Univar Solutions Inc (UNVR) 2016 Q3 法說會逐字稿

Good morning, my name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the Univar Inc third-quarter earnings conference call.

(Operator Instructions)

Mr. David Lim, Vice President of Corporate Development and Investor Relations, you may begin your conference.

Thank you and good morning. Welcome to Univar's third-quarter 2016 conference call and webcast. With me today are Steve Newlin, President and Chief Executive Officer; and Carl Lukach, Executive Vice President and Chief Financial Officer.

This morning we released our financial results for the quarter ended September 30, 2016, along with a supplemental slide presentation. The slide presentation should be viewed along with the earnings release, both of which have been posted on our website at Univar.com. During this call we will refer to certain non-GAAP financial measures for which you can find the reconciliation to the comparable GAAP financial measures in our earnings release and the supplemental slide presentation.

As referenced on slide 2 we may make statements about our estimates, projections, outlook, forecast or expectations for the future. All such statements are forward-looking and while they reflect our current estimates, they involve risks and uncertainties and are not guarantees of future performance. Please see our SEC filings for a more complete listing of the risks and uncertainties inherent in our business and our expectations for the future.

With that, I'll now turn the call over to Steve for his opening remarks.

Thank you, David, and welcome to Univar's third-quarter earnings call. We appreciate your interest in Univar performance and outlook. I'll start this call with some overall observations on where we are today is a Company, discuss our initiatives that drive commercial greatness and operational excellence and comment on our third-quarter performance and the market.

Three months ago on my first call as CEO, I shared with you my initial observations and said I would have much more to share with you on upcoming calls. In the last 90 days I learned a lot more about our Company. I've met with key customers and suppliers, spent more time with our employees, participated in our first-ever US sales leadership meeting and held discussions with existing and potential shareholders.

All of this has given me direct firsthand insights on what we are doing well, as well as a treasure chest of opportunities to improve. And with that clear understanding, we've mapped out our priorities.

On the positive side, we have a strong record on safety. Our suppliers and customers value this and it's a key differentiator for Univar in the marketplace. We have great product and service offerings, the broadest array of chemical products and services in the industry.

Our supplier base is very strong. We have relationships that span decades and carry terrific renowned brands. We give chemical producers the opportunity to capture more growth for their products by accessing markets and customers they don't.

Our delivery rates are among the industry's best. We have tremendous global scale. We are the number-one chemical distributor in North America and number-two in Europe.

We can leverage our market presence and operating scale to provide value to all our constituents. We are in an industry where commercial fundamentals present the opportunity to deliver superior earnings growth. We have opportunities to lower unit transaction cost through operational excellence and digitization and consolidation opportunities.

And we have great people at Univar and a recharged high-energy leadership team with a strong commitment and work ethic. It all adds up to a good list of positives from which to build a strong foundation with competitive advantage in a growing market, and we expect to increase our share of that growing market. However, particularly in the US, as we've not been taking full advantage of these many strengths.

Over the past few months, in discussions with several key customers and suppliers, I've confirmed that there are gaps in what our customers and suppliers expect from us and how we are executing. Our sales force productivity is not reaching our full potential to sell more new business that presents growth upside. We are in some very one-sided business arrangements that consume excessive resources, limiting our ability to go after good profitable business and create value.

These are all execution problems that we can and will fix and they're all upside opportunity for us. We have over $100 billion of potential business we need to get after. In order to make the most of this growth opportunity, we need change, with urgency.

We are going to change our culture, we've already started. We are going to improve our execution to drive commercial greatness and operational excellence. As I shared on our previous call we create a lot of value in the supply chain for customers and supplier partners.

With the number-one position in North America we're the market leader with plenty of room to grow. Now more than ever a value-based selling approach is perfect for today's environment, especially in light of the stagnant economy and customers' tight budgets. When we show our customers the value we create for them, we not only win in the short-term, we forge partnerships that will produce outsized returns for Univar in the future.

Our customers are looking for help and we have the products, services and the dedication they need. As our sales force execution improves, so too will the value we create for our supplier partners. During in the third quarter we began taking steps to improve our sales force execution.

We implemented new controls and processes to drive accountability and rigor with our sales management and reset expectations for profitability and growth. While we do not plan on adjusting incentive plan metrics until January 1, we started the process of changing the mindset of our commercial organization to reward performance that drives profitable growth. Sales force execution is clearly the biggest lever that we have.

As we improve our commercial execution we're going to become more valuable to our customers and our supplier partners, as we support their goals. This will take some time and results could be a bit bumpy in the short-term but we're going to go about this the right way to build a strong foundation that's consistent and sustainable. We're working to build a culture where discipline and rigor are a way of life.

We are instilling discipline in our approach to doing business, making sure that we are prepared, understand our customers and anticipate their needs. And our employees are responding; they are excited about what lies ahead. In North America, we compete in a $30 billion-plus market with more than 85% of the market in the hands of our competitors.

Our sales force sees this as a golden opportunity to win new profitable business at a much faster pace. When we bought our US commercial leaders together late last quarter, we worked on creating a profitability mindset and dug deep into redefining our sellers' roles and expectations we have of them. We also provided our sales leaders with value-based training and tools that will help them and their teams improve execution.

I've got to tell you, I'm really excited about what I saw. Our top sales leaders, and for that matter our entire organization, is getting focused, excited and ready to capitalize on the opportunities that they have in front of them. We will be investing in hiring, training and talent to drive profitable growth.

With regard to operational excellence we are deploying Lean Six Sigma methodology to improve the productivity of our operations, but we are in the early stages. We have many opportunities to simplify, automate and lean out processes. We are evaluating digitization projects, to simplify and lower our transaction costs, reduce errors and make it easier to do business with us.

We're also exploring opportunities to create efficiencies in our supply chain area and we'll take will take a fresh look to optimize our asset footprint and logistics capabilities. Switching now to our third-quarter results. I'm encouraged.

After what's been seven consecutive quarters of year-over-year adjusted EBITDA declines, it feels like we are at or near the bottom in terms of comparisons to the prior year. For the fourth quarter we've reported $146 million in adjusted EBITDA, slightly better than we expected, and posted double-digit EBITDA growth outside the US, with strong performance in Canada and Europe. In the US it feels like we are beginning to see some very early signs of execution gains and we are cautiously optimistic.

However, it is still very early and much work remains before we will see consistent double-digit profitability growth. Overall, we continue to see sluggish economic conditions in the markets we compete in, with flat industrial production and GDP growth. We do not expect these conditions to improve anytime soon -- of course, that is all more reason for us to execute better.

Let me comment briefly on our upstream oil and gas business which has continued to be extremely challenging. We made the decision to close four additional facilities and take $137 million non-cash charge to write-down assets primarily related to the acquisition of Magnablend in 2012. We bought this business at the market peak when oil prices were double today's price.

This investment has not performed well for us. We have become more selective, disciplined and thoughtful in our acquisition process and this is not something you should expect from us in the future. We're becoming more strategic on how we approach the markets we serve and we're in the very early stages of focusing our resources on the highest-value growth opportunities.

We made some tough decisions in an effort to reduce costs but we can not and will not be complacent and support businesses that do not create value for stakeholders. We are taking a hard look at our business relationships and we'll be pruning some one-sided arrangements across our business lines. Not only are some of these deals unprofitable, but they typically consume excessive resources that limit our ability to go after more profitable business.

We will also be conducting a comprehensive review of our product portfolio and market verticals to identify the highest-value opportunities for us to grow our profitability. We will have an update on that progress during a future call once our review is complete and our plans are in place.

We will continue to improve our balance sheet while executing on our strategy of enriching our business mix through commercial greatness, driving operational excellence and pursuing bolt-on acquisitions. We see many opportunities to make accretive acquisitions but we will be strategic and selective in our process.

With that backdrop, I'll now turn the call over to our CFO, Carl Lukach, who will walk you through our third-quarter results. Carl?

Thank you, Steve, and thanks everyone for joining. I'll begin on slide 3.

For the third quarter our GAAP earnings per share declined from $0.09 last year to a loss of $0.46 this year. The decrease was due to a $137 million, or $0.63 per share, impairment charge related to the write-off of certain assets in our upstream oil and gas business.

In addition our other operating expenses, net, were about $3 million or $0.02 a share higher than we forecasted three months ago, largely due to consulting expenses related to our restructuring activities. And we occurred roughly $3 million or $0.02 a share in non-operating expense that was not forecasted due to mark-to-market impacts related to foreign exchange translations.

Adjusted EBITDA in the quarter declined $11 million or 7% from $156 million to $146 million, as 12% growth outside the US was more than offset by lower results in our USA segment. As Steve noted, this was a bit higher than we forecast three months ago and we are seeing early signs of impact from the improvement actions we have underway. Our adjusted operating cash flow was strong at $156 million, that's adjusted EBITDA less change in net working capital, less CapEx.

Moving then to oil and gas on slide 4. During the quarter we revised our operating plan for our upstream oil and gas business to further reduce costs in response to the prolonged and significant decrease in demand for chemicals used in the fracking industry. We are closing operations at four more facilities and triggered an impairment of certain long-lived assets associated with our 2012 acquisition of Magnablend.

As a result, we recorded a non-cash pretax impairment charge of $131 million. We also recorded a loss of $3 million for unsalable inventory and $3 million in accelerated depreciation related to a site closure in our upstream business. The total of these charges in the quarter were $137 million pretax, or $0.63 a share.

We expect to incur an additional $4 million in expenses to complete these sites closures over the next six months. Turning now to our consolidated results on slide 5.

On a consolidated basis, our net sales were down 9%, 4% from lower volumes, 6% from lower average selling prices, partially offset by a 1% benefit from acquisitions. The 4% volume decrease was from a combination of lower demand from oil and gas and our EMEA restructuring. Excluding these two factors, global volumes were up slightly, about 0.5% versus last year.

Average selling prices globally were 6% lower, reflecting a significant drop in prices for a handful of bulk commodity chemicals in our portfolio. Our gross profit dollars declined $12 million from last year, or 3%, as a result of lower volumes. However, our gross profit percentage increased 150 basis points and our gross profit per pound of product increased 1% versus last year.

Adjusted EBITDA margins increased 20 basis points to 7.3% as a result of higher gross profit dollars per pound and lower operating costs, including lower delivery expense. I'll now take you through each of our segments, beginning with the USA on slide 6.

In our USA segment adjusted EBITDA declined 13% to $90 million, primarily due to the decline in oil and gas. Gross profit dollars declined 4% as a result of the 6% decline in average selling prices and 5% decline in volumes. Gross profit per pound increased 1% versus last year compared to a 4% decline in the last second quarter.

USA volumes were down 5%, but this was comprised of a 35% decline in our upstream oil and gas business and a 1% decline in our industrial chemicals and services business. Revenue from our USA-centric services businesses increased 15% in the quarter, reflecting the acquisitions of Weavertown and Bodine. Excluding acquisitions, organic top-line growth was 6% led by ChemPoint and its new product authorizations.

[Distributed] gross profit increased 16% in the quarter, driven largely by organic growth at ChemPoint and the acquisitions. In aggregate, our three service businesses comprised 13% of our USA sales versus 10% last year.

Our USA operating expenses, including delivery costs, increased 1% as lower personnel costs and lower discretionary spending were offset by incremental costs from acquisitions. EBITDA margins declined 20 basis points as a result of lower gross profit dollars.

Let's move then to Canada on slide 7. Our Canadian segment performed well in the quarter, as a strong ag season, favorable product mix and margin enrichment efforts offset the impact of soft industrial demand and weakness in Western Canada energy markets. Volumes declined 4% and average selling prices declined 8%, partially offset the benefit of acquisitions in FX, resulting in a net 10% decline in sales.

However gross profit increased 5% as a result of favorable product mix. Gross margins improved 310 basis points to 21%. Outside the agriculture industry, industrial demand in Canada remained sluggish.

We are pursuing mix enrichment initiatives that focus on personal care, pharmaceuticals and food ingredients and separately we are starting to see signs that a bottom may have been reached in our Western Canada energy business. We continue to see the benefits of productivity initiatives in Canada with a 3% decline in operating costs, excluding the impact of acquisitions. Adjusted EBITDA increased 10% and adjusted EBITDA margins increased 190 basis points to 10%, driven by growth in gross profit and strong operating expense controls.

Moving then to slide 8 and our results in Europe, Middle East and Africa. We had strong 34% growth in adjusted EBITDA in EMEA, despite overall stagnant demand from industrial markets and continued foreign currency translation headwinds. Sales declined 5%, overall volumes increased 2% but were offset by average selling price declines of 6% and FX headwinds of 1%.

Our gross margin increased 110 basis points to 23%, reflecting our mix enrichment strategy and the facility shut-downs we completed last year. Gross profit dollars were flat year over year. Gains in the pharmaceutical end-market were offset by declines in basic chemicals, reflecting sluggish demand and lower average selling prices.

Our EMEA adjusted EBITDA margin increased 200 basis points to 7%, due to gross margin improvements and 10% lower operating expense. As we said in prior quarters, we expect to lap in the fourth quarter the cost-saving benefits of our EMEA restructuring program and expect sluggish market demand to continue.

Moving then to slide 9 and the rest of our world segment, of which approximately 85% of our revenues are from Latin American markets. Sales declined 12% or 7% on a currency-neutral basis, reflecting the drop in the Mexican peso. Adjusted EBITDA declined 30%.

Our business in Latin America was negatively impacted by foreign currency translation and softness in demand from the oil and gas segment in Mexico. In addition, overall weak economic conditions in Mexico resulted in lower selling prices and gross profit per pound declines.

In Brazil we saw very weak economic conditions and sluggish industrial production. We are taking actions to improve our commercial activities and drive operating efficiencies in response to the weakness in market demand for chemicals.

Despite the softness in Latin America, our three segments outside the US, in aggregate, grew adjusted EBITDA 12% on a reported basis and 14% on a currency-neutral basis. We attribute this largely to cost reductions from our successful restructuring in Europe and the strong growth in our Canadian agriculture business.

On slide 10 you can see that our cash flow was again strong in the third quarter. Adjusted operating cash flow was $156 million. We define that as adjusted EBITDA less change in networking capital less CapEx.

This equates with 107% after CapEx cash conversion rate and a strong 8% operating cash margin. Our CapEx of $21 million was down 50% from last year. For the full year we continue to expect CapEx to be less than $100 million which would be down more than $45 million from last year.

While interest expense was flat with last year in the quarter, cash interest payments of $43 million were up $31 million, due to the timing of interest payments last year related to the refinancing we completed in the third quarter of last year. We continue to expect full-year cash interest to be about $150 million which would be about $11 million down from last year.

Pension contributions of $8 million were down nearly 50%. We continue to expect full-year contributions this year will be down about $30 million. Separate from pension funding, I want to point out that in the upcoming fourth quarter, we will make our annual mark-to-market pension accounting adjustment to reflect the change in market interest rates used to measure the net present value of our pension obligations, and also used to measure the forecasted return on assets we earned by the pension funds.

Based on current interest rates, we expect to have a significant non-cash mark-to-market accounting loss in the fourth quarter. Cash taxes were $3 million in the quarter versus $15 million last year. This is due to a higher mix of earnings in geographies where we were able to utilize our tax loss carry-forwards.

For the full-year 2016 we expect cash taxes to be under $5 million, that's $33 million lower than last year. Our effective tax rate for the quarter on a GAAP basis was higher than anticipated and might be misleading for forward guidance due to the tax accounting treatment of our oil and gas impairment loss. Excluding the impact of the oil and gas impairment, our effective tax rate for the quarter would have been 25%.

We estimate our annual effective tax rate to settle in between 15% and 20% when you exclude the impact of the oil and gas impairment and the upcoming fourth-quarter pension mark-to-market adjustment. With regard to uses of cash, our priorities continue to be to reinvest for growth in our asset-light business model, including digital projects that will lower transaction cost per unit, as well as sales force training and commercial investment. Second, to make targeted attractively-priced value-creating bolt-on acquisitions, and third, to pay down debt.

As a reminder, we have $40 million of scheduled debt amortization payments this year. Last quarter we indicated we were aiming to pay down double that amount this year. Through September we've reduced net debt by $100 million and may reduce it further in the fourth quarter.

Slide 11 details our debt profile. Net debt at quarter end was $2.9 billion, down $100 million from year end. Our leverage ratio of 5.1 times was in line with our leverage ratio in the second quarter.

Our total liquidity remains strong at $805 million and our cash interest coverage is 3.5 times, up from 3.4 times a year ago. Our weighted-average interest rate at quarter end was 4.6% pretax. While most of our interest expense is based on floating interest rates, we have hedged our exposure to future interest rate changes to achieve approximately a 70% fixed, 30% float ratio.

Our return on assets deployed in the quarter was well above our cost of capital but down from last year, mainly due to the decline in our oil and gas business. Let me now address our outlook for the remainder of the year on slide 12. Three months ago we shared with you our expectation that second-half adjusted EBITDA would be slightly below first-half and that the third and fourth quarters would be about evenly split.

While our third-quarter results were slightly better than what we forecast three months ago, we continue to expect second-half adjusted EBITDA will be slightly below first-half as we face fourth-quarter sluggish industrial demand, lingering headwinds from oil and gas and stiffer FX variance from post-Brexit exchange rates. We also need to overcome some favorable customer advance buying that we benefited from in the third quarter and in last year's fourth quarter. Our cost productivity actions will continue to help offset these headwinds.

Historically, the fourth quarter is our lowest earnings quarter. Our aim this quarter is to establish a baseline for future growth and to put an end to negative year-over-year EBITDA comparisons that started in the first quarter of 2015.

Taking the pluses and minuses into account, we expect fourth-quarter adjusted EBITDA to be between $127 million and $132 million. As a result, we are narrowing our full-year adjusted EBITDA outlook range from $550 million to $565 million to a tighter range of $555 million to $560 million. With that, I'll turn it back to you, Steve.

Thanks, Carl. Let me conclude by sharing with you with what we see in our future. While we can't say with certainty, it appears as though we should soon halt the year-over-year comparable declines and turn towards growth within the next few quarters, barring any major unexpected exogenous events.

We have an exciting opportunity here at Univar to grow the profitability and size of our Company. We have three powerful drivers for growth working in our favor. First, the distributed chemicals market is a growing market and we expect to grow it even faster.

More and more chemical producers are recognizing the growth and value that Univar can deliver. We will continue to invest in our value proposition to our customers and supplier partners to make it more compelling to do business with us and increase our number of new product authorizations.

Second, Univar's market share, even as the North American leader, is low in the highly-fragmented distributed chemicals market. As we improve our operational and commercial execution, leverage our large and growing scale and complete more bolt-on acquisitions, we will increase our market share.

Third, Univar's margins are rising and profitability growth will follow. By focusing on better sales force execution, improving our mix by selling more specialties, pruning unprofitable business, smarter in strategic marketing and reducing transaction costs per sales dollar, we will capture more of the value we create for our customers and supplier partners. In order to make the most of these drivers, we will invest in training, adjust our sales incentive structure and instill rigor and discipline across every task and function in the organization.

We will invest in marketing resources to better guide us to more attractive organic growth opportunities. In fact, we have a search underway right now for a Chief Marketing Officer.

We will invest in digital tools that will accelerate growth through more e-commerce and lower our transaction costs. We will take actions to optimize our asset footprint and improve our return on capital. And, to help fast-track our rate of improvement, we have engaged outside experts to broaden our thinking and deploy the latest best practices.

We have much work ahead of us but it's an exciting time for Univar. All of these actions will be accomplished within our current economic framework and use our strong stable cash flow to remain asset-light, reduce debt and begin to deliver attractive year-on-year earnings growth.

Before conclude, I want to let you know that we will host an Investor Day in the first half of next year, probably early spring, to lay out are in immediate and long-term financial targets, to quantify what all these changes will mean to our shareholders. I know this is important to all of you, and having financial targets is certainly something I believe in strongly. We'll have more on this as our plans firm.

Let me be clear, we can and will make the changes needed to build a foundation that delivers consistent sustainable earnings growth. We are not counting on any help from macroeconomic factors, here in North America or overseas, and our goal is to grow the value of Univar even in a stagnant macroeconomic environment.

I am encouraged and excited about the passion and commitment shown by our team members and the rapid start we've made. Like me, they are eager to become more disciplined in our business processes, more accountable for results and urgent in their implementation. Combined, this gives us great confidence in our future.

We have a tremendous opportunity to bring significant value for our customers, supplier partners, employees and shareholders, and we intend with full force to capture that opportunity. With that, we'll open it up for your questions.

(Operator Instructions)

Robert Koort, Goldman Sachs.

Thank you, good morning. I've got several questions, if I might. Firstly, Carl, you mentioned some pre-buying both this quarter and then a year ago in the fourth quarter. Is that purely related to customers getting out in front of cost inflation?

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

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

I think clearly the biggest prize involves capturing more new business gains, Bob. We haven't been bringing up new business in to support the kind of growth expectations that we have and to increase our share. That's a little longer term, I would call that intermediate term. The immediate opportunity is in stopping the silliness of allowing price to be mishandled as we have been. There is a lot more value that we are delivering to our customers that we haven't been selling and capturing. I'd put most of the opportunity that's near-term in that category.

Again, a little longer term. Lots of opportunities in the logistics side of our business. We are going to make a determination what the appropriate ratio is of in-house leads versus third-party logistics. I think we've gotten a little off-balance on that front. That's one example.

We are looking at all these assets that we have, over 100 facilities in the US and how many do we really need to maintain the delivery and support that our customers have come to expect and appreciate? We probably have some opportunities on those fronts as well. That will take a little bit more time but we are working on it right now and we're actually under review with those with an outside support group as we speak.

So I think more than anything, it all boils down to how the sales force operates. This is a business that has so much to do with how the feet on the street behave and how they manage their existing accounts to maintain them and how they pursue and capture new business.

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

Yes, certainly. I didn't -- and you probably know this from working with me in the past, I didn't give a specific definition. I think I gave a lower limit and the lower limit is what I refer to often as double-digit growth. So they may assume that's 10%, I don't necessarily assume it's 10%. And again, it's probably not 99% but everybody understands our mantra is to drive this Company back to consistent double-digit growth.

Second is making more calls, establishing more new business and we are providing a lot of tools to get that to happen. We are putting everyone through a specific sales training program that will focus on this. We will all have a common language. We will all have a common skill set. The leaders can coach these folks on how to go out and make the calls and get more new business. It sounds like a simple thing but the facts are we haven't been doing that.

Last is reduce the number of lost accounts where we have profitable business. We have some accounts that we are either going to make better or we're going to have to excuse ourself from the situation because the perception of our value in a few cases, it's not been sold or it's not there. But clearly getting new business, driving new business growth, better opportunities, not necessarily bigger, working on specialties, starting to look with a profitability mindset toward our base of customers and the potential customers that are out there that represent 85% of the business in the industry.

So that's what were working on with a lot of vigor. It's how do we execute, how do we make more calls, how do we actually effectively make those calls, would do we do when we are out there making the calls, who do we call on? It is pretty broad-based and we had a full two days at this with the entire sales leadership team. We had 120 people in the meeting. It went really well.

Great, thanks for the color.

Thank you.

Laurence Alexander, Jefferies.

Good morning. A couple of different questions. One is, as you look at the acquisitions you feel there are lessons to be learned from, what have you learned, apart from -- because I think some of the examples you cited were ones where clearly if a commodity market gets cut in half, then the related business will under-perform as well. What else have you learned from reviewing the acquisitions that will change your practices going forward?

And secondly, as you think about the churn in staff, you indicated that you are still hiring staff for growth. How fast do expect aggregate staff levels to increase? Or how much staff replacement do you expect to need to do over the next couple of years?

Okay. Laurence, first of all, let me start with the first question about acquisitions. We've made some pretty darn good acquisitions over the years here that have been accretive and have done well. I would characterize those bets as smaller, involving less risk. Businesses that fold fairly well in and bolt on to our existing business or the services business. They've done quite well.

The one that really stands out as not going well is the Magnablend. Unfortunately that's the biggest one and it eradicates all the good work that we've done in the others, unfortunately. I guess the lesson learned here are a couple.

Number one, is placing big bets is pretty risky and that was a half a billion dollar bet. Number two, when a market is at the peak and you don't, of course, know when it's at the peak, but you certainly know that it is substantially higher than it had been in the recent past, it's a pretty difficult time to get the appropriate valuation. And I would say those are probably the two biggest lessons learned with regard to Magnablend.

We acquired eight companies in about 18 months but they were small, they were all manageable. I think that's something that we have to -- would we do a larger deal? Possibly. A lot of that depends on our leverage ratio. We're not comfortable going out a lot farther at this point, for sure. But it would have to be something that was really sensible that we were already involved with. It wouldn't be a step-out into an industry that we hadn't had a long operating history with. And certainly we wouldn't do anything where we feel that prices are at or near their peak.

I think you could expect us to have an ongoing acquisition process, but a lot more thoughtful in what we go after. One of the things I'd like to see us do on the acquisition front is to get after some more specialty-oriented distribution opportunities, and they are out there. They may be small, but we find that we can leverage these. We have some holes in our specialty portfolio that we want to try and fill, so we're looking at those right now. To sum it all up, lessons learned, really risky play at the wrong time. And I think we are cognizant of both of those.

Your next question had to do with people and churn. I don't know how I can quantify the answer, other than to say we have had turnover here and we will continue to have some turnover over the next couple of years. Because we are changing the expectations and we are changing the qualifications that are needed to have success in our environment. It's manageable. The challenge is always finding great talent, and we are working hard to do that.

But you have to balance, it is almost a mass balance, if you will. You bring in new talent in you're ratcheting up expectations and we those that can reach it, and we have a lot of people who will, will be fine. And those who can't survive in the new environment, they'll either choose to leave on their own or we will help them make that decision.

We try to find this balance so we don't have voids and holes out there, and we don't get that perfect. We're chronically going to be looking for hiring 10s, people who have the talent and have the desire to be of something new that is transformative. We'll hope that we can continue to have adequate flow of great talent in the organization. I don't know how else to really quantify it other than that. If you have something more specific on that, Laurence, I'll try.

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

That's the mantra, that's what we are expecting in everyone. I have been in this space a long time, I've worked hard to have credibility with all of our investors and I'm not going to do something to risk that if I don't have supreme confidence in it right now. We are not there yet. I would be delighted if we could deliver that kind of a year next year, but the facts are we probably will have to build to that. I would expect after I've had a full year in this role, that a lot of these processes, expectations, the training, will stick and a lot of these things will begin to bear more fruit.

A few things are happening right now. I think what you have to understand is, we are very confident with the path and the plan that we have. We feel really good about it; it is starting to pay some early dividends. But the hardest part will be capturing more new business gains and getting the skill set in the sellers to get that done. And you're going to have to give us a little time on that front.

Fair enough, thank you.

Steve Byrne, Bank of America.

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

Steve, that's a great question and I really appreciate it. It is spot on. It has been one of our challenges. When you are involved with these major-league suppliers, you must have a trusting relationship that is mutually beneficial. I think we've had a relationship but I don't believe we've done our part in many cases to deliver on that.

These people want -- what do they want? They want you to grow, because they are only going to grow if you do, and we haven't been. The biggest thing we can do to change that is to get our growth back. And that's why you're going to hear over and over again us talk about growth and capturing new business and getting wins. Because that's going to solve a lot of problems, not just on the P&L, but with getting more authorizations and getting more opportunities from our existing supplier partners. And they want this, they want to see us succeed. So that's a really important step.

I make those calls and I have relationships in many of these accounts. So does David Jukes. This is part of senior management's new battle cry, is to get out there and build on the relationships and build trust and talk about the things we're doing. We're going to have a lot more things to do with our suppliers. Some we can't unveil right now, but in terms of getting closer to them, getting them to be a part of our growth strategy. I think it is a really exciting opportunity for us to make them more satisfied and to win more authorizations as we win more new business.

Another high level question about EBITDA margin outlook. Your Canadian business posted a 10% EBITDA margin versus consolidated closer to 7%. Is it product mix in Canada that drove that? I know in the past there was an initiative to get more into that formulation and blending business for crop chemical. I don't know whether that's driving that higher margin. What do you think about a longer-term objective for EBITDA margin? What do you think is achievable by Univar?

Steve, the first part of the question, what's driving it, is just a very solid execution by an experienced team. That Canadian team is -- they're strong and they are doing extremely well in ag, so ag had a lot to do with it. It's less about the market, in my opinion, and more about their ability to execute within the market. We'll say we got help from ag, a great season, but we also helped ourselves up there. I think that we will continue to see this team perform very well.

I don't know Carl do want to add -- in terms of EBITDA margin long term, we're going to unveil -- I appreciate the thirst for some targets and specificity and we're going to give you all that. You deserve that, I'd like to do that. Just not ready to do it right now with the full degree of confidence that I think a CEO who wants to be credible and hit the targets or exceed them, needs to have. So we are working through that and we will get to you on a pretty comprehensive list of high-level targets with regard to growth rates and profitability, sometime by early spring.

Steve, I'll add color on the Canadian business to what Steve said. You can think of our Canadian business as really three different zones. The ag business that we talked about, the industrial east which behaves more or less like the US industrial market, and then the energy market in the west.

Those three sub-segments have different margins so there is mix going on there. The energy space, as you know, is down. That's a little tougher market from a margin standpoint. The ag businesses is up. There's a little bit mix, 10% was a great result for Canada in the quarter. Those are the moving parts.

Very good, thank you.

Allison Poliniak, Wells Fargo.

Hi guys, good morning. Going back to the initial comment on your customers highlighting gaps with Univar, is it just execution or is it a product offering, a service offering that you don't have today but you would probably need to gain further revenue with them?

Really, we have a broad offering. It may be in some cases too broad, we need to do a little work on it. There are a couple of opportunities, I would almost call them holes, but they are not. They are opportunities to get more specialty components to our business that are higher-margin and more differentiated.

But we don't have any place where we are really short of the overall offering customers expect. We are not out-positioned by the competition on that front, we have the full array. And that also includes services.

So it us, we've got to execute. We have to do our jobs better. We have everything we need. Now we are providing new tools to the sales force, we need to give them a little time to work with those, a different strategy around the sales force and some different tactics and tools to deploy.

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

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

Great, that's helpful. Thank you.

Andrew Buscaglia, Credit Suisse.

Hey guys, thanks for taking my question.

Andrew, good morning.

God morning. Could you talk a little bit about -- you talked about, or in your slides too, you say your pricing could tick up a little bit sequentially. Can you talk about pricing in the US and what your conversations are like with your suppliers? One of your competitors talked about how they are trying to -- producers are trying to increase prices but it hasn't been happening. Although that was a little while ago. Can you talk about a recent update there?

Sure, Andrew, it's Carl. The year-on-year pricing is down, you saw that in our numbers. But the second point is that sequentially, and it started maybe the end of August or September for sure, we started seeing early signs of success in our ability to get pricing going. Certainly the suppliers are all eager to get pricing going through.

Some of the basic products where we saw that sequential price increase cost, there's been a lot written about that, [IPA] is sequentially better, propylene glycol, even HCL a little bit up sequentially, which you know is down 40%-plus year on year. Ethylene glycol and methanol ticking up a little bit. What you're seeing, I think, in our numbers is a difference between oil prices in the low $40s in the summer season to now where they are in the higher $40s. And some of that is coming through the more price-sensitive products that are tied to oil.

That's really what's going on. A handful of those products caused the year-on-year variance. The majority of our products are less down in price and we are trying to be a little smarter as well in our sales force execution around price. So that's the color on pricing.

Do you think that will continue into 2017? Or is this something more short-term?

This is Steve. It's hard to say, but I would say this, if oil prices don't decline, I would expect it to continue as long as we don't have any major downturns in industrial production that would reduce supply tightness and demand. I think that we are beginning to see some chemical price inflation which is good for us.

But I'll caution you, it's very early and it's not something we are counting on. We are trying to run our Company with plans around the steady-state, not getting help from outside and executing on our own to grow. And if we are fortunate enough to be helped and aided by some external factors, that's incremental to us. We are hoping but we are not planning.

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

I would say first of all, being more innovative and clever in using technology to facilitate a lot of work that's extremely manual right now. It's kind of surprising where we are today with some of the processes in a logistics business and needing to make some modest investments, not that big a dough we're talking about here, but some modest investments that allow us to understand where our raws are. Understand the packages that we're repackaging, get them out to the customer. And then really starting at the front end of that is how we take and process those orders. Reducing our transaction costs. We don't share our transaction costs publicly but they are well above what I believe is possible in this space and what benchmarking would suggest we have ability to get to. So that is one side of things.

The logistics of our fleet, we made a decision. Really, a lot of this was driven around the oil and gas explosion in opportunity, explosive opportunity in 2014. And we made a decision, because we were short with trucks, to in-source a lot of our logistics. So two-thirds of our delivery is handled by our own truck line. I just don't know that we can be as efficient as someone who does this for living all the time.

And until we can prove to ourselves we can be as efficient, we're going to be trying to understand what options exist, and there are many. I was at one time in another company that had a distribution business that had 100% outsourcing and maintained great delivery schedules and performance, just as we do. We are using Oracle Transportation to track our trucks and look at our efficiency of those right now. We're going to find out, can we do this inside as well as someone else? Or are we better off out-sourcing? Those are just a handful of examples. I hope that helps answer your question.

Very helpful, thank you.

I think we might have time for one more.

[Karen Lau], Scotiabank.

Thank you, good morning, thanks for squeezing me in. If I look at the complexion of the year-over-year EBITDA performance this year, a lot of the growth is driven by Europe. And I realize there is the passing of the baton going on, given the turnaround plan for the US. I want to touch on Europe a little bit. You mentioned that the cost savings pretty much anniversary in fourth quarter, but is there more that you can do in the cost structure of that business? Because If you look at the EBITDA margin, it is still a little bit below your largest peer. Or should we expect going forward that business is going to grow more in line with underlying market trends, not much from self-help cost savings, things like that?

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

Let me hitchhike on that. I just returned from Europe last week and I spent time with our senior management team there and it was a really impressive visit, I have to tell you. I really enjoyed where they are and where they are planning to go. They recognize that cost-cutting is something that doesn't last forever.

And while you have to be efficient and prudent and disciplined at all times, there comes a time when you have to grow your business by penetrating more new accounts. And that's what we spent our time talking about and they have a lot of plans to do this. There again, with all the great work that has been done in Europe, we haven't sold the appropriate amount of new business.

We are now organized there to win and to go capture new business. We are getting -- some of the things that came up earlier in the call, supplier authorizations. We are getting more supplier authorizations in Europe because of the good work that we have done with those suppliers. So we're going to get growth on that front as well.

Europe is quickly becoming all about capturing new business gains and driving the growth of the business by watching the losses very carefully and getting more new wins. And that group is very focused on doing just that.

Okay, that makes a lot of sense. On the US, I think going forward on top of the initiatives that you are doing, you do have the tailwind of oil and gas not going down anymore, not being a drag. Could you remind us what's the total drag embedded in the US number this year, so that we get a sense of how the US has been doing ex oil and gas?

For the full year? You mean the full-year drag?

Yes.

Full-year EBITDA drag year-on-year comparison from oil and gas, we haven't quantified that specifically but it's declining each quarter. It was mid teens in the first quarter. It was double-digits in the second quarter. It was a little more than mid single-digit in the third quarter and then we will probably have that same headwind in the fourth quarter. You can get a sense for the magnitude.

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

I would say it's more margin expansion-driven, driven by better discipline in how we -- let me put it this way, it is not cost-driven. We are going to make some modest investments that will help us grow. I think I mentioned the head of marketing that we are looking for, that is an incremental position. It is all manageable. We are going to fund all this through our growth and through our margin expansion.

You always, in business, have opportunities to reduce costs, but it is very finite and it's often a nonrecurring event. You want to grow in business year in and year out, you have to go get new customers and you have to drive profitability growth. And that's a formula that has always worked for me and it's going to work here again. I think that is what I would look at, is less about the cost and more about the growth opportunity.

Anyway, with that, I think we are out of time here. We have a group of people that we need to talk to, all of our employees around the globe and I look forward to that. We appreciate you joining our call. David?

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

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