UNVR (2019 - Q2)

Good morning, ladies and gentlemen, and welcome to Univar Solutions' Second Quarter 2019 Earnings Conference Call. My name is Julie, and I will be your host operator on this call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions]. I will now turn the meeting over to your host for today's call, Heather Kos, Vice President of Investor Relations at Univar Solutions. Heather, please go ahead. Heather

Thank you, and good morning. Welcome to Univar Solutions' Second Quarter 2019 Conference Call and webcast. Joining our call today are David Jukes, President and Chief Executive Officer and Carl Lukach, Executive Vice President and Chief Financial Officer. This morning, we released our financial results for the second quarter ended June 30, 2019. The first full quarter that includes Nexeo Solutions, Chemical Distribution business, which we acquired on February, 28 this year. We have posted on our website, a supplemental slide presentation to go with today's call. The slide presentation should be viewed along with the earnings release, both of which have been posted on our website at univarsolutions.com. During this call, as summarized on Slide 2, we will refer to certain non-GAAP financial measures, for which you can find the reconciliations to the comparable GAAP financial measures and our earnings release in the supplemental slide presentation. As referenced on Slide 2, we will 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 David for his opening remarks.

Thanks Heather, and good morning everyone. Since our last update, we've made significant progress on the integration of the legacy Univar and Nexeo chemical ingredients and distribution businesses on a more than satisfied with our execution to date. I'm pleased to say that our strategy is working and despite operating in what now widely reported as a challenging and weakening market, we were able to deliver solid second quarter results, marginally ahead of expectations, higher gross margins from favorable mix and improved sales force effectiveness. The first cost synergies from the integration program and improved operating efficiency drove earnings, offsetting any market weakness. We're now operating as one company, Univar Solutions, and I've seen the benefits of this strategic step. For the second quarter, we reported a gross profit of $577 million. On an estimated pro forma basis, this is down about 5% year-on-year driven by approximately 2% of FX, lit level [ph] of 1% by the anticipated synergies and 1% by continued adverse conditions in Canadian Ag. It's important to note though that in adjusted EBITDA basis a year-over-year performance, is essentially flat the $201 million. This in my view is an early proof point of how Univar Solutions is offsetting weak market dynamics and holding a EBITDA flat through cost control, mix improvements and synergy capture. You'll hear later from call, that our outlook for the year is being lowered from $750 million midpoint to a new midpoint to $732.5 million. Again, in my view, this slight reduction in full year guidance is prudent but another fabrication of our strategy delivering as we expected. Even with the continued lower demand and choppy market dynamics, we believe we can hold our year-over-year total adjusted EBITDA almost flat, due to cost control, mix improvements and synergy capture. Of course, if we see some uptick in the second half, we can improve on this expectation. Finally because of our early progress in the work of the organization, we are raising our growth synergy target by $20 million from $130 million to $150 million. We're also writing our integration cost estimates from $150 million to $225 million. But roughly half of the $75 million increase is due to additional ERP functionality, we are accelerating into earlier implementation. We're also active in monetizing excess assets and working capital, which provide substantial funding for the integration costs. Carl will have more detail on this, but overall, I'm very pleased with the integration process and the expected financial results and returns. Now, before I turn the call over to Carl, let me mention a few items that I feel are going to continue to drive long-term value at Univar Solutions. Our USA transformation continues to progress positively and our newly combined salesforce is stable and maturing. Our sellers are energized and excited about the opportunity in front of them as they learn innovative new ways to sell the value of an expanded list of industry leading products from our supplier partners and from our enhanced Univar Solutions platform. We have a team eager to bring unrivaled industry and products expertise to deliver more efficient solutions to customers at the time when due to the economic headwinds they need the most. During the quarter, we held our first ever National Sales Meeting at Univar Solutions. Over a thousand sellers and product managers along with a number of our supplier partners came together as one united commercial team, representing marketing, product management and each of our separate but dedicated sales channels. One of the featured events was a two-day gallery walk for our tea supply partners. This was a unique opportunity for them to interact with our sales and product management teams in a collective and collaborative forum. The PI feedback has been extremely positive and they told us this was an event like no other. The feedback was best summarized by one partner who said and I quote: “The event was better than any trade show I've ever attended”. Subsequent virtual sessions are scheduled to prepare our teams with additional training to support our new and expanded line card. Additionally, a counselor sales process, which helps build long-term win-win customer relationships is already been introduced to all new sellers with classes scheduled throughout the rest of 2019. We continue to invest in having the best equipped and skilled sales force in the industry. You may have seen our press releases during the quarter announcing new or expanded products authorizations. We were awarded from supply partners such as Dow, Novozymes, Axiom Foods and Seaweed & Co. These partnerships and the leading chemical and ingredient products they bring, truly excites us, reflect the benefits of our dedicated industry focused model and add to our expanded portfolio of natural ingredients as supply partners recognize the value that our expertise and digital capabilities bring them and believe in our objective to redefine chemical distribution and help them streamline, innovate and grow. Since the launch of Univar Solutions on March, 1; our confidence in the strategic rationale and value creation opportunity has grown as we focus on streamlining, innovating and growing our own business. We've identified additional cost synergies as we integrate the legacy companies and in some situations have expanded our scope, begin to optimize the business where we can and where it doesn't disturb or risk the integration process. We're working diligently and rapidly to simplify business processes, remove redundancies, eliminate bottlenecks, optimize up, consolidate the supply chain and digitize our business. These actions will structure reduce our cost base and enable us to leverage our scale for the benefit of our customers and supply partners into the long-term, creating a sustainable competitive advantage. Now, let me turn the call over to Carl. He will walk you through our second quarter results, update you on our next deal value creation opportunity and explain our full year guidance. Then, I will close with some further details on the progress of the integration. Carl?

Thanks David, and good morning everyone. I would like to start by saying that overall, we are pleased with our performance in the quarter. We executed well in what was and continues to be a choppy, industrial market environment as our customers continually adjusted their expectations and their orders. Over the course of the quarter, we saw progressively weaker demand from our customers in most global industrial end-markets. While our second quarter reported sales of $2.6 billion, were up 11% currency neutral, largely from including Nexeo. Our estimated pro forma sales were down 9% currency neutral reflecting the lower demand. So we did what we always do in market conditions like these. We focused intensely on those factors within our control, like remaining disciplined with our spending, continuing to build the strength of our sales force and most notably, capturing the valuable and growing treasure chest of synergies from the combination the legacy Univar and Nexeo organizations. In the second quarter, we reported GAAP net income of $16.3 million or $0.10 per share. This included $49 million of integration and transaction related costs and reflects the higher share count resulting from the Nexeo acquisition. Adjusted earnings per share for the quarter was $0.42 compared to $0.47 in the prior year. Higher share count and stock conflict spent along with an FX headwind more than offset the addition of Nexeo, which was in line with our expectations. Last quarter, we told you we would frame our discussion of performance by focusing on six key metrics. To remind you, these key metrics are: gross profit dollars, adjusted EBITDA, cash flow, return on capital, debt leverage and synergy capture from the integration. Let me update you now on each of these metrics for the second quarter. First metric, gross profit dollars. On a reported basis, gross profit dollars grew 18% currency neutral to $577 million and we expanded our gross margin by 120 basis points to 22.3%. As David explained, our estimated pro forma gross profit dollars were about equal to last year, excluding effects to synergies in Canadian Ag despite lower sales. Second metric, adjusted EBITDA. Our second quarter adjusted EBITDA of $201 million in the quarter grew 16% from the prior year or 19% excluding the impact of currency. Adjusted EBITDA margin expanded 50 basis points to 7.8% from the prior year. Like gross profit, Our estimated pro forma adjusted EBITDA was about flat with last year currency neutral, reflecting the higher gross margin, cost synergies from Nexeo and disciplined cost management despite again much lower sales. Third, free cash flow. Our cash flow year-to-date is ahead of last year, largely because we invested less in net working capital than we expected, as a result of the lower demand environment. This is a testament to the counter cyclical nature of our cash flow and business model, which provides us strength and resiliency in a sluggish macroeconomic environment. Our top priority for use of cash in the short-term continues to be deleveraging. Fourth, return on invested capital. ROIC, defined as adjusted net income divided by net assets deployed, was 9.9% down from 10.9% at this time last year, reflecting the addition of legacy Nexeo chemical assets. We project a steady rise in our ROIC as we successfully execute our integration and synergy capture plans. Next, debt leverage. Our leverage ratio was 4.1X at the end of the quarter, essentially flat with the same quarter last year and up slightly from the first quarter this year. We continue to prioritize our use of cash for debt pay down and remain on track to end this year at about 3.6X excluding any pay down of debt from any potential strategic divestitures. And finally, synergy capture. As you saw in our earnings news release this morning, we are raising our forecast of annual run rate net synergies to $220 million up from our prior estimate of $100 million. We also doubled our estimate of net synergies that we will capture this year from $10 million to $20 million. I'll go into more detail on this subject later in the call. Let me now share with you highlights from each of our geographic segments. In our U.S. segment, on a reported basis, adjusted EBITDA increased 31% to $128 million from including legacy Nexeo but boosted by a higher overall gross margin and disciplined cost management, which included cost synergies. On an estimated pro forma basis, adjusted EBITDA in the U.S. was essentially flat with the prior year despite the lower demand. Reported gross profit grew 29% and gross margin increased 110 basis points including the impact of the synergies that David mentioned. In this challenging environment, we managed our operating costs well and our U.S. conversion ratio increased 70 basis points to 34.1%. Outbound freight and handling costs continued to edge downward from peak levels last year. Cost per pound, however, remains high, reflecting lower utilization of our internal fleet. We do, however, anticipate favorability in the second half of this year, as we work to integrate and optimize the legacy company's transportation teams. In our Canada segment, adjusted EBITDA increased 1% on a currency-neutral basis and declined 2% on a reported basis. Solid performance in the core industrial chemical business and certain commodity products, along with some contribution from the Nexeo acquisition was partially offset by lower demand from the agriculture sector as our ag customers consume excess stocks from the prior 2 years. Our EMEA segment grew adjusted EBITDA 2%, excluding the impact of currency in a challenging and somewhat weakening macroeconomic environment. The second quarter was the 23rd consecutive quarter of currency-neutral EBITDA growth for our EMEA segment. Gross profit was roughly equal to last year on a currency-neutral basis. However, gross margin expanded 100 basis points driven by mix improvement. The beneficial Brexit impact of approximately $2 million that we realized in the first quarter, largely reversed in the second quarter. And as a reminder, our EMEA segment results are not impacted by including Nexeo. We are being disciplined with our spending as we navigate through a slower market environment in Europe. In our last hand segment, adjusted EBITDA grew 8% on a currency-neutral basis, benefiting from solid performance in Mexico's energy market and the Brazilian ag market, along with strong cost control and some contribution from Nexeo. This was partially offset, however, like in other markets by softness in industrial demand across both Mexico and Brazil. Gross Profit grew 12% on a currency-neutral basis, while gross margin decreased 160 basis points due to changes in product and market mix. We expect our customers in Brazil to continue to take a wait and see approach to business demand. Moving now to cash flow. We invested less in networking capital during the quarter than we expected due to the lower demand. This increased our cash flow. For reference, last year's second quarter change in networking capital was unusually high given the timing of Easter. Cash interest in the quarter was $26 million. We still expect cash interest for the year to be approximately $140 million. Cash taxes in the quarter were $13 million on track with our full year estimate of $50 million. Our effective tax rate for adjusted EPS in the quarter was 25.1% lower than the prior year second quarter of 31.2%, which increased adjusted earnings per share by about $0.04. The 6 months year-to-date tax rate of 28% is down slightly from last year's 28.4%. We now expect our full year effective tax rate for adjusted EPS to be within a range of 28% to 30%. Capital expenditures to maintain our facilities and grow our business were $29 million in the quarter. We continue to expect $100 million in CapEx for the year. Now before I turned to the outlook, let me share with you how we're doing with our Nexeo value capture work. Today we are raising our estimate for annual run rate gross cost synergies from the previously announced $130 million to now $150 million. That's gross cost synergies. We are not changing our $30 million estimate for these synergies at this time, although work is progressing well to offset these in the future with incremental wins. And we have not yet included an estimate for growth synergies from having a larger and better-trained sales force in the U.S.A. and from cross-selling products to each legacy company's customers. Our annual run rate net synergies, therefore, has increased from $100 million to $120 million. We are also doubling our estimate of the net synergies we will capture in this calendar year from $10 million to $20 million. Today's increase in estimated synergies results from updated assessments by each of our work stream leaders in the comprehensive discipline process we are running. Jen McIntyre is our chief integration officer and she has us ahead of plan. We are well organized, executing at pace and yet at a very granular level of detail. Confidence along with our team morale is high. We're also raising today our total 3-year estimate of onetime costs from $150 million to $225 million. Our work stream leaders have identified new opportunities to further streamline our processes, advance our digital functionality and systemically reduce our cost per transaction on an ongoing basis. To capture these savings, which are additional to my previously mentioned $150 million, will require us to broaden our IT scope now while we migrate rather than later. Once complete, our expanded scope will enable us to further reduce administrative costs as a percentage of sales and will add incremental savings to our new annual run rate of $120 million synergies. To scale the opportunity for you, in our U.S.A. segment alone, every 20 basis points reduction in administrative costs as a percentage of sales will equate with an annual run-rate savings of approximately $15 million. A little more than half of the $75 million increase in 3-year onetime costs can be attributed to the broader digitalization functionality, with the remainder attributed to revised estimates for severance, state consolidation and integration team cost. We see these expenditures as having a high return on investment. And lastly, as a reminder, we continue to expect to generate substantial cash funding for this one-time integration and optimization costs from the sale of excess real estate and optimization of networking capital. Both of these actions are well underway. Turning now to our updated outlook for 2019 in the third quarter. As we told you last quarter, we were not anticipating any second half uplift in the market. But as we mentioned in this call and as you have seen in the media, market demand for chemical ingredients remains choppy and has progressively declined in the first half of this year, decelerating, particularly in the second quarter. Many of our supplier partners and peers have significantly reduced their forecasts for the second half of this year to reflect expected slower macroeconomic activity. Based on this and recent trends, we also believe it's prudent to change our demand outlook from flat to lower than last year. Taking into account a lower than previously expected market demand and balancing against this, our improving execution and the higher forecasted net cost synergies from the next year integration. We are training our full year outlook for adjusted EBITDA approximately 2% to a range of $725 million to $740 million, compared to our prior forecast of $740 million to $760 million. The steady flow of growing cost synergies provides us valuable offset to the weaker macroeconomic environment. We are also adjusting our outlook for free cash flow to a range of $275 million to $325 million inclusive of the $63 million legal payment we made in April and before one-time integration costs and transaction fees. This adjustment is precipitated by our lower assessment of the agricultural market in Canada. In the third quarter of 2019, we expect adjusted EBITDA to be between $180 million and $190 million up from the $157 million we earned in the third quarter of 2018. With that, I'll turn it back to you, David.

Thanks, Carl. As I mentioned at the start of the call and as you heard in more detail from Carl, integration with the legacy Nexeo and Univar organization has made significant progress during the quarter and our strategy is working. As we work through each integration milestone, we remain focused on the opportunity we have to streamline, to innovate and to grow. Since the beginning, our philosophy and approach to integrations remain consistent moving forward with the best of the best on systems, assets, processes and people while staying focused on delivering increased value to our customers and suppliers. It is of paramount importance that the right leadership and personnel in place with clear accountability to deliver bottom-line results. I'm pleased to say that our whole organizational structure is finalized and thus far, our employee retention engagement has exceeded my expectations. Our people are excited by the values-based, purpose-driven culture of Univar Solutions and are performing really well in the sometimes trying circumstances of any integration process. I want to thank them publicly for their commitments and support and building a place where the best people want to work. Going forward, we will continue to focus on the execution of our plans while as effectively managing change to deliver new opportunities and further streamline, innovate and grow our company. Our U.S. Commercial team led by Mark Fisher have completed the sales force territory redesign ahead of our original estimates. They are now executing the implementation plan. Our sales force attrition remains at the low levels we observed since we closed the deal and our sellers are excited to have an estimated 20% to 25% of free capacity to grow and sell to new customers. We've identified the right sellers to support our 2 new focus industries, homecare and ancestral cleaning and metalworking and lubricants. Similar to our other focus industries, these 2 verticals are now staffed with subject matter experts to help customers identify and solve their most crucial problems supported by a dedicated technical support and application development capabilities through our now global network of solution centers. Real opportunity remains with our improved sales force efficiency and cross-selling opportunities. Our ERP migration is running smoothly. We have an excellent leader and team of experienced professionals in place. They've already successfully mapped our legacy Univar master data to the legacy Nexeo data. Our training plans are finalized for all impacted personnel. And the first of our 6 ERP implementation ways is beginning in 2 months, with the entire migration continuing to the beginning of 2021. Going forward, we'll continue to look for ways to optimize our processes across all functions and identify new value capture opportunities. Aside from the integration, I mentioned in our last call that we have started a strategic review of various lines of business within our portfolio to determine whether we are the best home for those businesses. We have a number of profitable and attractive businesses that like the legacy Nexeo plastics business, maybe adjacent to our core chemical and ingredient distribution business. We're advancing in our analysis and are still early in our evaluation process but this is a high priority for us. As a reminder, our capital deployment priority continues to be debt reduction that any proceeds from a sale to be used to pay down debt, with our aim to get below 3x levered by the end of 2020. Before concluding, I'd like to mention a few other highlights. In June, we released the first sustainability report as Univar Solutions. This report entitled Our Home Our Responsibility covers the 2018 goals and achievements from both the legacy Univar and legacy Nexeo Solutions organizations as well as sets the stage for our approach to sustainability now as Univar Solutions. Sustainability is a priority for us as it searches each of our core values and aligns with our vision to redefine distribution and be the most valued chemical and ingredient distributor on the planet, as well as being better stewards of the Earth's resources. Univar Solutions will continue the work started by each legacy organization and build on their solid foundations to establish a new and enhanced focus on sustainable business across our operations globally. This includes reaffirming our commitments, the signatories to the UN Global Compact, engaging with our workforce to continue our work and transparently reporting our performance. Also, we're pleased to announce that Univar Solutions is a co-recipient of the NACD Responsible Distribution Industry Excellence Award, the first time for either legacy company. This award is presented to companies that demonstrate a sustained and rigorous commitment to NACD Responsible Distribution, the association's Third-party Verified Environmental Health Safety and Security Program. This marks an early landmark for the new Univar Solutions and we're both honored and proud to be recognized by the NACD for excellence in these critical areas of our business. Univar Solutions is uniquely positioned to improve our profitability, grow our market share and grow the size of the distributed chemicals market or while advancing the digitization of our entire business. We can now add to that practice of growth drivers unlocking what Carl referred to as a treasure chest of viable cost and growth synergies from the combination of the legacy organizations. We have multiple levers in our control, including accelerating integration cost energies and continuing to improve our sales force execution to create value for our suppliers, customers and shareholders. We're doing this in a demanding environment, which has increasingly become more challenging and uncertain. While it's not easy, we've operated in these markets before and have confidence in our ability to remain agile and execute effectively, sustainably and responsibly. Thanks for your attention. And with that, we'll open it up to questions.

Thank you. [Operator Instructions] Your first question comes from the line of Steven Bunn from Bank of America. Your line is open.

Hi, this is actually Luke Washer on for Steve today. Thank you for taking my question. I wanted to ask a little bit more about your integration with Nexeo. Would you be able to provide more detail regarding kind of the process of your -- progress of your sales integration specifically, kind of where you're hiring or consolidating maybe at a regional level?

Sure, we can explain that a little bit better. I think we said before Jen McIntyre leads our Integration Program. We have a very thorough and a very detailed program that we're going through which is on plan. It's actually ahead of planners allowing us to increase those synergy targets so we dumped it today. We also mentioned on the call that our commercial teams, the mapping and remapping of the sales territories, has been completed ahead of schedule. Is now going into implementation so expect every new seller to have his new territory and be in place within the next 60 days. But every seller now knows what their new territory is, what their new city is, what their new lead management is and the new industries in place. So that's a very exciting development for us. We also said at the beginning of the program, that we would be retaining every single seller that we have through the joint company's performance permitting. And we've done that. Our commitment is to do that. And actually, we think we're going to have some more sales territories open up so recruiting more sellers into the sales organization over the coming period.

Great, thank you. And again, kind of post the acquisition, do you see yourself getting rewarded with increased supplier agreements from suppliers?

We do. I mean we recognize there would be some disadvantages and the disadvantages are very much in line with where we expected them to be. We have chemistries -- competing chemistries in the legacy Nexeo and legacy Univar organizations which we knew we couldn't sit next to each other. So we have been able to map our way through those. There's no surprises in there at all. The surprises synergies are happening pretty much as expected. And the winds that we expected to get are coming in as well. So we're very pleased. Our suppliers are very supportive. We did consult with our suppliers before we put the integration plans together to get their input on what they would like to see, what they wanted test, what they wanted changed, what they wanted more often. So we've been very integrated with our supply promise all the way through. But as you can see through some of the announcements that we've made and some of the increasing relationships we have with partners like [indiscernible] BASF. They're really excited about what we can do, how we can grow their business and the business model that we're putting in place.

Sounds good. Thank you.

Your next question comes from Kevin McCarthy from Vertical Research. Your line is open.

A couple of questions, I guess on demand. It sounds like you're baking into the 2019 forecasts and outlook for negative demand. I just wanted you to kind of talk through what has changed in your view on a regional basis. And then related to that, maybe provide some color if you would on the monthly patterns that you're observing in the demand function.

Sure. Let me try to answer that for you. So I think we said in our last call, that we expected demand in the second half to be flat and what we are seeing is a slower economy. What we saw is the demand patterns slowdown during the months of May and June and we've seen that continue into July. August is always a holiday month so it's difficult of course, so Q3 is really a September month, so it's difficult to understand exactly what Q3 will bring right now. Certainly we're seeing a slower economy in Europe, we're seeing in-hands amount of anxiety around some of the key markets, particularly the UK, with the hope situation, and the US has slowed sequentially as the months have gone on. We're not alone in that, I think pretty much every chemical producer is reported, is getting down for the second half, so whilst our outlook was directionally correct, the sluggish conditions really impacted us and our supply partners and are proving to be more challenging than we thought, so we think it's prudent to go down. Having said that, what we do have, is we have improved ourselves in execution, we have disciplined cost and margin management and we have the centages coming in from the next year earlier and slightly larger than we expected, and that offsets, goes a long way to offsetting that kind of market guide, so we think, a market demand, we think that we have pretty strong hand going into what is an increasingly shocking market conditions.

That's helpful. I appreciate the color there. The second, if I may on Canada, I was wondering if you could elaborate on two things, I guess the source of strength that you saw on the industrial side and then the weakness and [indiscernible], and how those two net out in the quarter. Do you think it turned out to be net-favorable or net-challenging versus your prior expectations?

Look, I think our core chemical ingredient distribution business has done really well, we got a big team managing that business, and what they're doing is what any good distribution does in trying market conditions that controls the controllable. That's what it's done, will average some of the capabilities that we put through the EMEA and through EU, has to be able to think about the focus industries growth in different shaped product margin, making the product better at managing the margin. Meanwhile, we have the business, which is largely weather-dependent and we had three years of foul weather, which is unrivaled, and we have supply chains fairly stopped and we have those farmers that are planting some of the lower cost products, so almost a perfect storm in Canada. Bad pun actually, perfect storm in Canada, sorry about that. Now, I think that what we are doing in Canada is not just sitting there twirling up arms [ph] and saying, “Gosh it's just the weather, there's nothing we can do”. We're doing all we can to change the business model there and to de-risk that going forward. So, I think the addition of [indiscernible], so you'll see us continue to change the profile of that business to de-risk it going forward. For the core industrial business, it's doing really well, it's doing what it does, its cost managements, its mixed improvements, it's doing the basics of distribution really well, which the Canadians seem very good at.

Yes, Kevin, it's Carl, if I could add to that too. Size-wise the two, more or less, netted out. Our Canadian segment reported flat for the quarter versus prior year and the upside that we realized on the industrial side offset the Canadian down. In addition, we do have some iterations in working capital that were really actively managing true in the act space and that is actually at the root of one of the lead precipitators for lowering our free cash-flow guidance for the year. So, it's a dynamic situation there as the industry works through the excess stocks.

Thank you both.

Your next question comes from Laurent Favre with Exane BNP Paribas. Your line is open.

Good morning, all. Thanks for taking my questions. This one's going back to what Kevin asked. I guess you used to pursue a flat second half, when the suppliers and all the chemical companies we follow used to say up, now you're saying down when they are all saying flat. So I'm just wondering, what are the areas that make you particularly concerned and make you think that when easier volume comes you will still have a down second half? Are there areas where there was stability and resilience in the second half of last year where you started to see some weakness? Basically, any color there would be helpful.

Sure, Loran. Good afternoon. So really beginning the year we laid out our key assumptions which really have flatten industrial demand or small recovery in Canada agriculture from the start below and then progress and use the prioritization and the continued improvement on our sales force and we see that. The change in our guidance really is directed to -- directly related to the industrial demand, which has softened with multiple global companies publicly got into a weak second half of the year, followed by a third consecutive year of poor conditions in Canada. So we continue to execute on what we can control and we've demonstrated progress on summing the authorizations, improving our sales force efficiency and increasing up synergy estimates. They're all helping offset the demand softness. I don't have a better crystal ball and anybody else on the economy but I remain conservative about what we'll see in the second half because there is so much uncertainty in pretty much any economic market that you look at. I think it's prudent for us to listen to what everybody else is saying and be prudent. If we see an uptick in demand, then we'll benefit from that. But I think it's prudent for us not to hope for that. Hope is not a strategy.

Right, it's Carl. I'm going back to what you said about easier comps in the second half. If I could just add a point on that. This started for us, we think back in October of 2018 when we first saw this choppiness and kind of trend line down that we talked about five-ish percent lower volume in orders. We're not talking about a cliff here. The trend lines are not a cliff. And we're not seeing that or projecting that into the second half. But it is lower today than it was back in October when this drop-down started. And I'd say maybe accented in Europe. It's -- we don't know if it's the summer vacations coming up or how long that will last and what September will bring but it is the easy comp part of your comment. I'm just reacting to that.

Thank you. And then the second question was on the free cash flow guidance. So am I right that excluding what you're doing in Canada, your free cash flow guidance should have been, let's say more optimistic than what it is? In other words, that on the lower demand you get lower EBITDA but you'd have had working capital fill back.

Sure, yes. It's exactly right, Loran. You're exactly right. Lower demand, we will harvest working capital and the lower EBITDA we project would be more than offset by the harvesting of working capital. What's working in our reduction of the forecast there is really in the ag space. I think you know that traditionally historically, customers in the ag industry in Canada prepay -- pre-buy protection products for the following season in the fourth quarter. Our market read is that our customer base in Canada has had such a rough time over the last 2 years and now 3 years that they may not be set up to do that here at the end of the fourth quarter. And we do historically have received a lot of cash in the fourth quarter from prepayments in the ag space. So we're adjusting that expectation downward and that is really the root of why we are lowering our free cash flow gardens. The transitory issue is that we hope will rebound next year.

Okay, thank you.

Thanks a lot.

David Begleiter from Deutsche Bank, your line is open.

Hi, good morning. This is Catherine Griffin on for David. Thanks for taking my question. So first, I was wondering if you could just talk a little bit more about the update on the portfolio optimization. And if any divestitures have been identified or if they're underway and sort of where those are aligned or not aligned. Thank you.

Hey, Catherine. So I can't share any updates with you today as you mentioned in the call. We got a number of profitable and attractive businesses that like the Nexeo plastics business and may be adjacent to our core chemical ingredient distribution business and may have a better growth profile in someone else's hands. So we're advancing in our analysis and we're still early in the valuation progress -- process. But our goal is to focus on owning businesses where we can maximize the value and look to sell those could be worth more to someone else. And then to use any proceeds from that to prioritize debt paid out. But I can't give you any specifics right now.

Okay, thank you. And I was just curious. So we've heard on -- over the past couple of weeks from some of your customers mentioned sort of changing trends and consumer prep, more towards sustainable ingredients, clean, natural. Have you seen any of that impacting demand kind of distinct from macroeconomic weakness? And is that seen as an opportunity in terms of where you're applying the focused industry's growth? Are you seeing any of that impact?

So there was a little blip midway through your question. So I think your question is about trends on natural ingredients. Is that right?

Yes.

Okay, so yes, we do see that. And we do see our focused industry model aligning very well with identifying market trends, getting ahead of market trends and bringing the latest in global trends to our local customers worldwide. So as we announced with the addition of someone like seaweed in tow, in the last quarter, we're adding to our portfolio of natural products. We do see this increasing trend in natural products and we intend to be at the forefront of that. Our focus needs to model aligned perfectly. With that we're able to bring the expertise -- dedicated expertise, whether that's to personal care customers or the food ingredients customers or wherever that is to bring them natural products which can -- which can help their sustainability goals.

Thank you.

Lawrence Alexander from Jefferies. Your line is open.

Hi, this is [indiscernible] for Lawrence. How are you guys doing?

Good, thank you. How are you?

Good. Giving all the important everything you're already doing with the integration are there any other levers you can pull if your environment were to weaken further?

Well, I think what we do is what we always do in times like this. I mean this is not the first time we've seen in weekly markets. So I think first thing on the integration and we've already pulled some things ahead and we have doubled our outlook for this year on synergy capture. So that's a big, big step. What we don't want to do is to damage the integration -- I'll put the integration of risk by bringing things artificially forward that damage the flow of what we're doing. So we're not going to put the ERP implementation at risk, for instance, just to try and save a few dollars in this year. What we do look forward to are the growth synergies that come from this integration. So getting that sales organization aligned and in place is really important to us because it frees up that 20% -- 25% of free capacity for them to go and prospects and hunt for new growth. But what we'll do is what we do in any tightening of demand. We'll control the controllable so we'll manage our costs effectively, we'll look to service our customers better. And what we'll do is we'll look to bring the new and inventive ways that they can stay in business and they can save costs in their pipelines. And we've actually seen a significant increase in our pipeline of opportunities in some of the differentiating chemistries. Some are 16% increase in the opportunities there as we look to formulate -- change formulate out some existing ingredients to have more sustainable, more cost-effective solutions. This is exactly what our customers want. They want someone who can provide solutions to them in times of difficulty. And we see that there's an opportunity for us and we see ourselves incredibly well placed to deliver on that.

Okay, thank you for the clarification. And then my other question is, you mentioned natural ingredients as potentially an area of growth. I was just wondering what percentage of sales that is and how fast it is growing?

So we have a wide range of natural ingredients, I can't give you growth numbers on them and also growth numbers from a low base are going to sound very exciting but remember what they are. They're going to be fairly low volume, fairly high-value products. But we have a growing stable of natural ingredients. Remember last year we acquired a company called Earthoil in Europe, which took us further into natural ingredients. So we do see being at the forefront of this. This move in the marketplace is very important to provide value to our customers.

Okay, thank you very much.

Bob Equoh [ph] from Goldman Sachs. Your line is open.

Thank you, good morning. Hi David, if you could talk about I think from the onset next year deal you guys have talked about having a very rigorous robust integration and planned. Just curious about the increased spending on IT scope. Can you give us one more detail. How that developed in clinic specifically what are those components of elevated costs at work in your original expectation.

Shop-up I means we've done it, we've gone through the process is we discovered no new things that that that we maybe underestimate the benefit of. Or didn't fully understand due to intelligent. And that leads to the 20 million increasing in costs intelligent that we've been able to announce in the last 24 hours. When we look in our capabilities I think what we've done is look at the whole next year system the ability to optimize that as we roll out. And the ability to be able to bring forward some of the optimization. We had it on line for 2021, 2022, 2023 combining digital platforms with optimize flows that will allow us to systemic reduce transaction calls. this is new learning process we really get deep under the covers about added functionality and added capabilities and also might be more of the process is that we have which will feed you know great so. Ease of use for our customers each of use for our people and more cost effective solutions with the business. So right now it's difficult to exactly quantify what those are. And you know this call mention 20 basis points in the U. S. is $50million. We do think there's a real opportunity to systemically improve our transaction cost and enhance additional capabilities what will have though is a technology platform base it up and digital capabilities across the Americas with a single capsule of a product's price availability 50 document downloads. Which really robust functionality which will allow us to be much more efficient much more effective and given much back the customer experience as well as reducing systemically the transaction costs of operating a business.

I just got a little more color on that. I mean in terms of the nitty gritty that you're used asked about their I mean think of it as you know our systems to price products, order processing, customer processing, issuing the purchase orders to our supplier partners for the chemicals, inventory management, billing collections it's all those and processing that tap into one moment. When you talk about this extra money that we want to spending and the outcome in addition to lower costs and better set the stage for our future digitization aspirations. So we build a better house by making these improvements now versus later.

Got it and can I ask you mentioned in the in the slide that the US sales force execution improvement and I think sales force execution and changing the culture of your sales force seem to have been a little bit of a bumpy path. So can you maybe give us some granular anecdotes of what you mean by improvement there?

Sure. And you're right it has been a bumpy past but culture change takes time is this as we consistently said. I mean what we're doing is we know we measure the effect of our sales force in a number of ways. We look at them in that call right that close right the win loss the gross profit dollar growth that we've seen from them. I'm seeing improvements in pretty much all of those areas. Firstly, we would use the turn over for sales force and sales force town over now is it fairly low levels it's around 10% to 12% which is kind of normal performance management levels. And it's being that now for a number of months so what that means is the trend that we've done the last couple of years is sticking and the people are speaking with us so we have a maturing sales which is building relationships with customers. What we're saying is our customer numbers starting to you know take upwards was not massively but upwards. And that's a good sign to take the amounts of change that we have going on with the integration to sales organization. What we're seeing is an increase in our pipeline of opportunities particularly in our focus industries. So the last quarter and 16.16% increase in the number of opportunities we expect to close in our differentiating canisters as a direct result of the focus of our dedicated industry so we see that working well. South conference that we had put real energy into the sales organization and to see that scene interrupted our core supplies and to see what our supplies to seeing and saying about. How they're operating is truly you know exciting to add to be held. The way seeing a number of metrics a number of ways which we see that sales force improvements really kicking. A countless sell program on that we have that builds in long some women customer relationships is all about relating discovering advocating and supporting our customers. We continue to invest in that we have the first class of legacy next a legacy in of our employees last week. I spoke about class last week here in in Chicago. I will continue to invest no through the rest of this year on an ongoing basis on having the best equipped and skill sales force in the marketplace. But I points reduce John I point to that you know increase in our opportunity pipeline and closes is real evidence that we are able to decide the sales transformation process these cities will be taking with.

Jim Se Han [ph] from SunTrust. Your line is open.

Morning, thanks for taking my question. So on the USA segment turnaround which you know you just spelled out is trying to gain momentum. What kinds of targets you have in mind for that segment in 2020 as the you know sell sports execution continues to make progress and you extricate execute better on cross selling opportunities.

Jim, so I mean we're not giving 2020 guidance yet you know we know that in 2020 we going to have a larger and more trained sales force. We will have a higher concentration in the view of sale in the market so a higher density we got more prospecting logic pipelines logic with sensual winds. We got improved value in use pricing sales and more cross selling. So there's a lot of things which are that to be excited about but we don't giving without well given 2020 guidance here.

Got it. And in terms of this energy is that you've seen on next year. You spell that out for the Q2. Pardon me if I miss this earlier but which are the outlook for potential dissenters that's incorporated into your second half of '19 guidance.

We expected that the full year descended used to be around $30 million you know we think what we're running at that sort of light. So that's what we expect to see how we expect those to be more impact for the 2nd half. In the post office what we do you know we expect our images to go a lot of way to assessing though. So which we think net synergy is around 30000000 on hitting in the 2nd half. What we have is an improving execution on synergy capsules to set back and that also improving offset programs without sales organization to win back products without chosen promise some of those products which will be lost that.

Jim, it's Carl. I could add to that on. It might be a little easier to net that this energy against the benefits of the cost saving energy and that indicates looks like it's projecting out for us.

I just want to follow up on Bob's question a bit earlier. It looks like you were originally expecting $100 million return on $150 million cash spend. Now that's about $120 million return on $225 million cash spend. So I guess -- can you talk about what areas or projects in the integration process are now costing you more than you originally thought? Or maybe perhaps lower return than you originally thought?

So as I tried to explain, what we have is the ability to capture most synergy and we're delivering on that, and we're taking that and I think that's very exciting that we can do that. But we're also doing though about half of that additional $75 million is spent on technology, which we're advancing, which we're bringing ahead and that doesn't contribute to the $20 million additional savings. That's more savings which we think we can deliver as yet on [ph] but more savings as we believe we can deliver through systematically trying to reduce that transaction costs. So that's -- as Carl said 20 basis points on that is $15 million. So think about it in those terms, about half of the extra $75 million is that advancing ERP and digitization to get more benefits over and above the net $120 million, the extra $120 million. So the extra $20 million comes from increasing the one [indiscernible] integration costs from $150 million to whatever it is $180 ish million something about order.

And Mike, it's Carl. Let me just add to that. With this new estimate of one-time costs, we're crossing the line from pure integration of the two companies. We're crossing that line now into optimization of the consolidated enterprise and what our work stream teams are coming back to us with is, if we do this, it wasn't in scope at the beginning, if we add this money we'll add this functionality and there is a real payoff. And the lens that we're looking through on this requests is return on investment. So those look very attractive to us. It looks like very smart business to do that. And then I just want to remind you Mike that, we also have another work stream going very actively on monetizing excess assets in the footprint and also monitor, optimizing the working capital level of the combined enterprise. Both of those work streams are very active and looking very promising. We stick with what we said back in September of 2018, that we expect to largely offset these one-time costs. Certainly, the pure integration costs with the monetization gains from selling exit assets and also the working capital position.

And I just want to clarify. I just want to add one thing. One thing I said it in the narrative earlier on. As we look to investing digital and in IT and this extra spend on this to advance opportunities that we saw in future years, we're doing it against a very, very rigid structure. That said, it cannot disturb or put at risk the base integration. So I don't want any concerns that we're trying to run away with ourselves. No, there's a very rigorous and disciplined process of integration. We'll do nothing which disturbs or puts at risk that integration program.

No, that's helpful. I guess I was just trying to make sure I was grading fairly on the ROY [Ph 1:03:43] that you guys are trying to measure against. So to be clear, the $35 million to $40 ish millions of brought in digital scope investment, none of any potential return on that is in that $20 million of updated synergies, that would be incremental. I guess that's the TBD box on the right there. Am I understanding...

You're absolutely right. None of that is in the next $120 million. That would be additional in the TBD box. You're right, on Slide 11 it says.

Okay. Thank you guys.

We have now reached the end of our Q&A session. I will turn the call back over to Heather for closing comments.

Thank you ladies and gentlemen for your interest in Univar Solutions. Given this is my first quarter here, I haven't had the chance to meet everyone yet but I'm looking forward to it. If you have any follow-up questions, please reach out to the Investor Relations team. This does conclude today's call.

This does concludes today's conference call and you may now disconnect.