VALVOLINE INC

The following summarizes the results of the Company’s continuing operations for the periods ended June 30:

(a)Refer to the “Use of Non-GAAP Measures” and Continuing operations EBITDA and Adjusted EBITDA for management’s definitions of the metrics presented above and reconciliation to the corresponding GAAP measures, where applicable.

Net revenues

Net revenues increased $45.2 million, or 12.0% for the three months ended June 30, 2024 compared to the prior year period. System-wide SSS grew 6.5% over the prior year primarily from increased ticket as a result of continued non-oil change service penetration, increased premiumization, and net pricing benefits, while transaction growth drove modest improvements. Additionally, net revenue growth also benefited from the addition of 157 net new stores over the prior year. The following reconciles the year-over-year change in net revenues:

Net revenues increased $130.0 million, or 12.3% for the nine months ended June 30, 2024 compared to the prior year period largely due to volume, mix, and pricing improvements. System-wide SSS grew 7.1% compared to the prior year with ticket contributing the majority of the benefits from non-oil change service penetration, pricing, and premiumization, while transaction growth drove the remaining improvements. The following reconciles the year-over-year change in year-to-date net revenues:

Gross profit

Gross profit increased $16.8 million, or 11.1%, for the three months ended June 30, 2024 compared to the prior year period. Profitability rose largely due to mix improvements from non-oil change service penetration and premiumization, in addition to volume expansion from store growth. Modest cost efficiencies from materials also increased profitability and were partially offset by higher store operating expenses, including higher depreciation. The following reconciles the year-over-year change in gross profit:

Gross profit margin declined modestly in the three months ended June 30, 2024 compared to the prior year period primarily due to increased store operating expenses, including higher depreciation from unit growth, as well as more consistent franchise incentives throughout fiscal 2024 where the prior year period benefited from timing of these offerings. This margin deleverage was partially offset by benefits from service mix and cost efficiencies in materials.

Gross profit improved $52.3 million, or 13.2%, for the nine months ended June 30, 2024 compared to the prior year period driven by increased ticket from continued non-oil change service penetration, strategic pricing actions, and premiumization. Additionally, increased transactions from store and customer base growth, as well as improved labor management, also provided benefits. The following reconciles the year-over-year change in year-to-date gross profit:

Gross profit margin improved modestly in the nine months ended June 30, 2024 compared to the prior year and was primarily due to labor efficiency from effective management which resulted in best-in-class service delivery that also improved overall service mix. These benefits were partially offset by increased store operating expenses, including depreciation.

Net operating expenses

Details of the components of net operating expenses are summarized below for the periods ended June 30:

Selling, general and administrative (“SG&A”) expenses increased $11.6 million and $29.8 million for the three and nine months ended June 30, 2024, respectively, compared to the prior year periods. Higher SG&A expenses support investments in growth, including the stand-alone retail business, and its increasing size and scale, following the sale of Global Products in fiscal 2023. Specifically, investments in implementing stand-alone information technology platforms and advertising drove higher costs that included license fees, outside services and implementation costs, which combined to increase expense by $9.6 million and $22.5 million in the three and nine months ended June 30, 2024, respectively.

Net legacy and separation-related expenses decreased $1.5 million and $30.6 million for the three and nine months ended June 30, 2024, respectively, compared to the prior year periods as a result of expenses that generally did not recur. During the nine months ended June 30, 2023, $24.4 million of expense was recognized due to the amendment of the tax matters agreement with Valvoline’s former parent company that resulted in an increased indemnity obligation for the utilization of certain legacy tax attributes. Additionally, expense was recognized in the prior year-to-date period associated with the modification of certain performance-based unvested stock awards for the continuing operation in connection with the sale of Global Products.

Other income, net increased $0.2 million and $2.5 million in the three and nine months ended June 30, 2024 compared to the prior year period. This increase in the nine months ended June 30, 2024 was largely attributed to the entire current year-to-date period including rental income from subleasing properties in connection with the sale of Global Products compared to a partial year following the sale of this business in the prior year. Additionally, expense associated with an investment impairment of $1.0 million in the prior year-to-date period did not recur.

During the fourth quarter of fiscal 2024, the Company expects to recognize a gain to reflect the completion of the sale of 17 company-owned service center stores to a franchisee during July 2024. This refranchising transaction provides an opportunity to accelerate network growth in a capital efficient manner.

Net pension and other postretirement plan expenses

Net pension and other postretirement plan expenses decreased $0.3 million and $0.6 million in the three and nine months ended June 30, 2024, respectively, compared to the prior year periods. The decrease was generally attributable to higher recurring expected returns on plan assets partially offset by higher interest costs of the rate environment as a result of the most recent annual remeasurement of the plans.

Net interest and other financing expenses

Net interest and other financing expenses increased $29.4 million and $26.5 million for the three and nine months ended June 30, 2024, respectively, compared to the prior year periods. Increased interest expense in the current year is largely attributed to lower interest income of $23.0 million and $17.3 million in the three and nine months ended June 30, 2024, respectively, as a result of maturities of invested net proceeds from the sale of Global Products, which began in late fiscal 2023 and completely matured in the second quarter of fiscal 2024. Additionally, debt modification charges and related fees were higher in the three and nine months ended June 30, 2024 by $7.2 million and $6.3 million, respectively, due to the current year repurchase of the 2030 Notes that resulted in the write-off of previously capitalized debt issuance costs and discounts, as well as third-party fees incurred in connection with the execution of the Debt Tender Offer, which were higher than those recognized in the prior year modification of the Senior Credit Agreement.

Income tax provision

The following table summarizes the income tax provision and the effective tax rate for the current and prior year periods:

The decrease in income tax expense for the three months ended June 30, 2024 is primarily attributed to lower pre-tax income in the current year. The increases in income tax expense and the effective tax rate for the nine months ended June 30, 2024 were driven by more normalized activity in the current year period as compared to the prior year period which included the recognition of a $26.5 million income tax benefit for the release of a valuation allowance due to the change in expectations regarding the utilization of certain legacy tax attributes as a result of the terms of the amended tax matters agreement with Valvoline’s former parent company. This amendment also resulted in higher Net legacy and separation-related expenses of $24.4 million for the related increased indemnity obligation for the nine months ended June 30, 2023.

(Loss) income from discontinued operations, net of tax

The following summarizes (Loss) income from discontinued operations, net of tax for the current and prior year periods:

The loss from discontinued operations, net of tax decreased $0.6 million in the three months ended June 30, 2024 from the prior year due to lower costs associated with the separation of processes and systems related to the sale of Global Products in March 2023. In the nine months ended June 30, 2024, earnings from discontinued operations decreased $1.253 billion, which was driven by the prior year recognition of the gain on the sale of Global Products, in addition to the current year period no longer reflecting operational results from the underlying business.

Continuing operations adjusted net revenues

The following table reconciles Net revenues to Adjusted net revenues for the current and prior year periods:

(a)Represents the results of a former Global Products business where operations were suspended during fiscal 2022 that were not included in the sale.

(b)Adjusted net revenues are reported net revenues adjusted for key items.

(c)Represents a non-GAAP measure. Refer to “Use of Non-GAAP Measures” for management’s definitions of the metrics presented above.

Continuing operations EBITDA and Adjusted EBITDA

The following table reconciles Income from continuing operations to EBITDA and Adjusted EBITDA for the current and prior year periods:

Adjusted EBITDA from continuing operations increased $12.8 million and $47.7 million for the three and nine months ended June 30, 2024, respectively, compared to the prior year periods driven by strong top-line expansion due to higher ticket from continued non-oil change service penetration and premiumization as well as from increased transactions, and unit growth. The nine months ended June 30, 2024 also benefited from improved labor cost efficiency. These benefits were partially offset by investments in SG&A expenses to support future growth.