3- or 5-year trend. But from where we are right now, because of that capacity that's out there, I think that it's unlikely that we'll see continued pressure. Now that certainly can change. I do think as miles driven has improved more refining capacity will come online, driven by the fuel side, and we'll continue to see lengthening of that market from a base oil perspective. So I don't know that there's anything really that unusual in terms of where we are today in what we expect moving forward.

Cody Ross -- Goldman Sachs -- Analyst

Great. And then last question, just the conversion between franchise and company-owned stores is accelerating, why is that? Is it because you're more aggressively bidding for the franchises? Or are the franchises wanting to exit more? If you could just provide any color that would be great. Thank you.

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Yes. The only real change there is that there's been a couple of our franchise partners who had approached retirement and a couple of them were in really key regions for us that were very attractive for us to add to our company store network. So it's not a major thrust of ours to acquire franchisees. But when there are opportunities, and it strengthens our network, we look for those opportunities. We'll take action on those. They're very low-risk acquisitions that still generate very strong return on investment. And yet, the thing to remember, like when we talk about this Quick Lube business, first and foremost, we want to grow the number of stores in the system. So we are working with our franchise partners to help them in their growth plans. And then, of course, to execute on the growth plans that we have for company stores, through acquisitions and ground ups. And so first and foremost, we have an opportunity to grow much faster. It's a very large and long-term market opportunity for us. And we're going to be aggressive there, and we feel really good about the levers that we have to keep driving that store growth.

We continue to build our capabilities and are executing really well on both ground ups, acquisitions and working with their franchisees to help them on their growth, too. So very excited about the progress there. So the mix, we don't think is critical, both franchising boat and company store growth, these are high-return investments that we're making. And so the big picture here at Valvoline is we're taking strong, steady cash flow from the product side of our business. And pulling that into growth in our service business that's generating returns to double the cost of capital. So we're very disciplined in how we're allocating capital. We're making great investments. They're strategic, and the strategy is very much working for us. So that's how the model works. We're becoming much more service model-driven in terms of our overall profit mix, but it's a great model that's working very well for us.

Operator

Your next question is from the line of Chris Shaw of Monness, Crespi & Hardt.

Chris Shaw -- Monness, Crespi & Hardt -- Analyst

Good morning, everyone. How are you doing? Sorry, I wasn't around for a couple of different calls, so I'm repeating anything, I apologize. But just quickly on your store acquisitions. I think you've already kind of met the guidance you had for the year or are pretty close to it. If that's true, is it that -- are you not acquiring anymore? Or don't have any -- you to increase the guidance because the pipeline is just not that full right now? Or just because you actually don't want to acquire any more this year, that's enough for the full year?

Mary Meixelsperger -- Chief Financial Officer

Yes. So we guided to a higher number this year because of the full pipeline and our confidence in the deals that we were going to close in the first quarter. Because those deals tend to be opportunistic, we typically would only include a smaller number of acquired stores in our guidance until we actually have the deals completed. But because of the timing of guidance and the fact that we knew those deals were coming in the first quarter, we had a higher confidence in the guidance to give a much higher number. We still have a robust pipeline of deals that we're working on. A larger number of smaller mom-and-pop stores that are in the pipeline. And so we likely will continue to work to acquire more stores. But in terms of where we set our guidance, it's a higher level of acquired stores that was really driven on that confidence in the deals that we were doing in Q1.

Chris Shaw -- Monness, Crespi & Hardt -- Analyst

Got it. And then just in Core North America sequentially into 2Q, is all the puts and takes, pricing, costs, maybe some better miles driven. I mean, do you expect profit profits to be up sequentially or flat? I mean do you have any expectations at this point, if all things sort of stood where they are today?

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

You're talking about EBITDA? Is that -- in Core North America, Chris?

Chris Shaw -- Monness, Crespi & Hardt -- Analyst

Yes. Profits.

Mary Meixelsperger -- Chief Financial Officer

Yes. I -- we guided to core North America being down year-over-year, and we certainly saw a good first quarter where we were up modestly. So if you look at a year-over-year for the balance of the year, because of that price cost lag impact of those rising raw material costs, my expectation is that for the balance of the year, core will be down year-over-year -- on a year-over-year basis.

Chris Shaw -- Monness, Crespi & Hardt -- Analyst

Great. Thanks so much.

Operator

And that was our final question. [Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Sean T. Cornett -- Director, Investor Relations

Samuel J. Mitchell, Jr. -- Chief Executive Officer and Director

Mary Meixelsperger -- Chief Financial Officer

Simeon Gutman -- Morgan Stanley -- Analyst

Cody Ross -- Goldman Sachs -- Analyst

Stephanie Benjamin -- Truist -- Analyst

Laurence Alexander -- Jefferies -- Analyst

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Chris Shaw -- Monness, Crespi & Hardt -- Analyst

More VVV analysis

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