Univar Solutions Inc.
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Univar First Quarter 2017 Earnings Conference Call. My name is Lisa, and I will be your host operator on this call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] I will now turn the meeting over to your host for today's call, David Lim, Vice President of Corporate Development and Investor Relations at Univar. David, please go ahead.

[David Lim:]

Thank you, and good morning. Welcome to Univar's first quarter 2017 conference call and webcast. Joining our call today are Steve Newlin, Chairman and Chief Executive Officer; David Jukes, President and Chief Operating Officer; and Carl Lukach, Executive Vice President and Chief Financial Officer. This morning we released our financial results for the quarter ended March 31, 2017 along with a supplemental slide presentation. The slide presentation should be viewed along with the earnings release, both of which have been posted on our Web site at univar.com. During this call, we will refer to certain non-GAAP financial measures, for which you can find a reconciliation to the comparable GAAP financial measures in our earnings release and the supplemental slide presentation. As referenced on Slide two, we may make statements about our estimates, projections, outlook, forecasts or expectations for the future. All such statements are forward-looking, and while they reflect our current estimates, they revolve risks and uncertainties and are not guarantees of future performance. Please see our SEC filings for a more complete listing of the risks and uncertainties inherent in our business and our expectations for the future. With that, I'll now turn the call over to Steve for his opening remarks.

[Steve Newlin:]

Thank you, David, and welcome to Univar's first quarter 2017 earnings call. We appreciate your interest in Univar. I'll start this call with some remarks on our first quarter performance and the market, and then provide an update on our actions to drive commercial greatness and operational excellence. I am very pleased to report adjusted EBITDA of $142 million, an increase of 6% over Q1 last year. Margins increased in the U.S., Europe, and Canada, and we posted double-digit adjusted EBITDA growth outside the U.S., with strong performances in Canada and Europe offsetting softness in Latin America. In the U.S., after eight quarters of year-over-year EBITDA declines, we achieved our first quarter of growth. And while the growth was nominal, it's note-worthy as we view this as a key turning point for us, and one that we expect to build upon. On top of that, growth turned positive in a quarter that was marked by significant organizational change in the U.S., which appears to have been done with minimal commercial disruption. There are signs our initiatives are taking hold, and we're very encouraged by our performance. Our business win/loss ratios are improving in EMEA and Canada, and we expect to improve our win/loss ratio in the U.S. We're in the early innings of our transformation, and there's still much work ahead of us before we see consistent double-digit profitability growth. Overall, market conditions remain sluggish from a volume perspective. In the first quarter, our volumes declined 3%. A portion of that decrease was expected as we executed our margin management and pruning actions. We see signs of optimism and confidence from our customers and suppliers, particularly in the U.S. Despite sluggish volumes, we saw some chemical prices increase in our portfolio as the quarter progressed. We're continuing to improve our position for growth based on our leading market position, broad product and service offering, top safety record, foremost [ph] on-time delivery rates, and a talented and experienced management team that's dedicated to execution. For the past nine months, we've been relentlessly focused on changing our culture and improving our commercial and operational execution. We continue to take steps toward better sales force execution. We implemented new controls and processes to drive accountability and rigor within our sales management, and reset expectations for profitability. In addition to holding our first ever North American Sales Leadership Conference, last fall, we also held a European Sales Leadership Conference in February. I personally attended this event, and came away highly impressed by the talent level, energy, and commitment displayed by our EMEA sales leadership team. The top priority for EMEA is to accelerate new business gains, and that team is highly committed to do so. We're making ongoing investments in our sales force's talent, including hiring and training, and changing the mindset and expectations of our organization to drive sustainable, profitable growth. As mentioned last quarter, we realigned our U.S. commercial organization structure, in February, into four distinct lines of business, focus industries, local chemical distribution, bulk chemical distribution, and services, making each of our sellers specialists in their respective business. This new structure largely replicates the structure that was put in place in Europe, last year, and is highly customer-focused. Our sellers were given their new roles and assignments February 1, and spent the first few weeks transitioning accounts. The reception from our sellers and customers has been positive, and we expect to improve our mix as we become more specialized with dedicated sellers aligned to customer end markets including industry, product, geography, and service. This will improve our value to our customers by providing deeper industry expertise, and market insights to address their needs. We are laser-focused on driving growth as our top priority, and are improving our execution to do so. While we're encouraged by our recent results, our sales force productivity has not nearly reached its full potential. We are upgrading our capabilities through training, and have open positions we need to fill. As we reset expectations and improve our skills, we'll sell more new business and lose less, driving value and growth. We're also deepening our supplier-partner relationships and more new product authorizations and grow the market, which represents tremendous upside for us. In parallel with our U.S. realignment, we're driving operational excellence by redesigning our supply chain to better fit the needs of our different lines of business. We're undertaking a comprehensive effort to improve supply chain, and go from good to great. Our new U.S. organization allows us to better serve our customers and suppliers by brining the right expertise, and a tailored supply chain to meet their needs. We believe that we can improve the efficiency and effectiveness of our branches and warehouses. At the same time, we're looking to increase the flexibility and competitiveness of our inbound and outbound logistics, target greater asset productivity, and develop more efficient relationships with our external providers. We are making progress with our initiatives to optimize our asset footprint. During the quarter, we announced the consolidation and closing of four non-core locations, and are continuing an active evaluation of our network. We're working with a highly respected consulting firm on a daily basis. Finally, we are implementing digitization projects to simplify and lower our transaction costs, reduce errors, and improve our customer experience. In late-April, we rolled out our new web-based digital interface for our customers called, MyUnivar.com. MyUnivar has been designed and built on specific customer feedback, with a focus on making it easier to do business with us. We are still in the early stages, and we will continue to upgrade the platform as we progress and build it out. In addition to executing on our growth strategy by building commercial greatness and driving operational excellence, we're improving our balance sheet while pursuing scalable acquisitions. We see many opportunities to make accretive acquisitions. We will remain strategic, selective, and disciplined in our process, seizing opportunities that make Univar better, and can be leveraged across our platform. With that backdrop, I'll now turn the call over to our CFO, Carl Lukach, who will walk you through our first quarter results. Carl?

[Carl Lukach:]

Thank you, Steve, and thanks everyone for joining. I'll begin it on slide three. Today, we reported GAAP EPS of $0.16 a share for the first quarter, compared to $0.10 reported in the prior year first quarter. Our earnings per share included mark-to-market revaluation losses of $4.1 million or $0.03 a share related to our foreign currency-denominated loans, and net monetary balances. Excluding these items, earnings per share would've been $0.19. Adjusted EBITDA increased $8 million or 6% from a $134 million last year to $142 million. Currency translations tempered EBITDA growth by 1.5% mostly from the change in the euro-dollar exchange rate, so, on a currency-neutral basis our adjusted EBITDA grew 7.5%. We had another quarter of double-digit EBITDA growth outside the U.S., which was up 16%. In the U.S., we turned the quarter to growth with a slight year-over-year increase after eight long quarters of decline that was largely precipitated by the drop in demand from U.S. upstream oil and gas market. We saw steady sequential improvement in our U.S. profitability from the actions we have underway, and we expect to build on those improvements going forward. We invested in working capital during the first quarter, as we typically do this time of year, especially in our Canadian ag business, and our cash flow reflects that investment. Our days working capital metrics improved from year-end, as we maintained our efficiency gains. Turning now to our consolidated results, on slide four, first quarter sales were equal to last year, 3% higher average selling prices were offset by a 3% decline in volume. The higher average selling prices resulted from modest chemical price inflation for certain of our products, and mix improvement from focused initiatives to improve our sales force effectiveness, along with actions we took to address low-margin business. The decline in volumes was mostly in the U.S., where we made significant changes to our go-to-market strategy and organizational structure, and spent several weeks realigning our sales force and transitioning customer accounts. Much of our volume decline was expected as we implanted margin enhancement actions and pruned some unprofitable business. Our gross profit dollars increased 9 million from last year as higher average selling prices and improved profitability more than offset lower volumes. Our gross profit percentage in the quarter increased 50 basis points to 22%. Operating expenses, which includes delivery, warehouse, selling, and administrative expenses, were essentially equal to the prior year as investments in sales force, digital tools, and training cost were offset by productivity gains. Adjusted EBITDA margin increased 40 basis points to 7.1% as a result of higher gross profit dollars per pound and operating expense control. Let me take you through each of our segments beginning with the U.S.A. on Slide 5. In our USA segment, we turned the quarter to growth as adjusted EBITDA increased a modest 1% to 82 million. Improved profitability per pound and lower delivery cost more than offset the impact of lower sales. Net sales decreased 3% as a 6% decline in volume was partially offset by 3% higher average selling price. Volume declines in the quarter were driven by commercial realignment and profitability initiative as well as soft demand. Despite the slight decline in sales, our gross profit dollars were equal to the prior year as a result of improved product mix and margin management initiatives. Our gross profit margin improved 70 basis points to 22.8%. EBITDA margin increased 30 basis points to 7.1% as a result of the higher gross profit dollars per pound. Turning then to our results in Canada on Slide 6; Canada had a strong quarter driven primarily by rebound in demand for methanol in Western Canada energy market, increased demand in mining, and a good start to the ag season. Net sales increased 13% to 307 million due largely to an 8% increase volume and 1% contribution from acquisitions. Our Canada team is executing well. And we are seeing improvements in our win/loss ratio. Gross margins decreased 40 basis points due to product mix, but gross profit dollars grew $5 million or 10% as a result of higher volume. Adjusted EBITDA increased 14%. And adjusted EBITDA margins increased 10 basis points to 8.1% as the lower gross margin percentage was offset by lower operating costs as a percentage of sales. In our Europe, Middle East, and Africa segment on Slide 7, you can see that adjusted EBITDA grew 8 million in the quarter to $36 million. Net sales increased 0.5%. Higher average selling prices were partially offset by a 2% decline in volume. The volume decline in part can be attributed to a temporary shortage of solvents in the marketplace which has subsequently been alleviated. Our local chemical distribution business had solid performance driven by improved conditions in the U.K. and Turkey. Our focus industry business which includes personal care, food, coating, and pharmaceuticals performed very well. And we are starting to see improvements in our win/loss ratio. Of the $8 million in adjusted EBITDA growth in the quarter, approximately half can be attributed to increased sales of our pharmaceutical finished goods than compared to an abnormally low level of sales in the prior year first quarter. The remaining growth in first quarter adjusted EBITDA in EMEA can be attributed to higher gross profit margins from our pricing actions and favorable product and market mix along with lower warehouse selling and administrative cost. As a result, adjusted EBITDA margin increased 170 basis points to 8.2%. Margins also benefited from two extra billing days in Europe this quarter due to the timing of the Easter holiday, which will reverse in the second quarter. We expect adjusted EBITDA margins in EMEA to give back some of the improvements seen in the first quarter. Moving then to Slide 8 and our Rest of the World segment; sales were essentially flat the prior year as higher average selling prices were offset by lower demand in Mexico and continued sluggish economic conditions in Brazil. In Mexico, we saw lower demand in the oil and gas market and softness in the economy which led to lower gross margins. In Brazil, our business performed well despite the sluggish economic conditions due to the high mix of specialty personal care products in our portfolio. We also took additional cost actions in Mexico and Brazil to respond to the tough economic conditions there. Adjusted EBITDA of $7 million decreased $1.2 million as lower gross profit was partially offset by lower operating expenses. Our three segments outside the U.S. in aggregate grew adjusted EBITDA in the quarter 16% on a reported basis and 20% on a currency neutral basis. This performance was largely driven by higher average selling prices, higher volumes in Canada, gross margin improvement, and the two extra billing days in EMEA. Moving now to Slide 9 where you will see an overview of our cash flow in the first quarter. As expected, we had a seasonal outflow of cash for working capital in the quarter in advance of our seasonally strong second and third quarters. Our accounts receivable and inventory metrics both improved. Our 13-month average net working capital as a percentage of sales improved to 12.3%, a decrease of 40 basis points from 12.7% a year ago. CapEx was 21 million in the quarter, down 11% from the previous year. For the full year, we expect CapEx of 110 million, up slightly to fund digitization projects. Cash taxes in the quarter were $12 million compared to an inflow of 7 million last year when we received a tax refund. Our effective tax rate for the quarter on a GAAP basis was 7%. Excluding the impact of discrete items, our effective tax rate was about 24%. We continue to expect our full year effective tax rate to between 20 to 25% With regard to uses of cash, our priorities continue to be first to reinvest for growth in digital projects or lower our transaction cost per unit, e-commerce, as well as sales force training, and commercial investment; second, to make targeted attractively priced and scalable acquisitions; and third, to pay down debt. In 2017, we have $90 million of scheduled debt amortization payment to be paid later in this year. Slide 10 details our debt profile. Net debt at quarter end was 2.7 billion, down from 3 billion a year ago. Our leverage ratio of 4.8 times was down from 5.0 times last year. Our total liquidity remained strong at 878 million, an improvement from 761 million last year. And our cash interest coverage is 3.9 times. In November 2016, we successfully executed attractively priced interest rates swaps that economically convert approximately 80% of our floating rate debt to fixed rate for the next 3.5 years. In January 2017, we re-priced 2.2 billion of our term loans, lowering annual interest cost by 50 basis points or approximately $11 million per year for the next 5.5 years; pro forma for the re-pricing, our weighted average interest rate on debt in now 4.35% pretax. Our return on assets deployed in the quarter was 20%. Well above our cost of capital. Let me now address our outlook for 2017 and the second quarter on Slide 11. We are making good progress against our commercial greatness and operational excellence initiatives. Our margins and working capital productivity improved in the first quarter. We are generating strong free cash flow and we are executing well on our growth and productivity plans. As a result, we are raising our guidance for the full year to deliver mid- to- high single-digit adjusted EBITDA growth. For the first half, we now expect mid single-digit EBITDA growth, and accelerating in the second half of the year to near double-digit growth by year end as our initiatives continue take hold. For the second quarter of 2017, we expect our adjusted EBITDA to increase mid single-digits from last year's 148 million as we invest and execute in our plans and build our growth profile. With that, I'll turn it back to you, Steve.

[Steve Newlin:]

Let me conclude by sharing with you what we see in our future. Our absolute priority is to drive profitability growth. And do so in a manner that is reproducible and lasting. We've ignited positive momentum now and intend to capitalize on that. We have a truly exciting and unique opportunity here at Univar to grow the profitability and the size of our company. As you know, we have three powerful pathways to grow the value of the Univar. First, the distributed chemicals market is a growing market. We expect to grow it even faster by making our value proposition to supplier partners and customers more compelling and make it easier to do business with us. Second, Univar's market share even as the North America leader is low in a highly fragmented distributed chemicals market; as we improve our win/loss ratio, capture more new business, make scalable strategic acquisitions, and leverage our scale will increase our market share in this large and growing market. Third, we are laser focused on execution. And Univar's margins and profitability are rising. By focusing on better sales force execution, improving our mix by selling more specialties and services, developing smarter and more strategic marketing, and reducing transaction cost, we'll capture more of the value create for our customers and supplier partners, and generate superior returns for our shareholders. In order to capitalize on these potent opportunities, we have adjusted our U.S. sales incentive structure and are investing in training and hiring, changing expectations, and instilling rigor and discipline across every task and function in the organization. We are investing in digital tools that will accelerate growth through more e-commerce and lower our transaction cost. We are taking actions to optimize our asset footprint and cost structure, and further improve our return on capital. A key element of building commercial greatness is having significant market intelligence at our disposal that will help us better identify, prioritize, and allocate resources for the most attractive high growth markets and further differentiate our brand. We also need to better capture and market the value that we offer our customers and supplier partners. In support of that in March, we hired Ian Gresham as our Chief Marketing Officer. Ian joined us from Sherwin-Williams, is already collaborating with our segment business leaders and marketing teams find better ways to gather, manage, and use data to drive more effective business decisions that will help us grow our sales and build our brand. We are increasing our rigor and discipline and fortified our management team. We are organizing to win in the U.S. drive superior growth under David Jukes' leadership. And we expect to grow double digits outside the U.S. We will use our strong stable cash flow to fund our CapEx and acquisitions, remain asset light, reduce debt, and begin to deliver attractive year-on-year earnings growth. We are instilling discipline in our approach to doing business making sure we are well prepared, understand our customers, and anticipate their needs. Our employees are responding and our performance is improving. In the U.S., we compete in a $30 billion plus market with about 85% of the market in the hands of our competitors. We see this as a golden opportunity to win new profitable business at a much faster pace. Culture change is really difficult, but it's also very rewarding. We're encouraged and motivated by our early progress. And while we have clearly defined the changes we need to make, there normally are some bumps along the way. We are closely monitoring the pace at which we make our changes, and the impact they have on our employees, customers, and supplier partners. We're moving quickly but thoughtfully, and we're making the changes needed to build a rock-solid foundation upon which we can deliver consistent, sustainable earnings growth for the long term. We have the right plan in place, and we're successfully executing against our plan with the utmost urgency. Before opening it up for your questions, I would like to call your attention to the announcement we made yesterday about the promotion of David Jukes, President and Chief Operating Officer of Univar. David is a seasoned, experienced world champion and senior executive with more than 35 years in chemicals and plastics distribution. In his 15 years with Univar, he built a strong position for us in the U.K., designed and led the restructuring of our business across Europe, the Middle East, and Africa, which has greatly increased our profitability there. And most recently, he realigned our largest segment, the U.S., to increase focus and accountability and best support our customers and supplier partners. And as you saw in the first quarter results today, there are early signs of his success as he led the USA segment to its first growth quarter following eight consecutive quarters of decline. He and I are fully aligned on our vision for Univar's future and how we will get there. David is the perfect person to partner with me to accelerate profitable growth around the world. David's announcement is another example of the actions we're taking to build the foundation for a growth company, developing the infrastructure, culture, the strategy as well as the execution skills and mindset to deliver superior growth for years to come. We have a tremendous opportunity to create value for all of our stakeholders. And we intend, with full force, to make the most of it. Thank you for your attention. And with that, we'll open it up for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Robert Koort from Goldman Sachs. Your line is open.

[Ryan Berney:]

Good morning. This is Ryan Berney on for Bob. And congratulations, David, I wanted to say that upfront.

[David Jukes:]

Thank you.

[Ryan Berney:]

Now you've been in place, Steve, for about a year. Curious as to your thoughts on maybe what's been the biggest surprise as far as headwinds go for you convincing some of your suppliers to open up more of their portfolio to the third-party distributor market, maybe as a market, and then maybe to you specifically.

[Steve Newlin:]

So Ryan, that's a great question. I mean, I think that the challenges that we face with our suppliers, and it's clearly getting a lot better. I mean, David has known these folks at the top levels, I know them. There's been trust that's been developed over years that predate the last year, here at Univar. And having worked with him in the past and seeing how we do things, they're really opening up their eyes and the opportunities for us. The biggest challenge, to kind of answer your question -- so that's just a little color around it, but to answer your question, the biggest challenge we've had is just -- they want us to have the right kind of marketplace behaviors, they want us to go get new business and grow, and hang on to the business that we have. And they also don't want to see antagonistic relationships, where we have multiple suppliers of the same product that have to compete through our channel. So we're working on all of those things at a really brisk pace. I think the biggest thing that we can do for our supplier partners is to execute better in our sales force. And that's the drum that I've been pounding since I took this job day-one. We're getting better, but there's a lot of work to do yet. This is a culture change. It involves changing how you reward people, how you recognize people, who you hire, how you train them, how you motivate them. And that's the biggest challenge that we have. And I will tell you that we're seeing very good successes in Europe, and in Canada, and we're seeing tremendous progress in the U.S., but trust like that takes time to develop, and we're nurturing the relationship, we're getting new shots at things. And I would expect this to continue, in fact, accelerate.

[Ryan Berney:]

Great, thanks. And then Carl, could you just give us your latest thoughts on where you think the right leverage target is, and maybe where you see that trending over the next year or two?

[Carl Lukach:]

Sure, Ryan. Our comfort -- I call it comfort versus target, is at three-and-a-half; we think that the stability of the cash flow that we have can support that much leverage. An ideal capital structure would be in that area. We're at 4.8 at the end of this [technical difficulty], but over the next year, year-and-a-half, I see that coming down, I'd say, on its way to 4 over that 18-month period that you mentioned. I think that's a reasonable expectation.

[Ryan Berney:]

Thanks very much.

[Operator:]

Our next question comes from the line of Allison Poliniak from Wells Fargo. Your line is open.

[Allison Poliniak:]

Hi guys, good morning.

[Steve Newlin:]

Good morning.

[Allison Poliniak:]

I wanted to touch on the volume decline in the U.S., I know you attributed some of it to your actions specifically, but then also a little bit of sluggish market. Could you help us quantify your [indiscernible] was it mainly your actions that led to the volume decline, was it markets still, and what kind of visibility do you have for the balance of the year?

[Steve Newlin:]

So Allison, it's Steve. I want to just give a little bit of -- I want to put this in context here, and then I'd like David and Carl to weigh in on it. And if you follow, I guess, my past practices, its volume is not the driver of profitability growth. And we're trying hard in our culture to be more selective about the customers we choose, to work on the mix of our product so that we have the appropriate amount of higher margin products in there. And in fact inside the tent here, I don't like us talking a lot about volume. Now, I know in your space you have to do that. And will come a time where you can really measure us on that front, but it took me a long time to get that changed in the last house. And we're moving a little faster here. So it doesn't bother me at all where our volume is. In fact, if our volume grows too much without a massive amount of leverage on the profitability line it makes me a little bit nervous because I don't want us spending our time on business that doesn't make a lot of sense for us. So that's the context. And with that, David, do you want to go first, then Carl?

[David Jukes:]

Thank you. Yes, and now in the U.S., and we've been very particular about how we drive our profitability forward, as Steve said, looking at -- we were thinking about mix enrichments so the blend of the products that we have and the blend of margin that we have there to support those. And that's paid dividends for us in the first quarter; we've seen good gains in our margin to the first quarter. But that's caused us to walk away and move away from some large-volume low-margin business. We will get growth, and we will get volume growth. I know Steve throws things at me when I mention the volume word, but we'll do that by improving our win/loss ratio. I mean, we need to win more business, and stop losing some of the business that we have. And that needs to be in our core distribution business, not in large volume markets where we may compete with our suppliers. And that's really a game of singles rather than homeruns. So we really fix that win/loss ratio, grow our new business, increase the effectiveness of our sales organization, be very disciplined about the pricing and being rewarded for the value we achieve, and we'll get our way back to long-term sustainable growth.

[Carl Lukach:]

Well, the only added color I can give you, Allison, if you look at the 3% decline globally, it was more so in the USA, and that's there, I'd say quantify -- I know you want to quantify if, but roughly a third of that was conscious withdraw in the upstream oil and gas business, and in particular at one account. So that was one area. The next third would be in what I'd say are lower-margin bulk commodity products. And that would be the third one-third would be our active margin management efforts account-by-account.

[Allison Poliniak:]

Great. That's very helpful. And then just lastly, I just want to clarify. The improvement in the outlook on adjusted EBITDA growth, it sounds like that's mainly your actions. Was there any underlying improvement or expectation in just the general market, or is this all you at this point?

[Carl Lukach:]

I think this is self-help more than anything else. We're not changing our view on the market outlook. I think that the executional activities and improvements that we've been driving hard are coming in, and we're going to expect them to continue to come in at a faster pace. So no changes in how we view the exogenous matters.

[Allison Poliniak:]

Perfect. Thanks guys.

[Carl Lukach:]

Thank you.

[Operator:]

Our next question comes from the line of Andrew Buscaglia from Credit Suisse. Your line is open.

[Andrew Buscaglia:]

Hi guys, congrats on a good quarter.

[Steve Newlin:]

Thanks Andrew.

[Andrew Buscaglia:]

So, I just have one thing, not to nitpick, but on your free cash flow. So it was negative this quarter. Can you just walk through what happened there? I mean I know seasonally it's probably lower and you're going to ramp this year. But just trying to parse that out in terms of how that relates to with your M&A, if you have enough cash on hand and I think…

[Steve Newlin:]

Sure, Andrew, thanks for that. I'd say that, to answer your last question first, yes, ample liquidity and cash on hand to more than enough to execute our acquisition strategy. In terms of the net working capital change in the first quarter, two parts to that story. Yes, as you said, the seasonal uplift which happens every year in the first quarter, sales happened in the second and third quarter, that is always amplified up in Canada with our Ag business. That's in the mix there too. But then again, in the cash flow statement you'll see that last year's first quarter we had a very large harvesting of working capital. A large portion of that was the decline of the oil and gas business at that time, kind of the peak of the decline. So tough comp, I'd say, when you look at the year-on-year cash flow of the company, and by saying that our full-year outlook of net working capital change in the $50 million to $100 million is still quite a safe bet. We, as you know, have outflow in the first, and inflow at the end of the year.

[Andrew Buscaglia:]

Okay, yes. No, I think I just phrased that wrong in terms of that, my M&A comment. But can you talk about M&A as it pertains to are you having discussions right now with companies? What's the activity like out there?

[Steve Newlin:]

Yes. So we are having discussions all the time. Obviously we won't talk specifics. I'm disappointed that we haven't landed a few smaller acquisitions. We're working on them. We've got a pretty good funnel or pyramid, if you will, of opportunities. We're in active conversations. I think the difference is we're going to remain disciplined. We don't want to overpay for things that -- it's pretty easy to determine the value of these enterprises. And you have to understand the motives of the sellers, and so on and so fort. So we're taking a rather disciplined approach. You might call it conservative, and I'm okay with that. But I will tell you that I'm disappointed we haven't landed anything of late. And we're working hard to do just that. My hope is that by the time we talk again, a quarter from now, we'll have some news. But you just can't predict this. You don't want to get overly excited about opportunities that cause you to behave in a way that you may regret someday. So, I'm sort of mixed with our process. I'm happy with our discipline, but I wish we had more flow. And you'll see us accelerate this before the year is out.

[Andrew Buscaglia:]

All right. Well, thanks guys.

[Steve Newlin:]

Thank you.

[Operator:]

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

[Unidentified Analyst:]

Hi, this is Dennis [indiscernible] for Laurence. How are you guys doing?

[Steve Newlin:]

Good. How are you?

[Unidentified Analyst:]

Good. To improve relations with your suppliers, are you looking to be going to like more self-sourcing for your larger product?

[Steve Newlin:]

So, I think the person that has done the most over the years to improve relations with suppliers, and we certainly have seen it happen in Europe, and it's happening here in the U.S. now, and he'll have a global role to do it, is David. So I'm going to let David Jukes answer that question.

[David Jukes:]

Thank you, Steve. I think there's two parts to the answer. One is very different for the undifferentiated products than for the differentiated products. But I think the consistent scene that we have is really changing the conversation with our suppliers, changing to conversation really with our partners, because that's what they are. These are long-term partners who have been with us for many years. And we choose our partners very carefully, and we work hard to earn the right to stay their partner. And we partner with people who are long-term winners in their space. So, it's not necessarily about sole arrangements. For some of the differentiated products it will be sole arrangements because it's difficult to invest the time in promoting someone's molecule, only to have it undercut by someone else, or it's difficult to have the degree of transparency that we'll need with our partners when developing in a specialty space if you have a crowded territory with other distributes. For the larger products, it's much more about changing that conversation, understanding the ebbs and flows of the partners' supply, and working with them and collaborating with them. So I'd think much more about changing the conversation. This is not an adversarial conversation, Steve mentioned that earlier on. This is really a conversation between partners. Many of those partnerships predate me, and many of them will go on longer after me. And that's the way we have to view it. We have to view ourselves as good stewards of that partnership while we're in place.

[Unidentified Analyst:]

Okay, thank you for that. And then you mentioned moving more business in this, so I guess in smaller or –- or in just hitting more singles, I guess. Is there a certain regional end market where you want to focus and you think it's more achievable or just better to look at?

[David Jukes:]

So I think that if you look at our business, we broke our business down into four lines of businesses, services, bulk, local chemical distribution, and focused industries. There's growth opportunities in all of those, but the sales cycles in all of those are very different. So you would expect to see some share gain more quickly in local chemical distribution than you would in focused industries, where the sales cycle will be much longer. But we see opportunity right across all our business. And the bits we didn't see opportunity, and we're doing much less of, that's the whole point of our focus.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

Our next question comes from the line of Karen Lau from Deutsche Bank. Your line is open.

[Karen Lau:]

Thank you, good morning everyone. I was wondering if you're already seeing some market share gain among suppliers. Are you realizing maybe more new authorization on product sales or are we still working on for now on the pruning phase, and maybe just sell more big products?

[Steve Newlin:]

So, we are getting some new authorizations. And we're getting those in various parts of the world. This is something David's been working very hard on. In order to do that, it goes beyond just the simple trusting relationship that you have; you've got to show them some data. You've got to show them that you're able to grow your business again, and that you can grow their business for them. And that's why it's so important that we focus on new business wins out there, and change the mindset of our sales force. This is what David is working -- we're all working really hard on, to get people to have better skill sets, to be more effective and more efficient in the execution of their sales call, to increase the amount of new business that we gain. This turning point for the first time in eight quarters of having growth in the U.S., those are the kinds of things that help us get more authorizations from our existing suppliers as well as those that we're pursing that we don't have relationships with. David, you want to add anything to that?

[David Jukes:]

I'll only add really -- I you've heard Steve talk about our three priorities, commercial greatness, operational excellence, and one Univar. And the one Univar piece is something that we're really working on at the moment, because we're brining our teams together globally to share knowledge, share experience, share expertise on the products that they have, and the authorizations that they have. And we're able to act more as a global company, and share technology across the planet. And that's very attractive to some of the suppliers that we worked with. So we have got some new authorizations. We have some in Europe. We've actually jus won one in the U.S. this week. It's very early days for us in the U.S., but it's all about our win/loss ratio. Give the suppliers a compelling value proposition then they will come with us. And we're getting good feedback so far.

[Karen Lau:]

Okay, great. So it sounds like there's more happening overseas, but U.S. is still very early in the process and more on to come, okay. Could you give us an update on the sales force churn since you started the new comp structure and implemented the realignment in February? And how does it compare versus historical?

[Carl Lukach:]

Well, historically we've had pretty high turnover in our sales force, too high. I know the prior two years we had 22% - 23% turnover. That's entirely too high. Generally where we want this to land is probably around 10% - 12%. You are always going to some -- you have some people that voluntarily leave. You are going to have some that just don't make it. So, it's been too high. Some of the actions we have taken are really exciting and motivating to those who like to get rewarded and are competitive and have the goal orientation and the drive to succeed because we're going to rewarding and recognizing them more. Some of those who don't have the skill set, the versatility, the adaptability to call outside the boundaries of just procurement and call through the organization and sell our value prop versus just sell our chemical, they are struggling. And so, there's turnover in those ranks on both ends whether it's our choice or theirs. So, specifics, David, I will leave that for you to discuss.

[David Jukes:]

So, I would point to three things. Firstly, when we put our organization together under the four lines of business, we were particular about the people we put in place though there was some degree of churn there when we looked at people with the right skills to go into the right slots. Secondly, I think we are driving a different culture here. It's very much a culture of winning. It's very much culture of value. And not everybody felt comfortable in that so there was some churn with that, but nothing that was regrettable. Thirdly, we are bringing some fabulous talent in. The people that we are bringing in are very strong, very competitive, high energy. And I am encouraged that actually some of the good people that we lost in the last couple of years have come back home. Have come back knocking on our doors saying we hear these good things happening again and make a space for us. So I am encouraged -- really encouraged by what's happening with our sales organization at the moment.

[Operator:]

Our next question comes from the line of Lawrence [indiscernible] from Evercore ISI. Your line is open.

[Unidentified Analyst:]

Good morning and thanks for taking two questions. The first one is on the U.S. volumes that you actually intend to keep, so not what you are trying to de-market, but the volumes that you actually like. Could you talk about what you are seeing there in terms of demands? You seem to talk about softness, so I am just wondering where you're seeing the softness. And the second question is on guidance sequence. I guess you are going to face tougher comps in Canada and in Europe in the second half. And that's exactly when you are trying -- when you are intending to accelerate. Can you talk about whether this will -- this should come from I guess acceleration in Canada and in Europe? Or, is it just the U.S. business seeing traction from the turnaround and accelerating extremely fast between the first half and the second half? Thank you.

[Steve Newlin:]

So I think the reason that we're more bullish on the second half clearly it has to do with the skill set, the new people that we're hiring. And we still have a lot of positions in the U.S. for sellers. And we are picky about who we hire. Very particularly about who we hire. So it takes little more time to attract, train, develop, and then get them in the game and have them go through the sales cycle and grab the business. So that work is ongoing. But we see time on our side to make it better, faster, stronger. And I think that's the reason for the delta and the uptick we expect later in the year. If you just kind of look at our progression all I mean the fourth quarter, we saw some turning. The first quarter, we are seeing turning in the U.S. while we've maintained the growth outside the U.S. And it's absolutely true the comps for the second half were stronger but our organization is stronger. And we had more time to implement and execute on the goals that we've established.

[Carl Lukach:]

Specifically with Canada and Europe, I think you're right that it's going to more front-ended profile for growth for those two segments this year, but I guess to underline what you assumed with U.S. two-thirds of the company it's those programs taking hold that gives us that confidence of growing, accelerating growth rate.

[Steve Newlin:]

I will just add more comment on this because I think it's very important to understand the complexity around this kind of change. We're talking about culture change here. And you can't wave wand or give everybody a shot and expect it to take hold. It takes reinforcement, it takes constant repetition, it takes leadership. It takes having the right people onboard who want to go a new way and want to succeed. And that takes time. And we are moving fast. Frankly, I think quite fast given the situation we've been in. But, we want to build the foundation properly and we want this to be sustainable. And so, you can expect that this should be a natural build. Our company - I will look at it this way, our company is getting better; getting better every day. You can't see that. We are getting every month. You can't see that. But you can see that each quarter, we are getting better. And the U.S. is so -- it's such a nucleus for our turnaround. It's such an important heavy weighted element of our overall business, that's the part that we have to get right. I mean we're pretty darn -- we are never fully satisfied. That's just not the nature of the management team here. But we are pleased with what's going on in Europe. We are pleased with what's going on in Canada. It's right here in the U.S. that we got to make the change. Those changes, you are seeing the signs. You look at the third quarter, fourth quarter, first quarter, and that progression continues. That is going to raise the vote for us.

[Carl Lukach:]

Then in terms of the market demand I mean there are no real standouts. It's spotty, but the real driver for us is our win/loss and increasing our wallet share with customers. That's the biggest thing that will drive our performance.

[Unidentified Analyst:]

Thank you.

[Operator:]

Our next question comes from the line of Steve Byrne from Bank of America Merrill Lynch. Your line is open.

[Unidentified Analyst:]

Hi, good morning. This is Ben on for Steve. In Canada, can you discuss the shift in mix that occurred in the quarter and what your outlook is for margins going forward in that segment?

[Carl Lukach:]

Okay. Hey, Ben, sure. Yes, there is a very visible shift going on. We had a nice rebound in the energy markets in Western Canada for that that brings to life a lot more demand for methanol and to the natural gas pipeline. And that is compared to the average, it's a lower margin product. So you see the shift in margin there. We also saw demand up in the mining sector in Canada in the first quarter. But we also have more initiatives for growth in place in Eastern of Canada and industrial end markets of Eastern Canada. So it's always to tell those three, and then you've got Ag in the middle of the country that is coming up pretty nicely this year. So our end margin is the result of those three distinct end market zones within Canada.

[Unidentified Analyst:]

That's helpful. Thank you.

[Operator:]

Our next question comes from the line of Kevin McCarthy from Vertical Research Partners. Your line is open.

[Kevin McCarthy:]

Yes, good morning. Thank you. Between November and February we saw quiet sharp inflation among lot of commodity petrochemicals; methanol, butadiene, propylene, styrene et cetera. Call it 30% to 100% in some cases. Can you talk about how you managed through that volatility? And whether or not it has any appreciable impact on your financials in terms of volume or profitability?

[Carl Lukach:]

So I mean we are constantly assessing the cost increases or decreases that we have and making sure that we don't get trapped in situations where we have a big down graft in pricing with a lot of inventory on hand. And like when it goes the other way, when inventory does revalue because of price increases and we work with our customers on what share of that we are willing to share with them. But we're on top of prices, of products all the time. We did see methanol, sodium hydroxide solution, xylene, some of these products went up. And we saw hydrochloric acid dropped about 16% in the quarter versus prior year. So, I would say all in, it's a little more up than down. We like that. We like dynamics in the marketplace because we think we're decent at and getting much better at adjusting our pricing appropriately to get our fair share.

[Kevin McCarthy:]

That's helpful. And then second one if I may, Steve, on Slide 4, you call it 120 basis points of improvement in your conversion ratio. How focused are you on that, do you manage to it, and how high can it go, maybe a little context here will be helpful?

[Carl Lukach:]

Hi, Kevin. It's Carl. As a distributor, conversion ratio is a metric that we look at monthly if not more frequently. And how much of the gross profits are pulled out to EBITDA. And 32-ish% is I would say okay, but we should -- and it moves around quarter by quarter. But on an annual basis, we see ourselves creeping up to 34%, 35%, 36%. If you look at industrial distributors, you will see those kinds of conversion ratios as pretty much at the mean. The only thing I'll add to that is the added benefit of e-commerce and digitization that we're brining into our portfolio as we reduce backroom [ph] cost and cost of transaction, and that can help elevate that conversion ratio even higher, but that's yet -- like a prediction on that yet, but that's another dynamic in the equation.

[Kevin McCarthy:]

I appreciate the color. Thank you.

[Operator:]

Our final question comes from the line of Jim Sheehan from SunTrust. Your line is open.

[Jim Sheehan:]

Thanks. And in EMEA, can you talk about the mix improvement you got there particularly with pharmaceuticals? And how sustainable that might be going forward in 2017/ I think you called out that some of the improvement you saw in EMEA is due to extra billing days and some of this mix is not going to be sustainable through the rest of the year. How should we do that in the second quarter?

[Carl Lukach:]

Good question, Jim. It's Carl. The improvement in EBITDA in the quarter was -- about half attributable to our pharmaceutical finished goods business that is more rightfully looked at it as an easy comp. Last year's first quarter was abnormally low in sales based on the selling patterns in that market. And so, we got to boost and amplify it to the growth in the quarter. Excluding that end market, we had 13% growth in the quarter in EBITDA. So I think that you are right. Going into the second, we won't get that kind of growth in the second quarter because of that easy comp in pharma, but we do hope to continue to execute against our restructured business there in Europe and continue the growth going.

[Jim Sheehan:]

Great. And then on the pricing environment you are seeing, we had kind of a tailwind in chemical price inflation in the first quarter. And some of your end markets, you are probably still seeing some increase; I think caustic soda is still on the rise. But then maybe some other areas with more petrochemical chains, some of those have started to roll over, where do you see pricing in the second quarter developing for you guys?

[Steve Newlin:]

I mean on that, your guess is probably as good as ours if you are into this space. We roll with -- we take the punches and roll with them. We try to stay ahead of them and make sure that whichever way they go, it's positive for us. We like them going up more than we like them going down. But we manage through both. And like I said earlier what we like are dynamics rather than steady state. So we're not -- we don't worry about that. We just adapt to it. And we adapt very quickly. And I think I can tell you that we are far more nimble today than we were about a year ago. With that, I think we are ready to close out. I want to thank you all for joining us today and also remind you that we do have Investor Day on the 15th of May in New York. Hope we get a chance to see you there. We are going to talk a little bit more about long term and talk about some of the important goals that we have to drive value creation. Thank you very much.

[Operator:]

This concludes today's conference call. You may now disconnect.