Q4 2022 Univar Solutions Inc Earnings Call
Yeah.
[music].
Good morning, ladies and gentlemen, and welcome to the Univar solutions fourth quarter and full year 2022 earnings Conference call. My name is Charlie and I will be your operator today. Currently all participants are in a listen only mode. After the presentation, we will conduct a question and answer session.
Instructions will be thought of at the time.
At any time during the conference call 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 and communications at Univar solutions. Heather. Please go ahead.
Thank you and good morning, welcome to Univar solutions fourth quarter, and full year earnings call and webcast.
Joining our call today are David Jukes, President and Chief Executive Officer, and Nick <unk>.
<unk>, Vice President and Chief Financial Officer.
Last night, we released our financial results for the fourth quarter ended December 31, 2022 and posted to our corporate web site at Univar solutions Dotcom, a supplemental slide presentation to go with today's call. The slide presentation should be viewed along with the earnings release, which has also been posted on our website.
During this call as summarized on slide two we will refer to certain non-GAAP financial measures for which you can find the reconciliations to the most directly comparable GAAP financial measure in our earnings release and the supplemental slide presentation, which also includes additional information regarding our use of non-GAAP financial measures.
As referenced on slide two we will make statements about our estimates projections outlook forecasts and our 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 detailed summary 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 David for his opening remarks.
Thank you Heather and good morning, good afternoon, and good evening to everyone and thanks for joining our call.
The record results, we achieved in 2022 demonstrates our successful transformation and solidifying our position as a leading value added services and solutions provider based on the needs of customers across a diverse range of end markets from health care to nutrition to electronics and many many more.
I'm immensely proud of the tireless efforts of my colleagues do throughout the year continued to put the customer at the center of all we do.
With both organic and inorganic growth.
Delivered over $1 billion in adjusted EBITDA and returned over $400 million to shareholders. During the year as we execute on our capital allocation strategy balanced between share repurchases acquisitions and investments for sustainable growth.
We are confident in the foundation, we've built for long term success and believe we are in a strong position to deliver sustainable shareholder value, while fulfilling our purpose and commitments to our people and our communities.
Now, let me hand, it over to Nick who will talk you through our Q4 and full year results and will also discuss our guidance and assumptions for 2023.
Nick.
Thank you David Good morning, and Hello to all I am pleased to share Universe solutions Q4 financial results.
<unk> in our business and provide our 2023 outlook.
Adjusted earnings per diluted share was <unk> 47 in the quarter a decrease from 60 in the prior year's fourth quarter, whereas full year. Adjusted EPS was $3 46, a share an increase of 53% year over year.
Cash from operations in Q4 was 376 billion, reflecting a reduction in net working capital and cash from operations for the full year was $546 million higher by 88% year over year.
Year end net working capital was 15, 9% of Q4 annualized sales, primarily due to higher inventory versus prior year driven by customer Destocking.
Capital expenditures for the quarter were $50 million, which reflect a good mix of high ROI investments.
Full year capital expenditures totaled $154 million slightly above our guidance of $145 million as we were able to complete more projects than anticipated.
Our ROIC.
Was 27% for the year driven by our strong earnings performance and efficient asset utilization and our leverage ratio now stands at two eight times.
These ratios are net of $409 million of cash returned to shareholders during fiscal year 2022 through our share repurchase program and with over $459 million returned to our shareholders. Since the beginning of the program in Q4 of 2021.
Sales in the fourth quarter on a constant currency basis were up approximately 7% with growth across all geographies, while the corresponding gross profit was down two 5%.
The higher sales were primarily due to our pricing discipline in inflationary markets. While gross profit was lower in the U S and EMEA as higher cost of goods sold and lower demand from customer stocking more than offset pricing benefits.
Canada gross profit increased year over year, and Latam <unk> benefited from the <unk> acquisition, which is performing better than planned.
Adjusted EBITDA for Q4 was $175 million and margins decrease across the board except for Latam, primarily due to lower gross profits, which were partially offset by operating efficiencies in some regions.
Adjusted EBITDA was slightly below our Q4 guidance as customer Destocking was more significant than anticipated.
For the full year on a constant currency basis sales were up 24% and a corresponding gross profit was up 19%.
Gross profit margins were lower for the year throughout our regions largely driven by input cost inflation, partially offset by pricing discipline.
For the year operating leverage led to higher adjusted EBITDA margins in the U S, whereas lower gross margins than other regions more than offset this benefit.
Moving on to trends in our end markets during 2022.
Our ingredients and specialty channel continues to grow in both life Sciences, formerly known as consumer solutions and industrial solutions.
Within life Sciences, food and beauty and personal care saw strength throughout the year as our partnership with our suppliers and customers provided formulations that address growing consumer trends such as clean label and next generation products.
Pharmaceuticals continues to growth due to the increased demand for high purity actors excipient and other necessary ingredients since the pandemic.
Within industrial solutions, homecare, and industrial cleaning and lubes and metalworking saw growth through pricing discipline and further supplier development.
Our case business was impacted by product tightens and inflation for most of the year and the slowdown in housing construction, resulting from higher interest rates during the back half of the year.
The chemical and services channel saw strong growth over the course of the year with many of our core industries seeing accelerated demand and resilient pricing.
Our continued focus on putting the customer at the center of all we do is led to above market growth in chemical manufacturing mining and clean energy.
A robust offering of water treatment Chemistries allows us to provide both municipalities and industrial customers with solutions for managing and purifying water.
We're also beginning to accelerate our offerings into the North American electronics market with high purity chemistries necessary for manufacturing microchips.
Additionally, we saw growth in agricultural Chemistries pulp and paper and in the general manufacturing sectors.
Our 2023 outlook assumes a continuation of year end destocking into Q1.
For the full year 2023, we expect low GDP in the U S and Canada with softer demand in the first half.
In EMEA, our recent growth has been weaker and we do not expect a significant change in 2023.
Overall, we expect chemical prices generally stabilized at current levels throughout all our regions.
We expect over $40 million of cost savings for the year with roughly half occurring in DCP from transportation efficiencies and the other half in WMA.
These will annualized over $60 million.
Given the expected lower growth environment, our 2023, adjusted EBITDA margin will be in the range of eight two to eight 4%.
We expect with normalized growth beyond 2023 to achieve our 9% EBITA margin target as we continue to grow market share and otherwise execute well as we have for the last several periods.
As a result, we expect our adjusted EBITDA performance for the first quarter to be in the range of $200 million to $220 million and for the full year, we expect our performance to be in the range of $900 million to $930 million.
Let's review some of our cash flow highlights for our 2023 outlook.
For year ended 2023, we are targeting a networking capital of 14% to 14, 5% of annualized quarterly sales by year end and expect networking capital to be a source of cash given the lower sales in 2022, and our initiatives to improve our net working capital efficiency.
Our interest expense is higher due to rising rates on the 30% of our debt that is floating rate and the expected use of cash during the year.
Our 2023 cash taxes are expected to be lower than the prior year and assume an effective tax rate in the 27% to 29% range given the geographic mix of earnings.
And we're expecting approximately $155 million of capital expenditures for 2023.
Consequently, our estimated net free cash flow for 2023 is $435 million, which is approximately a 48% conversion from adjusted EBITDA.
During 2023, we expect to continue our plans to return capital to shareholders in the range of $300 million.
Over the coming months, our board will continue to review plans to implement a dividend this year as an additional component of our capital allocation strategy.
We are confident in our execution and our outlook for the full year 2023 and beyond.
David.
Thanks, Nick.
As highlighted last quarter. In addition to growth in our markets, we hold ourselves accountable the metrics that our customers value most of which are independent of chemical prices.
We continue to make measurable progress in our four key areas of reliability safety technical differentiation and competitive pricing ending the year with a record high NPS score as well as a record low lost time injury rates.
Our investments in customer satisfaction, and ESG has shown steady sustainable improvements and we will continue to invest in technology based innovative solutions to support growth for our suppliers and customers.
Our pipeline of opportunities for inorganic growth is continuing to develop and I'm pleased that we've announced two highly complementary acquisitions. So far this year.
Last month, we entered into an agreement to acquire <unk>, a renowned specialty distributor based in Turkey, and dedicated to the homecare industrial cleaning and beauty and personal care markets.
This investment builds on our strong existing specialty presence in the region and supports our plan to be a leading specialty chemical distributor in the broader EMEA region.
Earlier this month, we acquired <unk> group, a leading ingredients and specialty chemical distributor with locations in Costa Rica, Guatemala, El Salvador, and Panama and Honduras.
The acquisition further extends our ingredients and specialties platform in the Central and South America and provides enhanced growth opportunities for our supplier partners.
We believe these acquisitions demonstrate our disciplined focused on identifying accretive tuck in M&A opportunities that serve to extend our supplier and customer relationships and enhance our shareholder value.
Our earlier acquisitions in Brazil, and Spain are already proving to be accretive as we are realizing higher planned benefits a new supplier authorizations ahead of schedule and more extensive than anticipated.
Our pipeline of inorganic growth opportunities remains very attractive and robust within the highly fragmented global distribution industry.
Over the past three years, we've successfully executed and delivered on our strategic plan, which provides us with a strong foundation for long term growth as well as the ability to successfully navigate the dynamic macroeconomic environment.
Solidified market leadership in North America, and reduced our significant exposure to some highly cyclical end markets.
We've established a global sales channel and delivered growth in and groups in specialties.
We successfully integrated the largest acquisition to date and chemical distributions and delivered the promised synergies on time.
And we've established digital leadership through our SAP migration and suite of customer centric digital tools.
Beyond these accomplishments we are now achieving market share growth new products authorizations, and executing tuck in M&A, which will collectively drive growth and margins and overall cash flow.
As previously mentioned in 2022, we delivered over $1 billion.
And adjusted EBITDA with sustained positive net free cash flow, which we used to buy back over $400 million.
Sure.
Our transformed business positions us well to continue to navigate the dynamic macroeconomic environment and more specifically as we demonstrated in the past provide insulation against some of the effects of an economic downturn.
We will evident macroeconomic circumstances, given the essential nature of ingredients and chemicals, we provide our communities need us to help keep them healthy clean.
Clean and sites and we do so with an unrelenting focus on safety and the environmental social and governance structure of our company where.
We are working every day to bring more sustainable and innovative solutions to our customers as we work closely with our suppliers as a thought leader and consultative partner.
We fully come to your questions and to summarize.
Over the last three years have transformed the company, putting the customer at the sense of all we do and expect to deliver consistently resilient results regardless of the macro environment.
We continue to believe in our 2025 goals and expect to deliver an adjusted EBITDA margin greater than 9% with 50% net free cash flow conversion.
Oh, I see a greater than 20% and adjusted EPS greater than $4 50.
We plan to use on net free cash flow to fund growth initiatives through a combination of high ROI capital investments and selected opportunistic acquisitions.
Our capital allocation strategy through 2025 reflects our confidence in our cash generation capabilities as well as the long term value of our company.
Net of capital expenditures, we continue to believe our business will generate approximately $1 5 billion.
And net free cash flow from 2023 to 2025.
And we expect to execute against our $1 $5 billion share buyback authorization over the next four years.
This along with our boards continued intention to initiate a dividend in 2023 demonstrates the confidence in our business and a serious commitment to returning capital to our shareholders.
We believe we're in a strong position to deliver long term shareholder value, while fulfilling our purpose and commitment to our people and communities.
Now I'll also welcome your questions in regards to our 2022 results of 2023 outlook or our business strategies.
Not intend, making any additional comments in regards to the announcement made on January the second related to indications of interest we received with respect to potential transactions.
As has been previously noted there can be no assurance that any discussions regarding indications of interest will result in a transaction.
With that thanks for listening and we will open up the lines to you.
Thank you.
At this time, if you'd like to ask a question simply press star followed by one on your telephone keypad.
If you'd like to draw. Your question. Please press star followed by two and please limit yourself to one question and one follow up please hold while we compile the Q&A roster.
Our first question comes from John Roberts of Credit Suisse to begin John . Please go ahead.
Okay.
John Your line is now open. Please proceed with your question.
Sorry, I was on mute.
I think of the <unk> business is growing faster than the CNS business, but in 2022. It grew slower in USA and it grew about the same in EMEA can you comment on why that mix shift occurred.
Yes, good morning, John Thanks for the question and both businesses grew last year.
<unk> delivered an outstanding performance, we do have growth opportunities right across the entire portfolio, which is one of the advantages of the business plan that we have on our IMS business. Some of that is very much consumer facing and so in the last quarter.
Would have seen a bigger dip due to destocking than our CNS business, which tends to be more of the essential chemistry, but we have great execution.
And.
Great results from both sides of that business.
And then Nick on slide eight the 70 $579 million of other use of cash is there something big that's driving that or is that just a bunch of small things aggregate it together.
Yes, sure John Good morning that principally reflects the disproportional bonus payments in 2023 that were accrued in 2022 versus a normalized level that would be paid out and accrued for 2023, given the target for the guidance. So it's really the timing.
A difference all of that is paid in Q1, So you will see that to be.
Positive number then through the rest of the year.
Great. Thank you.
Thank you. Our next question comes from Laurence <unk> of Exane BNP power Lauren. Your line is open. Please go ahead.
Yes, good morning, a question for David on strategy.
Disclosing more and I guess, you are performing well and I was wondering if you could talk to us about the pros and cons of keeping the group together so keeping the two businesses together, we didn't make any sense or do you think.
Alright lets say as you started to think a little bit more balance is now usefully too yes.
Ashwin the business into demos equity over the last year and a half.
Good morning, and thanks for the question look I mean, our board and management regularly review our strategy to ensure we're best positioned.
To enhance shareholder value and to grow our business and we've developed some very customer focused strategies across all our businesses and leverage that infrastructure to drive growth and margin. So whilst you suddenly recognize the relative valuations of the business in the equity markets. We believe our recent and expected performance highlights.
ROIC.
And cash flow yield of our total company strategy.
Thank you and then a photo.
Is there any part of the portfolio, where you would say U S steel will the earnings.
I don't think so no I wouldn't say that at all.
Okay. Thank you.
Thank you. Our next question comes from Frank Mitsch Fermium Research Frank Your line is open. Please proceed.
Thank you and good morning folks.
The $204 million worth of buybacks during the fourth quarter I'm curious as to what the pace of that was were you buying back stock.
During during December .
Hey, Frank It's Nick speaking as you know we executed an ASR right. After our last earnings call and so that was transacted as of that date.
And it was being executed via our agent Goldman Sachs and that process. So we were doing nothing during that period we.
We did a.
A little bit of stock buyback and the early part of that period, but all most of that $200 million of all the $200 million was really through the ASR and a third party.
Got you and so.
So that wouldn't have any impact so any discussions that you may or may not be having regarding a transaction with the company.
Since the ASR is in place that's not going to have a material impact on that is that correct.
I'm not sure I understand exactly the question, but as I said, the ASR was executed right. After the earnings call and we were not transacting directly in stock buyback as the company.
Understood. So just trying to clarify the $300 million that you have.
Planning on doing returning to shareholders this year.
Just curious.
Any discussions that you may or may not be having what the impact would be but it would sound like under an ASR that probably.
Isn't being impacted there and speaking of return to shareholders. The comment on the last conference call was the plan was to implement a dividend in the early part of the year.
The commentary today was just during this year what are the latest thoughts on the board on implementing a dividend.
Good morning, Frank.
Speak to you.
Our capital allocation strategy 2025, really reflects our confidence in our cash generation capability.
That's further evidenced by about $1 5 billion share repurchase program. We have now for reasons that have nothing to do with the prospective cash flow generation of our business right now is not the time that the dividend.
That we continue to assess but.
I mean, we still are very confident with a strong position to deliver long term shareholder value.
Thank you David appreciate it.
Okay.
Thank you. Our next question comes from Kevin Mccarthy of vertical Research partners. Kevin. Your line is open. Please go ahead.
Yes, good morning.
If prices were frozen today, what do you think your contribution to sales from higher prices could be in 2023.
Kevin.
Well thank you for the question.
<unk>.
Hi.
I mean, that's that's been incredibly hypothetical.
The prices aren't going to be frozen, where they are today and we operate.
And that dynamic macro environments.
Very confident about our ability to execute.
Dynamic macro environments. So I don't know I've got no idea.
Perhaps a bit of context.
It would help if I take your.
EBIT.
Midpoint of $915 million for 2023.
And I gross that up at mix margin midpoint of eight 3% I get about $11 billion of sales, which seems to imply that.
You would expect sales to go down.
I recognize it's an uncertain economic environment and volumes.
It may not be very exciting, but I would've thought that.
Price flow through would be positive in 'twenty three versus 22 given the.
Inflationary wave that so many chemical companies have been experiencing so that was that was sort of the genesis of how I was thinking about that.
Yes.
Kevin on a full year basis, they will go down given the exceptional pricing early in 2022.
But on a current level basis, which I think is what was Davis was answering we expect really no exceptional pricing benefit in our guidance that we've given you.
So the total year number is going to be down versus prior year on a sales basis and you did the exact correct extrapolation of our EBITDA to the margin level that we discussed.
Gotcha, Okay. Thank you for that.
Secondly, I think in your guidance.
Mistaken you've included a contribution from new supplier authorizations of $20 million.
Hi.
What is that enhanced today or an expectation for future wins and maybe you can help us to put that number in context.
Sure what the experience was in 2022 for example.
Sure Kevin.
Hypothetical and easier for me to answer.
We had 67 new authorization.
We closed in 2022, we expect to deliver $20 million in 2020 Detroit.
If I remember correctly going into 2022, we talked about I think $20 million, maybe $25 million.
From a new authorizations closed in 2021.
What were saying it was 67 closed in 2022 and they will generate we expect around.
$20 million in 2023.
I see thank you very much.
Thank you. Our next question comes from David Begleiter of Deutsche Bank. David Your line is open. Please proceed.
Thank you David just on the discussions can you at least provide maybe a timeframe. The board is thinking about in terms of either making decision are wrapping up the current round of discussions.
Hi, David Thanks.
Thanks for the question no.
I said earlier on I'm, not making any comment at all on this sorry no.
Understood and just on Destocking can you comment on both your de stocking.
That you went through as well as your customers are stocking that's occurred.
I mean as you'd appreciate it's kind of supply chain, so pretty full last year.
We think there is probably something like $25 million of Destocking that impacted our EBITDA in Q4.
<unk> done a little bit into Q1, we are expecting that to unwind at some point like many of our suppliers as well, but thats.
That's.
A border around it was around $25 million in the fourth quarter.
Thank you.
Thank you. Our next question comes from Stephen Byrne of Bank of America. Stephen Your line is open. Please go ahead.
So just continuing on to that.
<unk> discussion about the Destocking.
What would you say.
The split would be between price and volume in this 7% comp.
Austin currency revenue gain in the quarter was.
Or were volumes positive.
Thanks, Nicole and I can speak to you.
We don't talk about volumes very often.
<unk>.
Down in Q4.
As people worthy stocking as I mentioned earlier, one that was a little more.
Noted in those markets, which are very close to the consumer like <unk> for instance.
Structure or beauty care.
But I mean, it was general Destocking wise across the whole base.
So when we look back to the pre.
Three quarters into 2022, when your your margins were.
One.
Last the double digit range.
Were you getting where you're getting price then that was in excess of.
What was flowing through your purchases and raw material costs, so that if.
If you didn't have the destocking that occurred in the fourth quarter.
Your margins would've been up year over year or are you. Indeed at a point where pricing is more than offsetting raw material costs.
So we were very open about the amounts of overrunning that we did last year were very open for the first three quarters about the amount of over than we did last year.
That was a net $120 million, so we couldnt be more clear about that.
Also.
<unk> been open about our intrinsic value and the value. We think we can generate for the services that we provide.
Our customers recognize that.
<unk>.
We will continue to be disciplined with pricing.
And and take advantage of.
Upswings a bounce in the market if we can around the margin, but we were very transparent about our over earning last year.
Yes.
In the appendix every one of the regional segments the margin being down in the fourth quarter was attributed to price being insufficient to offset raws. It sounds like it was really more of a volume impact.
Price.
Yes, Steve I mean, it was definitely a volume impact that was the destocking and as it was noted we ended up with more inventory than we thought are also principally because of destocking, but youre absolutely right that the issue in Q4 was a volume issue as a result of Destocking.
Pricing was what we would view as a normalized spread between our cost of goods sold and prices. We had no exceptional profits in Q4, nor do we expect any during this year or at least not forecasted in our guidance.
Okay. Thank you.
Thank you. Our next question comes from Josh Spector of UBS, Josh. Your line is open. Please go ahead.
Yes.
Yes. Thanks for taking my question I, just want to continue some of the Destocking commentary and I guess a lot of the firms we've talked to you. So far talked about January not looking at a whole lot better than December and February I don't know if you have a lot of data points on yet, but I'd just be curious I mean, you talk about destocking anything have you seen that in the order patterns yet.
Any other commentary you can provide about that.
Your assumptions on growth I guess as you go through the rest of the year.
Yes, Josh good morning, and thanks for the question.
Yes.
We attribute about $25 million.
So the Destocking in Q4 is that all you are on that carried on a little bit into Q.
Q1 <unk>.
In our guidance.
<unk>.
Okay, well I guess, then so would you say now your order patterns in February .
Normal youre not seeing destocking carrying on your past that.
I think.
It all depends on the end market. There was some end markets, which is starting to.
Pick up again, there are others, which destocking carrying on.
That's been reflected in our guidance.
Okay, I guess shifting to acquisitions just to clarify for what in 2023, I guess is the deal that you completed in the guidance and the deal that yet not in the guidance and is there a way or not.
A notable.
So no.
Proceeds there was no benefit from the acquisition in our guidance.
Okay.
And just the expected.
And Josh the expected EBITDA benefit on a reported basis for the year would probably be $10 million to $15 million added to the guidance level and on a full year basis, those acquisitions would be 20% to $25 million depending on.
How many.
When we complete any other transactions, but for the two that we've talked about I would use a $20 million number.
Got it very helpful. Thank you.
Thank you and the final question today comes from Duffy Fischer of Goldman Sachs. Duffy. Your line is open. Please go ahead.
Hey, good morning, guys.
Just wanted to go back kind of the cash flow the $300 million you guys talk about coming back to shareholders is that both the new dividend plus buyback or is that just buyback.
Hey, Duffy, Nick our structure and approach is total return to shareholders the amount could be larger depending on our M&A for the year. So I would say it will be a $300 million plus number for the year, depending on what happens with the dividend.
Okay.
What would you guys recommend to the board as far as where the dividend should be.
Can you give us a range of what youre thinking about.
I think that's a conversation we will have we will continue to have with the board Duffy.
Okay fair enough.
And then if it if it's 300 the $1 35, thats above that from your net free cash flow from that slide eight should we assume that again. If this is all perfect. If that ends up going to M&A is that the delta there Theres no reason to build cash from here.
That's correct that's correct.
Okay, Alright, thank you guys.
Sure.
Thank you.
We currently have no further questions. So I'll hand back over to Heather Kos for any closing remarks.
Thank you, ladies and gentlemen for your interest in University Relations. If you have any follow up questions. Please reach out to the Investor Relations team.
This concludes today's call.
Yeah.
Ladies and gentlemen that concludes today's call. Thank you. So much for joining you may now disconnect your lines.
Yeah.
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Okay.
Yes.
Okay.
Okay.