Univar Solutions Inc (UNVR) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Univar Fourth Quarter 2017 Earnings Conference Call. My name is Jessa, 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 fourth 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 December 31, 2017, along with the 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 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.

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

Thank you, and welcome to Univar's fourth quarter 2017 earnings call. Let me start today's call with an overview of our fourth quarter performance and some brief comments on the markets we serve and the progress we're making on our initiatives. Then I'll ask David and Carl to provide added comments and insights about our performance.

During the quarter, Univar earned adjusted earnings per share of $0.34, an increase of 36% from a year ago. Adjusted EBITDA increased 10% to $149 million, our fifth consecutive quarter of adjusted EBITDA growth. And I'm very happy to report our first quarter of double-digit profitability growth since early 2014.

I'm very pleased we reached this milestone during my time as CEO and as David assumes the role of CEO. Economic conditions are supportive in our markets. We are seeing strength in the industrial economy and a positive environment for chemical prices broadly. More importantly, for the past 20 months, we've been working hard to change our culture and improve our commercial and operational execution to become a high-performance, innovative growth company that can generate superior earnings in any economic environment.

I'm proud to say that our business transformation is well underway. Across our organization, we've implemented new processes to drive accountability and rigor and to reset expectations for profitability. Our execution is improving and we're becoming a company that consistently delivers unsurpassed value for our customers, supplier partners and our shareholders. Our fourth quarter results demonstrate this.

And I'll now turn the call over to David to walk you through the details of our progress.

Thank you, Steve. 2017 was indeed a transformational year for Univar and our USA segments in particular. In 2017, we realigned our USA business to be more customer-focused. We went from a one-size-fits-all model to the creation of 4 new dedicated go-to-market lines of business: focused industries, local chemical distribution, bulk chemical distribution and services, to better meet the needs of our customers and supplier partners.

Our specialized approach aligns sellers and technical product experts with customers and end markets and creates focus and accountability for our sellers. It provides our customers with knowledge and industry expertise, along with market insights, which they tell us they value and trust. This drives deeper customer engagements and improves our mix of differentiated products and ingredients, which allows us to deliver and capture more value.

Our commercial teams are delivering and our customers are responding. Growth in our focused industries of food ingredients, pharmaceuticals, personal care and coatings has been accelerating throughout the year and increased double digits for the third quarter in a row, reflecting our higher resource commitment and improved execution in specialty products and ingredients.

We've taken several steps to improve our sales force execution, and we see a noticeable improvement in the performance for sellers who have gone through our training programs. Sales force productivity, measured in delivered gross profit dollars, is 20% higher for sellers who go through our formalized training versus those who've not yet. These trained sellers have larger opportunity pipelines and higher close rates, and we teach them how to sell the value we create for our customers, how to build a robust pipeline of potential new business, and how to nurture, satisfy and protect our existing accounts. This way, they ensure we are better brand stewards as well as brand advocates for our supplier partners.

We're advancing our efforts to find and develop the right sales talent to drive future growth. Through the quarter, we hired an additional 26 new sellers. At the beginning of 2017, we changed our sales incentive plan to reward performance that drives profitable growth and aligns our sellers with our growth objectives.

While it takes time for our new hires to become highly productive, we're excited about the talent we're attracting, sellers who are hungry to grow and advance their careers at Univar. In March, we'll be recognizing the top sellers globally who've made our first-ever champions club, which rewards and celebrates superior performance, making Univar a place where the best people want to work.

We continued to strengthen our management team. In December, we hired Mark Fisher as President of our USA business. Mark joined Univar from Owens & Minor and McKesson and knows the distribution business. Mark is a highly driven, results-oriented executive with proven track record of commercial, operational and leadership success. He will play a pivotal role at Univar as we transform our USA business to deliver, promote and capture the superior value Univar provides our customers and supplier partners.

Our win-loss ratios are improving in all our regions. While we still have a long way to go, we built on the gains we saw in the third quarter. In the U.S., our losses are narrowing and our pipeline of new customer opportunities continues to grow, although it's still nowhere near where we want it to be. And we have a robust pipeline of potential new supplier authorizations, which we didn't have a year ago.

Our supplier partners are excited about the focus our dedicated go-to-market strategy brings and our improving execution in the marketplace. A couple of weeks ago, we signed a new long-term strategic agreement with Cargill to serve the food ingredient market, as well as new authorizations with DowDuPont, Chemours and ABITEC. These all serve as validation of our new go-to-market strategy and the impact our improving execution can have on shaping and accelerating the outsourcing trend.

In parallel with our efforts to build Commercial Greatness, we're advancing our Operational Excellence initiatives. We're improving our branches site by site through hands-on engagement of our operations leadership. Transportation savings are multifaceted and going from carrier negotiations and optimization of our interbranch operations and fleet assets.

We've closed some branches in certain locations and we'll be realizing additional savings by running a more efficient hub and spoke network in 2018. Indirect procurement efficiencies have come from many sources as we bring more categories under management and leverage our size. All of these actions are being taken to combat an environment of rising regulatory, labor and carrier costs.

To ensure we appropriately price ourselves in the market, our operations teams are in constant dialogue with our commercial teams. We'll continue to invest in our digitization initiatives. Our digital investments help us reduce costs and improve the customer experience, making it easy for our customers to buy from us. Our e-commerce platform, MyUnivar.com, provides customers our full product catalog and features instant access to documents such as safety data sheets, order and shipment tracking and 24/7 access from any device.

While it remains early, I'm encouraged by the strong reception we've received from our customers as an increasing percentage of our orders are moving to digital channels.

Our M&A program is active, and we have a good pipeline of opportunities. In December, we announced the acquisition of Kemetyl Industrial Chemical in the Nordic region. The company generates roughly $30 million in sales and strengthens our position in Norway and Sweden in the pharmaceutical and water treatment markets. We intend to stay focused, strategic and disciplined with our process.

Our plan is working, and our execution is improving. Our teams are energized by the success they are seeing, and we're building on our gains to position ourselves to achieve our mid- and long-term financial targets.

Let me close by saying how excited I am to become Univar's next CEO. We have an energized and focused leadership team, an incredible landscape of growth opportunities we can capture and a clear plan on how to do it. I look forward to my future discussions with you and driving shareholder value creation.

Now let me turn the call over to our CFO, Carl Lukach, who will walk you through our fourth quarter results.

Thanks, David. I'll begin this morning on Slide 3. Today we reported GAAP earnings per share of $0.19 for the fourth quarter compared to a loss of $0.43 in the prior year fourth quarter.

Adjusted earnings per share were $0.34, an increase of 36% from $0.25 last year. Adjusted EBITDA increased 10% to $149 million from $135 million last year. We generated double-digit adjusted EBITDA growth both outside the U.S. and in the U.S., driven by higher selling prices and good cost management.

For the fifth consecutive quarter, we reported adjusted EBITDA growth, higher margins, higher conversion ratio and lower leverage, all from better commercial and operational execution.

Adjusted operating cash flow was $210 million for the quarter. That's adjusted EBITDA less change in net working capital, less CapEx. This was driven largely by our higher profitability.

Turning to our consolidated results on Slide 4. Gross profit dollars increased 8% over last year, reflecting higher average selling prices and improved product and market mix. As we've mentioned in the past, our primary objective is to increase the profitability and growth rate of our business through better selling and by capturing more high-value opportunities. Higher average selling prices this quarter resulted from focused initiatives to improve our sales force effectiveness as well as end market customer and product mix improvements.

Operating expenses, which includes outbound delivery costs, warehouse, selling and administrative expenses, declined 30 basis points as a percentage of sales.

We made good progress with our operational productivity initiatives and reinvested part of those savings in our sales force, digital tools and training costs as well as incentive compensation.

Adjusted EBITDA margin in the quarter increased 20 basis points to 7.6%, and our conversion ratio increased 90 basis points to 33.4%. Let me now take you through each of our segments beginning with the USA on Slide 5.

USA adjusted EBITDA grew 11% to $87 million, the fourth consecutive quarter of growth. EBITDA margin increased 50 basis points to 7.7%, reflecting higher gross margin and operating leverage to the bottom line from good expense management. This was despite higher freight expense from increased fuel costs and continued driver shortages that our supply chain teams are managing through.

Gross profit margin improved 30 basis points to 23% as a result of higher average selling prices, driven by improved sales force execution and mix improvement. Our focus on higher value sales and specialty products and ingredients is reflected in our margin improvement as we increase the profitability of our overall mix of business.

USA sales increased 4% in the quarter, and this was our first quarter of sales growth in the U.S. in 3 years. Sales growth reflects higher average selling prices and our efforts to change our mindset from pushing volume to improving the profitability of our overall mix of business and capturing higher-value opportunities.

Our USA conversion ratio increased 150 basis points in the quarter and 80 basis points for the year. Turning to our results in Canada on Slide 6. Adjusted EBITDA grew 13% as a result of strong operating expense management and the benefit of a weaker dollar. Our adjusted EBITDA margin increased slightly, but our conversion ratio increased 340 basis points.

Our gross margin in Canada declined slightly compared to a very strong fourth quarter last year as a result of the change in product and market mix, especially from a drought-challenged ag season.

In our Europe, Middle East and Africa segment on Slide 7, adjusted EBITDA grew 13% due to favorable FX translation and growth in our focused industries line of business and specialty products and ingredients. Operating expenses as a percentage of sales declined 40 basis points as a result of strong cost management.

Our win-loss ratio continued to improve, particularly in focused industries and industrial specialties. And we realized higher average selling prices from our continued focus on improving product and customer profitability along with chemical price inflation for certain products.

Gross margin declined 60 basis points due to a slight change in product and market mix compared to a strong fourth quarter last year.

Moving then to Slide 8 and our rest of the world segment. Adjusted EBITDA was essentially equal to last year as growth in our Brazil business and increased profitability in our small Asia-Pacific operations was offset by softness in Mexico.

Supply and demand conditions continued to stabilize from the weather events in the third quarter of 2017 and product shortages in both Mexico and Brazil led to higher average selling prices in the quarter.

Moving now to cash flow on Slide 9. Change in net working capital generated cash inflow in the fourth quarter of $86 million, reflecting our usual seasonal release of working capital. Net working capital productivity improved significantly.

Our 13-month average net working capital, as a percentage of sales, improved to 12.1%, a decrease of 30 basis points from 12.4% a year ago with the largest gains in the USA and EMEA. CapEx was $25 million in the quarter, about even with last year, and $83 million for the year, which was $7 million less than 2016.

For 2018, we plan to increase our CapEx to about $115 million as we make targeted investments in our operations and digital technology. Pension contributions in the quarter were $9 million and for the full year were $38 million. We expect to contribute about $42 million in 2018.

As noted in our earnings release, we recorded a fourth quarter charge of $37 million or $0.26 per share to reflect the net impact of the U.S. Tax Cuts and Jobs Act. The one-time tax on unrelated offshore earnings was $76 million. However, we are able to largely offset this by utilizing our U.S. net operating loss carryforward and other deferred tax assets.

As a result, we expect our 2017 U.S. cash tax to be approximately $8 million. Cash taxes in the quarter were $4 million and for the full year were $27 million. The effective tax rate for the full year used to compute adjusted earnings per share was 16% compared to 9% in 2016. Both years' low rates reflect our successful utilization of net operating loss carryforwards in EMEA as our profitability there increased.

In 2018, we expect this tax rate to increase to a range of 20% to 25% as we begin to exhaust some of those net operating loss carryforwards in EMEA. Despite the rise in our tax rate, we expect adjusted earnings per share to grow 15% to 30% in 2018.

One last point on taxes. Our tax dispute in Canada is now officially closed as the Canada Revenue Agency did not file an appeal to challenge the Federal Court of Appeal's judgment issued in our favor on the matter. As a result, the $58 million of letters of credit that we posted for this dispute have been canceled.

Moving on, also in cash flow. During the quarter, we sold a facility in Canada for $26 million and will be constructing a new, more cost-advantaged site nearby over the next 2 years. We reported a gain on the sale of $13 million and have reported it in other income, which is excluded from adjusted EBITDA and from adjusted earnings per share.

Slide 10 details our debt profile. Net debt at year-end was $2.4 billion, a decrease of $215 million from December 2016. Our leverage ratio decreased almost 3/4 of a turn from 4.7x to 4.0x. Total liquidity improved to just over $1.1 billion, a significant improvement from $858 million last year. And our cash interest coverage is a strong 4.4x trailing 12-month cash interest, up from 3.9x a year ago.

Overall net interest expense decreased $12 million from the previous year. In November, we amended our Term Loan B facility, which reduced the interest rate from LIBOR plus 2.75% to LIBOR plus 2.50% with a further reduction to LIBOR plus 2.25% when the company's net debt-to-adjusted EBITDA ratio falls below 4.0. The maturity date was extended from July 2022 to July 2024, and there were no material changes to the covenants or to Univar's total or secured leverage as a result of this transaction.

We expect cash interest expense to decrease in 2018, reflecting our refinancings in 2017 and lower debt balances. In addition, on February 12, we voluntarily paid down our Term Loan B principal amount by $300 million, utilizing the excess cash on our balance sheet that was outside the U.S.

Our return on assets deployed in the quarter increased 340 basis points to 23.3% from 19.9% a year ago and sequentially increased each quarter during the year.

Also, I'd like to call to your attention to 2 new accounting pronouncements that Univar is required to adopt in 2018 that were highlighted in our earnings news release, and in particular the pension reporting change.

Beginning with our first quarter 2018 earnings release, we will adopt the FASB retirement benefits pension accounting pronouncement. We will continue to report a small service component of pension expense and other post-retirement cost expenses in our operating cost, but we will move the non-service components of pension and other post-retirement benefits below operating income. We will apply the new pronouncement retrospectively and restate our 2016 and 2017 financial statements as required.

Adoption and restatement of the retirement benefits pension accounting pronouncements does not impact net income or cash flow, but will retrospectively reduce our adjusted EBITDA by approximately $10 million in 2017 and $15 million in 2016.

This change will not impact the leverage calculation defined in our debt agreement, so our leverage ratios will not be impacted either. We posted earlier today to our website a worksheet of our historical earnings per quarter reflecting the restatement of previous pension gains. Let me now address our outlook for 2018 on Slide 11.

In 2018, we will leverage the positive momentum we created in 2017 to further advance our key initiatives of Commercial Greatness, Operational Excellence and One Univar. We expect higher win-loss ratios and new supplier authorizations to drive mid-single-digit revenue growth.

Our operating expense productivity gains will help fund targeted investments in our sales force and digital technologies. As a result, we expect to deliver low double-digit adjusted EBITDA growth and adjusted earnings per share of $1.60 to $1.80. These expectations align with the 2019 and 2021 financial targets that we communicated in May of 2017 at our Investor Day.

For the first quarter of 2018, we expect adjusted EBITDA growth of around 10%, which will translate into a higher adjusted EPS growth rate.

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

Thanks, Carl. Our fourth quarter results build on the positive growth momentum we have created and further strengthen our confidence in our multiyear transformation plan. We have an exciting and unique opportunity to grow the profitability and the size of Univar.

In a large and growing market, in an industry that is fundamentally strong, historically, our own execution has held us back. But I'm pleased to say that we have made many of the changes needed. Our execution has improved and continues to improve, giving us confidence in the commitment our management team made to the investment community last May.

Our work is well underway, but much remains ahead of us as we pursue our vision and goals. This industry has abundant opportunity. It is ours for the taking. We're gaining traction but are still far from optimized. I hope it's becoming more evident to the investment community that we are building momentum and our growth is accelerating. We certainly see it internally, and our customers and supplier partners are taking note.

Univar is transforming into a growth company, developing the infrastructure, talent, culture and execution skills to deliver superior growth for years to come. Through our One Univar initiatives, we're going from a collection of individuals making independent decisions that aren't scalable to 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 will drive consistent double-digit profitability growth.

In recognition of the progress we have made, earlier this month, we announced that our Board of Directors has selected David Jukes as the company's next CEO effective at our Annual Shareholders Meeting, May 9.

Over the past 2 years, David has partnered with me to develop our long-term plan and execute on it. He's a 35-year veteran of the chemical distribution industry and has held numerous leadership positions with Univar, architecting the successful turnaround in demand and the transformation that is underway in the USA. David is uniquely qualified and is absolutely the right leader to advance Univar's transformation into a high-performance organization, focused on delivering unsurpassed value for all of our stakeholders.

Now before we open up the line for questions, as this will be my last investor call as CEO, let me conclude by saying I'm extremely proud and honored to have served as Univar's Chairman and CEO during this pivotal period in our company's history. It is truly a great time to be at Univar. I wish you could feel from the outside the degree of energy and enthusiasm that's building inside our company.

Our transformation is well underway, and our strong management team is extremely well positioned for accelerated earnings growth. I will continue to provide support and guidance as needed as Executive Chairman of Univar's Board of Directors, and I look forward to working with David in his new role.

Thank you for your attention. And with that, we will open it up for questions.

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

So a question. A lot -- you've had a lot of announcements in terms with respect to new authorizations, expanded agreements. And I can imagine it's probably not easy to quantify. But can you maybe help us understand, relative to expectations, how are these coming through? Are they accelerating? Just any way to gauge the success of this piece of the strategy.

Allison, let me just take a quick stab and then David can go a little deeper on this. I think, first of all, that these are relationships that David has personally been nurturing since he joined us here in the U.S. And he's migrating some of the great work he did in Europe with our suppliers, and he uses the trust and the relationships he's built over many, many years to get that done. So it's a great sign when we get these authorizations. As far as what we -- we can't always predict how far they'll take us, but David has some comments about the details around the authorizations.

Yes, thanks. We said last quarter that we're building a strong pipeline of authorizations, and it's good to see that some of those have come through in the last few weeks. And for us, really, it's a validation from the marketplace about our improving execution and our strategy to grow the business with our supplier partners. No single authorization is a game changer, but in aggregate, they add up and make a difference. I think more significantly, these authorizations are at competitive process. Our suppliers have choices, and they're choosing us because they entrust us with their product lines through our differentiated business model.

And then could you maybe, David, you put some interesting metrics around the success of the sales force that have gone through the training. Can you give us a sense of how far through that training most of your sales force stays at this point and sort of the runway that we have there?

Well, we continue to grow and develop the sales force. We added 26 in quarter 4. I think we've added another 22 this year so far. And we ran over 400 sales trainings last year. When we leave this call today, I'll be going talking to our sales managers because they're managing our sales organization -- they're managing -- they're training our sales managers right now. But I think, when I led a previous transformation like this, the sales transformation really is the hardest part. And overall, it took about 4 years. And we've been at this for about 20 months. And so it's encouraging so far, but there is a really long way still yet to go.

And next question comes from the line of Bob Koort from Goldman Sachs.

David, as you just said, and I think, Steve, you referenced as well that there's still a lot of work to do. I was wondering if you could help us calibrate a couple of things. One, I know when you guys have been working on culling or optimizing both your products slate and your account base, how far along are you in that sort of subtraction phase, where you may be reducing exposure where you have suboptimal margins? And then secondly, I think you said in the past that only about 1 out of 5 customers buy from multiple lines of business. Can you give us some sense on how that's progressed as you started to cross-sell?

Yes, thanks, Bob. First of all, I think that when you look at our -- where we are in the process of pruning, if you will, and being more selective, we're pretty far along in that process. We're more thoughtful, I think, today than ever about what business we take on. And we have pretty much, this quarter, lapped ourselves in the businesses that we chose to not -- or the specific accounts we chose not to participate in. So I think you'll -- that will affect, longer term, our growth rates starting -- you'll see that in the first half of next year. So we're pretty advanced through that. I can't say that we'll never be put in a situation where we get a tight squeeze put on us that doesn't make sense for us. But we are -- I think we're pretty much, this last quarter, wrapped that all up. And David, you want to answer the second part of the question?

Yes, sure. I mean, Steve, I think -- Bob, thanks for the question. Steve said I think we'll start to lap that in the first half of this year. And we got really hungry sellers now. We hire hungry sellers who are hunters and looking to grow, and we should see that start to come through. And I think in terms of cross-selling, that will be a little later. And we do have customers who only buy from one of our business units. We're very focused on growing in each of those business units at the moment. Then I think as we get very good at that, we'll work on the cross-selling. So I think -- it's probably too early to see the benefits of that right now. I'd love to see more, but I don't see it. But that's because we're really focused on the success of each individual unit.

Your next question comes from the line of Andrew Buscaglia from Credit Suisse.

Could you just talk a little bit more, in USA, first off, you guys got through some hurricane headwinds, what that shook out to? And then if you can break out before the -- I don't see the K here, but your pricing versus volume in the U.S.

I'm sorry, I had a little difficulty picking that. Was the first question about hurricane impact?

Yes, because I thought you guys had said $6 million.

Yes, we thought that -- we were concerned that we could hit a $6 million fourth quarter hurricane impact. We didn't see that, obviously. So we think that we had -- we know what we had in the third quarter, and that was about $6 million. And of course, we'll be able -- we'll have the opportunity to lap that as it's not in our base when we go through third quarter of 2018. So it was really a nonevent for us this quarter, with the exception of the impact of shortage of transportation. And I would say, that's something we're managing along with others. I'm very grateful that we do have a good chunk of our own fleet manage about 2/3 of our domestic U.S. business here. But we certainly are managing around shortages of drivers and equipment and the costs related with a squeeze on that. So that will be the only impact. And you really didn't see that in our performance for fourth quarter.

Andrew, can you repeat your second question?

Volume price mix.

Yes, price versus mix. Price versus -- yes, in the U.S.?

In the U.S., volumes were down mid-single digits in the USA. Still, as we compared with prior year, we think that, that comp will get a bit easier as we move forward into '18. Price was low double-digit, low double-digit a quarter, in the quarter.

Okay. And just in regards to inflation, you probably still would expect some benefit to come, I guess, on the -- from commodity inflation as we progress through '18 too?

We would expect that, yes. There's some tightness in the market. There are certain products that are rather tight. And there is inflation going on in the space right now. There's no question about it.

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

I've got 2 questions, please. And the first one regarding the cost initiative in the U.S. I think at Investor Day, you identified $20 million on transportation, $30 million on other expenses. I was wondering how far along you are on those reductions. And again, splitting the $30 million and the $20 million because I assume transportation costs are not down. The second question for Carl is on tax rate. You're giving this guidance of 20% to 25% for this year. With the tax reform, I was wondering how much higher do you think it can go over the, I guess, the rest of the period, 2019, 2021. I think you said 30% to 35%. I would assume that this is now way too high.

Okay. Thanks, Laurent. Okay, First on the cost productivity initiatives in the U.S. As you remember back in May, we mapped out -- Jen, our Head of Operations, mapped out roundly $50 million in improvements from 5 different areas. The headline is that all of those improvements are on track, and we're progressing as planned. We're also spending some of those savings for increases in investments in the sales force and the digital investments that we talked about. And then I have, as you pointed out, some of those gains were erased by the spike in freight costs post hurricanes that have hit the USA. So we had a little headwind there, but we're very pleased that we had these initiatives going to help fund that. On the tax rate, okay, let me outline this. The effective tax rate in our adjusted earnings per share was 9% in 2016 as we used NOLs and -- then still a low rate last year at 16% in 2017. We expect that rate on adjusted EPS to creep up to in the range of 20% to 25%. Now as you go out into the outer years, we expect that to go into the high 20s. And really reflects the geographical mix of where we're getting our earnings from with the U.S. now being one of the lowest tax rates at 21%. High 20s would be lower than what we said at Investor Day when we were guiding to even up to the mid-30s. So that highlights really the headline, which is the U.S. tax reform bill is a significant net present value benefit to our company.

You next question comes from the line of Jim Sheehan from SunTrust.

Carl, could you please update us on your Univar value-added metric?

You just made his day with that question. Thank you.

Jim, thank you. I love it when you ask that. And I'll go a little further and give some more insights on internal capital. But UVA, Univar value added, that's our EVA metric internally that we use operationally. It has -- it clearly started pivoting up in third quarter of '16 and has continued to climb. It's a dollar metric that we use, and we're very pleased with the ascent there as we increase the profitability of the company and reduce the invested capital base as we better manage our working capital. And as you know, we did close some operations in the oil fields over the last 2 years. So UVA is going up. I know that others outside don't use UVA, so ROIC is also going up. And it doesn't really matter how you measure it, whether it's CROIC or conventional ROIC or the one we quoted in the call today was return on assets deployed, which is EBITDA over last 13 months average of net permanent investment and working capital, at 23.3%. That's up from 19.9% last year and, as I mentioned in the call, has increased quarterly, sequentially throughout 2017. So ultimately, our improvements here are ending up in the return of capital metrics very nicely, and we're quite proud of that.

Terrific. And also, was there any movement in working capital in the fourth quarter that benefited 2017 but will wind up hurting 2018?

Nothing that I could call out and measure. There was a lot going on. On the positive side, our European team made meaningful improvements. They focused on that all year. Their net working capital as a percentage of sales is higher than our company average. They made improvements. Our U.S. team made improvements. These are the sustainable type of improvements, around better management of payables and receivables. The only anomaly I'll call out is, as you know, the 130-year drought in Canada did distort our working capital there. Smaller business, but we have higher inventories as we ended in the year than we normally do given the drought, and we'll see how this season is able to take up these volumes.

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

This is [Nick Farrow] on for Laurence. I was wondering if you can provide some additional color on end markets and any specific areas where you're seeing demand accelerating.

Yes, David, why don't you take one? I mean, end markets are strong right now. Things are looking pretty good out there. David, you can place some specifics on that.

Yes, Nick, I mean, we are seeing helpful economic situations at the moment. Conditions in Europe are good. We aren't seeing a negative impact from Brexit yet in our important U.K. business. In the U.S., we're seeing favorable conditions, modestly favorable conditions in the chemical price inflation. We're going -- we're focused on growing in certain key markets of food, pharmaceutical, personal care. We're seeing good, strong growth in those markets, but I think that's largely because of work that we are doing in that. So I think it's a favorable -- it's a commodity favorable economic background that we're operating in right now.

Your next question comes from the line of Kevin McCarthy from Vertical Research Partners.

It's Matt on for Kevin. I wanted to ask you a little bit about margins in Canada, especially given the mix issues you discussed. How sustainable is that kind of going forward in this 10 percent-ish range?

Matt, about margin, what, I'm sorry, I missed the word.

I'm talking about EBITDA margins in Canada.

Oh, Canada. Okay. Yes, we had strong fourth quarter margins at over 10%, which compares to last year's fourth quarter, there's a lot of seasonality, Matt, that goes on in Canada for us. The ag season is basically an 8-month season that starts up in April and ends by September or October. And that influences our quarter-on-quarter sequential margins. But I'd say the short answer is, yes, it's sustainable. That's where we are. We have a good business there and very focused on that.

Okay. And then how should we think about conversion ratio trends in 2018 given the North American pace of hiring? I would think new hires may offset some of the seller productivity. But will you be able to get more leverage out of the SG&A base?

Yes, so before you answer the detailed part of that, Carl. Yes, there's always this kind of productivity gap from the day you hire until the day they are able to -- sellers are able to collect business and go capture orders and new accounts. And it varies. It can be, on the best case, maybe 3 months and probably more average is 12 to 15 months, and it could be up to a couple of years. So it's not always that easy to predict. But in general, you can kind of look at a year. And what we're doing is we're balancing the investment. We're funding and fueling our investment from our growth. We want to meet our growth commitments that we've made externally, and we want to take some excess that we will deploy toward investment in sales, commercial resources as well as digitization. So Carl, you can talk about the metric specifics.

Yes, those are the drivers. That's the key point, Matt, is that we're trying to -- not trying, we're metering in these investments so that we meet our internal cost productivity goals. We still want to have, while cost will rise, cost as a percentage of sales are intended to not -- to decrease. That's part of our 5-year plan that we outlined. So while we don't forecast or guide to you on conversion ratios, they were up, as you know, quite significantly in total and for each segment in 2017, working this plan successfully will give us a continued rise in conversion ratios.

Okay. I mean, to follow up on that quickly, I guess, so you've had the goal of hiring 100 employees, and you kind of revamped that and did it again. I'm guessing, when does the -- I understand hiring will kind of continue to be fluid. But when does that kind of spree end or will you be satisfied with the team base that you have as a whole?

Hopefully, it'll be a long time because it's really a perpetual process. I think, done properly, you're always upgrading talent. And if you become a growth company, you're always going to want to add talent to, a, take care of the growth that you bring in as well as invest to continue to grow. You can still do this with an awful lot of leverage when you get -- when you begin to get top line growth kicking in as well as margin expansion. You're going to have leverage on the income statement. So we don't see things coming to an end. We see the intensity of the cycle diminishing with time. And by the way, the 100 employees, those were just sellers. So our efforts to recruit and expand our employee base have been very focused on commercial applications, marketing folks and sales leaders. And that's what we've been after, and that's where we've captured some really strong talent. So that's where we're, and you can expect us to continue to higher folks who to drive our growth on a double-digit basis.

You next question comes from the line of Duffy Fischer from Barclays.

First question just on the Canadian ag business, 2 questions there. One, what are the early indications for how strong that market will be this year, even though we haven't shipped a lot? I'm sure (inaudible) quarters. And two, how should we think about the sell-through versus the actual consumption? Do we need to eat through 5% or 10% or 15% of revenue as far as inventories go? Kind of what's a big-picture number there?

Okay. I mean, Mother Nature really controls this. And what we do is we have our team positioned really well. Our reputation is strong. We're known for service. We have extraordinary supplier relationships there. We do some unique things in terms of warehousing and climatized warehousing that are -- some capabilities that aren't broadly available throughout the area. So I love our position. It's just not that predictable. I think it was somewhat anomalous this past year, but we got through it. And as far as the drawdown of existing inventory, it's manageable. It's not something we're losing any sleep over. We'll manage through it. These are not -- the products that we're talking about here are not perishable. They're not shelf-life oriented. So we don't really view this as a concern.

I think I would add to that, Duffy, the acres are not forecast to go up in Canada. But our team is very focused on market share. And one way to -- the team is very focused on is selling more and having more share of the market. So too early to say anything on early signs for this year here at the end of February, but we should know more in a couple, 3 months.

Okay. And then another area that's been trouble for you, when oil prices fell precipitously, you lost a lot of business in that oil patch. Obviously, oil's recovered pretty significantly over the last 6 months. How should we think about the health of that business? And what's kind of a normalized, if we just think oil stays $60 to $70, what's a normalized level of revenue that we could get back to in that business for you guys?

Well, first of all, and I would like David to weigh in on this because he's very close to this. But we won't -- I don't see us getting back anywhere near the level we were previously because we were in some business applications where we were not ever going to become prosperous. So a lot of internal energy and resources were deployed that created no value. It was probably at best a breakeven situation. And if you really get into the full allocation of cost to serve, I could make a case that there were losses in certain applications. So we won't go back. We're in the market, but we're far more selective than we were. And the market structure has changed a bit as well. David, you want to make a couple of comments?

I mean, oil and gas is much less of an income for us than it was in its peak. It's probably less than 5% of our business overall these days. And we're very focused on profitable growth. So as customers who are in the oil and gas sector, they need to buy chemicals and we sell chemicals, have a demand, then we'll service that. Some of the chemistries, some of the formulations that we were providing some years ago, the peaks have gone away. They will never come back. So we're taking a very prudent view. We're a chemical distributor. There are customers in the oil and gas sector who buy chemicals. We'll service them profitably, and that's what we'll continue to do.

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

Thank you, ladies and gentlemen, for your interest in Univar. This does conclude today's call. If you have any follow-up questions, please reach out to the Investor Relations team. Thank you, and have a great day.

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