UNVR (2020 - Q2)

Good morning, ladies and gentlemen, and welcome to Univar Solutions Second Quarter 2020 Earnings Conference Call. My name is Carol, and I will be your host operator on this call. Currently, 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 2020 earnings call and webcast. Joining our call today are David Jukes, President and Chief Executive Officer; and Nick Alexos, Executive Vice President and Chief Financial Officer. Last night, we released our financial results for the second quarter ended June 30, 2020, and posted to our corporate website at univarsolutions.com a supplemental slide presentation to go with today’s call. The slide presentation should be viewed along with the earnings release, which has also been posted on our website. During this call, as summarized on slide 2, we will refer to certain non-GAAP financial measures for which you can find a reconciliation to the comparable GAAP financial measures in our earnings release and the supplemental slide presentation. As referenced on slide 2, we will make statements about our estimates, projections, outlook, forecasts and/or expectations for the future. All 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. On slide 3, you will see the agenda for the call. David will start with second quarter highlights and end market trends. Nick will walk through our financial update. And then, David will close with progress on our Nexeo integration and our business strategy. Following that, we will take your questions. With that, I’ll now turn the call over to David for his opening remarks.

Thank you, Heather, and good morning, good afternoon and good evening to everyone, and thanks for joining our call. Our mission at Univar Solutions is to Streamline, Innovate and Grow. And I’m pleased to see our progress reflected in our Q2 performance, which remains solid as we continue to adapt during these challenging times and deliver results. As a company that is always serious about safety, this remains our highest priority for our employees, our suppliers and our customers. Key highlights from the quarter are: We delivered solid earnings, beyond the upper end of our expectations in a challenged environment. Although sales were down versus the prior year, we were able to partially mitigate the COVID and economic headwinds by selling to new customers, disciplined margin management and cost reduction. We continued to monitor changing markets and meet new demand patterns for critical products. I’ll speak more on trends in a moment. We had strong cash provided from operations of $152 million, and in the quarter the liquidity of $815 million, above the $750 million to $800 million guidance range. With all our sites fully-operational and the strength of our supplier relationships, we were able to serve customers and met the high demand for household cleaning and sanitization products that were in short supply, as well as improve our product mix, enabling margin lift. Our Nexeo integration remains on track. As you saw in our release last night, we’ve accelerated our strategy to streamline operations and put digital firmly at our core with a program we’re calling Streamline 2022 or S22 to short, which Nick will speak to in greater detail. A key enabler to this program is a range of senior organizational alignments providing me direct functional reporting of the North American segment. We continue to advance our digital capabilities and make progress in our sales force effectiveness, attracting more new customers. And we continue to streamline our business with the disposal of some non-strategic assets. And before I speak more on trends, I want to provide a brief update on our COVID-19 go-forward plans. For our employees that are working remotely, return to a work site remains a voluntary process. Currently, we have returned to office site pilots at our global headquarters and a few other sites around the world. We are closely following WHO and CDC guidelines, while having PPE on site, new safety protocols and continued robust cleaning practices. We also continue to monitor our customer and supplier closures as well as reduced production schedules in each region on a daily basis. As compared to the prior year, excluding Environmental Sciences divestiture, April sales were down mid-teens, May sales were down mid-twenties and June sales down low-teens with a pickup occurring in the back half of the month, but still down year-over-year. Our end market displayed a wide range of demand patterns by region. Globally, we saw strong demand in consumer solutions with the products to essential end markets related to healthcare needs. Personal care started to see an uptick in the demand during June as salons and shopping centers reopened. Our general industrial market was softest in May, but saw improvement sequentially during the back half of the month. Refining and chemical processing markets were down significantly in the USA and Canada, affected by both, demand and pricing in our energy business. And although we are not reinstating full year guidance, I can say the sequential sales improvement we saw through the quarter has continued into July. The actions we’ve taken to-date and the steps we plan to take going forward, including to our S22 program, are designed to position our business for sustainable success as the pandemic evolves and into the future. Looking ahead, we believe that our industry vertical focus, global network of solution centers along with our digital platform will also continue to deliver comprehensive solutions to our customers and capture new business and market share despite this complicated macroeconomic environment. Now, let me turn the call over to our CFO, Nick. He’ll walk you through our second quarter results and our outlook. Then, I will close it with an update on our Nexeo integration progress and highlight our key business strategies.

Thank you, David. Hello and good morning to all on the call. Univar Solutions delivered solid performance in the quarter ahead of our expectation. Our operational agility, the diversity of our product portfolio and end markets, our digital investments and cost reductions significantly offset demand decline. Constant currency net sales of $2 billion were down 20.6%. Excluding results of Environmental Sciences from last year’s financials and FX, we estimate net sales were down approximately 16.5%. Gross profit exclusively of depreciation was lower by 15.3%, $489 million or 13.5% on a constant currency basis. Our gross margin expanded by 200 basis points to 24.3%, driven by the favorable product and end market mix. When excluding results of Environmental Sciences from last year’s financials, we estimate gross profit exclusive of depreciation was down 8.8% on a constant currency basis. Second quarter adjusted EBITDA of $163 million was lower by 18.8% and 16.6% on a constant currency basis. Adjusted EBITDA was unfavorable due to lower demand in markets globally, the Environmental Sciences divestiture and price deflation affecting certain product margins. The decrease was partially offset by favorable product mix, interim cost reduction measures and the realization of Nexeo’s synergies. Excluding Environmental Sciences businesses from last year’s results, adjusted EBITDA was approximately 11.3% lower on a constant currency basis. During the second quarter, we captured net cost synergies related to the Nexeo integration of approximately $13 million, which cumulatively year-to-date is $30 million of the planned $35 million for 2020. Based on internal estimates on a global basis, versus a Q2 adjusted EBITDA of $163 million, we believe we benefited by $20 million from nonrecurring product mix margin in the quarter. We also believe the COVID recession impact on demand was approximately $55 million versus prior year, which was partially offset by $17 million of non-Nexeo cost reductions. Absent these unique COVID impacts collectively, we would have had an adjusted EBITDA of approximately $180 million for Q2, which continued uncertainty economy, we estimate for Q3 and Q4 of 2020 a net $20 million per quarter of COVID-related headwinds, versus the prior year results. Q2 net income is $1.8 million or $0.01 per share, compared to net income of $16.3 million or $0.10 per share in the prior year quarter. The decrease in EPS was primarily due to the lower gross profit, the impairment charges and fair value adjustments on warrants issued in connection with the Nexeo acquisition. These are partially offset by lower warehousing, selling, and administrative expenses as a result of cost reduction measures, and lower integration related expenses and stock-based compensation. Adjusted earnings per share for the quarter was $0.33 compared to $0.42 in the prior year period. Working capital was our biggest source of cash during the quarter, reflecting the countercyclical and seasonal nature of our business model. Net cash from operations versus last year was partially offset by the lower net income, and the prior year second quarter did include the payment of a large one time legal settlement. Capital expenditures for this quarter were $20.9 million and integration-related expenses were around $14 million. We ended the quarter with cash on hand of $547 million for total liquidity, including availability under our asset-based credit lines of $815 million. This is an excess of our guidance, principally due to the timing of net working capital. Our ROIC was 9.4% for the quarter versus 9.9% last year. We expect these figures to improve as we continue to capture the synergies from integration, as well as grow the business. We ended the quarter at a 3.6 times leverage ratio, down from 4.1 the previous year. Moving on to slide 8, we have aggregated the key metrics across our four reporting segments and provided detail in the appendix. Across our three largest regions, we saw a top-line decline, due primarily to lower global demand and partially offset by higher demand for products in essential end markets. Latin America continued to benefit by growth in its range of markets. In the U.S., excluding the impact of the Environmental Sciences divestiture, sales would have been down approximately 22%. The higher demand in certain essential end markets also had a significant impact on gross margins, as more higher margin products were sold. Univar Solutions benefited by its advantage supply and operational position across all its geographies to serve these essential markets. Going forward, as some of the supply lines have freed up, we continue to service the marketplace, but at a more normalized return. All reporting segments showed a positive impact on the delivered gross margins, except for Canada, where the mix impact was not significant enough to offset the deflationary headwinds in some commodities. Adjusted EBITDA margin also expanded with strong performance in EMEA and Latin America. USA adjusted EBITDA margin, expanded by only 20 basis points, as results were further impacted by the contraction of the energy market. In Canada, plant cost reductions were not sufficient to offset the delivered gross profit decline. Moving on to slide 9 for an outlook update. Despite a good Q1 and Q2 and relative stability in our end markets today, our guidance remains withdrawn for the full year 2020, given the uncertain economic environment. As David mentioned, sales trends in Q3 so far are comparable with the latter part of Q2 with some signs of continued demand recovery. However, keep in mind, Q3 typically involves seasonal lows, given the holiday period in EMEA. Full year Nexeo net synergies are expected at $35 million, taking into account the delays in some of the SAP implementation. We also continue to expect over $40 million of incremental cost savings for the full year of which about half are reductions versus the prior year costs. Our S22 actions should also benefit margins in the second half of 2020. We are diligently managing our working capital and expect it to remain between 13% to 14% of the annualized net sales of Q4 by year-end. As we noted, while Q2 generated strong cash inflow from net working capital, we expect Q3 to be a seasonal use of working capital with a positive reversal in Q4 as it historically does with our year-end seasonality. CapEx is expected to be approximately $115 million, which is in line with prior guidance, while Nexeo integration costs may come in lower, now in the range of $60 million to $70 million. Cash used in 2020 of other expenses and timing of accruals should be around $90 million within our prior guidance, of which $32 million has already been spent year-to-date. The full year estimate also includes Q3 and Q4 S22 cash costs of up to $20 million. As discussed earlier, we exceeded our liquidity guidance in Q2, although Q3 will be a use of cash due to the seasonal effect on working capital and other cash needs. We continue to target liquidity to be in the range of $750 million to $800 million by year-end. And versus our last guidance, we now expect to end the year with approximately $100 million more cash available for debt pay down before the impact of any divestitures, asset sales or any acquisitions. Beyond 2020, our only significant other use of cash will be approximately $65 million in 2021, as the final portion of our Nexeo integration plan to total $225 million. And we still expect to achieve the targeted net Nexeo synergies of $120 million by Q1 2022. As David mentioned, with the onset of COVID and the subsequent recession, we have accelerated certain actions to reduce costs, streamline our operations and improve business performance, particularly in North America. For our press release yesterday, announcing our S22 program, we are targeting an EBITDA margin run rate of 9% by the end of 2022, and a net leverage of 3.0 times by year-end 2021. Other elements of our program are as follows. We have just signed this week a binding agreement to divest to nonstrategic industrial emergency response and cleaning businesses. We expect this transaction to close in Q3. During Q2, we recorded a $16 million impairment charge related to these assets and expect to now record a further loss of approximately $15 million in Q3. Although we view these businesses as nonstrategic, we are committed to growing our nationwide chemical waste services business, ChemCare, as we believe holds great promise for synergistic growth and is also supportive of our sustainability ambition. We have targeted other portfolio management and business alignment actions that may result in additional $35 million of charges, yet yield positive cash flow, assist with working capital management, and would be accretive to our margins going forward. Of these charges, we expect up to $20 million to be cash expense, which we have already reflected this in our year-end liquidity outlook. We expect these and additional portfolio activities could yield greater than $200 million in pretax cash proceeds with timing through 2021. As we focus on creating long-term value for all our stakeholders, we have aligned our management to drive growth and operating efficiencies and through our S22 program, we’re confident in achieving the target EBITDA margin of a 9% run rate by the end of 2022 with more details to be provided on our 2021 guidance call. It is clear in many ways that our Company has operated very well during this challenging period. While keeping our Nexeo integration and strategic plans on track and initiating additional measures designed to accelerate our market share growth and improve the cash flow profile of the business. We also continue to target free cash flow in a more normalized economic environment of $325 million to $375 million. With that, I’ll turn it back to you, David.

Thanks, Nick. Moving to our integration progress. Despite the COVID-19 obstacles, we successfully delivered on several significant integration milestones, realizing $13 million of net synergies during the quarter. I’d like to highlight a few of those milestones now. We successfully kicked-off the third wave of our ERP implementation, and we are continuing to successfully service our customers, while optimizing our processes. Our site consolidation plan continued, closing 6 branches in the quarter, bringing total closures to 19. We finalized the sale of 6 further sites with cash proceeds of approximately $6 million and remain on schedule to close 15 branches in total during the year. Our SAP migration plan is on time and remained the same as we communicated last quarter, which is 6 smaller, more agile waves, adopting a hybrid approach that includes much more remote training and support. The USA timeline to completion is Q2 2021, with Canada and Mexico roll-outs moving to the second half of 2021. We’re in the early stages of realizing the full benefits of optimizing our scale, but remain true to our strategy of having this strong local presence for our customers. Moving to our business strategy progress, sales force effectiveness remains a key driver of business improvement, as we leverage our advantage network of sellers in combination with our digital platforms. We continue to track our levels of pipeline growth, transactional activity, customer retention, margin management and activity at the local business level. Even with the obstacles of COVID-19, we’ve maintained momentum and continue to see good progress in the leading indicators. Our U.S. average customer contacts were up 37% sequentially from Q2, despite customer closures. And just like we saw in the first quarter, we welcomed hundreds of new and returning customers in the second quarter, defined as customers with no activity in the past 12 months. And equally important are the new customers we welcomed back in Q1, 40% purchased again in Q2. I am being patient to see the leading indicators feed through to the financials, which is why I’ve made certain changes to the organization, which will particularly impact North America and allow me to be closer to that business. Jen McIntyre’s leadership of the S22 program will allow us to drive process efficiency and structural cost improvements uninhibited by regional entropy. She will also take responsibility as Head of North American Operations. Our Chief Commercial Officer, Brian Herington has already made significant progress in establishing common global practices for pricing, sales force execution and digital disruption. By taking a direct control of the largely local chemical distribution business in North America, he can more readily drive these to execution through the local management team. And by globalizing our consumer and industrial solutions industry verticals under the leadership of Nick Powell, I expect us to deliver faster growth through an ability to perform consistently for supplier partners in whatever geography we operate, something they told that they want. The expansion of is largely differentiated set of chemistries and ingredients is an important driver of our mix enrichment goals. Our supplier partnerships remain a bedrock for our business and a source of competitive advantage, especially in times like these. You may have seen our announcements over the last few months regarding new or expanding product authorizations from supplier partners, such as Dow, Vink Chemicals, Biosynthetic Technologies, Gett Products, and Valio. These partnerships along with the leading chemical ingredient products they bring are a recognition of how our partners recognize the value of our ends market expertise and digital capabilities to support their growth. We continue to build and expand a robust portfolio of products and solution capabilities. And as we go forward, we’ve developed a customer centric approach to drive growth. In addition, we believe connecting our industry verticals globally, and increase use of our digital tools will allow for both greater cross productivity and deeper customer intimacy throughout the end markets we serve. We conducted an in-depth survey of our customers who’ve told us how they want to interact and purchase in the COVID-19 world. Not surprisingly, in-person meetings as the primary tool of engagement ran below with our customers in each region, and a mix of more virtual and less in-person interactions than previously will be the preferred norm. This has confirmed our strategic decision to accelerate our omni-channel approach, which has allowed us to open up or expand sales channels to better address customers’ current preferences. Just as one example, during the second quarter, we held 31 customer webinars to promote the technical capabilities and stimulate demand for certain chemicals and ingredients in North America, EMEA and LATAM, reaching approximately 1,500 customers while engaging our supplier partners. As our investment to expand our digital footprint continued to deliver results, this presents another source of competitive advantage for us as customers adopt and use our e-commerce platforms to search, select, source and self serve in growing numbers. These platforms create multiple entry points for customers and new ways for us to connect with them and gain share. Our Univar Solutions website provides customers with products and formulation information, and we’ve improved the ratio of website traffic to sales leads. We expanded our Shop.UnivarSolutions.com to offer self serve capabilities 24x7 to improve our customer experience. Customers in the USA can now browse the entire product catalog, request quotes and quickly purchase products. They can download a variety of documentation, including invoices and safety data sheets, as well as track their shipments, through recently launched where’s my stuff feature. We continue to expand our reach on ChemPoint.com, increasing the number of products and markets served through this digital channel. As we told you last quarter, we launched ChemCentral.com, a new, no-frills retail channel for those transactional customers who don’t require the high-touch service available through more regular Univar Solutions channels. This has been a really exciting startup platform that we are rapidly expanding and is attracting many new buying customers. Altogether, our digital foundation and committed sales force strategy is aimed to maximize the effectiveness and scale of our operations, as well as make it easier for customers and suppliers to do business with us and deliver market share growth. We’re confident that we’re investing in the right tools to streamline the supply chain, innovate new customers and accelerate growth there in step with customers changing preferences. Before concluding, I’d like to mention a few other highlights. In June, we released our sustainability report. This report is a more useful, comparable and comprehensive tool for our stakeholders than ever before with improvements that include a new dashboard, which shows our progress against the Company’s 2021 sustainability goals. Additionally, the report references the latest version of the global reporting initiative, GRI standards; integrating Univar Solutions sustainability performance data; representing the combined impacts and aspects of the entirety of our new Company, making our reporting more transparent and complete; reporting in accordance with the Sustainability Accounting Standards Board, SASB, for the chemicals sector; increasing the ability for stakeholders to access key information; expanding the toolkit of monitoring and managing our global impacts through the introduction of scope 3 emissions reporting; integration the material contributions that our business makes to the United Nation’s Sustainable Development Goals; achieving external assurance on our global sustainability reporting claims as well as assurance on our scope 1 and 2 emissions, safety and release metrics. This significant milestone is a marked development as we move to demonstrate our robust and honest approach to back to business. Sustainability is a priority for us, as it touches 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 a better steward of those resources. Also, we’re pleased to announce that Univar Solutions joined as a signatory of the CEO action commitments, pledging to take action and foster safe, collaborative, supportive and respectful environment that values diverse perspectives, mitigates unconscious bias and enables a culture where employees are able to bring their authentic self to work. Before we come to your questions, to summarize, we delivered solid financial results during these challenging times. We had $815 million of liquidity at June quarter end. We’re maintaining firm control of working capital and other cash needs and expect to end the year with $750 million to $800 million of liquidity. We’ve maintained momentum on our Nexeo integration program and expect to achieve our $120 million net synergies. We delivered $17 million of cost reductions in the quarter, against the greater than $40 million of additional cost savings we identified this year. We’re investing in furthering our original advantages, which is becoming increasingly attractive to our customers. We’ve launched S22 as a program to deliver growth in revenue and 9% EBITDA margins through global and functional excellence. We continue to see an opportunity to capture new business, even in a challenged economy as we target growth through sales force effectiveness and omnichannel approach and digital capabilities to better serve customers. Through S22, we’re focused on delivering the agility and decisive actions to enhance our competitiveness and increase our operational and financial flexibility as we work to position the Company to capture greater value from the anticipated market recovery and growth opportunities ahead. We believe these collected efforts provide a path to deliver greater shareholder value. Thank you for your attention. Please stay healthy and safe. And with that, we’ll open it up for questions.

Thank you. [Operator Instructions] Your first question this morning comes from Bob Koort from Goldman Sachs. Please go ahead.

Thank you. Good morning.

Good morning, Bob.

David, I was wondering if you could maybe give us some granularity on getting to that 9% EBITDA margin target. How much of that is volume dependent, how much of it is internal cost outs or other self-help? Can you give us a sense of the bridge to that 9% margin? And do you need to get back to 2019 demand levels to do it?

Yes. I mean, I think Bob -- I mean, thanks for the question. I mean, we’ve got enough confidence in our line of sight, and so announced that 9% margin target. And it’s a combination of portfolio management, cost management productivity and growth, share growth. And we’ll give much further guidance on that at our year-end earnings call. But, that’s how we’re seeing things. It’s very clear path that we have and a very clear program that we have.

And trying to understand a little bit about the change in management and responsibility. Can you maybe give us some specifics on how you’ll do things differently going forward with this changed structure?

Sure. What the plan really is, is to accelerate the optimization of our processes and speed up decision-making and accelerate some of the digital benefits and integrate the digital benefits into our operating model. So, it’s really about accelerating the strategy that we’re on and then enhancing the different pieces of the business that we have. So, our focus for the industries has been successful in our approach to focused industries and now segmenting those consumer solutions and industrial solutions and giving those to Nick Powell to run globally, and to give that global consistent performance, we expect to see good growth from that. Because that is something our customers and suppliers say that we want. And if we didn’t do that on a global basis and not get bogged down in some of the regional entropy that slows down decision making and actions, and then we believe that we can accelerate much faster. Certainly having Jen’s role as a single focus on the program and a single focus on optimization of business processes will have the virtuous effect of probably reducing our costs, certainly improving our cost productivity, but also making it easier to buy from, which is a key part of our growth strategy. So, think of it as a kind of front of house, back of house split, where Nick, Powell and Brian Herington with the local business have front of house. Jen has back of house, very clearly able then to leverage the benefits that we’re getting through SAP and our digital investments to drive process improvements. And then, it allows me to lean in much more into the U.S. business to make sure that we are doing the things that we know we ought to be doing at the time we ought to be doing them.

Your next question comes from Laurent Favre from Exane BNP. Please go ahead.

I have got two questions, please. The first one, David, is on ChemCare. It sounds now that this business is actually caught. So, I was wondering if you could share with us some KPIs of how this business is doing and to see what you want to do with it. How you intend to grow anything and kind first understand how perhaps misunderstood this business is within Univar right now? That’s the first question. And then, the second one, just trying to understand to get my head around Q3, sorry, I’m a bit bamboozled by all the number you provided. So, can you perhaps repeat how we should be thinking about the I guess, difference in mix going into Q3, and then how we think about the difference in the COVID cost between what’s happening in Q2 and what you would expect in Q3?

Sure. I’m sorry if we bamboozled. We’ll try and unbamboozle, if that’s such a word. Let’s look at ChemCare first and foremost. I mean, the businesses we divested were small businesses, which are businesses to do with emergency response, emergency cleanup, and they’re really just not core to chemical ingredient distribution. ChemCare is more core to our chemical ingredient distribution business because it provides a value-added service for chemical waste processes. So, our customers -- our existing customers are requiring those services and we can integrate that within our distribution network, the backhaul product, clean-up or dispose of chemical waste. It supports our sustainability goals as well. So, it kind of fits much more as an integral part of our chemical and ingredient distribution business. It’s a value-add business. It’s performing okay at the moment. It’s performed well for the last few years. It’s impacted right now. And as we note on the end market slide, I mean activity, there number of cleanups, number of transitions for manufacturing plants where ChemCare will both support. Haven’t been taking place in the second quarter, it is now improving its performance into the third quarter. So, we have great expectations and a clear plan to grow that business. In terms of Q3, let me let Nick unbamboozle you with the numbers.

Yes. Good morning Laurent and thanks for your notes last night. If we look at Q2, obviously, we performed very well and we’re quite pleased by that. We are very much tracking key components of the Q2 performance, and we’ve called out 3 pieces of those that we thought would be informative to all of you in terms of the performance, which is the product mix benefit, which we thought might’ve been unique to the quarter, a pure COVID impact, i.e. the recessionary impact on demand, and then the cost savings that we targeted going into the quarter as we spoke on our last earnings call. And, when you adjust for those, if we would try to adjust for those, we get to that $180 million number that one could look at as quote, core earnings power of a business pre-COVID. Obviously, we are continuing in a recessionary and perhaps COVID environment, and what we tried to do is, give context in terms of what the numbers would have otherwise been further impacted versus prior year. And we’ve detailed the number that we think is roundly $20 million for each of Q3, Q4. So, I would take a step back and say, what would one would have thought those numbers would’ve been earlier in the year pre the COVID recession and there’s is roundly a $20 million impact. As you know, Laurent, there are other factors, year-over-year. We had the divestment of the Environmental Sciences businesses, which needs to be backed out. But we’re also seeing a growth in certain parts of our market, which would offset that. But, what we tried to do is give you some sense of year-over-year continuing impact of COVID through the end of this year.

Understood. Thank you.

Our next question comes from Jim Sheehan from Truist Securities. Please go ahead.

Good morning. Thank you. Under 9% margin target, could you give some more color on where the cost savings are likely to occur by region? And what regions do you expect to drive more of the margin expansion?

Jim, thanks for the question. I mean, I think that firstly, S22 is a global program. So, we do see the opportunity for improvement right across our business. It is about process improvement and it is about streamlining operations and we do see opportunity to do that, particularly as you bring digital at our core and roll those digital solutions across the whole business. I mean, clearly, the U.S. is the largest part of our business. So, clearly, the U.S. is where we expect to see the bigger improvements, or the biggest improvements, but we have opportunities right throughout the business.

And on your free cash flow outlook. Could you maybe talk about your early views on free cash flow for 2021? I know, you mentioned your normalized free cash flow being around $350 million. What are the major puts and takes that we should be aware of for 2021? For example, is working capital going to be a large hurdle?

Hey, Jim. Thanks. There are obviously a lot of pieces. And we’re not at a stage of giving further guidance on 2021, other than highlighting that we think the one other factor that will continue to be useful, be the finalization of the Nexeo integration of roughly $65 million into next year. We very much feel that we can operate within the bandwidth of 13% to 14% working capital through 2021, much as we’re trying to do for this year. So, if we have growth, versus 2020, certainly there’ll be a use of cash. But, that will be positive outcome for all of us, given that we will be in a growth environment. If the year’s flat, then we would not have a significant use of cash. It’s clear, we also have to be cognizant of where we end up at the end of the year and certainly will talk about that in early 2021 when we give our full year guidance.

Your next question comes from Kevin McCarthy from Vertical Research. Please go ahead.

You’ve divested your pest elimination business and now an industrial emergency response business in the third quarter. Aside from ChemCare, which you addressed, what other businesses do you have in the portfolio that are not classic chemical distribution businesses?

Yes. Thanks for the question. I mean, firstly, portfolio management remains a priority for us. And obviously, it’s one of the elements which will support the S22 goal of getting below 3 times levered by the end of 2021. When we do have a number of other profitable and attractive businesses that like Nexeo’s legacy -- legacy Nexeo Plastics business, don’t fit into the core of what we would view chemical ingredient distribution. So, we’re looking at those, and we’ll work on some of those. And there are a couple of -- there’s nothing we can share today and nothing we can announce today. But portfolio management and cleaning up our business to focus on our core ingredient and chemical distribution business is a priority for us.

Okay. And then, it sounds like digital will be part of your new S22 program. Can you help us understand how big that business is today, what your vision is for the future, and how profitability compares with your non-digital businesses?

I’m sure -- I mean, I don’t necessarily think of businesses as digital or non-digital. What we think about is we are -- what we’re digitizing is processes. What we’re -- I mean SAP rollout, the business system migration is a form of digitization that allows this data which we can then put in a structured format to improve our processes to reduce touches and make it easier to buy from. So, we think about it as what we have is this big shopping mall. And rather than just have one front door to people to come through, I want lots and lots of doors for people to come through, whether coming to our specialty store for food or our specialty store for solvents or come into the general store through the front door. So, we’re building multiple entry points and multiple touch points for customers. We also talked about customers changing how they operate, changing how they want to interact. I think, certainly, at the moment when people are working from home, I suspect if you’re working from home, you’re not getting up at 9:00 and finishing at 5:00, you’re operating -- you’re getting your work done, but whenever timescale suits you best. If you want to walk the dog at 1, you’re walking the dog at 1. You come back and get the work done. Customers are no different. So, we’re seeing more customers interacting with us over our digital channel at 2:00 in the morning or on July 4th, or whenever. We need to be open and accessible. However, customers choose to interact with us and build as many doors to our business as we possibly can do, and then give them a streamlined way through our organization. So, we don’t disappoint them when they do, do that. And that’s really what the focus of our digital capabilities are about.

That makes perfect sense to me. I guess, what I was trying to get at is, when customers enter a digital door, are you indifferent in economic terms as to whether they do that or use the telephone to call up a salesperson, for example? Just trying to get a sense of what the margin implications may be from digital as you’re moving towards that 9% goal, if it’s straight up or if you go lower before you go higher, that kind of thing?

Well, just think about it in terms of -- think about it in two ways, one, the price; and then, second is the cost. So clearly, it costs me more to process an order, if I’m getting on the phone, and I’ve got inefficient processes, which means I have to touch it 10 times before it gets out the door, rather than if it comes in same as we go through the digital set of channels and then hops down to a truck and off it goes. So, I can enhance my margin without changing my selling price, but just being much more cost productive, just focusing on that transaction cost. And so, the pricing strategy will depend on the channel that we have. But, I don’t think that gives us the opportunity to change over market prices. It does give us the opportunity though to reduce our transaction costs to make our processes more effective and therefore more profitable.

Excellent. Thank you so much.

Your next question comes from Steve Byrne from Bank of America. Please go ahead.

Yes. Thank you. Regarding your management changes within the North American operations, I hunch on this one David is that, a key driver of this is likely a view from you that the pace of progress and the sales force effectiveness has just not been as fast as you would have liked to have seen. I would welcome your comment on that. But maybe more specifically, you commented on the touch points that you’re tracking with the reps. What other metrics do you look at that you’re monitoring that -- the sales force effectiveness, and how would you rate the overall level of effectiveness compared to what you think they should be accomplishing right now? What percent of optimum would you put it at right now?

Thanks for the question. Look, I mean, I think, we’re reporting good Q2 results, and we are progressing well on our integration plan and cost reductions. And so, I think the business is performing reasonably well. But, as I said in the prepared remarks, I mean, patience to see some of the really good leading indicators turn into the really good lagging indicators of share growth and sales growth. And so, that’s really what I want to try and do. I want to try and remove some of the organizational entropy that stops those two things connecting. As a metaphor, I think we’re building muscle. We need to improve the ligaments that connect the muscles together. So, they can operate effectively together, rather than just try and kind of focus on just building a muscle in one area, like touch points. I rated our sales organization 7 out of 10 when I was asked this question last time. I was asked, what would cause me to get into an 8 or 9 or a 10? And the answer was time executing well. I think, they are still at 7 out of 10. I think, it’s -- what we recognize is the strategy where we were on, needs to be adjusted slightly, because a strategy that said I want more sellers in front of more customers more often is probably not the best one to have when customers say I don’t want to or can’t see you right now. So, we have to look at how we have an omni-channel approach and different ways of touching them and different ways of approaching them. And we need to do that in a very, very agile and flexible way. So, Streamline ‘22 is really about improving our agility, improving our organizational agility. So, we can then better connect the leading indicators which are all trending the right way with the lagging indicators which are not where I would want them to be, hence my impatience.

With respect to the sales force muscle that you’re referring to, what is the headcount of your sales force right now versus what it was prior to the Nexeo acquisition at legacy Univar and versus what are words on day one of the acquisition?

We haven’t changed the size of the sales force since we combined the two businesses. We said at the time, it wasn’t about reducing sales heads, it was about sizing the sales organization, the opportunity for growth that we saw there. We still see the opportunity to growth there. Therefore, cutting sales heads is probably not the most sensible thing to do. However, adjusting sales channels and thinking about how you touch customers in a different way and how you make sellers more productive and so they can manage more customers and manage more transactions and how we can get to more people when they choose to do, does seem to me to be a sensible approach and sensible strategy.

Your next question comes from Dave Begleiter from Deutsche Bank.

David, just back on S22 program and thanks to your detail on that. Are the specific cost savings attached to the program?

Well, Dave, as we said, I mean, firstly, we see a very clear fact that 9% operating margin and we see that through growth and we see that through cross productivity. So, we’ll share more details of that as our -- when we talk about 2021. So, we’re going to follow the same execution model that we followed with the Univar program. [Ph] And you’ll remember, we talked about the bloodstained documents when people had to sign any blood work, they were going to deliver to enable us to execute that in the pace that we wanted to, and the pace we committed to. And that’s been a very successful program. We have delivered, in fact, over-delivered in certain cases, what we committed to, by engaging our people and then having them commit to what they can do, not some kind of theoretical notion. We’ll take the same approach with Streamline 2022, which is one of the reasons, Jen having been so successful running the Univar program, will manage -- lead the Streamline program.

Dave, if I could just add one point of emphasis. Clearly, the intention is not to announce as part of that, a further significant restructuring.

Yes.

Streamline 2022 is about the portfolio rationalization that we highlighted as well as improving the processes that David has highlighted with the leadership in place to improve our cost structure over time through 2022.

I think it is really -- cost productivity is the thing to look.

And growth.

And -- because that supports growth. Yes.

Got it. And again, just on the -- on non-core assets. I apologize, you mentioned this. What are the sales and EBITDA attached to non-core assets identified sale?

Yes. I would say, we’re not being specific for obvious reasons. Overall, they won’t be material to the impact of the profile of the business. And we’re going to work to try to achieve maximum value for those assets as we divest them.

Thank you very much.

Your next question comes from Duffy Fischer from Barclays. Please go ahead.

Yes. Good morning. Maybe I missed it. But, in your comment that July sales are comparable to June, what is the benchmark? What were jeans sales year-over-year that we can extrapolate that to?

Hey, Duffy. I think, we said in prepared remarks that June was down low-teens year-on-year. Although it accelerated as the month went on and July is more like the end of June, than the starts of June. So, that’s how we’re saying things.

Okay. And then, not really guidance but directional guidance that Nick gave that negative $20 million, just to be clear. Basically that’s just the run rate of July, taking into account seasonal effects is indicative of the rest of the year. We should subtract roughly $20 million in EBITDA per quarter for each of the next two quarters. Is that the right way to read that?

Yes. I would say -- Duffy, Nick here. You could take that approach. Our approach on the $20 million is basically pre-COVID whatever your views might’ve been for Q3, Q4, you would layer into that a $20 million net COVID impact. Obviously, it’s hard to determine exactly, but we are tracking the three pieces that we talked about and we extrapolated that we thought those would be about $20 million a quarter versus prior year results. You can take seasonality into account, obviously adjust for the Environmental Sciences businesses and maybe probably get to the same place. But, our context was a year-over-year comparison.

Fair enough. And then, maybe I could just sneak in a third. When you look at sequentially from Q1 to Q2, your gross profit was down $44 million, but yes, your EBITDA was up $1 million, which is terrific. Can you just walk through what it was -- you were able to kind of squeeze out in between the gross profit line and the EBITDA line and how much of that we might be able to repeat and how much of that was just kind of emergency measures when we really didn’t know what COVID was going to do to the world?

Yes. I mean, we called out the $17 million of savings that we kind of pulled on for the quarter that we said that that’s $40 million for the year. So that means, my math $23 million plus for the rest of the year, so less than the $17 million run rate in Q3 and Q4. And, I would highlight that those are numbers that are costs that we took out versus our plans going into 2020, about half of those costs are really savings versus prior year spending levels.

Your next question comes from Laurence Alexander from Jefferies. Please go ahead.

Good morning. A couple of things. Can you give a sense for your experience with digitalization so far, the reductions in error rates, and how you’re seeing sort of your net cash cycle evolve with customers who have kind of fully migrated to digital channels?

I can certainly try for you. And I think, firstly, if you think about those channels, the storefront channels, then most of our customers using shops today will be using it to download information, download data and reorder. So, with one of my greatest many of those to utilizing shop more often, we have a feature called where’s my stuff, which is exactly what it says, which we think is going to be a big driver of adoption for us, because it’ll bring people back into site to utilize the site, rather than picking up the telephone to do other things. If you look at something like ChemCentral, which we launched, which is a no-frills retail channel, their customers are swiping a credit card. So, we have you know public pricing there, people are also buying swiping credit cards. So, that’s a pretty touch-free program. It is a pilot, it is a launch, it’s been hugely successful so far, and it’s bringing new customers in, bringing in the massive data in. But, the cash cycle in that is pretty good.

And then longer term with your margin improvement, should your cash cycle get faster or slower as your margins improve?

I’m not sure that we’ll factor that into any working capital guidance that we would provide. I think, we look at the 13% to 14% working capital benchmark as being best-in-class. And we will plan to stay within that while serving our supply chain on both sides.

Your next question comes from Michael McGinn from Wells Fargo.

I just want to go back to the digital conversation really quick. Is this a scenario you see playing out as becoming more of like a dropship resellers marketplace where you don’t have to take inventory, what percent of that business is that today? And maybe parlaying that into free cash flow, do you envision a scenario where you see steady growth for the business overall, but still positive working capital contributions, given the nature of that low touch sale?

Sure. So, I don’t envisage what we’re doing that we become just a transaction engine. I do think -- I mean, firstly, handling dangerous chemicals, handling hazardous chemicals is a core value of ours; it is something we do very, very well; and it’s something that our supplier partners come to rely on us on, and it’s something that customers come to rely on. So, this is about digitizing the interaction of that. But, that’s a fundamental core competence that we have, as well as the expertise we have in the application and developments and use of certain differentiated chemicals and ingredients. So, I think there’s a value that we have to show, rather than just a pure transaction costs. So, I don’t see it evolving to a marketplace model. I don’t see it evolving into a kind of a just intermediary. I think, there may be place for us on marketplaces potentially, but that’s a more philosophical question about the evolution of marketplaces in this space, which is over the last 20 years, so far haven’t been successful. But, the brick-and-mortar and safety and sustainability and compliance in a highly regulated industry, those functions that we perform are core to what suppliers and customers value from us, and we’ll continue to invest in doing those incredibly well.

Okay. Thank you for that. And then, maybe switching gears to the management structure. I think, there’s some color early on the call. But I just want to get a sense of there seems to be a lot of regional focus and there’s an operational focus. Internally, is the regional the direct line and the operational the dotted line? Just trying to get a feel for how you’re organizing that, and what the change is versus the prior structure?

Sure. So, what we have is, we’ve globalized certain businesses, and globalizing functional excellence. And so the functional excellence will cross boundaries and cross barriers, and we’ll do that in a uninterrupted way by any regional structure. However, our business is a local business. And so, we have to operate regionally, we have to operate locally. So, we’ll still have very close local touch points with our customers, so global touch points with our suppliers. We still have those local sites and facilities. But, I think what we have, what we want to be able to do is to drive process excellence to enable, better, faster local decision-making. So, this is not centralization per se. It’s globalization of processes to have consistent effective processes, so you can make faster decision-making locally and better decision-making locally. And that’s where some of the operational agility comes in.

Okay. And in the past, you hadn’t been shy about changing the compensation structure of the organization. Are there any compensation structure changes now with this change or still the same?

Well, there isn’t for 2020. We will honor all the arrangements we made for 2020. We need to look at what we do for 2021 to make sure that’s fit for purpose. But, what I will tell you is, compensation will be based on gross margin growth. That’s what it will be based on. That will be the largest component for our sales organization, gross margin growth. We won’t flip it to volume or anything more esoteric. Driving gross volume growth, share growth is really important to us. So, while the 2021 change -- structure might be finessed and the fundamentals of its based on growth -- based on gross margin won’t change.

Thanks. I appreciate the time.

This concludes the Q&A portion of our call. I’ll turn the call back for any closing remarks.

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

Ladies and gentlemen, this does indeed conclude today’s conference call. Thank you once more for participating. You may now disconnect.