Ladies and gentlemen, thank you for standing by, and welcome to the Valvoline Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Sean Cornett, Head of Investor Relations of Valvoline. Thank you. Please go ahead.

Thanks, Tenia. Good morning, and welcome to Valvoline's Fourth Quarter Fiscal 2020 Conference Call and Webcast. Valvoline released results for the quarter ended September 30, 2020, at approximately 5:00 p.m. Eastern Time yesterday, October 28, and this presentation and remarks should be viewed in conjunction with that earnings release. Copy of which is available on our Investor Relations website at investors.valvoline.com. These results are preliminary until we file our Form 10-K 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 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 nonrecurring 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 3, let's review our financial results for the quarter and the year. For the fiscal fourth quarter, Valvoline delivered reported operating income of $176 million,…

Thank you, Sean. My hope continues to be that you and your families are doing well and remaining healthy and safe. I want to take just a few moments to reflect on a truly unique year. In many ways, the COVID-19 pandemic and the abrupt wide-ranging changes that caused a fiscal 2020, one of the most challenging years in my career at Valvoline. It also demonstrated the strength of our team. At Valvoline, it all starts with our people, and the team came through in tremendous fashion helping to deliver record results. The durability of the Valvoline business model was reflected in our rapid recovery from the depths of the COVID-19 impacts, ending the year with outstanding results that drove year-over-year growth in profitability. We have strong momentum as we begin fiscal 2021, and we see next year as an inflection point for the company. Our shift to a service-driven business is accelerating and will drive faster growth in the future, including expected double-digit adjusted EBITDA growth next year. Let's take a closer look at Q4 and fiscal '20 on the next slide. Valvoline's product and service business is focused on preventive maintenance, which remains steady across economic cycles. Our growth is driven by the competitive advantages that we continue to invest in, in our Quick Lubes segment and a hands-on customer-centric approach across all of our businesses. Our performance in Q4 was exceptionally strong and generated results that exceeded our expectations. Overall, sales improved 26% and adjusted EBITDA increased by 42% from our results in Q3. These strong sequential improvements happened across all 3 segments. Adjusted EBITDA and EPS both grew in mid-teens for the quarter versus last year, driven by improved margins in all segments. For the full year, adjusted EBITDA grew 7%, with the strong performance in…

Thanks, Sam. Our adjusted results for the quarter and the year are shown on Slide 14. In Q4, sales increased 4% on flat volume, primarily driven by the strong top line performance in Quick Lubes. For the full year, sales and volume declines were driven primarily by the significant impacts of COVID-19, particularly in Q3. Favorable mix and price/cost lag benefits in core North America, along with margin improvement in Quick Lubes and international drove the 430 basis point increase in our gross margin rate this quarter. Q4 performance and earlier benefits from mix, price/cost lag and the cost savings initiative we began last year, improved gross margins for 2020. Higher SG&A in Q4 was driven by an increase in incentive compensation and a return of advertising and marketing expenses. Full year SG&A benefited from the expense reductions we implemented as COVID-19 impacts, began to expand more broadly and were offset primarily by higher incentive compensation leading to modest SG&A growth in 2020. Overall, significant margin improvements were partially offset by higher SG&A, leading to growth in adjusted EBITDA for Q4 and for the full year. Let's review key corporate items on the next slide. Net interest and other financing expenses increased $20 million for the full year, primarily related to the cost associated with calling our 2024 bonds early, which we treated as a key item in Q2. Our adjusted effective tax rate was consistent with our expectations. Total net pension and open up obligations declined by $71 million year-over-year reflecting strong performance and risk management of our pension plans. Full year free cash flow grew modestly, a $47 million increase in operating cash flow, driven primarily by higher earnings offset a $43 million increase in CapEx due to investments in new stores in the China plant as well…

Thanks, Mary. We're pleased with the way we've been able to manage through the unique challenges this year from the ongoing COVID pandemic. We took decisive actions and our team focused on safety and adapted to working together and meeting customer needs in new ways. Our business performance over the last 5 years demonstrates the benefits of our preventive maintenance model. Our diverse product and service offerings across multiple geographies and channels have driven durable adjusted EBITDA growth and solid margins in the face of macro challenges, including raw material cost increases DIY market changes and now a global pandemic. Over the past 5 years, we've generated $1.1 billion in free cash flow, averaging $220 million annually. As we did again in 2020, while making significant growth investments. We have consistently generated return on invested capital above 20%. We continue to invest in high-return projects with returns roughly 2x our cost of capital. As we realize the benefits of these investments, our return on invested capital is expected to remain strong, while growth accelerates. Let's turn to the next slide. We anticipate 2021 to be an inflection point in our growth trajectory. We have made significant progress in core North America, and we're well positioned for growth in international. Most importantly, the investments we've made in Quick Lubes by building new company stores, making acquisitions and improving operational performance are working. We expect Quick Lubes to be more than half of our adjusted EBITDA next year. This is significant given the segment's high-margin and growth profile. We expect 2021 to be a strong year for Valvoline as a we enter a faster phase of growth and accelerate the shift to a more service-driven business. With that, I'll turn it back over to Sean to open the line for Q&A.

Thanks, Sam. [Operator Instructions]. With that, Tenia, please open up the line.

[Operator Instructions]. And your first question comes from the line of Jeff Zekauskas with JPMorgan.

Is your general approach to base oil prices that they've risen because of hurricane-related outages and disruptions in the refinery area and that in the course of the next 12 months, they'll probably come down from the levels that they're at? Or do you have a different view?

Yes, Jeff, you're right. The hurricanes have had an impact on the base oil market. And really, there were two base oil increases since last summer. The first I would say, was more tied to the increase in overall crude market, a modest increase and then the second, that will impact us as we go into Q1, tied to the hurricanes. As far as expectations for the future and what we've built into our guidance is really no change, no significant change following this recent round of base oil increases. It is possible that we could see decreases as capacity builds back up later this year. But we're not counting on that in terms of how we built our plan.

And can you talk about the fact that your China expansion will have on operating income or EBITDA in 2021, '22, '23 as that investment matures.

So Jeff, on the China plant, for our fiscal 21, we expect the China plant to actually have some onetime headwinds associated with the start-up, offsetting some of the potential benefits we have, we're going through processes of getting the appropriate approvals for the OEM business that we have through the joint venture in China. So our fiscal '21 will continue to be relatively neutral to a modest headwind as a result of the China plant. We do expect that plant over the long-term to have a return on invested capital in the low double-digit range. And we invested -- we came in under budget, just under $70 million in terms of the project overall. So longer term, I do expect to see those benefits flow into the China business. And that includes the benefits of volume gains that we expect to see with better control of our supply chain within China.

So you hit that number in 2023, your return on capital target?

I think it's going to be out over -- as we look at the plant's production, we'll see the benefits of that build over time in terms of the investment horizon in the longer-term phase. So I'm not going to give specific guidance as it relates to beyond fiscal '21, but we are well-positioned to see that return on the planned investment we've seen over time.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

Nice results. My first question is the retail channel guidance that you gave for North America, I think you said flat or down 1% slightly. Can you talk about -- is that just the typical normal decline that you'd expect? And then can you talk about -- is that just from lower usage of oil? Or is that market share? And part of that, Sam, you mentioned, I think, an outlook for stable private label pricing and that I think was driving the way you think about the business for next year. Can you talk about some of the assumptions in there? It sounds like a pretty typical year, but is there anything atypical with some of the inputs?

Yes. Yes. Let's first talk category, and then we'll talk Valvoline plans and performance expected. As far as the category goes, longer term, we've seen the category to be declining at about a 2%, 2.5% clip. And so next year, we don't see that really dramatically different. It's -- we're projecting it to be down maybe 1%, and that just has to do with the fact that there was weaker performance in the category during that March, April time period. But as you know, the DIY segment did recover quite quickly from the COVID impact. And so it wasn't as severe, say as the installer side of the business. So category next year, flat down to down 1%. We do expect Valvoline performance to be solid. As we mentioned in the presentation that we had flat DIY volume over the course of fiscal '20. So real pleased with that and even a little bit of growth in Q4. And so we have some good momentum with our plans going into fiscal '21. One of the most important factors we had predicted this and talked about the stabilization of our price gap versus private label that we would expect that into 2021 and as we've developed the merchandising plans for 2021 with each of our key accounts, we have a solid plan in place, and we don't see that gap expanding versus private label. In fact, some of the actions that we've taken with our plans, we've actually seen a nice contraction of that gap versus private label, and that's contributing to the solid performance that we've seen. So the category in DIY, there's some nice features about it with the continued growth in the synthetic segment. We're very much focused on growing our share in the synthetic segment with our marketing efforts, our advertising efforts, consumer promotion, trade promotion, all geared towards that. And so I think it represents another solid year in 2021 for the DIY business and the overall core North America. We did point out, of course, in the presentation that we had some benefit of that short-term price/cost lag effect in fiscal '20 with that dramatic reduction that we had in crude prices and base oil prices going back to Q2, so we benefited from that. But as that has turned more into a modest headwind, that will have an impact on overall core North America. But nonetheless, when you look at the performance that we're expecting and what we're able to deliver in Q4, and as we move into next year, we're expecting very solid performance. Volume overall to be up and when you compare that profitability to where we were in 2019, a nice step up, including those overall unit margins that we pointed out.

Okay. And then my follow-up on the Quick Lubes side. The normalized 6% to 8% growth that you're expecting, is there anything built in for batteries? And do you -- where are you with that test? And do you need to push it? Or you just can take your time with it since the core business seems to be doing well?

Yes. Thanks. Yes, the core business for the Quick Lube segment is really strong. And so we see -- we saw the start of a very strong recovery going back to June. We increased our marketing investment in Q4 or restored it really. And we saw just excellent performance across our regions and good momentum into Q1 here, looking at our October same-store sales performance, continued solid performance, strong performance. The makeup of same-store sales is a nice combination of both growth in transactions and growth in ticket. So what this tells us is that we're continuing to win market share as we attract more new customers to our stores. And that has been the case for a number of years. It's great to see that continuing during this time, but also really strong ticket opportunities. And the one that you mentioned, our new battery program, is definitely going to be a contributor to our ticket growth in fiscal '21. So we're close to rolling that out across all of our company stores that will be completed by the end of this calendar year. And then in calendar year 2021, it will roll across all of our franchise markets, too. And so for those that aren't familiar with it, we've been selling batteries for some time, but not nearly to the level that we felt we could with the right testing equipment and with the right supply chain. And so we've made some investments there that are really starting to pay off. And so in the early markets that rolled out, we're seeing increases doubling the sales of our batteries versus where we were before. So there's some really nice upside as we go into 2021 and beyond with the battery program. But ticket performance -- a lot of people want to understand how will we continue same-store sales growth, while miles driven continues to be softer than you would otherwise expect. It is because, number one, we're taking share. And number two, when it comes to ticket, we have these opportunities to increase our non-oil change revenue, continued growth in the premium mix of our oil changes. And then the pricing power that we have because of the strong service delivery that we continue to deliver. So it's really -- it's a great position for us to be in because, as I mentioned in the presentation, driving that operational improvement is the number one driver in our profitability in Quick Lubes. And then as you add in the levers of the new stores that are beginning to kick in, the stores that we've been building, that -- those haven't had an impact the last couple of years, but they will start to have an impact in fiscal '21, and that grows again in fiscal '22 and beyond.

Your next question comes from the line of Wendy Nicholson with Citi.

My question has to do with kind of the market that you may have gained. Over the last few months during the summer because you guys have a great brand, you had more stores open, maybe some of your competitors who are more of the mom-and-pop shops, shut down temporarily. And so I'm wondering, number one, is that crazy? Do you think you benefited from that during COVID? And also just -- and I'm thinking more on the Quick Lube side, obviously. But also as we go into the fall, I mean, this was the great summer of road trips, do you feel like, hey, part of the thinking in the guidance for the lower first quarter, is that everybody just got their oil changed in July, August, September? And so now I don't need to have it done for another 6 months. Is that credible thinking? Or is that off?

Wendy, most of it is right on in terms of how we gained market share by keeping our stores open during the depth of the impact back in that March, April, May time period. But I need to correct you when it comes to how we feel about Q1 and the momentum that we have in same-store sales growth. So we kept our stores open. That was a decision that we made even as we saw a pretty big negative impact. We worked with our franchisees so that they made the same decisions. And so being open definitely helped us recover faster, keeping our employees, our teams engaged at the store level with some higher compensation during that period. It really paid off for us, and we saw that particularly in Q4. So when you think about next year, we're very confident in continuing to grow our same-store sales and our market share because of the success of the marketing programs that we put in place and just the momentum that we continue to have with that standard car model. I think that the safety aspects of the standard car model work really well for our customers in this environment. But it's just the continued delivery of that quick, easy, trusted customer experience continues to resonate with customers, with car owners today. And so I don't know that there was any benefit from, say, a lot more road trips this summer. The models driven did recover going into the summer from where we were back in March and April. But it's still -- it's kind of leveled off right now in that minus 10% range. And so as we model next year, we haven't forecasted or built into our assumptions for same-store sales growth, a further recovery in miles driven. We hope that would be the case. I mean, that would be a nice tailwinds for us. But given continued impacts from the pandemic into next year, we still believe that we're going to be growing market share even as miles driven continues to be a bit soft. And we also think that we have these ticket opportunities that I mentioned in answering the earlier question, that's going to help us drive that same-store sales performance. So hopefully, that helps you understand the dynamics and how we're thinking about them.

And Sam, just to be really clear, Wendy, just to be crystal clear, we don't think our performance in Q4 was pent-up demand. We really -- we're continuing to see really strong performance with the start to Q1. And we think everything that Sam mentioned about the competitive advantages of our model will continue to drive our performance going forward. So we don't think it was a onetime thing in terms of what we experienced in Q4, we certainly are seeing a really strong start to the new fiscal year.

Fantastic. Fantastic. Okay. And then just on the M&A environment, again, thinking that there may be some operators out there who had a tougher time during COVID. I mean what are you seeing in terms of the M&A environment, maybe it's not the right time to be making more acquisitions, but rather just to be opening your own stores. Just generally, can you comment -- I mean, obviously, you've been doing a lot, but how much more room or how much more bandwidth do you think you have over the next 12 to 18 months to consolidate the market even more?

We think the M&A market is very attractive right now, but certainly, for smaller operators, less sophisticated operators, it has been a tough market. And so the work that we've been doing over the last couple of years to accelerate our growth through M&A and build a reputation as a great company to work with, to sell your business to, we see continued opportunities moving into 2021. So we've worked hard to develop relationships and that reputation and build that pipeline. So that's why we're pretty aggressive with our store growth forecast for 2021. Both, acquisitions and the new store builds, generate very strong return on investment for us. So they're both really important levers for us to execute well against to continue to build our market share. And just as a reminder, our market share is still quite small in the overall do-it-for-me marketplace. While we have a good market share, of course, in Quick Lubes, most of our new customer growth is coming from outside the Quick Lube channel, about 2/3 comes from outside of Quick Lubes. And so as we build more stores, we're going to increase our share from roughly 4% of the DIFM marketplace to something much bigger than that. And so the runway for continued store growth through both building new stores and making acquisitions, really key for us to build out our network.

And our next question comes from the line of Mike Harrison with Seaport Global Securities.

Mike, are you there? Or maybe come back to Mike. Okay. Go ahead. Got you.

Sorry. So I wanted to go back and revisit a little bit of this discussion around miles driven, you mentioned that it's kind of leveled off in this minus 10% range. Yet in the Quick Lubes business, you show an 8% same-store sales number, understanding some of that's pricing an average ticket, but you really seem to be bucking this underlying data on driving activity. So is -- should we view that strength as just pure market share gain? Or are you seeing some other changes in how people are approaching vehicle maintenance even as they appear to be driving less?

Yes. Overall, I mean, it is the strength of our marketing programs and how we deliver the service and just our growing reputation in markets where we have stores. And when we look at driving behavior or maintenance behavior, we know that there are some car owners that really pay attention to how many miles they drive between oil changes, some are focused on their oil-change indicator life. Some are more geared towards the time of year. And we have seen that for those people that are more focused on timing for their maintenance services, that they've continued to maintain that even though they're driving, on average, a little bit less. And you see this when we have the big drag in holidays is that our stores are very busy before the Labor Day weekend, for example, or before Thanksgiving, Christmas holidays. And that's because people see us as not just the oil change. It's the preventive maintenance services. It's making sure the car is ready for the road. So there's, I would say, some small changes that we think we're seeing in terms of those behaviors that benefit us and the relationship that we have with our customers and how they perceive the value that they get from visiting our stores. But for the most part, we're very confident that we're continuing to grow our market share as people discover the fact that we are so much more convenient than other traditional places for preventive maintenance services. And that we deliver it very efficiently and in a way that builds trust with our customers. So the model is really well-positioned for continued success in 2021 based on what consumers are looking for.

All right. And then on Slide 7, I think that the new set of data that you're providing to show that margin leverage in the core Quick Lube stores. Does that improvement that you're showing over time there suggests that we should see EBITDA margin eventually get back for the Quick Lube segment toward the high 20s level or even better over time as you kind of work through the new store ramp?

Yes, Mike, we do expect to see leverage in our EBITDA margins and Quick Lubes in 2021 and beyond. There are some other factors that impacted, including the mix of franchise and company stores. So as we accelerate through acquisition and building new company stores with a little bit higher company store mix, overall, the franchise stores do have a little bit -- they have a higher return on sale relative to company. And so that will moderate some of the pure leverage we're seeing with the same-store sales growth. The other thing that we've talked about in the past is new stores do have some deleveraging impact as they go up that 3-year ramp curve. And we start -- as we level out with new stores coming on stream in that 50 new stores a year range, we should see that moderate going forward as well. But we do expect to see operating margin leverage in the Quick Lube business moving forward.

Your next question comes from the line of Olivia Tong with Bank of America.

Great. I want to start on Quick Lubes. And just if you can revisit how you think about company-owned versus franchise versus acquiring, given the plans to expand your store base and pretty nicely so far already this year. We talked a lot about how the M&A environment is a little bit more favorable given potentially some questions around moms-and-pops and how much they want to continue doing what they're doing. And just how you're thinking about this year or the near-term versus your longer-term plans of about 100 a year?

Yes. So first of all, Olivia, the opportunity for us, as we've described, is significant in terms of store growth. And so we want to pursue store growth in both our company markets and our franchisee markets. And so we're working closely with our franchisees and their development efforts where they have a position, where they have strength, and fortunately, with all the success that they've had with their businesses, they have the capital and the desire to grow their businesses. And they definitely have opportunities in their markets. So we're going to continue to support that in the company markets, and we have been moving pretty aggressively in new markets in both into the South into Virginia, Texas, for example, we're going to continue to be aggressive, both in our store development plan, our ground-ups, but also looking for acquisitions that could fit and help us fill in these markets or accelerate that growth. So the important thing for us in the near term here, given the size of the growth opportunity, it's for us to really pull hard on each of the levers for driving that store growth. And I'm just really pleased with the success and the progress that we've made in ramping up our capabilities to build new stores. And then also the work of our corporate development team in developing those relationships and closing on those attractive acquisitions that helped us accelerate that growth. I do think longer term, we're going to have to work hard at some of the mom-and-pops that are more difficult to reach with our team on how we might consolidate more the smaller operators. But our focus over the last couple of years and into next year has really been more targeting the regional operators.

Got it. And then as miles driven obviously still under some pressure right now given the lower mobility on a year-over-year basis but what's been a nice benefit to you is obviously the price/mix benefit that you've seen more recently. So what's your view as miles driven eventually does improve? Can you hold on to that pricing mix benefit while also improving the underlying? Or does that potentially -- is there a little bit of giveback there?

Olivia, we really are well positioned to see tailwinds if we see that miles driven improve. So I think that the ticket improvements that we're seeing through the further penetration of non-oil change revenues, including the battery program Sam talked about earlier. The pricing power we have because of the unique nature and the high value of our service delivery model, and the overall premiumization tailwinds that are still in front of us, while close to -- we are in the high 60% from the premium side of the business, if you look at just the pure synthetic side of our penetration, that's only about 1/3 of our business within Quick Lubes, and there's a significant runway for continued synthetic penetration at the higher price points of our service levels pricing. So I think that we still have substantial opportunity as miles driven recovers over time to see even better top line results. Because I don't expect it to have an adverse impact on our pricing power.

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

This is Cody on for Jason this morning. I just wanted to talk about International. Your guidance is calling for significant top line growth in the International segment, but moderating profit growth due to channel development and brand investments. If I look back in the history, you guys only grew volumes 2% in FY '18, down 1% in FY '19. Can you just remind us of the growth opportunity at hand in the International segment, especially as the China plant comes on? And why you felt that it was a better investment using those dollars than accelerating Quick Lubes growth?

Yes. So looking at our International business, this is a business that when we look at over the last 10 years, we've had really nice growth, and we've developed a solid business with each of our regions contributing meaningfully to our profit. And yet, you're correct in that '18, '19 growth had slowed with some of the pressures that we had seen in the marketplace. But nonetheless, we feel that the opportunities for Valvoline's growth in international markets is quite significant. And we've been working hard to develop our capabilities in each of the regions, developing our distribution networks, our supply chain, and we've made really good progress in doing that. And so those channel development efforts are now being supplemented with brand investments. And we've got some nice momentum as we go into fiscal '21 because of just the strength of our team, our operations and the focus that we have in our key regions. So that's why we're confident about growth in the International business in '21 and beyond. And really, it's solid growth across regions. I mentioned in the presentation that we had some softness, particularly in Latin America, as impacted by COVID-19. Even as some of those pressures still exist, the progress that we've made in some step-ups in our distribution and capabilities there. We expect Latin America to be a nice contributor in fiscal '21, along with the growth that we expect to see in China, which, of course, saw a really rapid recovery in fiscal '20. Specifically in China, and the importance of that market, China has actually become the world's largest lubricants market when you add up both passenger car and heavy duty. And so Valvoline is committed to growing our business there. We've developed a strong team, and we have strengths with…

And Cody, I would also remind you that China surpassed the U.S. as the #1 lubricants market in the world last year. So we really think it's important for us to have an important -- a meaningful position there as that market moves to higher premium technology products as their emission standards and the regulations improve, we think there's a meaningful profit opportunity for us in growth. And that supply chain investment, we thought, we believe, is really going to support us in that expanding growth in that marketplace.

And I'd add that we're also piloting retail stores in China too now. And so that could be a nice long-term growth opportunity for us also.

I appreciate the thorough response. Just one quick housekeeping question. Your EBITDA guidance costs are about 12% growth. But if I back into cash flow from operations, it's roughly flat. Can you just describe what's going on there, what the delta is?

Yes, the largest delta, Cody, is cash tax increase, which is going up by more than $40 million in cash taxes. In fiscal '20, we had continued to benefit from the large borrower-to-fund transaction we had done in 2018, which had allowed us to use our foreign tax credits and beyond the NOL that we had from that large borrower-to-fund transaction. And we've kind of used up those deferred tax assets. And so we've been able to keep our cash tax liabilities down for the last few years, but we're back in 2021 to a more normal cash tax payment. So the largest driver of that is the substantial increase in cash taxes.

Your next question comes from the line of Chris Shaw with Monness Crespi.

Just another sort of market share question. I assume that some of the third quarter market share was from dealers. I think the dealers were closed very decent part of that quarter. I know you guys tracked metrics, I think, pretty well. Do you have any sense that customer -- new customers you gained, say, in 3Q, are you keeping them? It might be -- I know too soon, given that, I guess, people want to probably get oil changes once a quarter, but any sense to the stickiness of the customer lens?

Yes. You're right. It is a little bit early in terms of retention of the new customers that we gained in Q3, but we'll start to get a stronger read on that in the next quarter. But again, based on the trends that we're seeing as more of those competing installer outlets have opened up, our trends have remained very solid, very consistent.

We historically have had very strong retention rates when we see new customers come in the door. It's well in excess of 50% after the first visit and well in excess of 70% after the second visit. So my belief is that the historical view, the historical -- what we've seen in retention rates, combined with the stay-in-your-car service model and what continues to be a challenging COVID transmission environment, will continue to encourage both customer market share gains as well as retention within market share itself. So I'm very optimistic about our ability to retain those customers.

And just quickly, do you have any sense of the financial health of sort of the industry, maybe some of the smaller players? And any sort of maybe financial stress that -- and was that involved in the recent acquisitions you did, with sort of small retail chains you bought?

Chris, the acquisitions we've done that we've closed on here in October, have been from some pretty healthy operators. They've got really good models. We are a really strong operations-focused model. And the ones -- the deals that we've done came from very strong operators. So while we certainly think that there's more opportunities out there, especially in the very small mom-and-pop areas, and we are seeing those -- the deals that we've announced recently and completed has been in what I would call pretty financially healthy operators.

With that said though -- there -- we do expect that some of the weaker operators that have struggled in this market could be attractive acquisitions for us too and maybe more interested in selling after the challenges of last year and even the challenges moving into next year. So when we look at acquisitions, we run our real estate model to understand the location really well and what the potential is of that location. And we have some good success in making acquisitions where the performance has a lot of upside, both in terms of the number of transactions, but also the ticket when you add the Valvoline brand, the Valvoline marketing programs and that service execution that we can deliver.

Great. Congrats on that result.

Thank you.

And our final question comes from the line of Laurence Alexander with Jefferies.

So two quick questions. So first, can you give a sense for the longer-term opportunity to accelerate growth in China through partnerships or acquisitions? What kind of cadence, if you did -- decided to deploy capital if the right opportunities came available, could be feasible as an upper limit? And secondly, for Quick Lubes, the longer-term outlook, why shouldn't the base case for the number of new stores accelerate as you get scale and as your free cash flow improves, should we be thinking about 75, 100 new stores in 2025 rather than 50-plus?

Yes. So first of all, with regard to China, we do have a number of avenues for driving growth. And we are focused on how do we strengthen both our business in the heavy-duty side and the passenger car side. With regard to the passenger car market, which is large and continuing to grow at a nice rate, we're making investments in our brand and the channel development that we talked about. And we do expect that with the plant and improving our business with the OEMs, that this is going to help us continue to grow. The area of potential partnership, and we do have a partnership for the stores, the retail stores that are in pilot. We have a partner there that is working with us and bringing that local expertise. That's where we think it's potentially most important to have strong partners with local market expertise that can help us as we think about the retail opportunity. And it's encouraging that some of the early results that we've seen, the progress that we see in those stores are obviously -- the capital investment is much lower than the type of investment required here in the U.S. It's a different type of stores. It's not, say, that the exact same model as our quickly market as we think about it here, but we're learning and developing better insights on how we think about that market. And we think the opportunity in China, the long-term opportunity, is in this high-quality alternative to the car dealership. And so the car population, the car park is -- the age of the car is still relatively low, roughly about 6 years compared to the U.S. market, which is in the -- I think it's in the 11 to 12-year range. And so…

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