Univar Solutions Inc.
Q4 2016 Earnings Call Transcript

Published: 22 Feb 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Univar Fourth Quarter 2016 Earnings Conference Call. My name is Sherin, 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. [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 fourth quarter 2016 conference call and webcast. Joining our call 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 and year ended December 31, 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 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.

[Stephen D. Newlin:]

Thank you, David, and welcome to Univar's fourth quarter earnings call. We appreciate your interest in Univar. I'll start this call with some remarks on our fourth quarter performance and the market conditions, and then discuss our actions to drive growth through commercial greatness and operational excellence. I’m very pleased to report that after six consecutive quarters of year-over-year adjusted EBITDA decline, we’ve achieved our first quarter of year-over-year growth. We reported adjusted EBITDA of $135 million, which is an increase of 4% over last year, and we increased margins in all of our segments. We posted double-digit adjusted EBITDA growth outside the U.S with strong performances in Canada, Europe, and Latin America. In the U.S., we’re cautiously optimistic that we’re beginning to see some early signs of execution gains. You know I normally wouldn’t get excited about 4% growth, but this is quite a reversal for us, and I believe it's an inflection point. As we built momentum to become a strong and reliable growth Company. We generated strong free cash flow during the quarter and reduced our net debt for the full-year by $320 million, exiting the year at 4.6x net debt to adjusted EBITDA. That’s an improvement from 4.9x a year-ago. While we’re encouraged by our results, it's still early and much work remains before we see consistent double-digit profitability growth. Overall, market conditions remain sluggish from a volume perspective, but we’re seeing signs of optimism and confidence from our customers and suppliers, particularly in the U.S., and chemical price inflation is well underway. We’ve a number of key building blocks from which to develop a strong foundation for growth. We are the number one chemical distributor in North America and number two in Europe with tremendous global scale that can be leveraged to provide added value to our supplier partners and our customers. We’ve the broadest product and service offerings in the chemical distribution industry. We’ve supplier relationships that span decades and carried strong renowned brands. We give our supplier partners the opportunity to capture more growth for their products by accessing markets and customers they don't reach on their own. Our short order lead times and on-time delivery rates are among the industry's best. We're in an industry where commercial fundamentals present the opportunity to deliver superior earnings growth. We have opportunities to lower unit transaction costs through operational excellence and digitization, as well as e-commerce and consolidation opportunities. We have a superb record on safety, finishing the year with the global PCI, our total case incident rate of 0.69, which is a value differentiator for us with suppliers and our customers. And we’ve wonderfully dedicated employees at Univar and a high-energy leadership team with a strong commitment and work ethic. So this lets up to a strong base from which we can build competitive advantage, increase our profitability, and increase our share in growing market. We're committed to driving growth as the top priority and laser focused on our execution to do so. Let me talk about our markets a bit and some of the many actions we’re taking to drive growth. We’ve a small share of an addressable market that today is over $100 billion and that number is growing every year. In order to capture more of that market, we're changing our culture and transforming Univar to improve our execution and drive commercial greatness and operational excellence. This will benefit our customers and supplier partners and encourage them to do more business with us. During the past two quarters, we’ve taken steps to improve our sales force execution. We implemented new controls and processes to drive accountability in rigor within our sales management and reset expectations for profitability. We held our first ever North American sales leadership conference last fall, and during the third and fourth quarters invested in sales training for our commercial organization to move to a value-based selling approach. On January 1, we redefined our sales incentive plan in the U.S., the reward performance that drives profitable growth and aligns our sellers with our growth objectives. We're addressing some very unhealthy business arrangements that consume excessive resources and limit our ability to pursue attractive profitable business and create value for all constituents. We're investing in sales force talent, including hiring and training and changing the mindset and expectations of our organization to drive sustainable profitable growth. We really create a lot of value in the supply chain for our customers and supplier partners, and by moving to a value-based selling approach we provide our customers the help they need and the products, services, and dedication they are looking for. When we demonstrate to our customers the value we create for them, we not only win in the short-term, we forge partnerships that will produce outsized returns for Univar in the future. Our customers are already beginning to take notice of our changes. While we're encouraged by what we're seeing so far, our sales force productivity is not nearly reached its full potential. We're upgrading our capabilities through training and have open positions we need to fill. As we reset expectations and improve our skills, we will sell more new business and lose less, driving value in growth for our customers and supplier partners, as well as our shareholders. We can deepen our supplier partner relationships to earn more new product authorizations, which presents tremendous upside for us. Sales force execution is clearly the biggest lever we have. The good news is our supplier partners have already noticed the change at Univar, but we still have a long way to go. We're working to build a culture where discipline and rigor are way of life and this is the basis for strong execution. We're instilling discipline on our approach to doing business, making sure we are well prepared to understand our customers and anticipate their needs. Our employees are responding and we're starting to see signs of improvement in our performance. In North America, we compete in a $30 billion plus market with more than 80% of that market enhance of our competitors. Our sales force sees this as a golden opportunity to win new profitable business at a much faster pace. We're starting to become more holistic and strategic in how we evaluate the attractiveness of specific market opportunities as well as how we approach them. On February 1. under David Jukes leadership, we launched our new U.S commercial organization structure, organized to win which better reflects our end market opportunities and the way our customers and supplier partners operate. Our U.S commercial team has structured along 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. Our focused industries team provides expertise by industry vertical, including coatings and adhesives, food ingredients, personal care, pharmaceuticals, and energy. This will help us better diagnose customer needs and prioritize end markets so that we can deploy our resources to the highest value growth opportunities. Local chemical distribution will focus on customers within a 200 mile radius of key sites, with local knowledge, a competitive cost structure, and the pace in responsiveness to better compete with local and regional competitors, bulk chemical distribution will combine the deep single product value chain knowledge with efficient and economical delivery of high-volume commodity chemicals. In our services business, we will continue to provide complete storage and delivery systems, as well as waste management services that enhance customer productivity and safety. We expect to improve our mix and 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. And parallel with organize to win, we’re driving operational excellence by redesigning our supply chain to better fit the needs of our different lines of business. Our new organization will allow us to serve our customers and suppliers in a unique way by bringing the right expertise in a tailored supply chain to meet their needs. We're also undertaking a comprehensive effort to improve our supply chain and go from good to great. We believe we can improve the efficiency and the 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 continue to reevaluate our network on an ongoing basis and make sure that we’ve the right footprint and the right products in the right locations across all our businesses. Finally, we’ve many opportunities to simplify, automate, and lean out processes. We're implementing digitization projects to simplify and lower our transaction costs, reduce errors and improve our customer experience. For example, in the U.S., we currently have an order entry process which can be frustrating and disruptive to our customers and create unnecessary costs for us. We can deploy technology tools to streamline this process, reduce rework and cost and improve the customer experience, and that's what we're doing. We're executing on our growth strategy by building commercial greatness, driving operational excellence, and improving our balance sheet, while pursuing scalable acquisitions. We see many opportunities to make accretive acquisitions, but we will be strategic, selective, and disciplined in our process, seizing opportunities that will make Univar better and can be leveraged across our platform. We're focused on sustainable value creation and making investments and decisions that last longer than any CEO. With that backdrop, I'll now turn the call over to our CFO, Carl Lukach, who will walk you through our fourth quarter results. Carl?

[Carl J. Lukach:]

Thank you, Steve, and thanks everyone for joining. I will begin on Slide 3. Let me first address our earnings per share results. Today we reported a $0.43 GAAP EPS loss for the fourth quarter. As we highlighted for you last quarter, our fourth quarter GAAP results were impacted by a $0.35 per share non-cash pension mark to market charge, largely due to a decline in the discount rate used to estimate the net present value of our three frozen defined-benefit plan obligations. We also incurred a $0.35 per share charge for the non-cash revaluation of deferred tax assets, resulting from a December 7, 2016 change in U.S tax law. Excluding the impact of these two non-cash charges, fourth quarter earnings were $0.27 per share. For the full-year 2016, we reported a GAAP EPS loss of $0.50 a share. This includes the two non-cash charges in the fourth quarter and the $0.63 per share impairment charge we took in the third quarter associated with our upstream oil and gas business. Excluding the impact of these non-cash charges, our full-year earnings per share were $0.83. Adjusted EBITDA in the fourth quarter increased $5 million or 4% from $130 million in 2015 to $135 million. Adjusted EBITDA increased $10 million outside the U.S., but was partially offset by a $5 million decline in the U.S. Despite the decline in the U.S., we are seeing early signs of progress and increased profitability from the actions we have underway. While modest, I’m pleased to report that our USA delivered gross profit increased 2%, the first quarter of year-over-year improvement after six quarters of declines. That's gross profit less delivery expenses. Our cash flow for the year and for the fourth quarter was robust, reflecting net working capital efficiency gains and lower cash outflows for pension, taxes and interest. Adjusted operating cash flow was 7% of sales for the year and 12% of sales in the fourth quarter. We calculate that as adjusted EBITDA, less change in net working capital, less CapEx divided by sales. Turning now to our consolidated results on Slide 4. Fourth quarter net sales were down 8%, 4% from lower volumes, and 5% from lower average selling prices, partially offset by a 1% benefit from acquisitions. Of the 4% global volume decrease in the quarter, about 1.5% can be attributed to one less bill day versus last year with the rest largely due to lower volumes in the U.S and Latin America oil and gas markets. Average selling prices globally were 5% lower than last year, reflecting a significant drop in prices for a handful of bulk commodity chemicals in our portfolio. Our gross profit dollars declined $7 million or 2% from last year, as a result of lower volumes and lower average selling prices. However, our gross profit percentage increased 150 basis points to 22.8%. Adjusted EBITDA margins increased 80 basis points to 7.4%. Productivity gains and FX translation help keep our warehouse selling and administrative expenses flat with the prior year. Let me take you through each of our segments beginning with the USA on Slide 5. In our USA segment, adjusted EBITDA of $78 million declined $4.4 million or 5%, primarily due to lower volume and lower average selling prices. Volumes declined 6% due to one less billing day in the quarter and a 26% decline in our upstream oil and gas business. USA volumes excluding oil and gas and adjusted for the one less bill day declined 1%. Average selling price in the quarter was down 5% impacted by larger decreases in several commodity products. However, we saw progress with our delivered gross profit dollars, reflecting favorable product and market mix, lower delivery costs, and early gains from our margin management efforts. Our U.S centric service businesses grew revenues 10% in the quarter, reflecting the acquisitions of Weavertown and Bodine. Excluding acquisitions, organic top line growth was 3%. Delivered gross profit dollars increased 20% in the quarter driven largely by organic growth at ChemPoint and acquisitions. In aggregate, our three service businesses comprised 13% of our U.S sales in the quarter versus a 11% last year, showing solid advancement. USA EBITDA margin increased 30 basis points to 7.2%. Let’s move then to Canada on Slide 6. Our Canadian segment had a strong finish to the year. The end of a strong ag season along with favorable product mix and margin management efforts offset the impact of soft industrial demand and weakness in Western Canada energy markets. While sales were down 6% on lower average selling prices, our gross profit margin increased to 150 basis points to 22.8% as a result of a favorable change in product and market mix and the benefit of acquisitions. Industrial demand in Canada remained sluggish in the fourth quarter as it has all year. We are pursuing mix enrichment initiatives, focusing on personal care, pharmaceuticals, and food ingredients and are starting to see signs that a bottom may have been reached in our Western Canada energy business. We continue to see upside from productivity initiatives in Canada with a 7% decline in delivery and operating costs. Adjusted EBITDA grew 10% and adjusted EBITDA margins increased to 150 basis points to 10.2%, driven by lower delivery and operating expenses. Moving then to Slide 7, and the results in Europe, Middle East, and Africa. We had strong 19% growth in adjusted EBITDA, despite overall stagnant demand from industrial markets and foreign currency translation headwinds, as we continue to realize the benefits of lower operating costs from our 2015 restructuring actions. Sales declined 2%, largely due to FX headwinds of 4%. Volumes increased 1.4% and average selling price increased one half of 1% on a currency neutral basis. Our gross margin increased 40 basis points to 23.3% reflecting our mix enrichment strategy and the facility shutdowns we completed last year. Gross profit dollars declined one half of 1%, but increased 3% on a currency neutral basis as we saw gains for the quarter in the pharmaceutical, personal care, food and case end markets, all key Univar focus areas. Our EMEA adjusted EBITDA margin increased 130 basis points to 7.3% due to gross margin improvements, 6% lower delivery expenses, and 8% lower operating expenses. Moving then to Slide 8, and our Rest of the World segment, of which approximately 85% of our revenues are from Brazil and Mexico, sales declined 10% or 6% on a currency neutral basis, reflecting lower demand in Mexico from oil and gas and overall weak Brazilian industrial demand. However, gross profit dollars were flat with last year despite the lower sales, reflecting favorable product and market mix and margin enhancement actions. Adjusted EBITDA of $8 million, increased $4 million due to a focused effort to reduce costs in light of the weak market demand, including lower operating costs in our modest Asia-Pacific unit, lower operating costs in Mexico and lower delivery costs. Our three segments outside the U.S in aggregate grew adjusted EBITDA in the quarter 21% on a reported basis and 24% on a currency neutral basis. This performance was largely driven by gross margin improvement and lower delivery and operating costs. Slide 9 provides an overview of our cash flow in the fourth quarter. Seasonal working capital release and working capital efficiency gains generated a $106 million cash inflow in the fourth quarter and a $124 million cash inflow for the full-year. For 2017, we expect to rebuild working capital and have included cash flow guidance in our appendix. Our CapEx was $90 million for the full-year, down 38% as planned. For 2017, we expect CapEx to be slightly higher at $110 million as we reinvest our cash flow in specific projects for growth, cost savings, and to advance our digitization goals. Cash taxes of $4 million in the quarter were in line with last year. For the full-year, cash taxes were less than $1 million as we benefited from tax refund and utilizing tax loss carryforwards. We expect our cash taxes in 2017 to remain low at less than $25 million. Our effective tax rate for the quarter on a GAAP basis was impacted by the non-cash pension mark to market adjustment and the non-cash deferred tax revaluation. Excluding the impact of these two charges, our effective tax rate for the quarter was a benefit of 6%.For the full-year, our effective tax rate was 8% when you exclude the impact of the third and fourth quarter non-cash charges. For 2017, we expect our GAAP effective tax rate to be in a range of 20% to 25%, excluding the impact of any new tax legislation. With regard to uses of cash, our priorities continue to be

[Stephen D. Newlin:]

Thanks, Carl. Let me conclude it by sharing with you what we see in our future. Our absolute priority is to drive growth, and do so in a manner that is reproducible and lasting. We’ve a truly exciting and unique opportunity here at Univar to grow the profitability and size of our Company. As you know, we have three powerful drivers for growth working in our favor. First, the distributed chemicals market is a growing market and we expect it to grow even faster. This gives us ample opportunity to continue to invest in our customer and supplier partner value propositions 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, we capture more new business, we will increase our market share. And third, we are absolutely laser focused on execution and Univar's margin profitability are rising by focusing on better sales force execution, improving our mix by selling more specialties, pruning unprofitable business, developing smarter and strategic marketing and reducing transaction costs, we will capture more the value we create for our customers and supplier partners and generate superior returns for our shareholders. In order to make the most of these drivers, in the U.S we've adjusted our sales incentive structure, we’re investing in training and hiring, changing expectations, and instilling rigor and discipline across every task and function in the organization. We are investing in marketing resources, better guide us to more attractive organic growth opportunities. We're investing in digital tools that will accelerate growth through more e-commerce and lower our transaction costs. We're organizing to win in the U.S and continue to grow double digits in EMEA, Canada, and Latin America. We are taking actions to optimize our asset footprint and cost structure and improve our return on capital and we’re strengthening our position and have fortified our management team. During the quarter, we successfully recruited Eric Foster, as our new CIO to drive e-commerce and technology strategy, and we make great progress on our search for a Chief Marketing Officer. We expect to announce that very shortly. Our growth imperatives will be accomplished within our current economic framework and 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. While we have much work to do, we expect adjusted EBITDA growth to build throughout the year and hope to approach our target for double-digit adjusted EBITDA growth by the end of 2017. No culture change with some of the hardest work in organization can take on and that’s why it authors such great rewards for all associated with it. It takes time, experience and thought, and while we have a solid grasp with the changes we need to make, there are normally some bumps along the way. We're 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 foundation that delivers consistent sustainable earnings growth, and we’re doing so with an extreme sense of urgency. We have a tremendous opportunity to create significant value for our customers, supplier partners, employees, and shareholders and intend with full force to capture that opportunity. I want to thank you for your attention. And with that, we will open it up for questions. Thank you. [Operator Instructions] Your first question comes from Allison Poliniak from Wells Fargo. Your line is open.

[Allison Poliniak:]

Hi, guys. Good morning.

[Stephen D. Newlin:]

Good morning.

[Carl J. Lukach:]

Good morning.

[Allison Poliniak:]

In the U.S., you’ve talked about a 1% sales to revenue decline, exit -- adjusting for the day in ex oil and gas. You’ve also talked about addressing some of these unhealthy business arrangement. Was there a headwind in the quarter, and if so, could you help to quantify that a little bit?

[Carl J. Lukach:]

Good morning, Allison. Thanks for that. Yes, I will start with oil and gas, I mean, the volumes were still down. It's at a much lower level, our sales in the quarter are nearly 50% below where they were in last year's fourth quarter in upstream price and volume. So that -- to put that to the side, the margin management continues to be a high focus area in the U.S and we have made some advances there as you can see in our margin. So I would say those are probably the two headwinds around sales.

[Allison Poliniak:]

Okay. And then on accelerating EBITDA growth in the back half of '17, are you assuming a lift in the volume side or is this really purely -- with stuff that’s within your control at this point? Are you guys confident around that acceleration?

[Stephen D. Newlin:]

Yes, Allison. Its Steve. I think we’re very being very cautious about talking volumes right now, because I don't want that to get in the way of us making some important decisions about customer relationships. So we're not expecting a bunch of lift from the macroeconomic environment, we’re looking at steady-state on that front if we get some help there so much the better. But really what this is about is, is giving a little more, giving some time for these actions we’ve been taking to pay off. And for example, we still have open positions in sales and there's a time to productivity from when we hire new, until they begin to understand exactly where their territory account prospects are to get out and make the calls, develop relationships. The good news is in our business, it's a pretty short sales cycle, probably in the neighborhood of 9 to 12 months. So that means time to productivity is relatively fast, but there's still a period of time from the person -- from the day that person gets there, they’re about [ph] to go call and start bringing in new business. So some of that will start paying off in the latter part of the year. I think the same thing is true on some of the productivity initiatives and some of the digitization plans that while they’re underway, they’re not going to benefit us until later in this year.

[Allison Poliniak:]

Great. Thank you.

[Operator:]

Your next question comes from Robert Koort from Goldman Sachs. Your line is open.

[Robert Koort:]

Thank you, guys. Good morning.

[Stephen D. Newlin:]

Hi, Bob.

[Robert Koort:]

You had -- two questions. Firstly, you mentioned and it seems to be pretty pervasive that there's a feeling that things could be getting better. You give us some hard anecdotes of what you’ve seen, I don’t know if its daily sales trend so far in 2017, but where are you actually seeing explicit improvement versus maybe just some better attitude to better feelings for your customer base?

[Stephen D. Newlin:]

So, we do look at our gross profit per unit whatever that unit is, whether it's dollars or whether it's pounds whatever, and that is growing for us. So that's a sign that some of the pricing actions we’re taking are beginning to pay off and that pricing is such a key driver to improve our profitability. We create all this value, but we haven't consistently captured our fair share of that value that we create. So we worked hard on this. David Jukes and his team, in particular, have identified tactical and strategic levers that we're addressing and will address them through 2017 and into '18 in an effort to bring pricing in line with the value that’s delivered to those customers. And we’re seeing the early signs of that coming in, but we have a lot of work to do yet is to increase the amount of new business that we're gaining and that has more to do with skill sets and the training and the expectations of the sales force. And so we've invested in those areas, they haven't paid off yet, but they will. We are getting more activity and the new business generally has a lag between the sales call activity and when we actually land the accounts. And lastly, as you’re talking about, with kind of anecdotes we have, I’m getting input from customers and suppliers, that’s very positive. I just received an email last week from a customer talking -- really it couldn't have been a better testimony of what we're trying to do. Talking about our sales rep and how valuable they are to them and how they do so much more than just make sure that the chemicals get there on time. So those are the kinds of indicators, they give me a lot of optimism for the future.

[Robert Koort:]

And a follow-up, it seems your pricing dynamic in the U.S was little more punishing than in Europe, is that just a function of having more bulk chemical sales in the U.S., or why would we’ve seen such variance in the pricing development?

[Carl J. Lukach:]

Yes, Bob, its Carl. I jumped on the oil and gas point again. I mean, with some of the largest decreases in prices are focused on our upstream oil and gas area, hydrochloric to name one, but also methanol and a few others. That -- outside of oil and gas, the industrial market is also kind of exacerbate the price decline in the U.S versus the other segments. This is a …

[Robert Koort:]

Great. Thank you so much.

[Carl J. Lukach:]

… [multiple speakers] and as Steve corrected, we got some really good discipline around this Bob, and we’re not perfect by any means yet, but we think this is self-correcting.

[Operator:]

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

[Andrew Buscaglia:]

Hey, guys. Thanks for taking my question. Can you talk a little bit about -- you talked about the pricing a little bit, I know last year you said you’re trying to see if there was any volume pick up ahead of potential price increases? Are you seeing that in any of the region, any pre-buying or you would think with inflation here, we should be able to get some pricing at some point?

[Stephen D. Newlin:]

You know, Andrew, it's a great question and we really are seeing that. We're seeing in pretty steady-state. I think that the very early signs of inflation in chemical products are occurring and I'm not sure that the customers have figured out to get out front of that just yet. We're not seeing evidence of taking on added inventory or premature orders etcetera, which is just fine with us, because those things give you a little hiccup for a short period of time and of course and -- we have to deplete that inventory. But we're not seeing any evidence that they would suggest that.

[Andrew Buscaglia:]

Okay. And then, in your guidance -- we’re assuming there's no bolt-on M&A in that, correct?

[Carl J. Lukach:]

Yes, we do not include M&A.

[Stephen D. Newlin:]

No M&A in the guidance.

[Andrew Buscaglia:]

Okay. How about -- is there any update there on activity? Are you guys looking at any deals eminent or is there anything -- any updated thoughts on that?

[Stephen D. Newlin:]

We have a -- obviously we’ve to be really careful about what we say with regard to M&A, because believe it or not some other people might be listening to this call, but we're pretty active in looking at the right kind of acquisitions. I would say our activity is as high as its been in some time, we're just being more selective than we’ve been in the past and we’re looking for opportunities that we find are leverageable. So rather than just be simply a bolt on and we get a little bit of synergy and we buy at a low multiple and squeeze it a little bit more out of it, we’re looking at acquisitions that have some -- that can fill some holes for us, that have some niche markets that we're trying to enter and we could enter faster, that we could take around the country and even around the globe in terms of technology as well as knowledge of an industry. So, I think it's -- we're trying to be more patient and prudent in the process, but it's not for lack of effort and our line is in the water that's for sure.

[Andrew Buscaglia:]

So these are acquisitions that potentially could get you to maybe some adjacent product lines that you’re not currently selling right now?

[Stephen D. Newlin:]

It could be adjacent products perhaps, but also deeper penetration into the more attractive markets that we are pursuing.

[Andrew Buscaglia:]

Okay. All right. Got it. Thanks, guys.

[Stephen D. Newlin:]

Yup.

[Carl J. Lukach:]

Thank you, Andrew.

[Operator:]

Next question comes from Laurence Alexander from Jefferies. Your line is open.

[Laurence Alexander:]

Good morning. Two quick ones. I guess, first of all, can you talk through what you expect in terms of non-cash items in 2017, so interest, pension, restructuring costs, ah else that we should think about for the cash flow bridge? And secondly, for the four growth areas that you characterize, can you give us some feel for what percentage of sales they represent in North America, and how much of a deride [ph] do you see the underperformance in those selling strategies having on cash flow to sales?

[Stephen D. Newlin:]

Let me take the first one. Laurence, good morning. On the bridge, the non-cash items, I wish we could forecast mark to market pension accounting. For the fourth quarter of '17 we have not -- its not in our guidance and it will dependent on interest rates mostly, so that that's one. The modest amount of restructuring -- you see it lower in '16, it will be lower again in '17 is our expectation, but not zero, low single digits there is the goal. We've got -- I think that's pretty much it. That’s pretty much it. I think if you rack it up, it might be mild double digits, but down from the prior year.

[Laurence Alexander:]

Okay.

[Stephen D. Newlin:]

And Laurence could you repeat the second part of your question please? I’m not sure I tracked it exactly.

[Laurence Alexander:]

So you sketched four different selling strategies or focus groups in North America. Could you clarify -- can you give some sense for what -- how much they represent a sales and to the extent that there's been excess churn in the customer base because of those strategy is not being or needing to be realigned, how much of a drive has that been on cash flow to sales?

[Stephen D. Newlin:]

So we haven't really spun out publicly the breakdown of these areas, four lines of business. We got -- the bulk chemical distribution and that’s a business -- its working well for us and we have to -- we know what it is, we know that’s our highest margin business, but it's a really good business for us. I think what is new is that we broken out the local chemical distribution and what I really love about what David Jukes has done here is this is a head-to-head opportunity to tackle the locals and regionals who by the way have the biggest share of the market out there. So it gives us responsiveness, it gives us speed, it gives us a limited -- logistical circle around the concentrated site and its going to allow us to be more responsive and compete a lot better with the locals and regionals. I think where the real -- and all these are good opportunities, but the real opportunity I think is in our focus industries group, because that is a more specialized arena. We’re now looking into very specific vertical markets like food ingredients, like personal care, our case business, pharmaceuticals, energy, and really start to better understand those markets and the behaviors the customers want today and tomorrow and then fill out our product line and work on specifically with dedicated sellers those applications. And I think you'll see margin expansion probably the most prominent in that business, and of course you know about our service businesses and we’ve continued to work on nurturing that business. It's a nice business, a good margin business, a very -- a much more predictable steady stream business. But we haven't broken down publicly the elements of all these.

[Laurence Alexander:]

Thank you.

[Stephen D. Newlin:]

Yup.

[Operator:]

Your next question comes from Jim Sheehan from SunTrust Robinson. Your line is open.

[James Sheehan:]

Good morning. Could you discuss the proposal for a border tax adjustment? Would that be positive or negative for Univar?

[Carl J. Lukach:]

Hey, Jim. Good morning. Thanks for that question. Tax reform in the USA, well I think that the key point to understand is that the vast majority of our business in the U.S is of chemicals made in the U.S. We have a relative very small percentage of our sales, our products that are imported, they’re concentrated in a few products and even smaller percentage of sales that are exported. So when you take those two facts into considered, it's not a zero effect, but if border adjustment went through it would be rather minor compared to the other topics being discussed with tax reform right now.

[James Sheehan:]

Terrific. And when you talk about the tone of business picking up and sentiment picking up, could you talk about what you're seeing in January and February that’s almost done here. Have you seen an inflection in those trends or is it more or less a continuation of what we saw maybe in December?

[Carl J. Lukach:]

It's still -- I would say in short, it's the latter, Jim. I mean, we’re seeing ASP, selling price increases in all the regions as Steve mentioned continuing into the year as planned as we’re working on, but -- so our cost of goods sold, those of you who follow the chemical producers know about chemical price increases that are more and more talked about. Our profitability per pound is rising through the actions of our commercial greatness initiative, but in terms of the volume demand, not yet. I mean, it's still more or less chugging along at exit levels from 2016.

[James Sheehan:]

Great. And in your 2017 outlook what would you say is the currency headwinds contained in your outlook?

[Carl J. Lukach:]

Good question. It's the -- the short answer is that it's a little over 2% of 2016 full-year EBITDA is what we think. Now what we think is we took the top 20 banks on January 3 and average their forecasts and the three relevant rates to us are the euro and the Canadian dollar and now more so the British pound, because of what’s happening there. When you look at those 20 banks average compared to '16 actual, you should get something like a little over 2% of full-year EBITDA last year.

[James Sheehan:]

Thanks a lot, Carl.

[Carl J. Lukach:]

Sure.

[Operator:]

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

[Karen Lau:]

Thanks. Good morning, everyone.

[Stephen D. Newlin:]

Good morning.

[Carl J. Lukach:]

Good morning, Karen.

[Karen Lau:]

To start with a quick housekeeping for Carl, the 500 -- sorry, the $50 million to $100 million of working capital drag for this year, is that more of a conservative phase [ph] holder or is it driven by fundamentally -- maybe expected increase in pricing and some restocking and are there any offset to that on the receivable and payable side?

[Carl J. Lukach:]

Well, I wouldn't want to label it one way or the other there, but let me give you the insights behind what’s happening in working capital. First of all, competitively we're in good shape here, our metrics compared to the best and all the productivity working capital metrics. It is a focus area for us. We harvested a lot of cash in the fourth quarter. We continue to focus on it and we think that we've got some opportunities to further improve our working capital. At the same time, our prime focus of our commercial excellence initiatives is to increase our win rate out in the marketplace. Success there will require investment in working capital and I would say what you're seeing in our guidance there reflects all of that together. So some productivity improvement plus some -- our goals around win rate and increase in market share.

[Karen Lau:]

Okay, got it. And then could you provide a quick update on the pricing in oil and gas? I think you were in renegotiations, pricing renegotiations with some of the customers. Any update on that? Are you now more likely to participate more meaningfully or just getting more benefit from the recovery on that business or are you still looking at maybe exiting some of that upstream business?

[Stephen D. Newlin:]

So -- yes, go ahead, Carl.

[Carl J. Lukach:]

Let me be clear, we’re not exiting the upstream oil and gas market for sure. We had learned a lot from the rise in demand from that space, that market space in 2013 and '14, and we will apply those learnings when the market recovers, which it will. I think that's really the headline, Steve.

[Stephen D. Newlin:]

Yes, and I would just say we are going to be more selective about applications and we're going to be involved in applications where we make a respectable living. And if we can't do that, it doesn't make a lot of sense for us to throw energy into, there are lots of other places to pursue opportunities for value creation. But we will be in this marketplace, we will just be niche into I think the better applications where we have some degree of differentiation.

[Carl J. Lukach:]

And Karen, these comments are really focused at U.S fracking.

[Stephen D. Newlin:]

Yes.

[Karen Lau:]

Yes.

[Carl J. Lukach:]

We have a very different energy business in Canada that’s doing quite well.

[Karen Lau:]

Got it. And then, so do you expect the U.S upstream business to grow in terms of GP or volume this year? Is it a growth contributor to [multiple speakers]?

[Carl J. Lukach:]

It's not in our plan to have any significant growth in that business this year.

[Karen Lau:]

Okay.

[Carl J. Lukach:]

We would love to have some -- may be some upside of things, develop and move faster, but we're not counting on things that we have such little control over.

[Karen Lau:]

Got it. Thank you.

[Carl J. Lukach:]

Karen.

[Operator:]

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

[Ian Bennett:]

Thanks. This is Ian Bennett on for Steve Byrne. EBITDA margins in Canada have been about 10% now for two consecutive quarters. Can you talk a little bit about any of the structural differences between Canada and other regions that prevent a similar level of margin? And then any best practices or strategies that similarly could be applied in other regions?

[Stephen D. Newlin:]

Well, let me start and Carl you can pile on, but basically we have a well run business up in Canada. Some of this is mix, but a lot of it is the discipline and rigor with which that team goes to market and they’re savvy, they’re experienced, they know what they're doing, they have -- really I think it's still some great business practices. I don't -- I see this as an opportunity for other parts of our Company to lift our performance to their level. I mean, they have some ag business, they have some energy business. And ag business of course can be very seasonal, but they’ve seem to manage through all that. I think we have a really strong team and I think it shows you what can happen when you got talent out there and you'd make good decisions about your business over a long period of time. Carl?

[Carl J. Lukach:]

I think that’s it. Its three -- really comprise of three -- almost independent businesses, the ag base covering most of the central country and a bit seasonal as you know, and the industrial East and then the energy business, which is on its rebound right now. So structural, I can't point to, I think its execution.

[Ian Bennett:]

Thanks. And then as a follow-up, you mentioned earlier that some of -- the sales force being excited about the 80% of the market in the U.S that Univar does not have as well as some streamlining of and optimization of the supply chain. Is the current infrastructure in the U.S warehouses and distribution -- is that too high or too low or about right or is that still being work through?

[Stephen D. Newlin:]

So we’re still working through that. I don't -- it's not too low I can tell you that. We're really well positioned. There may be some aspects where it’s a little high and we’re weaving through that with some outside help. But sort of going back to the way you frame the question, I mean, the sales force is becoming really energized. They’re -- we're paying attention to them, we’re recognizing them, we're giving them, we're nurturing them with a lot of training and we're making -- we're trying to make the job fun for them again. We are trying to reward them differently, but the standards are higher and not all, we will make it. And so the cream is rising to the top and there's a lot of excitement. That 80%, 85% of the market that we don't own that’s always been there, but what I think is different is how we're directing and leading and organizing the sales force to go after it, and go get it and how we’re rewarding them. I mean, they should make more money this year. They deliver, they’re going to make more money than they have in the past. They’re going to get more recognition they have in the past. So if the job is getting more challenging and tougher and with that comes a greater sense of rewards and fulfillment, and that's really what's changed.

[Ian Bennett:]

Thank you very much.

[Operator:]

[Operator Instructions] Your next question comes from Kevin McCarthy from Vertical Research. Your line is open.

[Matthew DeYoe:]

Good morning. This is actually Matt on for Kevin. Just wanted to ask you a question on margins. As we look over the past few years, how much compression do you think you saw from general deflation passing through your inventory, I think kind of as we see inflation move back through the system how much do you think you can expect to get back?

[Stephen D. Newlin:]

Well, I don’t have a backward look, Carl. I don’t know …

[Carl J. Lukach:]

That’s tough. I mean, the deflation was most visible in the first eight months of 2016, the compression in the margins. Second is that the remaining five months of the year we got -- we pulled out from that compression. In gross profit margins, I will say, Matt, less than a 100 basis points of gross profit margin.

[Stephen D. Newlin:]

I would just add to that, I think if your game is really on and you position your Company to deal with the environments, you shouldn't have the margin compression in deflation. I've seen it done before very successfully and that's our mantra and that's we're working to build our company around, so that we don't have margin compression under any circumstances.

[Matthew DeYoe:]

Okay. And one more, if I may, as you look at the 2017 guidance for mid single-digit EBITDA growth and just the various factors that contribute, where do you expect the most volatility to come from, and what is driving that range of outcomes?

[Stephen D. Newlin:]

Well, I think the one thing we really have to be on top of is the chemical price inflation, so that we don't get surprised and find out in a month or a quarter that we had our margin decline, because we didn't get the pricing out there fast enough. We need -- we’ve got some early warning systems, but it's not perfected yet to understand all of these cost going into our pricing model. So we're careful about that. I think we’re on it, but I can't promise you that we were perfect with it by any means. So that's the one thing I worry about right now is some inflation running so fast that we haven't positioned our self to capture it and I don't want to squeeze in a month or certainly in a quarter. Carl, do you have anything else [multiple speakers]?

[Carl J. Lukach:]

Just the minor, ag [indiscernible], but the big one is the chemical price inflation.

[Matthew DeYoe:]

Okay. All right. Thank you.

[Carl J. Lukach:]

Right.

[Operator:]

There are no further questions at this time. I will turn the call over to Mr. David Lim.

[David Lim:]

Great. Thank you for your continued interest in Univar. Before we conclude, I’d like to announce the date for our Investor Day. Based on investor feedback, it will be May 15, in New York City to lay out our intermediate and long-term financial targets and share with you our roadmap for success and growth. We will be sending out additional details on the event shortly. But in the meantime, if you have any questions, please feel free to reach out. Thank you and have a great day.

[Operator:]

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