Univar Solutions Inc (UNVR) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Univar First Quarter 2017 Earnings Conference Call. My name is Lisa, 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, David Lim, Vice President of Corporate Development and Investor Relations at Univar. David, please go ahead.

Thank you, and good morning. Welcome to Univar's first quarter 2017 conference call and webcast. Joining our call today are Steve Newlin, Chairman and Chief Executive Officer; David Jukes, President and Chief Operating Officer; and Carl Lukach, Executive Vice President and Chief Financial Officer.

This morning, we released our financial results for the quarter ended March 31, 2017, 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, net earnings release and a 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 first quarter 2017 earnings call. We appreciate your interest in Univar. I'll start this call with some remarks on our first quarter performance and the market, and then provide an update on our actions to drive commercial greatness and operational excellence.

I'm very pleased to report adjusted EBITDA of $142 million, an increase of 6% over Q1 last year. Margins increased in the U.S., Europe and Canada. And we posted double-digit adjusted EBITDA growth outside the U.S., with strong performances in Canada and Europe offsetting softness in Latin America.

In the U.S., after 8 quarters of year-over-year EBITDA declines, we achieved our first quarter of growth. While the growth was nominal, it's noteworthy as we view this as a key turning point for us, and one that we expect to build upon. On top of that, growth turned positive in a quarter that was marked by significant organizational change in the U.S., which appears to have been done with minimal commercial disruption. There are signs our initiatives are taking hold, and we're very encouraged by our performance. Our business win-loss ratios are improving in EMEA and Canada, and we expect to improve our win-loss ratio in the U.S.

We're in the early innings of our transformation, and there's still much work ahead of us before we see consistent double-digit profitability growth.

Overall, market conditions remained sluggish from a volume perspective. In the first quarter, our volumes declined 3%. A portion of that decrease was expected as we executed our margin management and pruning actions. We see signs of optimism and confidence from our customers and suppliers, particularly in the U.S.

Despite sluggish volumes, we saw some chemical prices increase in our portfolio as the quarter progressed. We're continuing to improve our position for growth based on our leading market position, broad product and service offerings, top safety record, foremost on-time delivery rates and a talented and experienced management team that's dedicated to execution.

For the past 9 months, we've been relentlessly focused on changing our culture and improving our commercial and operational execution. We've continued to take steps toward better sales force execution. We implemented new controls and processes to drive accountability and rigor within our sales management and reset expectations for profitability.

In addition to holding our first-ever North American sales leadership conference last fall, we also held a European sales leadership conference in February. I personally attended this event and came away highly impressed by the talent level, energy and commitment displayed by our EMEA sales leadership team. The top priority for EMEA is to accelerate new business gains, and that team is highly committed to do so.

We're making ongoing investments in our sales force talent, including hiring and training, and changing the mindset and expectations of our organization to drive sustainable, profitable growth.

As mentioned last quarter, we realigned our U.S. commercial organization structure in February into 4 distinct lines of business: focus industries, local chemical distribution, bulk chemical distribution and services, making each of our sellers specialists in their respective business. This new structure largely replicates the structure that was put in place in Europe last year and is highly customer-focused.

Our sellers were given their new roles and assignments February 1 and spent the first few weeks transitioning accounts. The reception from our sellers and customers has been positive, and we expect to improve our mix as we become more specialized with dedicated sellers aligned to customer end-markets, including industry, product, geography and service. This will improve our value to our customers by providing deeper industry expertise and market insights to address their needs.

We are laser-focused on driving growth as our top priority and are improving our execution to do so. While we're encouraged by our recent results, our sales force productivity has not nearly reached its full potential. We are upgrading our capabilities through training and have open positions we need to fill. As we reset expectations and improve our skills, we'll sell more new business and lose less, driving value and growth.

We're also deepening our supplier-partner relationships to earn more new product authorizations and grow the market, which represents a tremendous upside for us.

In parallel with our U.S. realignment, we're driving operational excellence by redesigning our supply chain to better fit the needs of our different lines of business. We're undertaking a comprehensive effort to improve supply chain and go from good to great. Our new U.S. organization allows us to better serve our customers and suppliers by bringing the right expertise and a tailored supply chain to meet their needs. We believe that we can improve the efficiency and effectiveness of our branches and warehouses. At the same time, we're looking to increase the flexibility and competitiveness of our inbound and outbound logistics, target greater asset productivity and develop more efficient relationships with our external providers. We're making progress with our initiatives to optimize our asset footprint

During the quarter, we announced the consolidation and closing of 4 non-core locations and are continuing an active evaluation of our network. We're working with a highly respected consulting firm on a daily basis.

Finally, we are implementing digitization projects to simplify and lower our transaction costs, reduce errors and improve our customer experience. In late April, we rolled out our new web-based digital interface for our customers called myunivar.com. Myunivar has been designed and built on specific customer feedback, with a focus on making it easier to do business with us.

Still in the early stages, and we will continue to upgrade the platform as we progress and build it out. In addition to executing on our growth strategy by building commercial greatness and driving operational excellence, we're improving our balance sheet while pursuing scalable acquisitions. We see many opportunities to make accretive acquisitions. We will remain strategic, selective and disciplined in our process, seizing opportunities that make Univar better and can be leveraged across our platform.

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

Thank you, Steve, and thanks, everyone, for joining. I'll begin it on Slide 3. Today, we reported GAAP EPS of $0.16 a share for the first quarter compared to $0.10 reported in the prior year first quarter. Our earnings per share included mark-to-market revaluation losses of $4.1 million or $0.03 a share related to our foreign currency-denominated loans and net monetary balances. Excluding these items, earnings per share would have been $0.19.

Adjusted EBITDA increased $8 million or 6% from $134 million last year to $142 million. Currency translation tempered EBITDA growth by 1.5%, mostly from the change in the euro-dollar exchange rate. So on a currency-neutral basis, our adjusted EBITDA grew 7.5%.

We had another quarter of double-digit EBITDA growth outside the U.S., which was up 16%. In the U.S, we turned the corner to growth with a slight year-over-year increase after 8 long quarters of decline that was largely precipitated by the drop in demand from U.S. upstream oil and gas markets. We saw steady sequential improvement in our U.S. profitability from the actions we have underway, and we expect to build on those improvements going forward.

We invested in working capital during the first quarter, as we typically do this time of year, especially in our Canadian ag business. And our cash flow reflects that investment. Our days working capital metrics improved from year-end as we maintained our efficiency gains.

Turning now to our consolidated results on Slide 4. First quarter sales were equal to last year. 3% higher average selling prices were offset by a 3% decline in volume. The higher average selling prices resulted from modest chemical price inflation for certain of our products and mix improvement from focused initiatives to improve our sales force effectiveness, along with actions we took to address low-margin business.

The decline in volumes was mostly in the U.S., where we made significant changes to our go-to-market strategy and organizational structure, and spent several weeks realigning our sales force and transitioning customer accounts. Much of our volume decline was expected, as we implemented margin enhancement actions and pruned some unprofitable business.

Our gross profit dollars increased $9 million from last year, as higher average selling prices and improved profitability more than offset lower volumes. Our gross profit percentage in the quarter increased 50 basis points to 22%. Operating expenses, which includes delivery, warehouse, selling and administrative expenses, were essentially equal to the prior year, as investments in sales force, digital tools and training costs were offset by productivity gains. Adjusted EBITDA margin increased 40 basis points to 7.1% as a result of higher gross profit dollars per pound and operating expense control.

Let me take you through each of our segments, beginning with the USA, on Slide 5. In our USA segment, we turned the corner to growth, as adjusted EBITDA increased a modest 1% to $82 million. Improved profitability per pound and lower delivery costs more than offset the impact of lower sales.

Net sales decreased 3%, as the 6% decline in volume was partially offset by 3% higher average selling price. Volume declines in the quarter were driven by our commercial realignment and profitability initiatives as well as soft demand.

Despite the slight decline in sales, our gross profit dollars were equal to the prior year as a result of improved product mix and margin management initiatives. Our gross profit margin improved 70 basis points to 22.8%. EBITDA margin increased 30 basis points to 7.1% as a result of the higher gross profit dollars per pound.

Turning then to our results in Canada on Slide 6. Canada had a strong quarter, driven primarily by rebounding demand for methanol in Western Canada energy markets, increased demand in mining and a good start to the ag season. Net sales increased 13% to $307 million, due largely to an 8% increase in volume and a 1% contribution from acquisitions.

Our Canada team is executing well, and we are seeing improvements in our win-loss ratio. Gross margins decreased 40 basis points due to product mix, but gross profit dollars grew $5 million or 10% as a result of higher volume. Adjusted EBITDA increased 14%. And adjusted EBITDA margins increased 10 basis points to 8.1%, as the lower gross margin percentage was offset by lower operating costs as a percentage of sales.

In our Europe, Middle East and Africa segment, on Slide 7, you can see that adjusted EBITDA grew $8 million in the quarter to $36 million. Net sales increased 0.5%. Higher average selling prices were partially offset by a 2% decline in volume. The volume decline in part can be attributed to a temporary shortage of solvents in the marketplace, which has subsequently been alleviated.

Our local chemical distribution business had solid performance, driven by improved conditions in the U.K. and Turkey. Our focus industry business, which includes personal care, food, coatings and pharmaceuticals, performed very well, and we are starting to see improvements in our win-loss ratio. Of the $8 million in adjusted EBITDA growth in the quarter, approximately half can be attributed to increased sales of our pharmaceutical finished goods that compared to an abnormally low level of sales in the prior year first quarter.

The remaining growth in first quarter adjusted EBITDA in EMEA can be attributed to higher gross profit margins from our pricing actions and favorable product and market mix, along with lower warehouse selling and administrative costs. As a result, adjusted EBITDA margin increased 170 basis points to 8.2%. Margins also benefited from 2 extra billing days in Europe this quarter due to the timing of the Easter holiday, which will reverse in the second quarter.

We expect adjusted EBITDA margins in EMEA to give back some of the improvements seen in the first quarter.

Moving then to Slide 8 and our Rest of the World segment. Sales were essentially flat with the prior year, as higher average selling prices were offset by lower demand in Mexico and continued sluggish economic conditions in Brazil. In Mexico, we saw lower demand in the oil and gas market and softness in the economy, which led to lower gross margins.

In Brazil, our business performed well despite the sluggish economic conditions due to the high mix of specialty personal care products in our portfolio. We also took additional cost actions in Mexico and Brazil to respond to the tough economic conditions there.

Adjusted EBITDA of $7 million decreased $1.2 million, as lower gross profit was partially offset by lower operating expenses. Our 3 segments outside the U.S. in aggregate grew adjusted EBITDA in the quarter 16% on a reported basis and 20% on a currency-neutral basis. This performance was largely driven by higher average selling prices, higher volumes in Canada, gross margin improvement and the 2 extra billing days in EMEA.

Moving now to Slide 9, where you will see an overview of our cash flow in the first quarter. As expected, we had a seasonal outflow of cash for working capital in the quarter in advance of our seasonally strong second and third quarters. Our accounts receivable and inventory metrics both improved. Our 13-month average net working capital as a percentage of sales improved to 12.3%, a decrease of 40 basis points from 12.7% a year ago.

CapEx was $21 million in the quarter, down 11% from the previous year. For the full year, we expect CapEx of $110 million, up slightly to fund digitization projects. Cash taxes in the quarter were $12 million compared to an inflow of $7 million last year, when we received a tax refund. Our effective tax rate for the quarter on a GAAP basis was 7%.

Excluding the impact of discrete items, our effective tax rate was about 24%. We continue to expect our full year effective tax rate to be between 20% to 25%.

With regard to uses of cash, our priorities continue to be, first, to reinvest for growth in digital projects that will lower our transaction cost per unit, e-commerce as well as sales force training and commercial investment; second, to make targeted, attractively priced and scalable acquisitions; and third, to pay down debt. In 2017, we have $90 million of scheduled debt amortization payments to be paid later in this year.

Slide 10 details our debt profile. Net debt at quarter-end was $2.7 billion, down from $3 billion a year ago. Our leverage ratio of 4.8x was down from 5.0x last year. Our total liquidity remains strong at $878 million, an improvement from $761 million last year. And our cash interest coverage is 3.9x.

In November 2016, we successfully executed attractively priced interest rate swaps that economically convert approximately 80% of our floating-rate debt to fixed rate for the next 3.5 years. In January 2017, we repriced $2.2 billion of our term loans, lowering annual interest cost by 50 basis points or approximately $11 million per year for the next 5.5 years.

Pro forma for the repricing, our weighted average interest rate on debt is now 4.35% pretax. Our return on assets deployed in the quarter was 20%, well above our cost of capital.

Let me now address our outlook for 2017 and the second quarter on Slide 11. We are making good progress against our commercial greatness and operational excellence initiatives. Our margins and working capital productivity improved in the first quarter. We are generating strong free cash flow, and we are executing well on our growth and productivity plans. As a result, we're raising our guidance for the full year to deliver mid- to high single-digit adjusted EBITDA growth. For the first half, we now expect mid-single-digit EBITDA growth and accelerating in the second half of the year to near double-digit growth by year-end, as our initiatives continue to take hold. For the second quarter of 2017, we expect our adjusted EBITDA to increase mid-single digits from last year's $148 million, as we invest and execute in our plans and build our growth profile.

With that, I'll turn it back to you, Steve.

Let me conclude by sharing with you what we see in our future. Our absolute priority is to drive profitability growth and do so in a manner that is reproducible and lasting. We've ignited positive momentum now and intend to capitalize on that.

We have a truly exciting and unique opportunity here at Univar to grow the profitability and the size of our company. As you know, we have 3 powerful pathways to grow value at Univar.

First, the distributed chemicals market is a growing market, and we expect to grow it even faster by making our value proposition to supplier partners and customers more compelling and make it easier to do business with us.

Second, Univar's market share, even as the North American leader, is low in the highly fragmented distributed chemicals market. As we improve our win-loss ratio, capture more new business, make scalable strategic acquisitions and leverage our scale, we'll increase our market share in this large and growing market.

Third, we are laser-focused on execution, and Univar's margins and profitability are rising. By focusing on better sales force execution, improving our mix by selling more specialties and services, developing smarter and more strategic marketing and reducing transaction costs, we'll capture more of the value we create for our customers and supplier partners and generate superior returns for shareholders.

In order to capitalize on these potent opportunities, we've adjusted our U.S. sales incentive structure and are investing in training and hiring, changing expectations and instilling rigor and discipline across every task and function in the organization. We're investing in digital tools that will accelerate growth through more e-commerce and lower our transaction cost. We're taking actions to optimize our asset footprint and cost structure and further improve our return on capital.

A key element of building commercial greatness is having significant market intelligence at our disposal that will help us better identify, prioritize and allocate resources to the most attractive high-growth markets and further differentiate our brand. We also need to better capture and market the value that we offer our customers and supplier partners.

In support of that, in March, we hired Ian Gresham as our Chief Marketing Officer. Ian joined us from Sherwin-Williams and is already collaborating with our segment business leaders and marketing teams to find better ways to gather, manage and use data to drive more effective business decisions that will help us grow our sales and build our brand.

We're increasing our rigor and discipline and have fortified our management team. We are organizing to win in the U.S. to drive superior growth under David Jukes' leadership, and we expect to grow double digits outside the U.S. We will use our strong, stable cash flow to fund our CapEx and acquisitions, remain asset light, reduce debt and begin to deliver attractive year-on-year earnings growth. We're instilling discipline on our approach to doing business, making sure we are well-prepared, understand our customers and anticipate their needs.

Our employees are responding and our performance is improving. In the U.S., we compete in a $30 billion-plus market, with about 85% of the market in the hands of our competitors. We see this as a golden opportunity to win new profitable business at a much faster pace.

Real culture change is really difficult, but it's also very rewarding. We are encouraged and motivated by our early progress. And while we have clearly defined the changes we need to make, there normally are some bumps along the way. We are closely monitoring the pace at which we make our changes and the impact they have on our employees, customers and supplier partners. We're moving quickly, but thoughtfully. And we're making the changes needed to build a rock-solid foundation, upon which we can deliver consistent, sustainable earnings growth for the long-term. We have the right plan in place, and we're successfully executing against our plan with the utmost urgency.

Before opening it up for your questions, I would like to call your attention to the announcement we made yesterday about the promotion of David Jukes, President and Chief Operating Officer of Univar. David's a seasoned experienced growth champion and senior executive with more than 35 years in chemicals and plastics distribution. In his 15 years with Univar, he built a strong position for us in the U.K., designed and led the restructuring of our business across Europe, the Middle East and Africa, which has greatly increased our profitability there. And most recently, he realigned our largest segment, the U.S., to increase focus and accountability and best support our customers and supplier partners.

And as you saw in the first quarter results today there are early signs of his success, as he led the USA segment to its first growth quarter following 8 consecutive quarters of decline. He and I are fully aligned on our vision for Univar's future and how we will get there. David is the perfect person to partner with me to accelerate profitable growth around the world.

David's announcement is another example of the actions we're taking to build the foundation for a growth company, developing the infrastructure, culture, the strategy as well as the execution, skills and mindset to deliver superior growth for years to come.

We have a tremendous opportunity to create value for all of our stakeholders, and we intend with full force to make the most of it. Thank you for your attention. And with that, we'll open it up for questions.

(Operator Instructions) Our first question comes from the line of Robert Koort from Goldman Sachs.

This is Ryan Berney on for Bob. And congratulations, Dave. I want to say that upfront.

Thank you.

Steve -- now you've been in place, Steve, for about a year, curious as to your thoughts on maybe what's been the biggest surprise as far as headwinds go to -- were you convincing some of your suppliers to open up more of their portfolio to the third-party distributor market, maybe as a market, and then maybe to you specifically?

So Ryan, that's a great question. I mean, I think that the challenges that we face with our suppliers -- and it's clearly getting a lot better. I mean, David, he's known these folks at the top levels. I know them. There's been trust that's been developed over years that pre-date the last year here at Univar, and having worked with them in the past and seen how we do things, they're really opening up their eyes and the opportunities for us. The biggest challenge, to kind of answer your question -- so that's just a little color around it. But to answer your question, the biggest challenge we've had is just they want us to have the right kind of marketplace behaviors. They want us to go get new business and grow and hang on to the business that we have. And they also don't want to see antagonistic relationships, where we have multiple suppliers of the same product that have to compete through our channels. So we're working on all of those things at a really brisk pace. I think the biggest thing that we can do for our supplier partners is to execute better in our sales force. And that's the drum that I've been pounding since I took this job day 1. We're getting better, but there's a lot of work to do yet. This is a culture change. It involves changing how you reward people, how you recognize people, who you hire, how you train them, how you motivate them. And that's the biggest challenge that we have. And I will tell you that we're seeing very good successes in Europe and in Canada, and we're seeing tremendous progress in the U.S. But trust like that takes time to develop. And we're nurturing the relationship. We're getting new shots at things. And I would expect this to continue, in fact, accelerate.

Great. And then, Carl, can you just give us your latest thoughts on where you think the right leverage target is and maybe where you see that trending over the next kind of year or 2?

Sure, Ryan. Our comfort, I'll call it comfort versus target, is at 3.5. We think that the stability of the cash flow that we have can support that much leverage. An ideal capital structure would be in that area. We're 4.8 at the end of this (technical difficulty) there. And over -- but over the next year, 1.5 years, I'd see that coming down, I'd say on its way to 4 over that 18-month period that you mentioned. I think that's a reasonable expectation.

Our next question comes from the line of Allison Poliniak from Wells Fargo.

I wanted to touch on the volume decline in the U.S. I know you attributed some of it to your actions specifically, but then also a little bit of sluggish market. Could you help us quantify or flush out sort of was it mainly your actions that was the volume decline? Was it the markets still? And what kind of visibility do you have for the balance of the year?

So Allison, it's Steve, I want to just give a little bit of -- I want to put this in context here and then I'd like David and Carl to weigh in on it. So -- and if you follow, I guess, what my past practice is, it's volume is not the driver of profitability growth. And we're trying hard in our culture to be more selective about the customers we choose; to work on the mix of our products so that we have the appropriate amount of higher-margin products in there. And in fact, inside the tent here, I don't like us talking a lot about volume. Now I know in your space, you have to do that and will come a time where you can really measure us on that front. But it took me a long time to get that change in the last house, and we're moving a little faster here. So it doesn't bother me at all where our volume is. In fact, if our volume grows too much without a massive amount of leverage on the profitability line, it makes me a little bit nervous because I don't want us spending our time on business that doesn't make a lot of sense for us. So that's the context. And with that, David, you want to go first, and then Carl?

Thank you. Yes, in the U.S, we've been very particular about how we drive our profitability forward, as Steve said, looking -- we're thinking about our mix enrichments. So the blend of products that we have and the blended margin that we have to support those. And that's paid dividends for us in the first quarter. We've seen good gains in our margin to the first quarter. But that's caused us to walk away and move away from some large volume, low-margin business. We will go to -- we will get growth. We will get volume growth. I know Steve throws things at me when I mention the volume word. But we'll do that by improving our win-loss ratio. I mean, we need to win more business and stop losing some of the business that we have, and that needs to be in our core distribution business, not in large volume markets, where we may compete with our suppliers. And that's really getting singles rather than home runs. So we really fix that win-loss ratio, grow our new business, increase the effectiveness of our sales organization, be very disciplined about the pricing and be rewarded for the value that we achieve, and we'll get our way back to long-term, sustainable growth.

The only other color I'll give you, Allison, if you look at the 3% decline globally, it was more so in the U.S.A. And that's, there, I'd say quantify -- I know you want me to quantify it, but roughly 1/3 of that was conscious withdraw in the upstream oil gas business and, in particular, at one client account. So that was one area. The next 1/3 would be in what I'd say are lower-margins bulk commodity products. And that would be the 1/3. 1/3 would be our active margin management efforts account-by-account.

Great. That's very helpful. And then just lastly, I just want to clarify the improvement in the outlook on adjusted EBITDA growth. It sounds like that's mainly your actions. Was there any underlying improvement or expectation in just -- just the general market? Or is this all you at this point?

I think these are -- this is self-help more than anything else. We're not changing our view on the market outlook. I think that the execution, all activities and improvements that we've been driving hard are coming in, and we're going to expect them to continue to come in at a faster pace. So no changes in how we view the exogenous matters.

Our next question comes from the line of Andrew Buscaglia from Crédit Suisse.

So I just have one thing. Not to nitpick, but on your free cash flow, so it was negative this quarter. Can you just walk through what happened there? I mean, I know, seasonally, it's probably lower, and you're going to ramp this year. But just trying to parse that out in terms of how that relates to with your M&A, if you have enough cash on hand and things (inaudible)

Okay, sure. Sure, Andrew. Thanks for that. I'd say, to answer your last question first, yes, ample liquidity and cash on hand to -- more than enough to execute our acquisition strategy. In terms of the net working capital change in the first quarter, 2 parts to that story. Yes, as you said, the seasonal uplift, which happens every year in the first quarter. Sales happen in the second and the third quarter. That is always amplified up in Canada with our ag business. That's in the mix there, too. But then again, in the cash flow statement, you'll see that last year's first quarter, we had a very large harvesting of working capital. Some of that, a large portion of that was a decline of the oil and gas business at that time, kind of the peak of the decline. So tough comp, I'd say, when you look at the year-on-year cash flow of the company. So I'd end by saying that our full year outlook of net working capital change in the $50 million to $100 million is still quite a safe bet. We, as you know, have outflow in the first and inflow at the end of the year.

Yes. Okay, yes. No, I didn't -- I think I just phrased that wrong in terms of my M&A comment. But can you talk about M&A as it pertains -- are you having discussions right now with companies? What's the activity like out there?

Yes. So we are having discussions all the time. Obviously, we won't talk specifics. I'm disappointed that we haven't landed a few smaller acquisitions. We're working on them. We've got a pretty good funnel or pyramid, if you will, of opportunities. We're in active conversations. I think the difference is we're going to remain disciplined. We don't want to overpay for things that -- it's pretty easy to determine the value of these enterprises. And you have to understand the motives of the sellers and so on and so forth. So we're taking a rather disciplined approach. You might call it conservative, and I'm okay with that. But I will tell you that I'm disappointed we haven't landed anything of late. And we're working hard to do this -- just that. My hope is that by the time we talk again, a quarter from now, we'll have some news. But you just can't predict this. You don't want to get overly excited about opportunities that cause you to behave in a way that you may regret someday. So I'm sort of mixed with our process. I'm happy with our discipline, but I wish we had more flow. And you'll see us accelerate this before the year is out.

Our next question comes from the line of Laurence Alexander from Jefferies.

This is Dan Rizzo on for Lawrence. To improve relations with your suppliers, are you looking to be going for like more sole sourcing for your larger product?

So I think the person that has done the most over the years to improve relations with suppliers, and we certainly have seen it happen in Europe and it's happening here in the U.S. now, and he'll have a global role to do it, is David. So I'm going to let Dave Jukes answer that question.

So I think that's -- thank you, Steve. I think there's 2 pieces, 2 parts to the answer. One is very different for the undifferentiated products than for the differentiated products. But I think the consistent theme that we have is really changing the conversation with our suppliers, changing the conversation really with our partners because that's what they are. These are long-term partners who have been with us for many years. And we choose our partners very carefully and we work hard to earn the right to stay their partner. And we pay -- we partner with people who are long-term winners in their space. So it's not necessary about sole arrangements. For some of the differentiated products, it will be sole arrangements because it's difficult to invest the time in promoting someone's molecule only to have it undercut by someone else or it's difficult to have the degree of transparency. We're in league with our partners when developing in a specialty space if you have a crowded territory with other distributors. For the larger products, it's much more about changing that conversation, understanding the ebbs and flows of the partners' supply and working with them and collaborating with them. So I think much more about changing the conversation. This is not an adversarial conversation. Steve mentioned that earlier on. This is really a conversation between partners. Many of those partnerships predate me, and many of them will go on long after me. And that's the way we have to view it. We have to view ourselves as good stewards of that partnership while we're in place.

Okay. And then you mentioned winning more business in the -- so I guess, it was smaller or just hitting more singles, I guess. Is there a certain region or end market where you think this -- where you want to focus anything that's, I guess, more achievable or just better to look at?

So I think that if you look at our business, you broke our business down in 4 lines of businesses -- services, bulk, local chemical distribution and focus industries. There's growth opportunities in all of those, but the sales cycles in all of those are very different. So you would expect to see some share gain more quickly in local chemical distribution than you would in focus industries, where the sales cycle will be much longer. But we see opportunity right across all our business. And the bits we didn't see opportunity, and we're doing much less of, that's the whole point of our focus.

Our next question comes from the line of Karen Lau from Deutsche Bank.

Just wondering if you're already seeing some pocket share gain among suppliers. Are you realizing maybe more new authorization on product sales? Or are we still working for now on the -- are we still working on for now on the pruning phase and maybe just sell more distinct products?

So we are getting some new authorizations, and we're getting those in various parts of the world. This is something Dave has been working very hard on. In order to do that, it goes beyond just the simple trusting relationship that you have. You have to show them some value. You have to show them that you're able to grow your business, again, and you can grow their business for them. And that's why it's so important that we focus on new business wins out there and change the mindset of our sales force. This is what David is working. We're all working really hard on to get people to have better skill sets, to be more effective and more efficient in the execution of their sales calls to increase the amount of new business that we gain. This turning point, for the first time in 8 quarters of having growth in the U.S., those are the kinds of things that help us get more authorizations from our existing and -- suppliers, as well as those that we're pursuing that we don't have relationships with. David, you want to add anything to that?

I'll only add really -- I mean, you've heard Steve talk about our 3 priorities, commercial greatness, operational excellence and One Univar. And the One Univar, this is something where we're really working on at the moment because we're bringing our teams together globally to share knowledge, share experience, share expertise on the products that they have and the authorizations that they have. And we're able to act more as a global company and share technology across the planet. And that's very attractive to some of the suppliers that we work with. So we have got some new authorizations. We have some in Europe. We've actually just won one in the U.S. this week. It's very early days for us in the U.S. But it's all about our win-loss ratio. Give the suppliers a compelling value proposition, then they will come with us. And we're getting good feedback so far.

Okay, great. So it sounds like there's more happening overseas, but U.S. is still very early in the process and more on to come? Okay. Can you give us an update on the sales force churn since you started the new comp structure and implemented the realignment in February? And how does it compare versus historical?

Well, historically, we've had pretty high turnover in our sales force. Too high. I know the prior 2 years, we had a 22%, 23% turnover. That's entirely too high. Generally, where you want just to land is probably around 10%, 12%. You're always going to have some. You're going to have some people that voluntary leave. You're going to have some that just don't make it. So it's been too high. Some of the actions we've taken are really exciting and motivating to those who like to get rewarded, and are competitive and have the goal orientation and the drive to succeed because we're going to be rewarding and recognizing them more. Some of those who don't have the skill set, the versatility, the adaptability to call outside the boundaries of just procurement and call through the organization and sell our value prop versus just sell our chemicals, they're struggling. And so there's turn over in those ranks on both ends, whether it's our choice or theirs. So specifics, David, I'll leave that for you to discuss.

So I'll point to 3 things. Firstly, when we put our organization together under the 4 lines of business, we were very particular about the people we put in place. So there was some degree of churn there when we looked at people with the right skills to go into the right slots. Secondly, I think we are driving a different culture here. It's very much a culture of winning. It's very much a culture of value, and not everybody felt comfortable in that. So there was some churn with that, but nothing that was regrettable. Thirdly, we are bringing some fabulous talent in. The people that we're bringing in are very strong, very competitive, high energy. And I'm encouraged that actually, some of the good people that we lost in the last couple of years have come back home, have come back knocking on our door saying, "We hear there's good things happening again and there's a space for us." So I'm encouraged, really encouraged by what's happening with our sales organization at the moment.

Our next question comes from the line of Laurent Favre from Evercore ISI.

The first one is on the U.S. volumes that you actually intend to keep, so not what you're trying to demarket, but the volumes that you actually like. Could you talk about what you're seeing there in terms of demand? You seem to talk about softness. So I'm just wondering where you're seeing the softness. And the second question is on the guidance sequence. I guess, you're going to face tougher comps in Canada and in Europe in the second half, and that's exactly when you're trying -- when you're intending to accelerate. Can you talk about whether this will -- this should come from, I guess, skill acceleration in Canada and in Europe? Or is it just the U.S. business seeing traction from the turnaround and accelerating extremely fast between the first half and the second half?

So I think the reason that we're more bullish on the second half, clearly, it has to do with the skill set, the new people that we're hiring. I mean, we still have a lot of open positions in the U.S. for sellers. And we're picky about who we hire, very particular about who we hire. So it takes a little more time to attract, train, develop, and then get them in the game and have them go through the sales cycle and grab the business. So that work is ongoing, but we see time on our side to make it better, faster, stronger. And I think that's the reason for the delta in the uptick that we expect later in the year. If you just kind of look at our progression -- oh, I mean, the fourth quarter, we saw some turning. The first quarter, we've seen turning in the U.S. And while we've maintained the growth outside the U.S, it's absolutely true that comps for the second half were stronger. But our organization is stronger, and we've had more time to implement and execute on the goals that we've established.

I think that's right. Specifically with Canada and Europe, I think you're right that it's going to be more a front-ended profile of growth for those 2 segments this year. But I guess, to underline what you assumed, with the U.S., 2/3 of the company, if there's improvement programs taking hold, it gives us that confidence of growing -- accelerating growth rate.

I'll just add one more comment on this, because I think it's very important to understand the complexity around this kind of chain. We're talking about culture change here. And you can't wave a wand or give everybody a shot and expect it to take hold. It takes reinforcement. It takes constant repetition. It takes leadership. it takes having the right people onboard, who want to go a new way and want to succeed. And that takes time. And we are moving fast, frankly, I think quite fast given the situation we've been in. But we want to build the foundation properly, and we want this to be sustainable. And so you can expect that this should be a natural build. Our company -- I'd look at it this way, our company is getting better. We're getting better every day. You can't see that. We're getting better every month. You can't see that. But you can see that each quarter, we're getting better. And the U.S. is so -- it's such a nucleus for our turnaround and such an important heavy-weighted element of our overall business. That's the part that we have to get right. I mean, we're pretty darn -- look, we're never fully satisfied. That's just not the nature of the management team here. But we're pleased with what's going on in Europe. We're pleased with what's going on in Canada. It's right here in the U.S. that we've got to make the change. Those changes, you're seeing the signs. You look at the third quarter, fourth quarter, first quarter, and that progression continues. That is going to rise -- raise the boat for us.

Then in terms of the market demand, I mean, there are no real standouts. It's spotty. But the real driver for us is our win-loss ratio and increasing our wallet share with customers. That's the biggest thing that will drive our performance.

Our next question comes from the line of Steve Byrne from Bank of America Merrill Lynch.

This is Ben on for Steve. In Canada, can you discuss the shift in mix that occurred in the quarter, and what your outlook is for margins going forward in that segment?

Okay, Ben. Sure. Yes, there's a very visible shift going on, and we had a nice rebound in the energy markets in Western Canada. For that, that brings to life a lot more demand for methanol into the natural gas pipeline. And that is, compared to the average, it's a lower-margin product. So you see the shift in margin there. We also saw demand up in the mining sector in Canada in the first quarter. But we also have more initiatives for growth in place in Eastern Canada, in the industrial end markets of Eastern Canada. So it's always a tale of those 3. And then you've got ag in the middle of the country that is coming up very nicely this year. So our end margin is the result of those 3 distinct end market zones within Canada.

Our next question comes from the line of Kevin McCarthy from Vertical Research Panelists (sic) [Partners].

Between November and February, we saw a quite sharp inflation among a lot of commodity petrochemicals -- in methanol, butadiene, propylene, styrene, et cetera -- call it, 30% to 100% in some cases. Can you talk about how you managed through that volatility, and whether or not it has any appreciable impact on your financials in terms of volume or profitability?

So I mean, we are constantly assessing the cost increases or decreases that we have and making sure that we don't get trapped in situations where we have a big downdraft in pricing with a lot of inventory on hand. We kind of like it when it goes the other way, when our inventory does revalue because of price increases and we work with our customers on what share of that we're willing to share with them. But we're on top of prices, of products all the time. We did see methanol, sodium hydroxide solution, xylene. Some of these products went up. Then we saw hydrochloric acid drop about 16% in the quarter versus prior years. So I would say, all in, it's a little more up than down. We like that. We like dynamics in the marketplace because we think we're decent at and getting much better at adjusting our pricing appropriately to get our fair share.

That's helpful. And then a second one, if I may, Steve. On Slide 4, you called it 120 basis points of improvement in your conversion ratio. How focused are you on that? Do you manage to it? And how high can it go? Maybe a little context there would be helpful.

Kevin, it's Carl. At the distributor, conversion ratio is a metric that we look at monthly, if not more frequently, and how much of the gross profit dollars we pull down to the EBITDA. And 32%-ish is, I'd say, okay. But we should -- and it moves around quarter-by-quarter. But on an annual basis, we see ourselves creeping up to 34%, 35%, 36%. If you look at industrial distributors, you'll see those kinds of conversion ratios as pretty much as a mean. The only thing I'll add to that is the added benefit of e-commerce and digitization that we're bringing into our portfolio as we reduce background cost and cost of transaction. And that can help elevate that conversion ratio even higher. But that's yet to come. I won't make a prediction on that yet. But that's another dynamic in the equation.

Our final question comes from the line of Jim Sheehan from SunTrust.

In EMEA, can you talk about the mix improvement you got there, particularly with pharmaceuticals, and how sustainable that might be going forward in 2017? I think you called out that some of the improvement you saw in EMEA is due to extra building days, and some of this mix is not going to be sustainable through the rest of the year. How should we view that in the second quarter?

Good question, Jim. It's Carl. The improvement in EBITDA in the quarter was about half attributable to our pharmaceutical finished goods business. That is more rightfully looked at it an easy comp. Last year's first quarter was abnormally low in sales based on the selling patterns in that market. And so we've got a boost, an amplifier to the growth in the quarter. Excluding that end market, we had 13% growth in the quarter in EBITDA. So I think that you're right, going into the second, we won't get that kind of growth in the second quarter because of that easy comp in pharma, but we do hope to continue to execute against our restructured business there in Europe and continue the growth going.

Great. And then on the pricing environment, you're seeing -- you had kind of a tailwind in chemical price inflation in the first quarter. And some of your end markets, you're probably still seeing some increase. I think caustic soda is still on the rise. But then maybe in some other areas with more petrochemical change, some of those have started to roll over. Where do see pricing in the second quarter developing for you guys?

I mean, on that, your guess is probably as good as ours if you're into the space. We roll with the -- we take the punches and roll with them. We try to stay out ahead of them and make sure that whichever way they go, it's positive for us. We like them going up more than we like them going down, but we manage through both. And like I said earlier, what we like are dynamics rather than steady state. So we're not -- we don't worry about that. We just adapt to it. And we adapt very quickly. And I think we're -- I can tell you that we're far more nimble today than we were about a year ago.

So with that, I think we're ready to close out. I want to thank you all for joining us today, and also remind you that we do have an Investor Day on the 15th of May in New York. I hope we get a chance to see you there. We're going to talk a little bit more about long-term and talk about some of the important goals that we have to drive value creation. Thank you very much.

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