Q3 2020 Univar Solutions Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to Univar solutions third quarter 2020 earnings call.
My name is Carol and I will be your host operator for this call.
Currently all participants are in listen only mode.
After the presentation, we will conduct a question and answer session.
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If at any time during the conference you need to reach an operator, Please press star followed by zero.
I will now turn the meeting over to your host for today's call Heather Kos, Vice President of Investor Relations Universe solutions. However, please go ahead.
Innovation grow and I am pleased to see progress on that mission reflected in our Q3 performance, which remained solid as we continue to adapt to these challenging times and deliver results.
Confident that it's all a serious about safety. This remains our highest priority for employees suppliers and customers and I'm pleased to report that all our facilities remain operational.
Key highlights from the quarter.
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We delivered solid earnings beyond the upper end of our expectations and a challenge environment.
Although sales with downloads to surprise, yeah, we were able to possibly mitigate the economic headwinds by 70, new customers practicing disciplined margin management and implementing cost reductions.
We continue to monitor changing customer demands as we operate in this new normality I'll speak more an overall trends in a moment.
We had strong liquidity $750 million and are on track to envy you within a $750 million to $800 million guidance.
Our next integration remains on track and we continue to make progress on a business systems migration.
Third quarter results and our outlook, then I will close to an update on next to integration and the streamline Twentytwenty two progress and highlight our key business strategies.
Thank you, David Hello, and good morning to all I.
Im pleased to share universe solutions strong financial results and update you on our business activities.
Constant currency net sales were down 15.6%.
During the quarter, we captured net cost synergies related to the next to integration of approximately $11 million for year to date total of $41 million versus a revised $45 million for all of 2020.
Q3, net income is $28.9 million or 17 cents per share compared to net income of $2.5 million in the prior year period.
The increase in net income was primarily due to the lower taxes and lower warehouse selling and administrative expenses, partially offset by lower gross profit.
Adjusted earnings per share for the quarter was 34 cents a share compared to 36 cents in the prior year period as lower adjusted EBITDA more than offset lower interest expense and lower taxes.
The environmental Sciences divestiture sales were down approximately 14% also reflecting the continued headwinds in energy.
In may up at a disproportionate benefit from co. Good related essential end markets in Q2, which tailed off but is otherwise seeing solid sequential trends.
Let Pam continued to benefit from growth across its range of end markets.
As I mentioned in each of our geographies, we saw favorable product mix contribute to a higher gross margin with a lower impact from the covance related essential end markets.
And cash use of other expenses and the timing of your in a cool is now at 80 million, which is 10 million lower of which $26 million has already occurred here to date as a hughes.
We continue to target at least $100 million cash available for that pay down by year end pre any divestment proceeds with liquidity to be in the range of $750 million to $800 million.
G. As 22 milestones through two three include the closing on the sale of our industrial spill, an emergency response business and.
Announcing the exiting of our Canadian agricultural distribution business, we expect to generate over 70 billion in cash mostly in 2021 as we undertake an orderly wind down of our working capital.
As of this week, we have an agreement for the sale of our Canadian Agriculture services business, which is expected to close in queue for although definitive terms aren't being announced at this time. It will be added to 100 million of cash available for that pay down and accretive to our leverage both of them.
We are increasing our as 23 charges to approximately 90 million versus the 50 million guidance, we gave last quarter the.
The change is principally due to goodwill and fixed asset impairments on the act services divestment and some additional charges related to act distribution exit.
Total cash portion related to the X three two charges. However has been reduced to approximately $10 million from $20 million. Most of this cash portion is included in our other cash use as noted for 2020.
These initiatives are integral to achieving net leverage of three times by year end 2021, and improving our margins.
Although we do not provide any specific 2021 EBITDA guidance at this time. Some key factors that we expect may impact are adjusted EBITDA and cash will for next year are as follows.
Given our breath and a range of strategies, our business will grow organically in line or better than the economy.
Sure again less amounts to be realized in Q4 2020.
I would like to further highlight expected strong net free cash flow conversion of a company of approximately 40% in 2021 as we complete the next you'll integration and execute on our S 22 plants.
Before I hand, it back to David I want to sincerely. Thank all 11000 of our employees as well as our many constituents outside the company for the solid commitments during this challenging environment.
David.
Thanks, Nick.
Activity at the local business level.
Even with the obstacles of COVID-19, we've maintained momentum and continue to see good progress and the leading indicators.
And the USA are average customer contacts remain the elevated levels of Q2. Despite this restrictions on face to face visits.
And I'm pleased to report that the trend started in the first half of the continuing to three cause we welcomed hundreds of new and returning customers and equally important of those new customers. We walk through the first half of the year.
Dissent purchased again in Q3.
It will expand the pullets authorizations from suppliers, such as Facebook in North America, Comstock, Refrigerants, Dalbec chemicals, Huntsman, Nova sides, and PBS Chlor alkali.
These partnerships along with the leading chemical and ingredient products. They bring our recognition of how our partners recognize the value of our end markets expertise and digital capabilities to support growth.
We continue to build and expand the robust portfolio of products and solution capabilities.
And as we look forward to putting the next integration process clearly in our rearview mirror, we developed a more externally focused customer centric approach to drive growth.
We believe the differentiated operating model, we deployed supported by an increased adoption of our digital tools will allow for both deeper customer intimacy and creates a cost productivity throughout the end markets we serve.
We continue to accelerate our omni channel approach better addressing current customer preferences.
We expanded our podcasts and customer webinars offerings from other technical capability and stimulate demand for certain chemicals ingredients in all regions, reaching over 1000 customers in the quarter.
Remark endpoint dotcom, our longstanding dedicated digital enabled sales channel continues to advance in a marketplace, where traditional sales methods a challenged.
Overall, our digital footprint continues to deliver results presenting another source of competitive advantage for us as customer search select source and self serve in growing numbers with EBITDA time of day or night they choose.
And as we operationalize the current customer centric focus I spoke of earlier, our recently launched whereas my stuff feature as received rave reviews from our customers.
Altogether, our digital foundation uncommitted Salesforce strategy is aimed to maximize the effectiveness and scaled our operations as well as making it easier for customers and suppliers that do business with us and deliver market share growth.
We're confident that we're investing in the right tools to streamline the supply chain in effect with customers and accelerate growth in step with consumers changing preferences, while always staying in tune with specific local needs of customers.
So before we come to your questions to summarize we.
We delivered solid financial results during these challenging times.
We're maintaining from controlled our working capital and other cash needs and expect to end the year with $750 million to $800 million of liquidity.
We maintained momentum in our next to integration program and are on track to achieve our $120 million of net synergies.
We delivered $10 million of cost reductions in the quarter against the greater than $40 million of additional cost savings. We identified this year half of which a year on year.
We're investing in furthering our digital advantage is becoming increasingly attractive to our customers.
Yes, 22 program is tracking very well towards delivering growth in revenue and 9% EBITDA margins three global and functional excellence.
We remain on track to deliver at least a $100 million in debt paydown from cash pre any proceeds from divestments.
We plan to progress with our portfolio management that design to lower our leverage to three times by year end Twentytwenty War and focus on strategies on our core business.
We continue to see the opportunity to capture new business as we target growth through sales force effectiveness and omni channel approach the digital capabilities to better serve customers.
By completing the next integration.
Yes business systems migration and that 22, and 2021, you will drive further focus on delivering operating utility and decisive action to enhance our competitiveness that will increase our operational and financial flexibility.
The company is positioned to capture greater value from anticipated market recovery and growth opportunities ahead, and we believe these collective efforts will provide greater shareholder value.
Thank you for your attention, please stay healthy and safe and with that we'll open it up to your questions.
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Our first question comes from Steve Byrne from Bank of America Securities.
Please go ahead.
Hi, Good morning, Nick This is actually look Walker on for Steve.
You touch points were up 75% year over year sales were obviously down in the quarter. So I wanted to ask how are you measuring the effectiveness of these touch points are you looking at kind of a win loss ratio and you feel you're gaining share from other suppliers.
Hi, good morning.
I think that the sales organization I think are in are in pretty good shape at the moment I'm very pleased with how they've adapted.
Changed I'm sales model and how they're adapting to the sales routines that we are we put in place for them. So I'm pretty pleased with how that organization is it going I never happy but I'm pleased.
I think what you have to be mindful off if you look at our topline is that are we have a headwind in our energy business, which will take some topline growth down, but if you look at the improvements in our mix improvements in our margins were actually winning business and winning share in that.
On core distribution business. So the quality of the business that we're winning in taking is a good business and it's more that more recall kind of business for chemical distribution company.
So I'm I'm overall, I'm pretty pleased with how things are shaping up.
Great and just one other one on next year's synergies during the quarter.
It looks like you got more next year synergy than maybe you had expected before but your full run rate of synergies through 2021 has remained the same at a 120. So when you look at three Q is this kind of just a pull forward of those synergies or do you think you potentially identified opportunities for people who are more consolidation.
In or anything like that.
Now I'm very focused on a 120 million dollar commitments.
And so we were able to pull some things forward into Q3 as we go through the systems migration program and just.
Our able to focus on a few things that we we couldn't have got to earlier on but now weve remained committed to 120 million commitment. However, we have Rs 22 program and clearly we see opportunity to add to optimize the business further and so our focus is also on the is also on that.
Yes. Thank you.
Our next question comes from Bob Koort from Goldman Sachs. Please go ahead.
Thank you good morning.
Only about EBITDA was I was struck a little bit.
In your personal guidance for next year about talking.
For organic growth to be aligned with the economic growth out there.
Yes, it seems a little bit out of line with the.
Surgeons are selling differentiated benefits tier suppliers and customers, especially focus.
The Salesforce tracks and why why not have greater ambition.
On your sales development going into next year.
Well I think we said that we grow at the rates or better.
That's how we see things you know, we do see the mix enrichment strategy.
Working we do CD.
Great to focus on those differentiated end markets I'm starting to work.
But clearly the economy is going to play a part in what we did but we believe we can grow at least it economy or better.
All right, maybe it's my semantics in line versus at least in line, but.
Nick Let me ask your question you did mention a headwind from.
Normalizing comps.
Compensation and some of the Covidien related travel reductions. This year can you dimensionalize that for us in the next year, how big of a deal.
Delta could that be.
Yep.
Thanks for the question and thanks for your note last night as well.
We are necessarily Dimensionalize here I think as you would expect in any recessionary period, you tend to pay less incentive comp and as you recover you have to absorb that incentive comp and any operating expense.
In your growth rate. So we're just trying to make that point so that people recognize that we will balance that as we target towards that 9% target.
Which would mean that you might see less increase in margin next year and then the proportional increase in 2022.
If I could sneak one last quick one you mentioned the inventory write downs in the Canadian.
AG business.
How big is that and why was that required work what product.
Thank you Yeah. I know you said is essentially we decided to pursue an orderly exit of that business. As you can see in the appendix, there's about $77 million of working capital out less than the Canadian business that we will liquidate orderly over the next couple of quarters.
Part of that is inventory, it's a small part of it less than a third of that inventory.
We just reserved are roughly $5 million in Q3 against that we don't expect any material further risk.
Against that are going into the next few quarters, but it was really just taking a reserve against some of that inventory. It's all good inventory that will sell through into the season next year.
Okay. Thanks, so much.
Our next question comes from Andrew.
From Exane. Please go ahead.
Hey, good morning, guys and the first question is on oil and gas and.
Dave I was wondering if you could give us a sense of how many do you know the decline there and you know I guess closest can't come to bounce being down one cents.
Are we talking about this in magnitude I know you have more upstream exclusions, so maybe that's even less than that.
How small how big is that business now when we think about the second half for instance, and that's the first question.
Good morning.
Our on time, so I mean, our oil and gas business last year in total our energy business last year in total was about 9% of our sales as we go through this year, it's about 6% of our sales.
Of that.
Probably.
Just a little over a third of that is upstream oil and gas and Thats harped on this year.
So you know it's been a significant headwind for us going into this year. We we said at the start of the year, we expect to see that a 20 million dollar headwind from from oil and gas is going to be at least than probably double it maybe a little more than doubling on but what I am pleased to say is that we are growing our business and others.
This is.
Improving the mix to to partially offset that whilst I said the rig counts is looking a little better for October you know honestly, we don't expect any pickup in that business going forward that is built into our thoughts and the business that we have these days in that sector is.
More specialized products.
So we feel it's a bit more robust and better margin business than than we would have traditionally had so I think I think we're.
I think we're at the bottom.
Thank you.
The second question was on the the Twentytwenty lung next sale and integration and so on one side, you're talking about cost 60 to 70 and on the other side relies on any cuts of 20 site, we usually see a beacon ratios constitute any seats at the beginning of an integration and that's at the end. So I'm just wondering.
To remind us whats in that 60 to 70 and.
Very good and some costs that are actually related also to the 22 program.
So so their own cost related to the 22 program you know it is uncertain in terms of the benefits from it I mean, the last part of the benefits don't come to begin to get Twentytwenty. Two is a big chunky chunky number that that comes from we can turn off the legacy I T systems. So until we can turn off the legacy IP systems. It now as long as the.
You'd have about 5% on the legacy IP systems are happy Kiaka environment of the up and up alive. So I can't shut that down until 2022 and thats when the big benefit or the big Chunky final benefit come through.
As you know we're wrong Theres a further incremental.
EBITDA pickup in 2022 in the last quarter, which is additive to that $25 million.
Got it thank you.
Our next question comes from Tyler Kenyon from Jefferies. Please go ahead.
Hey, guys standards will influence how are you.
Thank you Paul.
Provide color on I don't think we've heard alone reams with suppliers I'm just wondering if it is a growth from here as a slow during the pandemic or I mean is it where you want it to be.
Sorry, Dan I Didnt quite catch the question.
Okay agreements with suppliers and something you guys highlighted in the past.
Yes, I was wondering what my color on that.
Well, we have seen only we announced five or six new agreements in the last quarter. You know certainly business is a little more complicated these days than it used to be but.
But we are now making good progress we have a very focused group of people in our dedicated industry verticals all focused on their end markets and the products and chemistries in ingredients that are required for their end markets. Then we'll bring benefit to customers. So we have a dedicated group and a dedicated team on that now.
As part of our consumer solutions.
As business on the Knick Power's leadership.
So and also suppliers are now thinking about how they operate.
In this new normal on so I think that we'll see Uh huh.
Despite the more accelerated rate in Twentytwenty, one of them is getting 2020, but we continue to make good progress.
We referenced in the year ended prepared remarks.
Okay, and then you mentioned, what's going on with with clean I I was wondering.
Other potential business line divestitures, obviously, you're not going to name them, but I was wondering where you are in the process is we took a really just getting started.
You kind of it's an ongoing thing or somebody was completed just any color.
With that I think we flagged up that we expect to get at least them $200 million from divestitures.
And we are on well on track with that the AG.
Business contribute to that and how fast we do have other things that were considering you know I would.
It's never precise science buying and selling businesses I would hope.
Hope that we can be through that in the early part of Twentytwenty one.
Got it thank you very much.
Our next question comes from Kevin Mccarthy from Bank.
Research partners.
Please go ahead.
Good morning, this is corey on for Kevin.
As it relates to the AG business I was wondering if you could give us.
Some guidance maybe on what the EBITDA the margin and timing of the closing of the deal is just so we can kind of get an idea of what that was contributing.
Yes, so Cory there's two AG businesses, there is the distribution business, which as.
As we said is being liquidated over time.
That is was broken out in our SEC filings is roughly about a 300 million revenue business not contributing a lot of EBITDA. So thats basically the.
$70 million of working capital the AG services business that while we've just executed this week, we're not disclosing the details it's less than a quarter of the total $200 million odd divestiture proceeds that we're targeting and we just kind of called out that you know its a.
Accretive to our leverage multiple so I think it's a good outcome for the company and for Us.
Got it thank you and just.
Just.
Certainly different tack here.
However, logistics costs trending I think shipping costs have risen but.
Like domestic shipping costs or how is that trending for you guys.
And certainly third party price, it's a little tighter than it was a few months ago. So there is some tightness on that but we do have.
You know most of our price of almost.
Most of our fright.
But two thirds of our prices on our own fleets and so we can get operating effectiveness data our own fleet. The third party third party freight prices are increasing because that market is tied to the moment.
Glad that we have this fleets of our own that we can we can work in sweats harder and as we consolidate assets down.
He brings efficiencies into how we can manage that that.
That's right.
Got it thank you.
Our next question comes from Dentek, keeping begleiter from Deutsche Bank. Please go ahead.
Hi, My name is different platforms, that's going on for Brian first I just wanted to touch on the quarterly guidance on that I mean, I think today of course, we did much better than we were.
[laughter] backbones stemming from a guidance Brad.
Thank you the guidance great reports about that playing out again.
Well, a little bit like incrementally more negative than the potential edmar I covered related shutdowns and normal seasonality. If I guess I'm, just curious like <unk>, where things were last quarter.
I think that we thought about it in the bridge from 19 to 20, <unk> or where are you moving back up.
And you know what we think about this guidance as well.
Okay.
Well I'm, Catherine I think that.
What we have what we can do is control our own business and we control in that very well, we're controlling our expenses very well and I think we're getting good growth and good share growth in those core chemical ingredient markets that we're focusing on.
And you know we performed I think you know very creditably in Q3.
Especially given all the difficulties that we face that we all face I mean, I'll just operating today.
You know as we look forward to Q4 again I think we said we had a good October October in line with.
The September November.
From December are always short month, I sees me turn down but you know we are mindful of some of our European markets are already locking down are already closing down or we are mindful that there was a rising incidents of cases in other geographies as well. So we we don't really have a great crystal ball about what may or may not.
Happen and so I think we are giving guidance.
We tried to establish a track record of guidance that we feel confident that we can head thats, what we have given you for Q4 as well.
Okay, That's fair and then I will.
About youre right that the call out an absolute decline in front of me essentially.
Unlike the man.
Right.
Yes.
Sorry can you hear me.
Yeah, we continue Catherine Okay.
Yes, I just wanted to ask a little bit more about the quality of the decline on the essential and markets that filling them, but that is clearly on the like Barack Highbury sales an overhang on farm size or that you know equally kind of caught like their pharmaceutical applications within water treatment just how should we think about that.
Hi, Brian.
Well I think you should think about it unrelated to our comments on quarter to what we called out the we were able to.
You know maker.
A better than normal margin on certain key products into certain essentially market simply because of the supply demand situation on those key products and we were able to sell you know kind of yesterday's topic today.
Prices. So there's a margin increase in that and we think it will still be a higher level of demand for essential and markets that there won't be but price is a more normalized as supply and demand comes back into into balance and so those markets that you spoke about water treatments you know.
Uh-huh.
Nicole I mean.
We are in business to keep it.
People clean healthy and safe and so those products that go into those markets will still be in demand for the won't be the opportunity to or there won't be that we don't foresee that supply demand imbalance.
That would distort the margin quite the way it did in Q2.
Thank you.
Our next question comes from Michael making please go ahead.
Good morning, everybody good quarter, Mike Newman on for Mike again.
[laughter].
[laughter].
So I just wanted to sort.
Put a finer point on the 2021 framework with yeah. It looks like the next year synergies.
Settings that their investment EBITDA.
Yes, the up tick in.
The comp that you mentioned in the end market and favorable essential end market headline news confirming that you guys are expecting EBITDA to be up year over year and 2021 is that correct.
Well at the moment, we don't give any guidance on 2021 and what we're trying to do is give you some elements into our thinking as we look at them you know, we'll get Twentytwenty long guidance when it comes to Roland comes to the February call.
Okay.
A third shot but.
But.
Maybe on the end market growth growing in line with the market. What do you. What are you benchmarking or is it the industrial production came in factor in our railcar chemical volumes in any major.
Major metrics that you guys are calling out separately.
Yes, I mean, its chevies GDP and industrial production that are kind of things that we look I mean, we look at a whole variety of metrics to try and get a view on what people things are going to happen but.
But GDP and industrial production are key drivers for us.
Okay, and then if I can.
One more in on energy refining is there any noticeable difference between your exposure or whether your larger Io Cesar you have some exposure to smaller operators and then just your general thoughts on industry consolidation in general and where where are your position with some of the larger players.
Well, Mike you May remember that we that we backed away from some of the larger players a few years ago as we kind of extricated ourselves out of some of the energy markets and so we have we still have business with some of the larger players.
Players, but it's a much lower level would have had.
A couple of years ago, I think theres going to be some consolidation in that marketplace and certainly thats one place that we we look at our outstanding debt is very very carefully because clearly it's a no place.
The place where.
As a difficulty in the marketplace and there is some under under funding, but we feel we overall, we feel very confident about our ability to grow across.
Other markets and and and retain that kind of specialty focus within the energy and refining business that we are and then.
Confident about how we can really grow in some of those consumer solutions and Justice solutions General industrial markets, which are kind of much more robust for us longer term.
Okay I appreciate the time thank you.
Thanks, Mike.
As a reminder, star one okay. Good question.
Our next question comes from Tom Brown. Please Bandhan Bank. Please go ahead.
Yeah. Good morning, guys. Thanks, very much but taking your question.
The follow up.
I mean really that's one that I think that's very helpful point did you gave us around that 2021 adjusted EBITDA.
You called out the.
And then.
The cost savings that you I agree, yeah, which Brian yeah.
I just wondered if you could give us intent.
Well I mean, the episodic ones does that cost savings you're posting for as you go into a 2021 and I'm thinking about the comment around getting margin expansion, yes, 2020 targets or just any sort of quantifying of that year over year cost savings again, it's only one and then a follow up on that the point around any.
See you out for the UK businesses.
Just on the energy headwinds as we end this year.
I would say that that had the shrinking part of the business, but as you see the world today.
I meant for the sort of run rate headwind as we head into 2021. Please.
Sure Tom Thanks, I think that you know if you look at the cost savings I mean, we're trying to give you some bits and pieces that 21, and our general view that we can grow.
At least ask and ahead of market.
We're trying very hard not to nail down a number 2020 one at the moment, because we're still doing our internal not song.
On our budgets and plans if you think about the 20 40 million of cost savings I mean 20 million of those at least would reoccur into into the following year. So we think those are cost which are gone gone robbing cost, which are just flexed and.
And so you can kind of look at that number as part of the hour. That's a number we have in our thinking going forward.
In terms of the energy market.
We we don't really see energy.
As being a growth market for Univar solutions, we do have some some interesting pieces of the energy market. Those more differentiated chemistry is we have a team of technicians and technical experts, who kind of work on those things.
So it's a more robust business that we have now within the energy market, but we don't see we don't expect.
A bounce back or growth in the energy market and Norway, Norway I'm staffing for that but we are staffing for though is growth in other markets.
Much more robust markets much more.
Zillion markets like the consumer solutions markets food personal care pharma light industrial solutions business cleaning coatings lubricants, I mean, those kind of markets as well as growing share just through our local network of assets. We've got some some fabulous assets.
And we can handle no chemicals, you know incredibly safely houses chemicals incredibly safely we see some really good opportunities to get better operating leverage through those assets. So very focused on that local business as well as well as our in our services business.
So we see really good opportunities for growth in lots of other places and we're really anticipating all our chips on on the oil and gas problem anymore.
Great.
Very helpful color. Thank you very much.
This concludes Kenny portion of our call I'd like to turn it back to their cost for final comments.
Thank you, ladies and gentlemen for your interest in unit acceleration. If you have any follow up questions. Please reach out to the Investor Relations team. This does conclude today's call.
Thank you, ladies and gentlemen, Mr. from D conclude the conference call. Thank you once again for participating you may now disconnect.
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