Univar Solutions Inc (UNVR) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Univar second-quarter 2015 earnings conference call. My name is Ian, and I will be your host operator on this call.

(Operator Instructions)

I will now turn the meeting over to your host for today's call, Kerri Howard, Vice President of Investor Relations and Treasurer at Univar. Kerri, please go ahead.

Thank you, Ian. Good morning and welcome to Univar's second-quarter 2015 earnings conference call and webcast. Earlier this morning, we released our financial results for the quarter ended June 30, 2015, along with a supplemental slide presentation. The presentation should be viewed in conjunction with the earnings release, both of which can be found on our website under the Investor Relations section, at www.univar.com. With me today are Erik Fyrwald, President and Chief Executive Officer, and Carl Lukach, Executive Vice President and Chief Financial Officer.

As referenced on slide 2, the Company may make statements about its projections or expectations for the future. All such statements are forward-looking statements, and while they reflect current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review the Company's filings with the Securities and Exchange Commission for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. The Company does not plan on updating or revising any forward-looking statements during the quarter.

In addition, the Company also refers to certain non-GAAP financial measures, for which you can find the reconciliations to the comparable GAAP financial measures in our earnings release, which has been posted under the Investor Relations section, at www.univar.com.

I will now turn the call over to Erik for his opening remarks.

Good morning, and thank you for joining us today. We are very excited to be hosting our first quarterly earnings conference call following our initial public offering, which closed on June 23.

I would like to begin today's call with a brief overview of Univar and our strategy and discuss some recent developments and highlights from the second quarter. I will then turn the call over to our Chief Financial Officer, Carl Lukach, who will go into more detail on our quarterly results. I will come back to describe our strategic priorities to grow investor value and our performance against those strategies, and then describe our outlook. After our comments, we will open the lines for your questions.

Please turn to slide 3. To get started, we would like to provide a brief introduction to our business and the important position that we occupy within the chemical industry value chain. Univar is one of two global chemical distributors, and a clear number one in the most attractive market, North America. We have scale, at $10 billion in sales and a solid base business we have built over many years that would be very difficult to replicate. We are diverse, which helps reduce cyclicality, and are not highly dependent on any single product, supplier or customer. Our top-10 customers represent only 13% of sales. We offer a broad range of chemical products and services, and we touch nearly every manufacturing sector. We also have strong multi-decade relationships with key producers and customers and continue to expand on these relationships and add new ones.

Producers rely on us in many ways. We arrange bulk shipments for some of their production. Producers will also ship in bulk to our facilities, and we cost-effectively sell, repackage and deliver less than bulk quantities of their products, together with other producers' products, and we access customers they cannot effectively serve. Customers lower their total cost of ownership with Univar by simplifying their sourcing process and outsourcing key activities, like inventory management, blending and accessing a complete bundle of products that can usually be delivered in a full truckload, whenever and wherever they need it. And we have differentiated ourselves through our high margin, high growth value added services that enhance our base business. Univar's clear value proposition, together with our focus on organic growth in attractive markets, commercial excellence initiatives, and productivity were key drivers for our second quarter performance.

Moving on to slide 4. We had a solid quarter, despite a very challenging market created by the significant decline in the oil and gas markets and the strong US dollar. Reported adjusted EBITDA was down 4%; however, on a currency neutral basis, was up 1.5%. Second quarter adjusted EBITDA of $169 million equates with $179 million on a currency neutral basis, slightly higher than the $176 million we earned in the second quarter of last year. Gross profit margin rose 110 basis points, to 18.6%, and EBITDA margin rose 55 basis points, to 6.7%. We had mix enrichment from our higher margin industrial chemicals business and solid growth in our service businesses.

In EMEA, our restructuring has given us a lower cost base and the ability to focus on expanding margins and growing in target markets. In addition, we are realizing year-over-year productivity gains through Company-wide Lean Six Sigma programs. In April we completed the acquisition of Key Chemical, a leading provider of high purity fluoride to municipal water treatment in the United States. This is an exciting opportunity for Univar to expand our offering and bring more value to water treatment customers.

Finally, our financial condition is now much stronger. Proceeds from our IPO and concurrent private placement with Temasek and refinancing lowered our debt by $650 million, or 17% when compared to year-end 2014, and we substantially lowered our future interest cost. We extended our debt maturities 5 years, to 2022 to 2023, while maintaining just under $1 billion in liquidity. Our credit rating was also raised. I would like to also note that while Univar sold 20 million shares as part of the IPO, there was a secondary issue by one of our shareholders in addition to the green shoe, for an additional 20.25 million shares. In total, 40.25 million shares were sold to the market, with a value of just under $1 billion.

I will now turn the call over to our CFO, Carl Lukach, who will provide more detail on the second quarter financial results. Carl?

Thanks, Erik, and good morning, everyone. Turning to slide 5 and the consolidated results for the quarter. Comparisons that I call out this morning are to the second quarter of 2014, unless otherwise noted. Sales were $2.5 billion in the quarter, down $351 million, or 12%, of which 7% was due to foreign currency translation rate variance. The remaining 5% decrease was largely attributable to lower demand from oil and gas drilling markets, mostly in the US. Outside of oil and gas, global sales were down about 8.5%, but flat on a currency neutral basis. Product mix, however, was much more favorable.

Gross profit of $467 million was down 7%, but flat on a currency neutral basis. Our gross profit per billing day, while flat overall, was up approximately 7%, excluding oil and gas, and down about 30% for sales into the oil and gas markets. Gross profit margin was up 110 basis points, to 18.6%, reflecting favorable product mix in industrial chemicals, a higher proportion of sales from our services businesses, and the increase in gross margin in Europe associated with the redesign we have underway of our business model there.

In Q2, our conversion ratio, which we define as adjusted EBITDA divided by gross profit, increased 90 basis points, to 36.1%, versus last year's Q2. On a currency neutral basis, it increased 40 basis points, to 35.6%. This is consistent with our strategy to grow the value of Univar and reflects favorable impacts from product mix enrichment, our European structuring program and cost productivity initiatives.

Adjusted EBITDA of $169 million was down just under $8 million, or 4%, from the $176 million we earned last year, but up 1.5% on a currency neutral basis, despite the drop from oil and gas markets. For the first half of the year, our adjusted EBITDA of $314 million was down 2%, but up 3% on a currency neutral basis, and adjusted EBITDA margin was up 55 basis points, to 6.7%. As Erik pointed out, our ability to grow adjusted EBITDA on a currency neutral basis demonstrates the resilience of our business model. So to sum up the quarter, despite the drop in demand from oil and gas markets, on a currency neutral basis, we were able to increase gross profit margin, increase our conversion ratio, increase our EBITDA margins and grow adjusted EBITDA dollars.

Let's move now to each of the segments, starting with the USA on slide 6. USA sales of $1.4 billion were down $157 million, or 10%, reflecting the significant decline in demand for chemicals from US fracking well sites. According to Baker Hughes, as of last week, US rig count was down 1,007 sites to 876, or a 54% decrease versus last year. Univar oil and gas sales were only down just over 30%, however, as our business is highly weighted to the largest oil field service firms. As a response to the lower volume, we reduced our headcount and operating cost in phases this year, in line with the overall oil and gas industry.

Excluding oil and gas, USA sales were down just under 2%. This reflects solid growth in our service businesses and in personal care, food ingredients and pharmaceutical vertical end markets, offset by lower pricing for certain commodity chemicals tied closely to oil prices. We continue our focus on the three basic elements of our business model, agile buying, improving logistics and inventory management, and skillful selling. And we continue to invest in all three to make our value proposition even more compelling on both sides of the supply chain, chemical producers and to chemical end users.

Our services businesses continues to grow at a healthy pace. First half sales for chem care, min bulk, chem point and environmental sciences grew 7%, and in aggregate were 16%, or $440 million, of total first half sales in the US. Our market penetration rates for most of these businesses are low, and our gross profit and adjusted EBITDA margins are at the high end of our portfolio. This collection of services businesses differentiates us in the industry and presents an attractive growth opportunity within our existing customer base and with new customers.

Total USA gross profit increased about 120 basis points, 20.5%, benefiting from pricing and product mix improvements and also from cost productivity initiatives. Our adjusted EBITDA margin improved 110 basis points, to 7.9%.

Turning now to Canada, on slide 7. We had good growth in Eastern Canadian industrial markets. Our manufacturing base customers experienced increased demand from US buyers taking advantage of the weaker Canadian dollar and we participated in their rise in volume, as well. These revenue gains in Eastern Canada were, however, offset in Western Canada by the decline in oil drilling activity and from low natural gas prices.

Our ag business got off to a strong early season in the quarter, prompted by warm, wet weather, but then tapered off in June, when dry conditions reduced grower demand for herbicides and fungicides. Total sales in Canada in the quarter were $535 million, down $53 million, or 9%, but on a currency neutral basis were up 3%. Gross profit of $63 million was down $5 million, or 7%, but again up 5% on a currency neutral basis. And adjusted EBITDA of $30 million was down $2 million, or 5%, but up 8% on a currency neutral basis. Both gross profit and adjusted EBITDA margins improved by approximately 20 and 30 basis points, respectively. To summarize, we delivered solid results in Canada in a sluggish overall economy where, excluding the effects of a significant currency variance, sales grew 3%, gross profit grew 5%, and adjusted EBITDA grew 8%.

Moving to EMEA, on slide 8. Our sales across Europe, Middle East and Africa in the quarter of $467 million were down $130 million, or 22%, but 18% of that decline is attributable to translation of the weaker euro and certain other currencies into US dollars. Most of the remaining 4% decline in sales is attributable to our conscious exit from the low profitability business in certain countries and from shutdown of certain warehousing facilities as part of our restructuring program.

Gross profit and adjusted EBITDA margins each increased nearly 200 basis points, reflecting the benefits of the mix enrichment strategy we have underway. While market conditions remain sluggish in Europe and FX is a strong headwind, our adjusted EBITDA of $27 million grew $4 million, or 19%, in the quarter, and on a currency neutral basis grew 40%.

Strong results can be attributed to three factors. First, our strong market position in the UK, where we are benefiting from the reshoring of certain manufacturing that is occurring there, for example, in the automotive sector. Next, growth in specialty products in those pan-European markets where we can win, which was a key element in our business model redesign. And third, capturing return on our investments, like pricing software, that has enabled us to manage our margins better.

Our restructuring program is complete in Southern and Central Europe, only the Nordic zone left. We accrued an additional $8 million in restructuring charge in the quarter for severance and dismantlement charges and have excluded that charge from the EMEA results.

Moving then to our rest of the world segment on slide 9, this segment includes sales in Mexico and Brazil and, to a lesser extent, China. Second-quarter sales were $119 million, down $12 million, or 9%, but on a currency neutral basis were up 10%. Gross profit margin improved 350 basis points, 18%; and adjusted EBITDA margin improved 160 basis points to 5.2%, both benefiting from the successful tuck-in acquisition of D'Altomare that we made in Brazil in November, 2014. Integration is ahead of plan, as are targeted cost and marketing synergies. D'Altomare brought us a good position in the personal care market in Brazil, which is proving to be a growth market even during the current recession in Brazil.

On slide 10, I would like to cover several total company financial highlights. First point is cash flow. Our year-to-date free cash flow -- that's after interest expense and cash taxes -- was $51 million, compared to a large cash outflow at this time last year. Most of our improved cash flow can be attributed to lower net working capital, especially accounts receivable, which reflects lower sales volumes in oil and gas and also lower cost per unit for certain commodity chemicals in inventory. Compared to last year June balances, total net working capital days sales were down 1 day to 40. Receivables day sales were down 2 days to 50. Accounts payable days were 1 day longer at 52. Inventory days were, however, 2 days higher, to 40, as we continue to find the optimum balance between customer satisfaction and inventory levels.

Next point is return on assets deployed. We are earning 22.2%, up 50 basis points from this time last year. Lastly, our tax position. Cash taxes year-to-date of $17 million are higher than last year, but still quite low as a percentage of EBITDA, reflecting our utilization of a tax loss carry forward. We are projecting a full-year cash tax amount of about $50 million to $60 million, based on our most recent forecast, recognizing that this depends highly on the geographic mix of pretax income and on our ability to utilize our tax loss carry forwards, especially in Europe.

Finally on slide 11, our reduced leverage and strengthening financial condition. With almost $760 million in funds raised from our June 23 IPO and private placement transaction, we retired all $650 million of our high cost 10.5% mezzanine senior secured debt, taking our total debt down 17%, from $3.7 billion to $3 billion. This reduced our leverage ratio more than a full turn, to 4.5 times from 5.6 times, and eliminated $68 million in annual interest expense on a pro forma basis. Our leverage ratio is defined as total debt less cash divided by adjusted EBITDA.

In July, while not a second quarter event, we refinanced much of our capital structure. Terms and maturities of our new capital structure will be detailed in our Form 10-Q, which we plan to file next week. The net effect of our refinancing is to push out our debt maturities five years and reduce annual interest expense. Taken together, our IPO, private placement and refinancing transactions have significantly strengthened our balance sheet and reduced our pro forma annual cash interest expense by almost $100 million per year, which we will reinvest for future growth or further reduce debt.

With that, I will turn it back to Erik. Erik?

Thanks, Carl. As I previously mentioned, I am pleased with our second quarter performance and our progress building better execution capability. Before we take your questions, I would like to take a few moments to revisit our three core priorities for growing the value of Univar, on slide 12. These are the strategies which guide our organization.

First is capturing organic growth in attractive markets. We are focusing our commercial capabilities on the end markets we think will have the highest growth in the coming years, including food ingredients, personal care, health and wellness, and water treatment. These markets represent over half of our sales and each is expected to grow faster than GDP. Our highly trained sales force, wide range of products and services, and technical expertise enable us to provide a full product solution set model to customers. This provides a clear value proposition to our customers by making it easier for them to get exactly what they need with fewer touch points and more flexibility and reliability.

We also have built a large set of service businesses with higher margin and growth rates. These very attractive services enhance our base business by reducing the total cost of ownership for our customers, further enhancing Univar's value proposition. In the second quarter, we saw strong growth within the food, pharmaceutical and personal care markets, as well as strong year-over-year growth in our chem care, mini bulk and chem point service businesses.

Second, we continue to enhance Univar's productivity through our continuous improvement efforts. Our operational excellence projects are helping us more cost effectively deliver the right product on time and are helping streamline our back office work. You've heard how our EMEA restructuring has refocused our business and people on clearly defined markets where we can compete and win at the desired profitability levels. And we are continuing to improve key metrics through which we track performance, such as our on-time delivery performance and customer and supplier satisfaction.

Third is completing tuck-in acquisitions that complement organic growth. After the quarter ended, we completed the acquisition of Chemical Associates, strengthening our offering with a broad portfolio of oleochemicals, many of which are based on renewable resources. Oleochemicals are building blocks for products used in a wide variety of end markets, such as personal care, food, cleaning and sanitization, lubricants, and coatings and adhesives. Because of our commitment to growth and position as one of the two large global players, we are an attractive consolidator. We continue to look for companies that are good strategic fit and enhance our ability to serve and deliver value to our customers, suppliers and shareholders.

These three priorities are the core of our strategy and were key to our ability to offset the significant oil and gas headwinds in the second quarter. They will continue to be key to do the same for the rest of 2015 and will put us in a strong position to grow as we lap these headwinds in early 2016.

Slide 13 shows our outlook and summary. We expect that oil and gas will continue to be a strong headwind in the third quarter. With the July drop in oil prices, we expect Q3 adjusted EBITDA results to be modestly lower than last year on a current currency neutral basis. As Carl previously mentioned, we have aggressively reduced costs in oil and gas, consistent with our largest oil and gas customers, and are well-positioned to gain when oil production drilling activity rises again. We expect to lap the largest negative year-on-year oil and gas challenges in the second half of this year and will finish the year with lower oil and gas exposure to total Company sales.

As of the second quarter, our oil and gas and mining sales were 13% of total Company sales. We are experiencing good momentum in our specialties businesses and services businesses and continue to achieve sustainable benefits from our productivity initiatives company-wide. Our financial condition is now much stronger. With our successful IPO and the completion of our debt refinancing in July, we have significantly strengthened our balance sheet and will improve future cash flows by reducing cash interest payments. With just under $1 billion in liquidity, we have the resources to invest in attractive growth. The bottom line is that we are continuing to strengthen our execution of our clear strategy, with the goal of growing the value of Univar through product and services mix enrichment, productivity and acquisitions. And we have the right leadership team in place to deliver.

With that, I will turn it over to the operator for Q&A. Thank you.

(Operator Instructions)

Brian Maguire, Goldman Sachs.

Good morning, everyone.

Good morning, Brian.

Just had a question. The gross margin improvement was pretty impressive, up about 110 basis points. Just wondering if you could decompose that a little bit, how much of that was maybe benefiting from timing differences in lower chemical prices versus when you have to pass that through to customers, and how much of that was mix and how much of that was just some of the productivity and logistics improvements that you've been doing?

Good morning, Brian. Thanks for that. It's Carl. A little bit of what you said in there. But the primary driver, you saw the big step up in the EMEA gross profit margin, which is very much reflective of the plan that we have underway there, the mix enrichment strategy underway. We did walk away from some business that was low or no profit for us. That was a big contributor. You mentioned productivity. That was a big plus for us in the United States, especially, where our Lean Six Sigma rollouts are quite extensive and hitting the gross profit line, as well as the OpEx line. Then you heard in our presentation, services was a contributor. These are higher margin businesses for us. So the mix, the proportion of services revenues in our total revenue for the quarter, was higher versus last 2Q. So I think those were the primary drivers.

Okay. Great. And Carl, you mentioned that the head count and cost reductions in oil and gas are going to be done in phases. Maybe you can just give some timing guidance on when that will start to flow through, how much of it we saw in the second quarter versus how much we will see in 3Q and 4Q?

Good point. The comparisons get a little tricky there. Because remember in 2014, we were ramping up this business in response to exceptionally strong demand. But we are well into phase 4, I'd call it, and the actions have largely been taken. There's still some more to do. But in terms of year-on-year comparisons, that will become more of a help in offsetting the lower volume in the second half of the year than as we phased out, took these actions in the first half. So that's a sense for the timing of when things are happening there.

This is Erik, Brian. I'll just add to that, that the bolt-on acquisitions that were delivering key chemicals, which happened during the second quarter, and then Chemical Associates, which has just more recently happened, are both enhancing our profit margins.

Okay. One last one, if I could sneak it in. I appreciate the guidance on the third quarter being a little bit below the year-ago on a currency neutral basis. Any estimated impact for currency on EBITDA in 3Q?

You saw in the 2Q, it was about $10 million. And we said that it was $168 million, our adjusted EBITDA was $168 million and change. And on a currency neutral basis, $179 million. So that same magnitude of currency headwind is what we are facing here in the third quarter.

What has gotten more challenging in the third quarter and through the second quarter is the oil and gas area. As you've seen, the oil prices continue to decline. It's now in the $50 range. And that's presented a big challenge for us, as well drilling activities have continued to decline. Our customers are telling us it's pretty much bottoming out now. But as we had talked before, our hopes for it to recover in the second half, we now see as unlikely. So we're not counting on oil and gas recovering in the second half. We're going to keep pushing hard on the other 92% of our business, or 91% of our business, as well as bolt-on acquisitions.

Great. Thanks very much.

James Sheehan, SunTrust Robinson Humphrey.

Thanks for taking my question. Could you talk about how your BCS segment did during the quarter, and what is your outlook for that business in the second half?

Jim, thank you for that. BCS, I'd say that pluses and minuses, I think the biggest challenge was the drop in HCL pricing. That reflected the significant drop off in demand from the oil and gas industry. Caustic soda is down a bit during the quarter in volumes and a bit in pricing. Those are the two that jump out the most. HCL is really a demand story.

Pricing year-on-year in the quarter was up, but it's dropped off a lot, and the comps there will be a bit negative in the third quarter. I think those are two of the highlights, HCL and caustic. I would add that the mini bulk business, we continue to see growth in the mini bulk area, which is the higher margin outlet to our BCS products. And we've continued to also add facilities across the US. We will end up adding four facilities this year. So while the overall core alkali market is challenged, largely because of the oil and gas drop, we are seeing areas that we're able to drive growth.

And Brian, just to circle around that, BCS represent about 10% of our chemicals.

Thanks, Carl.

I'm sorry, more than 10% of our total, down about 10% in the next change quarter-on-quarter in revenues.

Great. Thanks, Carl. And could you also update us on your Univar value add metric? Has your outlook for that for the full-year changed at all?

Great question. Return on capital. For those who don't know, I'll use the internal metric. But let me address return on capital. We mentioned that our return on assets deployed was up in the quarter, 22.2%. That's one way to measure it. Our [CROCE], of you use that metric, was also up 11.4% for the quarter. Our internal EVA metric that we use, UVA, the expectation is we have that actually out next couple three years, we expect that to rise quite attractively as we receive the benefits of the improvement in profitability in Europe from our restructuring plan, as we continue to get benefits from a more active management in our net working capital area, and get our days working capital there a little more optimal.

I would say, in sum, we're on plan.

Very much on plan, yes.

Thank you.

Ryan Merkel, William Blair.

Good morning, Ryan.

So I'd like to understand the cadence of sales or gross profit through the quarter, and then what have you have seen in July?

Okay. GP dollars per day in the quarter were flattish in total. But as you break that down, as we mentioned, Ryan, we are showing good growth in GP dollars per day through the quarter in our industrial chemicals business, our ex oil and gas business. GP dollars per day in oil and gas were down in the 30%-ish during the quarter. July trends, I guess I would say that we do not see much change from that going into July. Certainly, the July drop of double-digit drop in oil prices has changed our view on green shoots in the drilling space in the United States in the fracking area. So we don't see any improvement, we don't expect any improvement with the current trend lines in July in oil and gas, and yet, we're driving very hard in industrial chemicals space and hope to continue those trend lines.

The way I would put it is that we see continued improvement in our execution across the Company. The one negative factor is the oil and gas drilling decline due to the lower oil and gas prices, which causes us to have an outlook for the third quarter to be slightly down on a currency neutral basis for EBITDA. But outside of that drilling decline, we are very much on plan and driving hard across the other 91% of our business that isn't upstream oil and gas. Our productivity, our commercial excellence, and our driving our service businesses, resourcing them harder, all with the goal of driving gross profit dollar growth and margin enhancement.

Okay. Very helpful. Then my second question -- very nice performance in the value added services. Did you give the growth rate excluding FX, and then do you think that growth rate can continue or even maybe accelerate from that Q2 level?

Yes, so the majority of our service businesses, as we define them, are in the United States. So there is not significant currency effect. What we have been doing is significantly focusing on these services businesses to make sure that we are resourcing them to grow, with the ultimate goal of getting to double-digit type growth. This quarter, we saw strong single-digit growth and we are going to keep pushing that. I would say that in the near term, our goal is to maintain and build on that single-digit growth, and over the next year or two to try to get that to double-digit growth. But we are very pleased with the fact that two years ago, these service businesses weren't growing, we've now got them to be growing faster than the marketplace, a solid basis, and we're going to continue to push for higher growth. And yes, we believe that's sustainable.

So to put it in my own words, nice performance today, but you're going to get to double-digits, because you're going to add more resources and that's how you get there?

That's our goal for a few years out.

Right. Okay. Great.

And it will be resources and some M&A, the bulk on M&A.

Thank you.

(Operator Instructions)

Jamie Cook, Credit Suisse.

Hello. Good morning. Just a couple questions. One clarification. I think you said during the quarter that oil and gas for you guys was broadly down about 30%. Can you just quantify? I know you're not expecting an improvement in the second half or in the third quarter, but what do you expect that number to be in the third quarter or second half? And then my other two questions, on the SG&A line, the SG&A was lower than I would've thought it looks like you are making good progress there. Was there anything unusual in there and how to you think about that in the back half. And also, the working capital that you made some improvement in all areas, I guess, except inventory. Should we expect working capital days to improve throughout the year? Thanks.

Okay. Good morning, Jamie. It's Carl. Three good questions there. First, the oil and gas, 30%. We had hoped that would gradually sequentially improve in the second half. And now we've changed our forecast, because of the July drop in prices and what we're hearing in the market space that we think that the year-on-year comps in the second half are going to be just as tough.

Remember that last year, we really didn't see oil and gas volumes drop until February of this year. It was ramping up through the whole year. So the second half of last year was even higher than the first half, in terms of volume. So the comps are going to get tougher. The comps will be tougher in the second half in oil and gas. So we've got that ahead in the second half. And just call out again what Erik said, to get the scaling right there on how proportionate that is to our total business. In terms of SG&A, I didn't call it out on our presentation, but certainly we did benefit from FX there. That's probably the largest dollar amount change in SG&A.

Sales force effectiveness is a primary objective that we have going on, with our productivity, our Lean Six Sigma initiative. And net working capital, yes, we improved in receivables and payables. Inventory clicked up a little bit. I think that the sense of that is we're still trying to find the sweet spot between high, high on-time delivery rates and customer satisfaction, and we measure that very closely, versus what I'd say a more financial optimum inventory level. We've got customers that we really want to please and be able to meet their demands on delivery of promise there. So we're still trying to find that sweet spot on receivables. 40 days, not bad, still we can improve on that.

But we don't expect the inventory days to increase significantly from where they are. Over time, as we are putting in place systems to enable us to better manage our inventory, over the next 12 to 18 months, we actually expect our inventory days to come down. But near term, we expect them to be flattish to slightly down to where they are today.

All right. Thanks. I will get back in queue.

Okay. Thanks.

There are no further questions at this time. I turn the call back over to the presenters.

Thank you all for your interest in Univar. We very much appreciate that. We feel very good about the progress that we are making in improving the execution to deliver strong results and value for our Company and our shareholders. We feel like we are continuing to make progress versus our plan that we've described to you in the past. And we will continue to do that, despite the challenges in the oil and gas market, which make us just more committed to drive the improvements that we've got across the Company and deliver the kind of results that you expect. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.