Univar Solutions Inc.
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Univar Inc. Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. David Lim, Vice President of Corporate Development and Investor Relations, you may begin your conference.

[David Lim:]

Thank you and good morning. Welcome to Univar's Third Quarter 2016 Conference Call and Webcast. With me today are, Steve Newlin, President and Chief Executive Officer, and Carl Lukach, Executive Vice President and Chief Financial Officer. This morning we released our financial results for the quarter ended September 30, 2016 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 2, 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 involve 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.

[Stephen D. Newlin:]

Thank you, David, and welcome to Univar's third quarter earnings call. We appreciate your interest in Univar's performance and outlook. I'll start this call with some overall observations on where we are today as a company, discussed our initiatives to drive commercial greatness and operational excellence, and comment on our third quarter performance and the market. Three months ago, on my first call as CEO, I shared with you my initial observations and said I'd have much more to share with you in upcoming calls. In the last 90 days, I learnt a lot more about our Company. I met with key customers and suppliers, spent more time with our employees, participated in our first ever U.S. sales leadership meeting, and held discussions with existing and potential shareholders. All of this has given me direct first-hand insights on what we're doing well as well as the treasure chest of opportunities to improve. And with that clear understanding, we've mapped out our priorities. On the positive side, we have a strong record on safety. Our suppliers and customers value this and it's a key differentiator for Univar in the marketplace. We have great product and service offerings, the broadest array of chemical products and services in the industry. Our supplier base is very strong. We have relationships that span decades and carry terrific renowned brands. We give chemical producers the opportunity to capture more growth for their products by accessing markets and customers they don't, and our delivery rates are among the industry's best. We have tremendous global scale. We're the number one chemical distributor in North America and number two in Europe. We can leverage our market presence and operating scale to provide value to all our constituents. We're in an industry where commercial fundamentals present the opportunity to deliver superior earnings growth. We have opportunities to lower unit transaction cost through operational excellence and digitization and consolidation opportunities. And we have great people at Univar and a recharged high-energy leadership team with a strong commitment and work ethic. It all adds up to a good list of positives from which to build a strong foundation with competitive advantage in a growing market and we expect to increase our share of that growing market. However, particularly in the U.S., we have not been taking full advantage of these many strengths. Over the past few months, in discussions with several key customers and suppliers, I have confirmed that there are gaps in what our customers and suppliers expect from us and how we are executing. Our sales force productivity is not reaching our full potential to sell more new business that presents growth upside. We're in some very one-sided business arrangements that consume excessive resources, limiting our ability to go after good profitable business and create value. These are all execution problems that we can and will fix, and they are all upside opportunity for us. We have over $100 billion of potential business we need to get after. In order to make the most of this growth opportunity, we need change with urgency. We're going to change our culture, we've already started, we're going to improve our execution to drive commercial greatness and operational excellence. As I shared on our previous call, we create a lot of value in the supply chain for our customers and supplier partners. With the number one position in North America, we're the market leader with plenty of room to grow. Now more than ever a value-based selling approach is perfect for today's environment, especially in light of the stagnant economy and customers' tight budgets. When we show our customers the value we create for them, we not only win in the short term, we forge partnerships the will produce outsized returns for Univar in the future. Our customers are looking for help and we have the products, services and the dedication they need. As our sales force execution improves, so too will the value we create for our supplier partners. During the third quarter, we began taking steps to improve our sales force execution. We implemented new controls and processes to drive accountability in rigour with our sales management and reset expectations for profitability and growth. While we do not plan on adjusting incentive plan metrics until January1, we started the process of changing the mindset of our commercial organization to reward performance that drives profitable growth. Sales force execution is clearly the biggest lever that we have. As we improve our commercial execution, we're going to become more valuable to our customers and our supplier partners as we support their goals. This will take some time and results could be a bit bumpy in the short-term, but we're going to go about this the right way to build a strong foundation that's consistent and sustainable. We're working to build a culture where discipline and rigor are way of life. We're instilling discipline in our approach to doing business, making sure that we are prepared, understand our customers and anticipate their needs. And our employees are responding. They are excited about what lies ahead. In North America, we compete in a $30 billion-plus market with more than 85% of the market in the hands of our competitors. Our sales force sees this as a golden opportunity to win new profitable business at a much faster pace. When we brought our U.S. commercial leaders together late last quarter, we worked on creating a profitability mindset and dug deep into redefining our sellers' roles and the expectations we have of them. We also provided our sales leaders with value-based training and tools that will help them and their teams improve execution. I've got to tell you, I am really excited about what I saw. Our top sales leaders, and for that matter our entire organization, is getting focused, excited and ready to capitalize on the opportunities that they have in front of them. We will be investing in hiring, training and talent to drive profitable growth. With regard to operational excellence, we're deploying Lean Six Sigma methodology to improve the productivity of our operations, but we're in the early stages. We have many opportunities to simplify, automate and lean out processes. We're evaluating digitization projects to simplify and lower our transaction costs, reduce errors and make it easier to do business with us. We are also exploring opportunities to create efficiencies in our supply chain area. We will take a fresh look to optimize our asset footprint and logistics capabilities. Switching now to our third quarter results, I'm encouraged. After what's been seven consecutive quarters of year-over-year adjusted EBITDA declines, it feels like we are at or near the bottom in terms of comparisons to the prior year. For the [fourth] [ph] quarter, we reported $146 million in adjusted EBITDA, slightly better than we expected, and posted double-digit EBITDA growth outside the U.S. with strong performance in Canada and Europe. In the U.S., it feels like we're beginning to see some very early signs of execution gains and we're cautiously optimistic. However, it is still very early and much work remains before we will see consistent double-digit profitability growth. Overall, we continue to see sluggish economic conditions in the markets we compete in, with flat industrial production and GDP growth. We do not expect these conditions to improve anytime soon. Of course, that's all the more reason for us to execute better. Let me comment briefly on our upstream oil and gas business, which has continued to be extremely challenging. We made the decision to close four additional facilities and take $137 million non-cash charge to write down assets primarily related to the acquisition of Magnablend in 2012. We bought this business at the market peak when oil prices were double today's price. This investment has not performed well for us. We have become more selective, disciplined and thoughtful in our acquisition process and this is not something you should expect from us in the future. We are becoming more strategic in how we approach the markets we serve and we're in the very early stages of focusing our resources on the highest value growth opportunities. We made some tough decisions in an effort to reduce costs, but we cannot and will not be complacent and support businesses that do not create value for stakeholders. We're taking a hard look at our business relationships and will be pruning some one-sided arrangements across our business lines. Not only are some of these deals unprofitable, but they typically consume excessive resources that limit our ability to go after more probable business. We will also be conducting a comprehensive review of our product portfolio and market verticals to identify the highest value opportunities for us to grow our profitability. We'll have an update on that progress during a future call once our review is complete and our plans are in place. We will continue to improve our balance sheet while executing on our strategy of enriching our business mix through commercial greatness, driving operational excellence and pursuing bolt-on acquisitions. We see many opportunities to make accretive acquisitions, but we'll be strategic and selective in our process. With that backdrop, I'll now turn the call over to our CFO, Carl Lukach, who will walk you through our third quarter results. Carl?

[Carl J. Lukach:]

Thank you, Steve, and thanks everyone for joining. I'll begin on Slide 3. For the third quarter, our GAAP earnings per share declined from $0.09 last year to a loss of $0.46 this year. The decrease was due to a $137 million or $0.63 per share impairment charge related to the write-off of certain assets in our upstream oil and gas business. In addition, our other operating expenses, net were about $3 million or $0.02 a share higher than we forecast three months ago, largely due to consulting expenses related to our restructuring activities, and we incurred roughly $3 million or $0.02 a share in non-operating expense that was not forecasted due to mark-to-market impacts related to foreign exchange translations. Adjusted EBITDA in the quarter declined $11 million or 7%, from $156 million to $146 million, as 12% growth outside the U.S. was more than offset by lower results in our USA segment. As Steve noted, this was a bit higher than we forecast three months ago and we are seeing early signs of impact from the improvement actions we have underway. Our adjusted operating cash flow was strong at $156 million, that's adjusted EBITDA less change in net working capital, less CapEx. Moving then to oil and gas on Slide 4, during the quarter we revised our operating plan for our upstream oil and gas business to further reduce costs in response to the prolonged and significant decrease in demand for chemicals used in the fracking industry. We are closing operations at four more facilities and triggered an impairment of certain long-lived assets associated with our 2012 acquisition of Magnablend. As a result, we recorded a non-cash pre-tax impairment charge of $131 million. We also recorded a loss of $3 million for unsalable inventory and $3 million in accelerated depreciation related to a site closure in our upstream business. The total of these charges in the quarter were $137 million pre-tax or $0.63 a share. We expect to incur an additional $4 million in expenses to complete these site closures over the next six months. Turning now to our consolidated results on Slide 5, on a consolidated basis, our net sales were down 9%, 4% from lower volumes, 6% from lower average selling prices, partially offset by a 1% benefit from acquisitions. The 4% volume decrease was from a combination of lower demand from oil and gas and our EMEA restructuring. Excluding these two factors, global volumes were up slightly, about 0.5% versus last year. Average selling prices globally were 6% lower, reflecting a significant drop in prices for a handful of bulk commodity chemicals in our portfolio. Our gross profit dollars declined $12 million from last year, or 3%, as a result of lower volumes. However, our gross profit percentage increased 150 basis points and our gross profit per pound of product increased 1% versus last year. Adjusted EBITDA margins increased 20 basis points to 7 .3% as a result of higher gross profit dollars per pound and lower operating costs including lower delivery expense. I'll now take you through each of our segments, beginning with the USA on Slide 6. In our USA segment, adjusted EBITDA declined 13% to $90 million, primarily due to the decline in oil and gas. Gross profit dollars declined 4% as a result of a 6% decline in average selling prices and 5% decline in volumes. Gross profit per pound increased 1% versus last year, compared to a 4% decline in the last second quarter. USA volumes were down 5%, but this was comprised of a 35% decline in our upstream oil and gas business and a 1% decline in our industrial chemicals and services businesses. Revenue from our USA-centric services businesses increased 15% in the quarter, reflecting the acquisitions of Weavertown and Bodine. Excluding acquisitions, organic top line growth was 6%, led by ChemPoint and its new product authorizations. Delivered gross profit increased 16% in the quarter, driven largely by organic growth at ChemPoint and the acquisitions. In aggregate, our three service businesses comprised 13% of our USA sales versus 10% last year. Our USA operating expenses including delivery costs increased 1% as lower personnel costs and lower discretionary spending were offset by incremental costs from acquisitions. EBITDA margins declined 20 basis points as a result of lower gross profit dollars. Let's move then to Canada on Slide 7. Our Canadian segment performed well in the quarter, as a strong ag season, favorable product mix and margin enrichment efforts offset the impact of soft industrial demand and weakness in Western Canada energy markets. Volumes declined 4% and average selling prices declined 8%, partially offset by the benefit of acquisitions and FX, resulting in a net 10% decline in sales. However, gross profit increased 5% as a result of favorable product mix. Gross margins improved 310 basis points to 21%. Outside the agriculture industry, industrial demand in Canada remained sluggish. We are pursuing mix enrichment initiatives that focus on personal care, pharmaceuticals and food ingredients, and separately we are starting to see signs that a bottom may have been reached in our Western Canada energy business. We continue to see the benefits of productivity initiatives in Canada with a 3% decline in operating costs, excluding the impact of acquisitions. Adjusted EBITDA increased 10% and adjusted EBITDA margins increased 190 basis points to 10%, driven by growth in gross profit and strong operating expense controls. Moving then to Slide 8 and our results in Europe, Middle East and Africa, we had strong 34% growth in adjusted EBITDA in EMEA despite overall stagnant demand from industrial markets and continued foreign currency translation headwinds. Sales declined 5%. Overall volumes increased 2% but were offset by average selling price declines of 6% and FX headwinds of 1%. Our gross margin increased 110 basis points to 23%, reflecting our mix enrichment strategy and the facility shutdowns we completed last year. Gross profit dollars were flat year-over-year. Gains in the pharmaceutical end market were offset by declines in basic chemicals, reflecting sluggish demand and lower average selling prices. Our EMEA adjusted EBITDA margin increased 200 basis points to 7% due to gross margin improvements and 10% lower operating expense. As we said in prior quarters, we expect to lap in the fourth quarter the cost saving benefits of our EMEA restructuring program and expect sluggish market demand to continue. Moving then to Slide 9 and our Rest of the World segment, of which approximately 85% of our revenues are from Latin American markets, sales declined 12%, or 7% on a currency neutral basis, reflecting the drop in the Mexican peso. Adjusted EBITDA declined 30%. Our business in Latin America was negatively impacted by foreign currency translation and softness in demand from the oil and gas segment in Mexico. In addition, overall weak economic conditions in Mexico resulted in lower selling prices and gross profit per pound declines. In Brazil, we saw very weak economic conditions and sluggish industrial production. We are taking actions to improve our commercial activities and drive operating efficiencies in response to the weakness in market demand for chemicals. Now despite the softness in Latin America, our three segments outside the U.S. in aggregate grew adjusted EBITDA 12% on a reported basis and 14% on a currency neutral basis. We attribute this largely to cost reductions from our successful restructuring in Europe and the strong growth in our Canadian agriculture business. On Slide 10, you can see that our cash flow was again strong in the third quarter. Adjusted operating cash flow was $156 million. We define that as adjusted EBITDA, less change in net working capital, less CapEx. This equates with 107% after-CapEx cash conversion rate and a strong 8% operating cash margin. Our CapEx of $21 million was down 50% from last year. For the full year, we continue to expect CapEx to be less than $100 million, which would be down more than $45 million from last year. While interest expense was flat with last year, in the quarter, cash interest payments of $43 million were up $31 million due to the timing of interest payments last year related to the refinancing we completed in the third quarter of last year. We continue to expect full-year cash interest to be about $150 million, which would be about $11 million down from last year. Pension contributions of $8 million were down nearly 50%. We continue to expect full-year contributions this year will be down about $30 million. Separate from pension funding, I want to point out that in the upcoming fourth quarter, we will make our annual mark-to-market pension accounting adjustment to reflect the change in market interest rates used to measure the net present value of our pension obligations and also used to measure the forecasted return on assets we earn by the pension funds. Based on current interest rates, we expect to have a significant non-cash mark-to-market accounting loss in the fourth quarter. Cash taxes were $3 million in the quarter versus $15 million last year. This is due to a higher mix of earnings in geographies where we were able to utilize our tax loss carryforwards. For the full-year 2016, we expect cash taxes to be under $5 million. That's $33 million lower than last year. Our effective tax rate for the quarter on a GAAP basis was higher than anticipated and might be misleading for forward guidance due to the tax accounting treatment of our oil and gas impairment loss. Excluding the impact of the oil and gas impairment, our effective tax rate for the quarter would have been 25%. We estimate our annual effective tax rate to settle in between 15% and 20% when you exclude the impact of the oil and gas impairment and the upcoming fourth quarter pension mark-to-market adjustment. With regard to uses of cash, our priorities continue to be to reinvest for growth in our asset-light business model including digital projects that will lower transaction cost per unit, as well as sales force training and commercial investment; second, to make targeted attractively-priced value-creating bolt-on acquisitions; and third, to pay down debt. As a reminder, we have $40 million of scheduled debt amortization payments this year. Last quarter, we indicated we were aiming to pay down double that amount this year. Through September, we reduced net debt by $100 million and may reduce it further in the fourth quarter. Slide 11 details our debt profile. Net debt at quarter end was $2.9 billion, down $100 million from year-end. Our leverage ratio of 5.1x was in line with our leverage ratio in the second quarter. Our total liquidity remained strong at $805 million and our cash interest coverage is 3.5x, up from 3.4x a year ago. Our weighted average interest rate at quarter-end was 4.6% pre-tax. While most of our interest expense is based on floating interest rates, we have hedged our exposure to future interest rate changes to achieve approximately a 70% fixed, 30% float ratio. Our return on assets deployed in the quarter was well above our cost of capital but down from last year, mainly due to the decline in our oil and gas business. Let me now address our outlook for the remainder of the year on Slide 12. Three months ago we shared with you our expectation that second-half adjusted EBITDA would be slightly below first-half and that the third and fourth quarters would be about evenly split. While our third quarter results were slightly better than what we forecast three months ago, we continue to expect second-half adjusted EBITDA will be slightly below first half as we face fourth quarter sluggish industrial demand, lingering headwinds from oil and gas and stiffer FX variance from post-Brexit exchange rates. We also need to overcome some favorable customer advanced buying that we benefited from in the third quarter and in last year's fourth quarter. Our cost productivity actions will continue to help offset these headwinds. Historically, the fourth quarter is our lowest earnings quarter. Our aim this quarter is to establish a baseline for future growth and to put an end to negative year-over-year EBITDA comparisons that started in the first quarter of 2015. Taking the pluses and minuses into account, we expect fourth quarter adjusted EBITDA to be between $127 million and $132 million. As a result, we are narrowing our full-year adjusted EBITDA outlook range from $550 million to $565 million to a tighter range of $555 million to $560 million. With that, I'll turn it back to you, Steve.

[Stephen D. Newlin:]

Thanks Carl. Let me conclude by sharing with you what we see in our future. While we can't say with certainty, there appears as though we should soon halt the year-over-year comparable declines and turn towards growth within the next few quarters, barring any major unexpected exogenous events. We have an exciting opportunity here at Univar to grow the profitability and size of our Company. We have three powerful drivers for growth working in our favor. First, the distributed chemicals market is a growing market and we expect to grow it even faster. More and more chemical producers are recognizing the growth in value that Univar can deliver. We will continue to invest in our value proposition to our customers and supplier partners to make it more compelling to do business with us and increase our number of new product authorizations. Second, Univar's market share even as the North American leader is low in the highly fragmented distributed chemicals market. As we improve our operational and commercial execution, leverage our large and growing scale and complete more bolt-on acquisitions, we will increase our market share. Third, Univar's margins are rising and profitability growth will follow. By focusing on better sales force execution, improving our mix by selling more specialties, pruning unprofitable business, smarter and strategic marketing, and reducing transaction cost per sales dollar, we will capture more of the value we create for our customers and supplier partners. In order to make the most of these drivers, we will invest in training, adjust our sales incentive structure, and instil rigor and discipline across every task and function in the organization. We will invest in marketing resources to better guide us to more attractive organic growth opportunities. In fact, we have a search underway right now for a Chief Marketing Officer. We will invest in digital tools that will accelerate growth through more e-commerce and lower our transaction costs. We will take actions to optimize our asset footprint and improve our return on capital. And to help fast-track our rate of improvement, we have engaged outside experts to broaden our thinking and deploy the latest best practices. We have much work ahead of us but it's an exciting time for Univar. All of these actions will be accomplished within our current economic framework and using our strong stable cash flow to remain asset-light, reduce debt and begin to deliver attractive year on year earnings growth. Before I conclude, I want to let you know that we will host an Investor Day in the first half of next year, probably early spring to lay out our intermediate and long-term financial targets to quantify what all these changes will mean to our shareholders. I know this is important to all of you and having public financial targets is certainly something I believe in strongly. We will have more on this as our plans firm. Let me be clear, we can and will make the changes needed to build a foundation that delivers consistent, sustainable earnings growth. We are not counting on any help from macroeconomic factors, here in North America or overseas, and our goal is to grow the value of Univar even in a stagnant macroeconomic environment. I am encouraged and excited about the passion and commitment shown by our team members and the rapid start we have made. Like me, they are eager to become more disciplined in our business processes, more accountable for results, and urgent in their implementation. Combined, this gives us great confidence in our future. We have a tremendous opportunity to create significant value for our customers, supplier partners, employees and shareholders, and we intend with full force to capture that opportunity. With that, we will open it up for your questions.

[Operator:]

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

[Robert Koort:]

I've got several question, if I might. Firstly, Carl, you mentioned some pre-buying both this quarter and then a year ago in the fourth quarter, Is that purely related to customers [indiscernible] in front of cost inflation?

[Carl J. Lukach:]

Yes, in the third quarter, I mean we announced some price increases in August here in the U.S. and also in September. And so we think that there naturally was some – they were effective October 1, so there naturally was some acceleration there. Not much, we don't think it was that much, but enough to register with you.

[Robert Koort:]

And then, Steve, I was wondering if you might give us a sense, you mentioned that treasure chest of opportunity, what are some of the quickest payback projects you see and then what are some of the most sizable opportunities you see?

[Stephen D. Newlin:]

I think clearly the biggest prize involves capturing more new business or more new business gains, Bob, and we just haven't been bringing up new business. And to support the kind of growth expectations that we have and to increase our share, that's a little longer-term, I would call that intermediate-term. The immediate opportunity is in stopping the silliness of allowing price to be mishandled, as we have been. So, there's a lot more value that we're delivering to our customers that we haven't been selling and capturing. I put most of the opportunity that's near-term in that category. Again, a little longer-term, lots of opportunities in the logistics side of our business. We're going to make a determination what the appropriate ratio is of in-house fleets versus third-party logistics, and I think we're off, we've got a little off-balance on that front. That's one example. We're looking at all of these assets that we have, over 100 facilities in the U.S., and how many do we really need to maintain the delivery and support that our customers have come to expect and appreciate. We probably have some opportunities on those fronts as well. That will take a little bit more time but we're working on it right now. We're actually under review with those with an outside support group as we speak. So, I think more than anything, it all boils down to how the sales force operate. This is a business that has so much to do with how the feet on the street behave and how they manage their existing accounts to maintain them and how they pursue and capture new business.

[Robert Koort:]

Got it. And a last one, if I might, and I'll hand the call off, but you mentioned resetting profit and growth expectations with your sales force. Can you tell us what those were and where they were reset to?

[Stephen D. Newlin:]

Yes, certainly. I mean I didn't, and you probably know this from working with me in the past, I didn't give a specific definition, I think I gave a lower limit and the lower limit is what I refer to often as double-digit growth. And so, they may assume that's 10, I don't necessarily assume it's 10, and again it's probably not 99, but everybody understands our mantra is to drive this Company back to consistent double digit growth. Second is making more calls, establishing more new business and we're providing a lot of tools to get that to happen. We're putting everyone through a specific sales training program that will focus on this. So we'll all have a common language, we'll all have a common skill set, the leaders can coach these folks on how to go out and make the calls and get more new business. And it sounds like a simple thing but the facts are, we haven't been doing that. And last is, just reduce the number of lost accounts where we have profitable business. We have some accounts that we are either going to make better or we're going to have to excuse ourselves from this situation because the perception of our value in a few cases is just not been sold or it's not there. But clearly, getting new business, driving new business growth, bigger – better opportunities, not necessarily bigger, working on specialties, starting to look with a profitability mindset toward our base of customers and the potential customers that are out there that represent 85% of the business in the industry, so that's what we're working on with a lot of vigor. It's how do we execute, how do we make more calls, how do we actually effectively make those calls, what do we do when we're out there making the calls, who do we call on, it's pretty broad-based and we had a full two days at this with the entire sales leadership team. We had 120 people in the meeting and it went really well.

[Robert Koort:]

Great. Thanks for the color.

[Operator:]

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

[Laurence Alexander:]

I guess couple of different questions. One is, so as you look at the sort of acquisitions that you feel sort of they are lessons to be learned from, what have you learned apart from – because I think some of the examples you cited were ones where certainly if a commodity market gets cut in half then the related business sort of will underperform as well – so what else have you learned from reviewing the acquisitions that will change your practices going forward? And secondly, as you think about the comment around the churn in staff, you indicated that you are still hiring staff for growth, how fast do you expect the aggregate staff levels to increase or how much staff replacement do you expect you need to do over the next couple of years?

[Stephen D. Newlin:]

Okay. Laurence, first of all, let me start with the first question about acquisitions. We've made some pretty darn good acquisitions over the years here that have been accretive and have done well. I would characterize those bets as smaller, involving less risk, businesses that fold fairly well in and bolt on to our existing business, or the services business, they've done quite well. The one that really stands out as not going well is the Magnablend. Unfortunately, that's the biggest one and it kind of eradicates all the good work that we've done in the others, unfortunately. I guess the lesson learned here are a couple. Number one, placing big bets is pretty risky, and that was $0.5 billion bet. Number two, when a market is at the peak, and you don't of course know when it's at the peak but you certainly know that it's substantially higher than it had been in the recent past, it's a pretty difficult time to get the appropriate valuation. And I would say that those are probably the two biggest lessons learned with regard to Magnablend. We acquired eight companies in about 18 months, but they were small, they were all manageable. I think that that's something that we have to – when we do a larger deal possibly, a lot of that depends on our leverage ratio, we're not comfortable going on a lot farther at this point for sure, but it would have to be something that was really sensible, that we were already involved with, it wouldn't be sort of a step-out into an industry that we hadn't had a long operating history with, and certainly we wouldn't do anything where we feel that prices are at or near their peak. So, I think you could expect us to have an ongoing acquisition process, but a lot more thoughtful in what we go after. One of the things I'd like to see us do on the acquisition front is get after some more specialty-oriented distribution opportunities, and they are out there. So they may be small but we find that we can leverage these, and we have some holes in our specialty portfolio that we want to try and fill. So, we're looking at those right now. So I guess, to sum it all up, lessons learned, really big risky play at the wrong time, and I think we are cognizant of both of those. Your next question had to do with people and churn, and I don't know how I can quantify the answer other than to say, we have had turnover here and we'll continue to have some turnover over the next couple of years because we're changing the expectations and we're changing the qualifications that are needed to have success in our environment. It's manageable. The challenge is always finding great talent and we're working hard to do that, but you have to kind of balance the – it's almost a masked balance, if you will. You bring in new talent and you are ratcheting up expectations, and those that can reach it, and we have a lot of people who will, will be fine and those just who can't survive in the new environment they'll either choose to leave on their own or we'll help them make that decision. And we try to find this balance so we don't have voids and holes out there, and we don't get that perfect, but we're chronically going to be looking for 10s, for hiring 10s, people who have the talent, have desire to be part of something new that's transformative and we'll hope that we can continue to have adequate flow of great talent in the organization. I don't know how else to really quantify other than that, and if you have something more specific on that, Laurence, I'll try.

[Laurence Alexander:]

Actually if I can just squeeze in one very short one is, you commented also like meeting a little bit of a choppy period as the firm realigns. When do you think we should hold you to a kind of 10%-plus double-digit kind of expectation?

[Stephen D. Newlin:]

That's the mantra, that's what we're expecting in everyone. I just don't – like I've been in this space a long time, I've worked hard, I have credibility with all of our investors and I'm not going to do something to risk that if I don't have supreme confidence in it right now. We are not there yet. I would be delighted if we could deliver that kind of a year next year, but the facts are we probably will have to build to that. I would expect after I've had a full year in this role that a lot of these processes, expectations, the training will stick and a lot of these things will begin to bear more fruit. A few things are happening right now. I think what you have to understand is, we are very confident with the path and the plan that we have. We feel really good about it, it's starting to pay some early dividends, but the hardest part will be capturing more new business gains and getting the skill-set in the sellers to get that done, and you're going to have to give us a little bit of time on that front.

[Laurence Alexander:]

Fair enough. Thank you.

[Operator:]

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

[Steve Byrne:]

Steve, you were talking here a bit about trying to get new business and the focus being on changing the sales force focus and so forth. I'm curious as to what you see your own role in that. Given your background, is there a role for you kind of at the top level, down, your counterparts, say the DuPonts of this world, how do you convince them to outsource more of their product distribution to Univar and what do you see as the reluctance to do so now?

[Stephen D. Newlin:]

Steve, that's a great question and I really appreciate it. It is spot on. Look, it's been one of our challenges. When you are involved with these major league suppliers, you must have a trusting relationship that is mutually beneficial, and I think we've had a relationship but I don't believe we've done our part in many cases to deliver on that. These people want – what do they want? They want you to grow, because they are only going to grow if you do, and we haven't been. So the biggest thing we can do to change that is get our growth back. And that's why you're going to hear over and over and over again us talk about growth and capturing new business and getting wins because that's going to solve a lot of problems, not just on the P&L but with getting more authorizations and getting more opportunities from our existing supplier partners. And they want this, they want to see us succeed. So it's a really important step, and I make those calls, and I have relationships in many of these accounts. So does David Jukes. This is part of senior management's new battle cry, is to get out there and build on the relationships and build trust and talk about the things we're doing. We're going to have a lot more things to do with our suppliers, some we can't unveil right now, but in terms of getting closer to them, getting them to be a part of our growth strategy. So, I think it's a really exciting opportunity for us to make them more satisfied and to win more authorizations as we win more new business.

[Steve Byrne:]

And kind of another high-level question about just EBITDA margin outlook. Your Canadian business posted a 10% EBITDA margin versus consolidated closer to 7%. Is the product mix in Canada that drove that? I know in the past there was an initiative to get more into that formulation and bonding business for a crop chemical. Don't know whether that's driving that higher margin, but what do you think about maybe a longer term objective for EBITDA margin? What would you think is achievable by Univar?

[Stephen D. Newlin:]

Steve, the first part of the question, what's driving it, is just a very solid execution by an experienced team. That Canadian team is, they are strong and they are doing extremely well in ag, so ag had a lot to do with it, but it's less about the market in my opinion and more about their ability to execute within the market. So, we'll say, we got help from ag, a great season, but we also helped ourselves up there. And I think that we'll continue to see this team perform very well. I don't know, Carl, if you want to add. In terms of EBITDA margin long-term, we're going to unveil – and look, I appreciate the thirst for some targets and specificity and we are going to give you all that, you deserve that, I would like to do that, just not ready to do it right now with the full degree of confidence that I think as CEO who wants to be credible and hit the targets or exceed them needs to have. So, we're working through that and we will get to you on a pretty comprehensive list of high-level targets with regard to growth rates and profitability sometime by early spring.

[Carl J. Lukach:]

I'll just add color on the Canadian business to what Steve said. You can think of our Canadian business as really three different zones, the ag business that we talked about, the industrial East which behaves more or less like the U.S. industrial market, and then the energy market in the West. And those three sub-segments have different margins. So there is mix going on there. The energy space, as you know, is down. That's a little tougher market from the margin standpoint. The ag business is up. So there's a little bit of mix. The 10% was a great result for Canada in the quarter and those are the moving parts.

[Steve Byrne:]

Very good. Thank you.

[Operator:]

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

[Allison Poliniak:]

Just going back to I guess the initial comments on your customers highlighting gaps with Univar, is it just execution or is it maybe a product offering, a service offering that you're not, you don't have to [indiscernible], but you probably need to, to gain further revenue with them?

[Stephen D. Newlin:]

So really we have a broad offering. It may be in some cases too broad. We need to do a little work on it. There are a couple of opportunities, I would almost call them holes, but they are not, they are opportunities to get more specialty components to our business that are higher-margin and more differentiated. But we don't have any place where we are really sure of the overall offering customers expect. We're not out-positioned by the competition on that front. We have the full array, and that also includes the services. So it's us, we've got to execute, we have to do our jobs better. We have everything we need, now we're providing new tools to the sales force, we need to give them a little time to work with those, a different strategy around the sales force and some different tactics and tools to deploy.

[Allison Poliniak:]

Great. And then just turning to oil and gas, one of the distributors got supplies to energy, noted a more positive tone in looking at growth for 2017 at this point. How should we think about that with you guys? You've taken a lot of costs out. Are you trying to de-emphasize that end market or just participate with a lower cost basis going forward?

[Stephen D. Newlin:]

So we're not going to de-emphasize the market but we are going to play in a little different way. There are places where we've participated in business that just didn't make any sense for us. They might have made sense for the customer but they didn't make any sense for us. And we are not going to play in that sandbox. So, we're staying in the marketplace, we'll always be in that marketplace, but we're going to be selective and thoughtful about where we play and where we can get credit for the value that we add.

[Allison Poliniak:]

Great, that's helpful. Thank you.

[Operator:]

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

[Andrew Buscaglia:]

So could you talk a little bit about, you talked about, on your slides you say your pricing could tick-up a little bit sequentially, can you talk about pricing in the U.S. and what your conversations are like with your suppliers? One of your competitors talked about how they're trying to produce to such high in the increased prices but it hasn't been happening, although that was a little while ago. So, can you just talk about the recent update there?

[Carl J. Lukach:]

Sure, Andrew. It's Carl. The year-on-year pricing is down. You saw that in our numbers. But the second point is that sequentially, and it started maybe the end of August, September for sure, we started seeing early signs of success in our ability to get pricing going. Certainly the suppliers are all eager to get pricing going through. Some of the basic products where we saw that sequential price increase, cost, I think there's been a lot written about that, IPA is sequentially better, propylene glycol, even HCL a little bit up sequentially, which you know is down 40%-plus year-on-year. Ethylene glycol, methanol ticking up a little bit. But you're seeing I think in our numbers the difference between oil prices and the low 40s in the summer season to now where they are in the higher 40s, and some of that is coming through the more price sensitive products that are tied to oil. So that's really what's going on. A handful of those products caused the year-on-year variance. The majority of our products are less down in price and we're trying to be a little smart as well on our sales force execution around price. So, that's the color on pricing.

[Andrew Buscaglia:]

And do you think that will continue into 2017 or is this it's something more short-term?

[Stephen D. Newlin:]

This is Steve. It's hard to say, but I would say this. If oil prices don't decline, I would expect it to continue As long as we don't have any major downturns in industrial production that would reduce supply tightness and demand, I think that we're beginning to see some chemical price inflation, which is good for us. But it's really, I'll caution you, it's very early and it's not something we're counting on. We're planning, trying to run our Company with plans around sort of the steady-state, not getting help from outside and just executing on our own to grow, and if we're fortunate enough to be helped and aided by some external factors, that's incremental to us. So, yes, we're hoping but we're not planning.

[Andrew Buscaglia:]

Okay, makes sense. And then just one last one, you talked about potential efficiency improvements in your supply chain that could help you guys longer-term, what exactly, specifically what are some of those efficiencies that you could improve on?

[Stephen D. Newlin:]

So I would say, first of all being more innovative and clever in using technology to facilitate a lot of work that's extremely manual right now. It's kind of surprising where we are today with some of the processes in a logistics business and needing to make some modest investments, not that big a dough we're talking about here but some modest investments that allow us to understand where our raws are, understand the packages that we're repackaging, get them out to the customer, and then really starting at the front-end of that is how we take and process those orders, reducing our transaction costs. I mean we don't share our transaction costs publicly but they are well above what I believe is possible in this space and what benchmarking would suggest we have ability to get to. So, that's one side of things. The logistics of our fleet, we made a decision, really a lot of this was driven around the oil and gas explosion in opportunity, explosive opportunity in 2014, and we made the decision because we were short with trucks to in-source a lot of our logistics. And so, two-thirds of our delivery is handled by our own truck lines. I just don't know that we can be as efficient as someone who does this for a living all the time, and until we can prove this to ourselves that we can be as efficient, we're going to be trying to understand what options exist, and there are many. I was at one time in another company that had a distribution business that had 100% outsourcing and maintained great delivery schedules and performance, just as we do. We're using Oracle Transportation to track our trucks and look at our efficiency of those right now, and we're going to find out can we do this inside as well as someone else or are we better off outsourcing. So those are just a few handful of examples. I hope that helps answer your questions.

[Andrew Buscaglia:]

Yes, very helpful. Thank you.

[Stephen D. Newlin:]

I think we might have time for one more.

[Operator:]

Your next question comes from the line of [Karen Lau] [ph] from Scotia Bank. Your line is open.

[Unidentified Analyst:]

So if I look at the complexion of the year-over-year EBITDA performance this year, a lot of the growth is driven by Europe, and I realize there is a passing of the baton going on given the turnaround plan for the U.S., but wanted to touch on Europe a little bit. You mentioned that the cost savings pretty much anniversary in fourth quarter, but is there more that you can do in the cost structure of that business, because if you look at the EBITDA margin, it's still a little bit below your largest peer, or should we expect going forward that business is just going to grow more in line with underlying market trend with not much from like self-help, cost savings, things like that?

[Carl J. Lukach:]

I think the later there, Karen, I think that your second part, you had it right that the primary driver for the step-up and growth in EBITDA in Europe in the quarter was our cost comparison to the prior year reflecting our restructuring program there. And we're at 7%, I mean we've jumped the margins there, more than doubled in the last two years as a result of that program. So I think that what you said [indiscernible] the later comparison there that more normalized the market driven growth from here, and the economy there is not necessarily gangbusters at the moment.

[Stephen D. Newlin:]

Let me just [indiscernible] from oil and gas, no, we haven't quantified that specifically, but it's declining each quarter, it was mid-teens in the first quarter, it was double-digit in the second quarter, it was a little more than mid-single digit in the third quarter, and then we'll probably have that same headwind in the fourth quarter. So, if you add those up, you kind of get a sense for the magnitude.

[Unidentified Analyst:]

Got it. And then last question, Steve, is it fair to characterize that the near term results of the U.S. turnaround is more top line driven as opposed to cost-driven, which kind of was the case for EMEA?

[Stephen D. Newlin:]

So I would say it's more a margin expansion driven, driven by better discipline in how we – let me put it this way, it is not cost driven and we are going to make some modest investments that will help us grow, and I think I mentioned the Head of Marketing that we are looking for. That's an incremental position. It's all manageable, we're going to fund all this through our growth and through our margin expansion, but we're not – you always in business have opportunities to reduce cost but it's a very finite and it's often a non-reoccurring event. If you want to grow in business year in and year out, you have to go get new customers and you have to drive profitability growth, and that's a formula that has always worked for me and it's going to work here again. So, I think that's what I would look at is, less about the cost and more about the growth opportunity. So anyway, with that I think that we're out of time here. We have a group of people that we need to talk to, all of our employees around the globe, and I look forward to that. We appreciate you joining our call. David?

[David Lim:]

Thanks everyone for joining, and if you have any questions, as always please feel free to reach out to myself or to [Kenny Wayne] [ph] here at Univar. Thanks again for your interest.

[Operator:]

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