Univar Solutions Inc (UNVR) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Univar Second Quarter 2017 Earnings Conference Call. My name is Desean, 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 Second 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 June 30, 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 a 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, forecasts 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.

Well, thank you, David, and welcome to Univar's Second Quarter 2017 Earnings Call. We appreciate your interest in our company.

I'm very pleased to report that Univar earned adjusted EBITDA of $161 million in the second quarter, an increase of nearly 9% over the second quarter of last year. Our margins and adjusted EBITDA increased in all our segments as we executed our plans to drive toward consistent, double-digit profitability growth.

In the U.S., we said 3 months ago that the first quarter was a turning point for us and that we would capitalize on the positive momentum we created. I'm very happy to report that in the second quarter, our U.S. segment grew EBITDA 11%. This reflects the direct impact of our actions to strengthen our execution, especially by our sales force.

For the past year, we've been relentlessly focused on changing our culture and improving our commercial and operational execution. We've implemented new processes to drive accountability and rigor within our sales management and reset expectations for profitability. We're making ongoing investments in our sales force globally, including hiring and training. And we're changing the mindset and expectations of our organization to drive sustainable profitability growth. We have an extraordinary opportunity to capture more new business gains, or new accounts, as we develop and upgrade our sales force capabilities.

As we continue to upgrade and expand our sales force and our new sellers become productive, we expect to improve our win-loss ratio globally. Our initiatives are taking hold, yet we're in the very early innings of our transformation, and there's still much work ahead of us to position us for consistent, double-digit profitability growth.

Overall, we're very encouraged by the responses we are seeing to our initiatives. In the second quarter, our volumes declined, as expected, as we focused on improving our mix and executed margin management and pruning actions. There is a growing feeling of optimism and confidence from our customers and suppliers, particularly in the U.S.

We're gaining confidence by what we are seeing in our business, and we have a strong foundation to build upon. We have a leading position in the market, one of the broadest product and service offerings, a top safety record, foremost on-time delivery rates and a talented team dedicated to execution.

At 60% of our global EBITDA, our U.S.A. business is the area where the improvement opportunity remains the greatest, and we're making progress on our U.S.A. transformation plan.

The second quarter represents our first full quarter of operations with our new commercial structure, and we are very encouraged by the reception from our sellers and customers. Our specialized approach with dedicated sellers aligned to customer end markets, including industry, product, geography and services, enhances the value we bring to our customers by providing knowledge and industry expertise, along with market insights. Our new commercial alignment allows our product and technical professionals to drive deeper customer engagement and improve our mix with differentiated products. In addition, we have an aggressive effort under way to upgrade our sales capabilities by filling open sales roles with the right talent that will drive future growth.

Let me reiterate something you've heard me say before. We are laser focused on improving our execution to drive value and growth. Along with these Commercial Greatness efforts, we aligned our supply chain and digital and customer experience teams and developed a Commercial Greatness center dedicated to building a strong pipeline of sales talent.

In support of driving value and growth, we also started an effort earlier this year to evaluate the profitability of certain accounts. We made the conscious decision to redirect our efforts from some of the least profitable accounts to focus on better quality business relationships, where we can be appropriately rewarded for the value we deliver.

You see this reflected in our volumes and margin expansion.

During the quarter, we began implementing processes to bring discipline to our pricing execution. Pricing is now handled by product management, reducing variability and moving it in line with the market and the value we bring.

We also added a rigorous process to manage our new business opportunity pipeline and sales force productivity. It's still quite early, but we are definitely seeing an improvement in our results. During the quarter, our new sales force management process resulted in gross profit margin improving 140 basis points for the quarter in the U.S.A.

We're also working on initiatives to reduce our costs while improving our customer experience. In April, we launched our new e-commerce platform, myunivar.com. Customers can efficiently order products and access product documents online, making it easier to do business with Univar.

This launch was just the initial step of our improved e-commerce experience, and additional enhancements are in the works.

In parallel with our efforts to build Commercial Greatness, we're driving operational excellence. Along with our redesigned U.S.A. supply chain organization that complements our different lines of business and better serves our customers, we began work on improving the efficiency and the effectiveness of our branches and warehouses. We're focused on increasing the flexibility and competitiveness of our inbound and outbound logistics, targeting greater asset productivity and developing more efficient relationships with our external providers.

We're also advancing our initiatives to optimize our logistical reach. We anticipate our supply chain efforts will begin to bear fruit later this year as they systematically roll out across our multiple U.S. locations.

There's still much work ahead of us in order to reach our potential and drive sustainable, double-digit profitability growth. However, we are confident we have the right plan and the right team in place and expect to build on our recent gains.

On that note, I will now turn the call over to our CFO, Carl Lukach, who'll walk you through our second quarter results. Carl?

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

Today, we reported GAAP EPS of $0.22 for the second quarter compared to $0.29 reported in the prior year second quarter. Our GAAP earnings per share in the quarter included $11.5 million of U.S.A. transformation costs or $0.06 a share. It also included losses related to movements in foreign exchange and hedging contracts of $10.8 million or an additional $0.06 a share compared to a gain of $0.04 a share in the prior year for the same items. Excluding these items, second quarter earnings per share were $0.34 in 2017 compared to $0.25 in 2016, an increase of 36%.

Adjusted EBITDA increased $13 million or nearly 9% from $148 million last year to $161 million. On a currency-neutral basis, our adjusted EBITDA grew 11% as currency translation tempered EBITDA growth by 2%.

In U.S.A., our EBITDA growth accelerated from a nominal increase in the first quarter to just under 11% growth in the second quarter. We saw improvement in our U.S. profitability from the actions we have under way, and we expect to build on those improvements going forward.

Our margins and EBITDA grew in all segments outside the U.S.A., and our cash flow in the quarter was strong, driven by net working capital productivity gains that enabled us to further reduce our net debt.

Adjusted operating cash flow of $165 million increased $53 million or 46% from $112 million last year. Our cash conversion ratio was high at 102.5%, as was our cash operating margin of 7.3%.

Turning now to our consolidated results on Slide 4. Second quarter sales were about equal as last year as 6% higher average selling prices were offset by a similar decline in volumes. The higher average selling prices resulted from our focused initiatives to improve our sales force effectiveness and mix, along with actions we took to address low-margin business. The decline in volumes was mostly in the U.S.A., where we implemented margin enhancement actions and pruned some unprofitable business, but also in EMEA, which was impacted by 3 less billing days due to the shift in Easter holiday.

Gross profit dollars increased $21 million from last year or 5% as higher average selling prices and improved profitability more than offset lower volumes. Our gross profit percentage in the quarter increased 110 basis points to 21%.

Operating expenses, which includes delivery, warehouse, selling and administrative expenses, increased $8 million from last year as higher incentive compensation and investments in sales force, digital tools and training costs were partially offset by productivity gains.

Our adjusted EBITDA margin increased 60 basis points to 7.2% as a result of improved gross margin and strong operating expense control. Taking all of this into account, our conversion ratio increased 120 basis points to 34.5%.

Let me now take you through each of our segments, beginning with the U.S.A. on Slide 5. In our U.S.A. segment, adjusted EBITDA increased $9 million or just under 11% to $92 million as higher gross margin more than offset the impact of lower volumes. Our adjusted EBITDA was adversely impacted by roughly $3 million of charges related largely to the write-off of inventory in our upstream oil and gas business.

Net sales decreased 2% as lower volumes were mostly offset by favorable product mix and higher average selling prices. Volume declines in the quarter were largely precipitated by our margin management and pricing initiatives and accounted for the majority of the decrease.

Average selling price increased 5%, driven by our sales force execution initiatives and margin management.

Gross margin improved 140 basis points to 23.1%.

EBITDA margin increased 80 basis points to 7.7% primarily due to increased gross margins and strong operating expense controls.

Our U.S.A. conversion ratio increased 180 basis points to 33.4%. Although we plan some additional investments in the second half, we expect our conversion ratio will move higher as our supply chain programs begin to take hold.

Let's turn now to the results in Canada on Slide 6. Our Canadian segment performed well in the quarter, driven by higher sales volumes. We saw strong growth in our Western Canada energy business and also in our industrial East business, where we captured gains from margin enrichment efforts and improvements in our win-loss ratio. These gains were partially offset by softness in our ag business. While the ag season started well, drought conditions prevailed in sections of the Canadian prairies through June and continued throughout all of July. This has reduced grower demand for fungicides, herbicides and inoculants for canola, grains and lentil crops.

During the quarter, Canada net sales increased 1% to $492 million due to a 9% increase in volumes. Gross margins increased 120 basis points to 13.7%. And adjusted EBITDA margins increased 100 basis points to 7.5%. Results in the quarter benefited from improved sales force execution, margin management efforts and mix improvement, as well as higher supplier rebates in the second quarter compared to last year.

In our Europe, Middle East and Africa segment on Slide 7, you can see that adjusted EBITDA grew $3 million or 10% in the quarter to $36 million. Net sales increased 1% as higher average selling prices were partially offset by lower volumes. As we explained last quarter, our volumes were impacted by 3 less billing days, which shifted sales out of Q2 into Q1 as a result of the timing of the Easter holiday across EMEA compared to last year. Excluding the impact of 3 less billing days, volumes declined 2.5% in the quarter, with most of the volume declines coming in lower-margin commodity products.

Gross profit increased 2% while gross margin increased 20 basis points to 22.6% as our margin management efforts and favorable product and end-market mix led to improved profitability, which more than offset the lower volumes.

We are pleased with the performance of our go-to-market strategy in EMEA, with local chemical distribution, focused industries and bulk commodities as we seek to drive profitable growth across all of our lines of business.

We continue to see improvements in our win-loss ratio. Our local chemical distribution business had solid performance in the quarter, and our focused industry business continues to gain traction with both customers as well as with supplier partners, particularly in the food, pharma and personal care verticals.

Adjusted EBITDA grew $3 million in the quarter due to the higher gross profit margin and lower operating expenses.

Adjusted EBITDA margin increased 60 basis points to 7.8%, and our conversion ratio improved 270 basis points to 34.7%.

Moving then to Slide 8 and our Rest of World segment. Sales decreased 4% from prior year as higher average selling prices were more than offset by lower demand and continued sluggish economic conditions in Latin America.

Gross profit was equal to the prior year as a result of strong margin management efforts to counterbalance the challenges brought by the rapid appreciation of the Mexican peso and its impact on our margins.

In Mexico, we saw lower demand and softness in the economy, which led to lower gross margins. In Brazil, however, our business stayed resilient, benefiting from the high mix of specialty personal care products in our portfolio.

Despite the soft economic conditions in Latin America, our Rest of World segment adjusted EBITDA increased to $5 million or 17%. This was largely the result of solid performance in Brazil and cost reductions in our small Asia Pacific business.

Moving now to Slide 9, where you can see an overview of our cash flow in the second quarter. Our cash flow was seasonally strong in the second quarter and better than last year. Adjusted operating cash flow was $165 million. That's adjusted EBITDA less change in net working capital less CapEx. Adjusted operating cash flow as a percentage of sales increased 230 basis points to 7.3% from 5% last year.

Our accounts receivable and accounts payable productivity metrics both improved. Our 13-month average net working capital as a percentage of sales improved to 12.2%, a decrease of 60 basis points from 12.8% a year ago.

CapEx was $18 million in the quarter, down 18% from the prior year. For the full year, we still expect CapEx of $110 million, up slightly from last year to fund digitization projects.

Cash taxes in the quarter were $7 million compared to $1 million last year.

Our effective tax rate for the quarter on a GAAP basis was 19% compared to the low 2% we reported last year. The higher year-on-year effective tax rate this quarter adversely impacted our earnings per share by $0.05 compared to last year's second quarter. We continue to expect our full year effective tax rate to be between 20% to 25%.

Taking all of this into account, we generated free cash flow of $48 million in the quarter, up $18 million or 60% from last year's $30 million.

Our priorities for deploying capital continue to be a balanced approach to: self-funding reinvestment in our core business to drive growth, self-funding accretive acquisitions that we can leverage and paying down debt. Our reinvestments for growth will focus on sales force development and the use of new digital tools that will help improve customer experience, expand our market and lower costs per transaction. For acquisitions, we will continue to use a strategic, selective and disciplined approach.

With our strong cash flow in the quarter, we were able to further reduce our net debt as compared to the second quarter of last year.

Slide 10 details our debt profile. Net debt at quarter-end was $2.7 billion, a decrease of $245 million from this time last year. Our leverage ratio decreased to 4.6x from 5.2x last year. Our total liquidity improved to $1 billion, a significant improvement from $825 million last year. And our cash interest coverage is at a strong 4.2x trailing 12-month cash interest. Slight decline in this metric from last year was due to timing of our senior notes' semiannual interest payments. We expect interest coverage at year-end 2017 to show improvement versus year-end 2016.

Today, we have in place interest rate swaps that economically convert approximately 80% of our debt to a fixed rate. Swap contracts expire in 3 years with an annual declining balance. We will maintain compliance with our interest rate hedge policy.

In January this year, we repriced $2.2 billion of our term loans, lowering annual interest costs by 50 basis points or approximately $11 million per year for the next 5 years. Our current weighted average interest rate on debt is 4.6% pretax.

Our return on assets deployed in the quarter was 21.5%, well above our cost of capital and up from 20.1% a year ago.

Let me now address our outlook for 2017 on Slide 11. In the second half of this year, we will continue to execute our plans, and we will reinvest a portion of our gains for future business growth. We do expect some impact from what now appears to be a drought-impacted ag season in Canada, and we still have much work to do in our U.S.A. transformation plan. However, we are encouraged by our progress. Our margins and working capital productivity improved in the second quarter, as did our conversion ratio. And we are generating strong free cash flow. We are executing successfully on our growth and productivity plans.

As a result, we are raising our full year guidance and now expect adjusted EBITDA for the year to grow high single digits versus last year. For the third quarter, we also expect adjusted EBITDA to grow high single digits compared to the $146 million we earned in last year's third quarter.

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 have ignited positive momentum now and intend to capitalize on it.

We have a truly exciting and unique opportunity here at Univar to grow the profitability and the size of our company. And here's why. First, the distributed chemicals market is large, attractive and growing, as is the outsourcing trend. In the U.S. alone, we compete in a $30 billion-plus market, with more than 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. We're investing in our value proposition to make it more compelling for our customers and supplier partners to do business with us and accelerate the outsourcing trend.

Second, as an industry leader, we have a solid foundation from which to build. This includes our committed people, our product breadth, market reach, our service and support capabilities, our long-standing supplier and customer relationships, our best-in-class safety record and our scale.

Third, we have a clear path to growth. We're laser focused on execution, and our margins and profitability are rising. As we improve our operational and commercial execution, leverage our scale and develop marketing excellence, we can and will capture more new business. We will also reduce transaction costs and increase our operational efficiency, which will enhance our value proposition to customers and supplier partners.

Fourth, our asset-light business model generates strong free cash flow, which we will prudently deploy to strengthen our business and grow while improving our balance sheet. Our priorities for capital deployment will be to reinvest in our core business to drive growth through sales force development and digital tools that lower costs per transaction, improve customer experience and expand our market reach. We also see many opportunities to make accretive acquisitions, but we'll be strategic, selective and disciplined in our approach. And we'll balance our growth initiatives with our priority to delever the balance sheet to achieve our target capital structure.

And fifth, we have a strong management team with a superb and proven track record and deep industry experience to execute on our plan. And the progress we're making is visible and accelerating.

Cultural change is taking place in our organization, a change that excites our people, our customers and supplier partners and will allow us to expand our business in a growing market. 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 and attractive earnings growth for the long term.

In May, we held our first Investor Day as a public company and shared with you our vision for the future of Univar. Our multiyear transformation is improving our company on many fronts. We're moving from an organization with transactional sellers to a consultative, value-based sales model. This moves us from a focus on selling high-volume commodity products and treating our suppliers as vendors to a commercially savvy organization selling differentiated specialty products, services and commodity chemicals and treating our key suppliers as true partners. We're moving from lean to agile and fit; and from an organization with numerous, uncoordinated facilities to a tailored, optimized and harmonized supply chain, one that moves processes from manual to digitally enabled.

In short, Univar is transforming into a growth company, developing the infrastructure, culture and strategy as well as the execution skills and mindset to deliver superior growth for years to come. We're no longer a collection of individuals making independent decisions that aren't scalable, but are quickly becoming a collaborative, cohesive organization, with a culture that holds people accountable and recognizes and rewards superior performance.

This is the basis for strong execution and how we drive consistent, double-digit profitability growth. We have the right plan and team in place, and we're successfully executing against our plan with the utmost urgency. We're going all in to seize this tremendous opportunity to create significant value for our customers, supplier partners, employees and shareholders. And we're just getting started.

So I'd like to thank you for your attention. And with that, we'll open it up for your questions.

(Operator Instructions) And your first question comes from the line of Allison Poliniak with Wells Fargo.

So Q2 adjusted EBITDA growth, obviously well ahead of where you guys had estimated it when we last talked in Q1. Could you help us understand? I know there's a lot of moving parts with the internal initiatives. But what drove that better-than-expected plan? Is there any way to articulate that?

I think the -- well, fundamentally, what drove and what will continue to drive it is the profitability mindset change that we have that's driving gross profit growth, coupled with reasonable cost control while we're actually making some investments on top of all that. So we're spending some money, I think very prudently, to build a stronger future for ourselves but managing our ongoing data. There's just an opportunity to take costs out of the organization and continue to lean out the organization. But more than anything else, the commercial front is where the activities are the greatest, where the prize is the largest, and David Jukes and his team are really beginning to execute very well on that front.

That's great. And then obviously, revenue decline, you anticipated it based on some of the initiatives you put forth. But I guess based on where your expectations were trending with unwinding some of those less profitable contracts, I mean, are you kind of in line with those expectations? Better or worse? Any color there?

Yes, I mean, I'll let David hitchhike on this, but I'll tackle that first, Allison. I mean, I don't spend a lot of time worrying about the revenue line or the volume line, and let me give you some reasons why. And I think this is really important for all of our investors to understand because it's counterintuitive, it's different than the way you look at most businesses, especially in the chemicals side where you have a heavy asset-intense business. We don't have that. Our fixed costs are extremely small in our business. And so our opportunities for growth focus really on the profitability side, the better mix, the better pricing, the wins and losses. And we could absolutely show volume growth and revenue growth at any time. I can do that tomorrow if you wanted to. But -- if we wanted to. But we just don't want to right now. I think I view this as a very positive thing for us, and it might be something that is a little bit misunderstood outside our company. But inside, we are consciously trying to liberate ourselves from deals that don't make any sense. And it's going to go somewhere. I mean, it's going to land on the doorstep of some competitor. Somebody's going to take that business, and good for them. We're liberating and freeing up our resources to go after much more attractive business. I'll take a $0.5 million account at 25% margin way quicker than I will a $2 million account at 3% margin. So that's really what's going on, and I'm not -- I don't lose any sleep about it. What we have to focus on is capturing good-quality new business, and we can do a better job on that front. And so with that, David, do you have any other color you want to add?

Yes. I mean, really, I think the message is we're focusing on the profitable growth. I mean, Steve mentioned twice, I think, in his presentation profitable growth and a laser focus on profitable growth. And that means moving away from the high-volume, low-margin business. And that often means that we lose volume in railcars. Where we're picking it up is by the pallet because a pallet of a specialty product will often have the same value, the same return as a truckload of a low-value commodity. So our sales force are very focused on our small- to medium-sized customers, the bread and butter of the distribution business, where our break bulk, our repackaging, our technical expertise, our product support can really add value for us. And that's where our sales force execution is really focused on driving that profitable growth.

And your next question comes from the line of Robert Koort with Goldman Sachs.

Steve, can you talk a little bit about the path for the sales force effectiveness? Have you completed all the training that you intended? Have you fully implemented the value-based selling? Is there anything left on the horizon to do there? And when do we actually see that? I know you're not fixated on revenue growth, but can you give us some metrics that suggest the underlying mix enrichment? Maybe as David talked pallet sales, are there some, maybe one of the LOBs, where you can point to some success here?

Yes, sure. Let me take a stab at that, Bob, and then I want to hand that off to David because he's living with this day in and day out and he has a lot more metrics than I see. Look, I think training for us is going to be ongoing, the upgrading of our sales force. We're attracting great talent right now. Those who are with us today that are legacy sellers have improved their skill set. They've got the right rewards and recognition in front of them, and they're doing a better job for us. But any time you do this, it -- there is a time to productivity, and that probably is between 6 and 12 months, from the time someone enters the organization until they really can get out there and have developed the relationships to get the kind of business we want, they could transact much more quickly. You could give a seller a bag and they could go out and collect volumetric orders tomorrow that are just purely transactional. But to do it the way we're trying to do it here and the way we are doing it, is it requires a lot more skill set. So the training will be ongoing. And what we do, Bob, is we don't just start with here's your initial training and you're finished. There's coaching that goes on with the sales management team. There are ongoing more sophisticated training programs. So that's going to be around, hopefully, for decades into perpetuity. That's the training front. As far as looking at the effectiveness, so, I mean, we -- the most important metric that we are putting emphasis on right now for the sales force is the win-loss ratio. And what we mean by that is, how much new business are you bringing in at what degree of profitability? And how much are you losing at what degree of profitability? And we have work to do on that front. We are getting better, but we're not anywhere near where we want to be, on the basis of captured new business versus lost business. So with that, David, do you want to add some more remarks?

Sure. I think at our Investor Day, we spoke about hiring 100 sellers in 100 days, and we did that. And whilst we have had some turnover, we're not taking any victory lap yet. We now want to go and recruit another 100 sellers in another 100 days because we're really committed to invest in growth for Univar. So that growth comes in the number of sellers but also the skill set of the sellers that we have. I've been really impressed by the quality of the sales professional we've been able to attract and that we have now. We've got really hungry hunters, and we've lost some of the more farming mentality sellers that we had. The sales incentive plan is driving growth and is driving the right kind of behaviors. Now every seller has a review and a dashboard review with their sales manager on looking at their win-loss ratio, building their pipeline, how we can stop the churn of customers. So there's a real focus on that bread-and-butter sales management's approach to make sure that we continue to grow. But we -- as for training, as Steve says, we built a Commercial Greatness center. We have a sales academy in place now, where we'll train and develop our sellers and their skill sets. We'll really invest in keeping to develop their skill. Commercial greatness is one of our strategic priorities, and a key pillar of commercial greatness is having the best equipped and skilled sales force. We'll continue to invest in our sellers to upskill to make sure they can bring the best value to our customers and our supplier partners.

And your next question comes from the line of Duffy Fischer with Barclays.

It's Michael Leithead on for Duffy. On the guide, it seems like we've moved up to reflect the strong first half start, but 3Q and 4Q seem to be roughly in line with where we started the year. Are we just being prudent here? Or are there some offsets such as the ag drought you mentioned that might have tempered the outlook a bit?

Yes, it's Carl. Yes, the ag is one. I also want to mention that as we grow our profitability, we have a list of very attractive investments we want to make in our sales force and in digital projects. And we plan to feather those in as that growth occurs. So we're taking that into account. The ag point you mentioned, it does look like that'll be a softer season than what we expected. I think those are the majors. Our guidance changed today. We're lifting the lower end of that range more than $15 million of EBITDA. So I hope you saw that in the numbers. But yes, I think that's about the size of it, Mike.

Got it. And then just a follow-up. The $12 million U.S.A. transformation charge you took in the quarter, can you just give a bit more clarity on what that is? Is that personnel related? Is it asset shutdowns? Kind of any color there would be appreciated.

It's not asset shutdowns, and it's not severance for letting go of people. This was the front-end expense that we paid to get into Organize To Win, what we call Organize To Win in the U.S. A. transformation. It was outside advisers that helped us get that. And the good part of that story is the plan is well under way and rolling and those costs are largely behind us.

And your next question comes from the line of Steve Byrne with Bank of America.

Steve, you had mentioned 85% of this market is being distributed by others. Do I understand you correctly that what you're referring to here is the pie, is the pie that -- of chemical volumes that are outsourced? If that's the right read on your comment, can you comment on how your initiatives are going to try to extract more outsourced volume from your suppliers?

Yes. So thanks, it's a good opportunity to clarify. The number I referred to, that is existing distributed chemicals business. That's the outsourced chemicals business. The 85%, by the way, is in North America. It's even -- that we don't have. It's even larger if you get outside the U.S. So if you go all in on what we have as a share of the current distributed chemicals business, we have less than 5%. And we're #2 in the world. So it's very fragmented. There are massive opportunities. And this is why execution is so darn important in this game we're participating in.

And your comment on trying to increase the size of that pie, are you convincing some of your customers to outsource more of their volume to you?

We always try to get a bigger share of the outsourcing pie that exists today. I mean, that's the game: what's our value proposition vis-à-vis the competition? But you have to be -- what's different today is we're very selective. We're going after business that we think has either some barriers around it or a culture of appreciating the value that's delivered versus just going out for a quick transaction that will disappear over a short period of time most likely anyway. So -- and then the next thing related to that is working with our suppliers in a different way than we have in the past. Our suppliers want to grow. They want to grow volume, but they also want to grow profitability. And they want the marketplace to be handled appropriately. So we have great opportunities to work with our supplier partners, a select number especially, and get additional authorizations for different lines that aren't in our portfolio today. But from a customer standpoint, it's getting our sellers out there, feet on the street, knocking on the doors, convincing, persuading customers that we have more to offer than brand B. So that's what it's really all about right now, and that's why you hear us talk so much about the energy that's going into this upgrading of our sales force, rewarding them and paying them differently, recognizing them in a different way, investing in tools for them to go out and do selling versus go into procurement and get a transaction. Hopefully, that answered your question.

It does, Steve. Can you just rank the potential merit of increasing those volumes with your existing suppliers and -- through one mechanism or another versus getting more customers, you mentioned your e-commerce initiative, versus, say, M&A? Can you rank those as what you see are potential drivers of the top line?

So first of all, I won't do it on a volume basis, but I will do it on a -- so on a profit basis. And these things go hand-in-hand. If we get a new -- here's an example. Let's say we get a new authorization from a supplier. We don't go make calls. We've got to go out and sell that line to existing or new customers. And that's what we spend a lot of time on, and that's all about being efficient, making good calls, making effective calls. That's how we please both the supplier and our customer as well as then our shareholders. So product authorizations is one element. Just going out and knocking on doors of this 95% globally or the market that we don't have, that's a wonderful opportunity to win, but you need to call on the right ones with the right people and the right value proposition. Last, and we haven't talked about it yet, but there's also an opportunity for us on the acquisition front. And while we've been a little dormant in that for a while here, I think we've clearly reoriented our thinking, we've reoriented our strategy, we have things in our -- we have active projects in our pyramid. And you will see over time the addition of acquisitions as another way to grow. Last of all is just the ongoing opportunity to provide mix improvement by, again, not just high-grading customers but by selling more specialties or higher-margin products. Sometimes, it's even smaller packaged goods than bulk. Those are all opportunities for us to grow. We have a lot of different vehicles to drive growth in our company.

And your next question comes from the line of Andrew Buscaglia with Credit Suisse.

Just piggybacking on that last authorization question, can you just give us a sense of how you expect to convince these producers to give you those authorizations as you're still kind of like in turnaround mode here? It's only about a couple quarters, so what will convince these guys to give you that -- those higher authorizations?

So I'm going to let the -- thanks, Andrew. It's Steve. I'm going to let the master, who's done this for quite a long time and is very, very good at it and has long-standing relationships with these key supplier partners, answer that. So that's David Jukes. David?

Okay.

No pressure then, Steve. Well, I mean, firstly, remember that there's more than just the U.S.A. Our Canadian, our Brazilian, Mexican and European teams have been pretty stable for quite some time. And there's new authorization opportunities for them, and we're seeing that in some of their numbers and we'll see that in some of their numbers going forward as well. So primarily, what we have to have is a compelling value proposition and a value proposition based on very clear industry knowledge and superior execution, partnership, transparency, partly using the digital capabilities that we're now developing, which we think are pretty good, leveraging our experience with our ChemPoint business, which has been very successful in this space. So we work very hard with our suppliers. We know the markets we want to go into. We know the micro markets we want to go into. We then know the chemistries that are best served in those markets and the players that are the leaders in those chemistries. And we work very closely then, understanding what their needs are and then building a model that delivers their needs. And so we're already having a lot of conversations and some very early success, and I think this will be a good driver of growth for us for the coming years. But it is about having a compelling value proposition. One part of that compelling value proposition that we can offer that some others can't is our ability to execute in a very similar way using common systems, common CRM systems and common digital systems on both sides of the Atlantic and into South America as well. And that's quite an attractive value proposition for quite a few of the people that we're talking to today.

All right, that's helpful. And along those authorization lines, what's the latest with the M&A in the space? I know it's been a little bit quiet, but I think -- is it almost easier to buy the specialty guys than get these authorizations from the producers, do you think?

I'm not sure that it's easier. I mean, deals are always difficult because you need to motivate a seller and a buyer that's willing to pay the appropriate levels of that, because we don't have any intentions of overspending. We're pretty prudent on that front. So I think it's -- the nice thing about the chemical distribution business is we have all these variety of different ways to grow. Overriding everything is the ability to go out and capture new customers because we have a more effective sales force. On top of that, you have pricing and profitability opportunities. You have mix -- product mix opportunities. And that means going to more specialties or different packaging sizes, et cetera. You have the acquisition opportunities and you have these supplier partner authorizations. So not many places that I've been in my career that have as many ways and opportunities to grow as we do. That's why it's been frustrating that we haven't been growing and it's fun to see that growth accelerate quarter-after-quarter here. So I wouldn't say -- I wouldn't really rate them in terms of degree of difficulty, Andrew. I think you really have to -- you have to be careful when you go after acquisitions that you have the right fit, that you don't acquire something where the owners leave after a year and then open up a shop and compete against you, that -- this is something that incrementally helps you and you can leverage as opposed to just a bolt-on that we get a little bit of cost synergy out of. We're looking for acquisitions that give us incremental speed of growth.

All right, that's helpful. If I can just squeeze one more in. There are some cost cutting or some low-hanging fruit in terms of like optimization of your fleet and warehouse expenses. Is this still going on? Or have you identified anything that you'd like to update us on?

So a good question, and thanks for the recall on that. We have -- that project is well under way. And so look, I'm not comfortable talking too much about it right now because there are a lot of related issues to that, that we really can't get into. But we are very pleased with the progress, and I think late this year, you'll begin to see some visible -- and certainly early next year, you'll be able to see some visible signs of the outcomes from the good work that Jen McIntyre and her team, coupled with some outside help, are doing in that front.

And your next question comes from the line of Jim Sheehan with SunTrust.

Can you talk about the amount of pruning that you've done in the U.S. versus what needs to be done? Do you expect a lot more action there? Or just kind of what inning in the ballgame are we in, in terms of pruning the low-margin business?

So I think that this is -- first of all, it becomes an iterative process of high-grading your accounts. But I think the bulk of it comes early. And I've done this before and it was a, I think, a longer process than we have going on here right now. I think we're through - I would say the biggest problematic areas that were highly visible, we're through with most of that, but keep in mind you have to lap that for a year before you really see the appropriate comps. The best thing we can do is get out and get more new business of the kind that we want coming in so that sort of [pays] quickly. I wish there was more opportunities for pruning because pruning for us is a very good thing. It frees up our resources to go sell better-quality business. And as I mentioned earlier, that business lands somewhere, and I'd rather have somebody else tie up their sales force and their logistics teams taking care of business that doesn't -- that isn't very rewarding for the owners or the shareholders. So I wish we had more. I would say you'll see this go on for maybe the next 12 months, and then you'll see it in a very subtle way that probably won't be very noticeable going forward from that.

Great. And can you also comment on the general pricing environment that you've seen into July? Are you seeing generally more inflation or deflation? And how are you managing through that?

David?

So Jim, yes, we see inflation. Yes, we see deflation. Yes, we're managing our way through it. I mean, it depends on where we are in the product and which product that we're talking about. Though there was some inflation earlier on in the year, the prices in some of the petrochemical-related products have stalled and slipped back a little. But we just manage that every day. I mean, we just have to have the agility to manage the ups and downs of pricing. And having pricing now controlled in the hands of product management with visibility really down the molecule chain and the supply chain and a tight control on that allows us to run with the market and make sure that we put in the right price into the marketplace at the right time and not getting ahead or behind. So it really is a core function of a distribution company, to manage the ebbs and flows of prices. There's nothing significant. We've seen -- as I said, we saw some inflation, then prices softening a little. We've seen some hardening of prices on some of the big inorganics. We've managed our way through those as well. Sometimes, we get a little bit behind on those because they're bigger customers who we may be contracted for a month or 2. So that may squeeze the margin for a month or so. But that's just the ebb and flow of the business. I think really having pricing in the hands of product management with very clear category management under their control allows us to manage that with the agility that we need to make sure that we keep our customers competitive in their spaces.

And last one for Carl. Could you give us an update on your Univar value-add metric, please?

Jim, I'm thrilled that you asked. I was hoping you would because I know you're, as I, an avid fan and perhaps somehow had forgotten that metric. It's our internal cash return on capital metric. And I'm very happy to report a pivot up in our UVA metric. It hit bottom in the third quarter of last year and has been moving at a very nice clip straight up. That reflects the asset invested capital adjustments that we made in our oil and gas space. You saw us shut down a number of sites there. So our invested capital base has declined a bit. And it also reflects the higher numerator, the EBITDA rise that we've had for the last 3 quarters, and cash return. So it's -- I'm looking at the chart here and it's just a nice pivot up. I'll leave it to you all experts to draw the correlation there with stock price, but yes, it's going very well, Jim. Appreciate your asking.

And your next question comes from the line of Kevin McCarthy with Vertical Research Partners.

Steve, back at your Investor Day, you unveiled a long-term growth for -- or goal rather for 300 basis points of EBITDA margin expansion by 2021. And I believe that was meant to come from 3 categories: mix upgrade, operational improvements and new business wins, 100 bps each. And so wondering, recognizing that it's still very early days, if we look at the 60 basis points of margin improvement that you posted, where would you say you're improving the margin the most among those 3 categories? And where do you have perhaps the most upside still to come?

Yes, Kevin, thanks. I mean, I appreciate the opportunity to talk about this. And you have a good recollection of what we laid out. What's working the best right now is our pricing and profitability improvement and our mix improvement. That's what's really driving the growth right now. Not so much on the new business gains and losses, but this is really on our plan. This is to be expected. We knew we had a change in culture. We knew we had to give some tools and skills to the sellers that we understood in our sales force that could make it and wanted to be a part of this. And we also knew we had to attract a lot of new sellers as well. So that takes a little bit longer, and we're going to keep pushing hard on improving the new business wins and reducing the losses. That's the part that has the greatest opportunity to improve in the next phase. Until then, we continue to keep upgrading the mix of our products and making sure that we have appropriate pricing for the value that we deliver.

Great. And then a second question for Carl on cash flow, if I may. Maybe 2 pieces. You affirmed your CapEx guide at $110 million on Slide 12. Looks like you spent $39 million in the first half, and so I'm wondering if you could comment on, I guess, the implied $71 million in the latter half and what would account for that acceleration. And then the second part -- and I apologize, this is maybe a little bit detailed, maybe we can follow up offline, but under changes in operating assets and liabilities, it looks like you have $39 million negative under other, and that was identical to last year, also $39 million. I'm just wondering what's in there. It seems like a fairly chunky number.

Look -- Kevin, good to hear from you. On the CapEx, as you will note, we are running a bit behind. It's not a straight, linear progression of spend there through the year. There will be an uptick in the second half. That's really concentrated in the digital project area, where, in the first half of the year, we've spent more of our time around framing out exactly what the project is going to do, some of the end-to-end process work that we're doing. And so we expect to spend the dollars that would be capitalized as part of CapEx on those projects later in the second half. It may end up a little short of that $110 million. We'll just have to see how that goes. We'll, of course, book that when the expenditures are made. On the cash flow, the other accrued liabilities line that we talked about, we'll probably going to need to follow up on that. There's a lot of miscellaneous, small items in there that add up to the number you quoted and year-on-year not impacting the cash flow. You've got prepaids in there and other reserves and accruals in there that move. Not -- no real headline news in either year.

And this concludes today's Q&A session. I'll turn call back over the call to the presenters for closing remarks.

Yes, thank you all for joining us today, and we look forward to ongoing discussions about the opportunities to grow our company and your participation in that. Thank you very much.

And this concludes today's conference call. You may now disconnect.