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spk04: Hello and welcome to today's Univar Solutions second quarter 2022 earnings conference call. My name is Bailey and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Heather Koss, Vice President of Investor Relations. Heather, please go ahead.
spk07: Thank you and good morning. Welcome to Univar Solutions' second quarter earnings call and webcast. Joining our call today are David Jukes, President and Chief Executive Officer, and Nick Alexo, Executive Vice President and Chief Financial Officer. Last night, we released our financial results for the second quarter ended June 30th, 2022, 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 two, we will refer to certain non-GAAP financial measures for which we can find the reconciliations to the most directly comparable GAAP financial measures in our earnings release and the supplemental slide presentation. As referenced on slide two, we will make statements about our estimates, projections, outlook, forecast, and 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 detailed summary of the risks and uncertainties inherent in our business and our expectations for the future. On slide three, you will see the agenda for the call. David will start with quarter highlights and end with market trends. Nick will walk through our financial update, and then David will close with progress on 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.
spk09: Thank you, Heather, and good morning, good afternoon, and good evening to everyone, and thanks for joining our call. Coming off eight straight quarters of outstanding earnings, I'm delighted to report another strong quarter of net income and adjusted EBITDA, thanks to our strategy of putting the customer at the center of all we do, supported by continued superb operational execution by our dedicated and talented team. We're building robust competitive moats, seeing improvements in our MPS scores and gaining market share. We believe the results we achieved this quarter reinforce the fact that we are taking the right steps to grow our business as we gain more momentum despite the ongoing macro challenges. Looking forward, we remain focused on the execution of our strategy and delivering market share growth through organic and inorganic opportunities. We're confident in our ability to capitalize on evolving global trends as we leverage our asset base, extensive private transportation fleet, digital capabilities, and ESG innovations. Moving to key highlights from the quarter, we delivered strong Q2 net income of $163 million and adjusted EBITDA of $292 million. We expanded our market share in the quarter as evidenced by our positive win-loss ratio and higher new customer retention levels. We continue to improve the customer experience as evidenced by our all-time high NPS scores and better on-time delivery performance. We increased sales of ingredients and specialties driven by strong demand and new supplier authorizations. We continue to leverage our digital investments with 49% of our U.S. customers now registered on our e-commerce channels and able to utilize 24-7 self-service capabilities. We made progress on our inorganic growth objectives and yesterday announced the acquisition of Vicon, a specialty chemical distributor headquartered in Spain. In addition, we're evaluating other promising acquisition opportunities. we returned $81 million of capital to shareholders via share repurchases. In the second quarter, we continued our trend of outpacing the prior year, thanks in large part to the lasting customer relationships we're building through technical differentiation and supply chain solutions, as well as the contribution from new supplier authorizations. We believe our ability to provide customers with security of supply reliably and safely coupled with the sound product stewardship we provide to our suppliers has allowed us to win you and retain existing market share. Looking at the end markets, across all four of our geographic reporting segments, we demonstrated impressive sales growth. We believe this is a result of the simple operating metrics we provide to our commercial teams as well as our flexible sales channels that are designed to accommodate changing customer needs. In our global consumer solutions channel, which serves life science markets, we manage through challenging inflationary dynamics with skilled pricing discipline. This kind of execution demonstrates our agility and resilience in difficult macro conditions. In personal care and pharmaceuticals, Our new supplier authorizations, coupled with our technical sales force, enables us to help formulate new solutions for customers. Our food ingredients offering, which is now known as Foodology, recently opened a new innovation kitchen where we're helping customers create recipes to meet the latest market trends, as well as reformulating in response to supply shortages, such as sunflower oil. Turning to our industrial solutions channel, by combining our solvents capabilities with our technical formulations, we grew our lubricants and metalworking offering. Our customers in the coatings industry have come to rely on us for supply, in spite of ongoing supply shortages. And our specialty surfactants and enzymes portfolio has enabled us to grow our household industrial cleaning business. as customers turn to us to formulate solutions that meet the demand for more sustainable and clean label products. Within our chemicals and services channel, we saw strong growth across a variety of industrial end markets with continued strength in chemical manufacturing, water, and mining chemistries driven by ongoing supply tightness and higher market demand. Our extensive organic chemistry portfolio and global scale have driven especially strong results in the U.S. and Canadian segments while enabling us to provide customers with continuity of supply. Now, a much smaller part of our business, energy store growth has higher oil prices of accelerated production with increased customer demand for more sustainable solutions in this sector. the ongoing comfort in Ukraine continues to create uncertainty in the marketplace, which is accelerating onshoring, local sourcing, and just-in-case inventory trends. We believe our full line card of solutions, local availability of stock, coupled with our own trucking fleet, has never been more valuable or provided a greater advantage. Add to this our ability to provide full lifecycle chemical product management, and we believe we are a differentiated, and preferred provider for all of our business partners. For 2022, amidst growing macroeconomic uncertainties, we remain focused on factors we can control. We're confident that our chosen strategic priorities, coupled with our operational execution abilities, will drive expected market share growth and deliver strong results, even as chemical pricing levels stabilize through the year. Accordingly, for Q3 2022, we estimate an adjusted EBITDA guidance of $240 to $260 million and increase our guidance for the full year 2022 to $1.4 billion to $1.8 billion, with resulting strong cash flows. Looking further ahead to 2023, we continue to expect to achieve the financial targets inclusive of our target of $960 million of adjusted EBITDA, laid out at last November's Analyst Day, delivering a full year ahead of schedule. We believe our focus on market share growth through an ever-improving customer experience as we leverage our technical expertise, our asset base, our extensive private transportation fleet, digital capabilities, and our long-standing commitment to our ESG goals positions us for continued success. We believe we are perfectly placed to capitalize on the evolving global trends such as local sourcing, sustainable solutions, and digitization, and believe we have the right people, products, tools, and strategy to grow our delivered gross profits at rates greater than general economic consensus, and as such believe we're in a strong position to deliver long-term sustainable shareholder value. Now let me turn the call over to Nick. He will walk you through our second quarter results and our outlook before I comment on our key strategies and we get to your questions. Thank you, David.
spk12: I am pleased to share Universe Solutions Q2 financial results, update you on our business activities, and review our revised outlook for 2022 as well as comment on 2023. Sales were up around 30% on a constant currency basis, and the corresponding gross profit was up 26%. These growth rates are driven by our pricing discipline in inflationary markets, as well as operational execution and market share gains. Second quarter adjusted EBITDA of 292 million was up by 52% on a constant currency basis, primarily driven by the higher gross profit. Gross profit growth was partially offset by higher outbound freight and handling as well as operating expenses reflecting higher variable compensation, but benefiting by $9 million, the final portion of the $120 million Nexio Net Synergies. Per our detailed schedules in the appendix, adjusted earnings per diluted share were $1 in the quarter, an increase from $0.57 in the prior year's second quarter. Cash from operations of $48 million was lower versus the prior year, primarily due to the networking capital use and timing of cash tax payments. Networking capital was in line with prior quarter at 15.6% of quarterly sales annualized, reflecting the inflationary impact as well as further investment in inventory as needed to ensure security of supply to our customers. Capital expenditures for the quarter were $32 million, which reflects a good mix of high ROI investments. Our ROIC was 21.6% for the quarter, driven by our strong performance and efficient asset utilization. And net debt leverage now stands at 2.2 times within our stated goal range of 2.0 to 2.5 times. These ratios are net of a further 81 million of cash returned to shareholders during the second quarter through our share repurchase program, totaling just over 155 million since last quarter last year's Q4. On slide eight, we've aggregated the key metrics across our four reporting segments, and we provide details in the appendix. Sales were higher across all geographies, primarily the result of our pricing discipline in inflationary markets and market share gains. Vlad Tam's results benefited from the SweetMix acquisition, which is performing ahead of plan. Gross profit and adjusted EBITDA grew across all the regions. Gross profit margins were lower throughout the regions due to input cost inflation. EBITDA margins increased for USA and Canada due to operating leverage and declined in the other regions from the lower gross profit margins. Additionally, EMA's results were impacted by roughly $9 million in currency headwinds. Our 2022 outlook reflects a stable end market demand for the rest of the year, continued market share gains, and solid operational execution. While we anticipate chemical price inflation to stabilize and the related price benefits on margins to moderate in the second half, we are continuing to monitor supply chain complexities, geopolitical uncertainties, and recessionary signals. In Q2 2022, we realized the upper end of the non-recurring price benefit we had forecasted, resulting in a total benefit of $110 million for the first half reflected in the adjusted EBITDA. Accounting for all of these factors, our guidance for Q3 adjusted EBITDA is a range of $240 to $260 million. And for fiscal year 2022, we've increased our adjusted EBITDA guidance to a billion, 40 million to a billion, 80 million. We stand by our commitment to reach our 2024 financial goals in 2023, which includes our target of a 960 million adjusted EBITDA, nine plus percent adjusted EBITDA margins, and 50% free cash flow conversion. These targets reflect our judgment that in general, chemical pricing will be sustained at 2021 levels rather than the lower pre pandemic levels. We understand the concerns about an impending economic downturn. However, it is important to note that our 2023 assumptions account for the reversal of the noted 2022 pricing benefits, as well as anticipated lower variable compensation. Additionally, In 2023, we expect to achieve at least half of our planned $80 million value capture from optimization and productivity workstreams, which we expect will help moderate and offset downdrafts in the economy. And as we've demonstrated in previous vouchers, most recently a 40 million cost reductions during the COVID crisis in 2020, that we have the flexibility to rapidly take out further costs if needed. As mentioned previously, we plan to continue utilizing our authorized share repurchase program, and in 2022, we expect to return capital to shareholders at the higher end of our 20 to 30% of adjusted net income guidance range. For 2023, in addition to share repurchases, our intention is to begin paying a dividend. Let us review some of the cash flow highlights of our 2022 outlook. By year-ended 2022, we are targeting net working capital of 13.5% to 14.5% of annualized quarterly sales. Based on the typical seasonal patterns and as the supply chain disruption starts to normalize through the end of 2022, net working capital is expected to be a source of cash in the second half. Cash taxes were higher in the second quarter due to the timing of payments However, our guidance for the full year remains unchanged, which is higher versus last year due to 2022's taxable earnings levels and the runoff of NOLs. Given the geographic mix of earnings, we continue to expect our effective tax rate to be in the 26 to 28% range. And we are expecting approximately 135 to 145 million of capital expenditures for 2022. Consequently, we are targeting net free cash flow of $400 to $450 million for 2022, which is approximately a 40% conversion from adjusted EBITDA. Our strong results for the second quarter reflect the successful execution of our strategies throughout the company as we seek to take full advantage of our leadership positions in the market, build on our momentum, and remain focused on growth. We are confident in our outlook for the full year 2022 and our expectations for 2023 and beyond. David.
spk09: Thank you, Nick. We're making good progress on our strategic plans, continue to expand our portfolio of ingredients and specialties through new supplier authorizations and a growing share by attracting new customers, enhancing the laws of existing ones and the retention of both. I'd like to spend a few moments to highlight some of the programs we have that not only support this, but also deliver real cost efficiencies. In June, we held our most recent Innovation Day, providing our customers and suppliers with a peek inside our global network of solution centers. During the day, and on demand since then, our chemists, food scientists, and application development specialists presented the latest trends and technical developments across 15 different topics as diverse as the latest in the eco-suffactants to growing trends in plant-based protein. More than 1,000 people have so far viewed the content, and the feedback has been so overwhelmingly positive that we're already planning our next Innovation Day for later this year. We recently announced a new name for our food ingredients business, Foodology by Universe Solutions to reinforce our commitment to being a dedicated and differentiated solutions provider to the food and nutrition industry. Through Foodology, we're looking to help shape the future of food through customized services for the industry, as well as innovation support through our global development kitchens, the latest of which, located at the Hatchery in Chicago, had a grand opening as part of the International Food Trade Show in July. It was an ideal opportunity to show off our capabilities to a large and inquisitive crowd of customers and suppliers, whilst also supporting the great community-based mission of the Hatchery. We continue measuring Net Promoter Scores, which in Q2 reached the highest monthly score since initiating our Voice of the Customer program in 2021. Over 2,600 responses were received in Q2. And we continue to leverage these insights in real time with our functional and sales teams to drive an effortless experience while delivering what customers tell us matters most. Additionally, I'm proud to share that our CX efforts received three gold and one silver award at the first ever U.S. Customer Experience Awards for 2022. Sponsored by the Customer Experience Professionals Associations, hosted by awards international the awards celebrate america's most outstanding customer experience initiatives and honors companies who have demonstrated exemplary service and customer centricity this recognition validates universe solutions ongoing dedication to putting the customer at the center of all we do as nick touched upon earlier as we sunset our s22 program having hit and exceeded the targets we laid out over two years ago, we've launched the new value capture workstreams aimed at delivering optimization and productivity improvements that will reduce our outbound freight, handling, and WS&A. Additionally, we acquired ViCom, a specialty chemical distributor headquartered in Spain, which will further expand our already robust specialty portfolio to the case market and enable more sustainable solutions for customers. With our strong earnings and our net leverage at 2.2 times, our board has continued to evaluate making a dividend part of our capital allocation strategy. For us, the question has been one of timing. After due consideration and planning, our present intention is to begin paying dividends early next year. It's important to note that this does not change our determined commitment to pursuing inorganic growth opportunities, high ROI capital projects, and opportunistic share buybacks, with our total return of capital to shareholders falling within the range previously given. Our overall commitment to our capital return program demonstrates our strong belief in the future of the company. As we shared in prior calls, our digital capabilities enable profitable sales growth reduced our operating costs, and create a competitive advantage for our business. Orders through our digital channels grew 92%, and the number of purchasing customers increased 99% in Q2 22 versus the prior year. Our nimble approach to launching new digital capabilities allow us to learn quickly and uniquely leverage our network footprint, expertise, customer service, and diverse product portfolio while retaining and winning new market share. Providing relevant experiences and content tied to industry-leading e-commerce capabilities drives traffic to our sites, extends our reach, and helps us acquire new transacting customers. For example, visitors to our new Foodology experience see a global menu of food and beverage ingredients supported by the formulation expertise of our Digital Solutions Center services. Meanwhile, our self-service capabilities are helping us be easy to buy from and create stickiness with our customers while reducing our transaction costs. On November Analyst Day, we shared the example of our online invoice payment feature that makes it easier for check writing customers to pay us instantly 24-7. The number of users utilizing this customer requested feature has grown 89% quarter over quarter. Last quarter, we also extended our tracking, all the tracking capabilities for our private fleet deliveries, giving customers additional insight into delivery and tracking status. And in a program that will improve the customer experience, reduce cost, and support our ESG commitments by eliminating paper, we have just completed the pilot of our paperless delivery program, which allows us to capture delivery signatures digitally and instantly deliver key documents such as proof of delivery, wait tickets, invoices, and bill of lading, along with photos of products to customers electronically at the time of delivery. This is a hugely exciting development, and we're rapidly scaling to roll out this pilot in the coming quarters. Our advanced analytics capabilities and AI have enabled us to extend our Customer 360 tool across the Americas, providing real-time visibility of key performance indicators across several touchpoints throughout the customer journey that allow us to better understand the customer's experience and show where our areas of opportunity lie. All this leads to greater customer loyalty and retention. Our digital vision is clear. Meeting customers wherever, whenever, and however they want to engage with us and delivering them value-added solutions that keep them coming back. We believe these are just some of the competitive moats we have that will deliver sustained growth and competitive advantage. Moving to ESG, we released our annual report for 2021 in June, which is our 13th edition. we've made strides with our agenda as demonstrated by successfully accomplishing our 2021 Global Sustainability Goals, which was set back in 2017. Additionally, we announced our long-term Global Sustainability Goals for 2025 and reaffirmed our carbon neutrality commitment by 2050 with Scope 3 reduction goals in progress. Additional progress includes the following. Continued investment in energy efficient technologies and hybrid and electric vehicles to reduce our carbon footprint in line with our net zero commitment. We launched paid time off for volunteering in North America. Being awarded with new supplier authorizations for a variety of more environmentally friendly ingredients and solutions. Continuing to put safety first, which is evidenced by our world class safety record. and continuing to advance our diversity, equity, and inclusion goals. ESG is a priority for us, understanding that it's our home, our responsibility. 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 better stewards of Earth's resources. Before we come to your questions, And to summarize, we delivered strong Q2 results. Although the second half of the year poses uncertainties, we're confident in our strategy, execution, and operating agility, and have increased our expected 2022 four-year adjusted EBITDA guidance in the range of $1.4 billion to $1.8 billion, with resulting net free cash flow between $400 million to $450 million. Additionally, we expect to deliver our 2024 financial target in 2023, a year ahead of schedule, include delivering an adjusted EBITDA margin greater than 9% and 50% net free cash flow conversion. We plan to use that cash to fund growth initiatives through a combination of high ROI capital investments, selected opportunistic acquisitions, and return of capital to shareholders. We believe we are perfectly positioned to deliver enhanced shareholder value while fulfilling our purpose and commitment to our people and communities. Thank you for your attention and your interest in Universal Solutions. Please stay healthy and safe. And with that, we'll open it up for your questions.
spk04: Thank you. If you would like to ask a question today, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question today comes from the line of Kevin McCarthy from Vertical Research Partners. Please go ahead. Your line is now open.
spk10: Yes, good morning. Relative to your sales growth of 30%, would you comment on underlying volume and how that may have trended and varied by region of the world?
spk09: Good morning, Kevin. Thanks for the question. I mean, really, I think our strategic priorities have been putting the customer at the center of all we do and working to take full advantage of every opportunity we have to drive growth. Our core value proposition is offering customers security of supply. And I think during Q2, we were able to do that in some very challenging markets. It's a difficult supply chain. There are shortages of some products, and we were able to keep our customers whole. So our volumes sequentially are flat, which I think is an absolutely great performance given the challenges.
spk10: Okay. Thank you for that. And then just a question on capital allocation. You seem to be looking overseas through bolt-on deals such as the VICOM deal you announced yesterday. Can you just comment on the private market as you see it? Why are you hunting more overseas, apparently, than domestically? Is it the case that multiples are more attractive there? And how do you expect that to evolve in coming quarters?
spk09: Well, I mean, we're an international business. So, you know, we have a great business in Spain already. And so for them, this is a home business. We're looking for attractive value added opportunities to expand our product portfolio and expand our footprint. We have a robust pipeline of opportunities and we're able to do some very attractive deals. You know, this is one of them, the sweet mix deal that we did in Brazil. last year is performing incredibly well and well ahead of our plan. And so we have a good track record now of integration, you know, leveraging that Nexio integration muscle that we flexed so successfully over the last few years.
spk10: Okay. And lastly, if I may, for Nick, it sounds like you're anticipating higher cash conversion in 2023 versus 2022. I'm not sure if that's related to your commentary on an initial dividend or not, but perhaps you could frame that out for us in terms of moving parts as you forecasted in the cash flow equation.
spk12: Yes, Kevin, thanks. The free cash flow conversion that we quote is pre any capital allocation, whether it's stock buyback or dividends. And we have targeted a 50% free cash flow conversion as one of our key goals. pulling that into 2023. This year, that number is lower just because of the inflationary elements in working capital and our commitment to have inventory available to serve our customers. But our long-term target is 50% plus net-net free cash flow conversion after interest, taxes, all other items, but pre-capital allocation of M&A or returning capital to shareholders.
spk10: Okay, so less of a working capital drag next year kind of gets you back to a more normal glide path. Certainly. Yes, thanks. Okay. Okay, thank you, guys. Good luck. Thank you, Kevin.
spk04: Thank you. The next question today comes from the line of Laurent Favre from Exane BNP Paribas. Please go ahead. Your line is now open.
spk01: Good morning, all. My question is related to what Kevin asked on volumes, and it's more about customer behavior, in particular into Q3. I was wondering if you had any evidence of these talking as customers prepared for a recession or whether, if anything, you're seeing pre-buy as customers prepare for more disruptions, in particular in Europe. That's my first question.
spk09: Thanks for the question, Laurent. Good morning. We're not seeing really any evidence of customers destocking. I think there's a great degree of uncertainty in the marketplace. So what we are seeing is customers buy less more often. People aren't quite sure whether prices are going to go up or go down. So they are being careful about what they buy for the moment. But there's no evidence of destocking that we can see or really ability to restock.
spk01: Thank you. And my second question is related to Europe. I was wondering if you could talk about the two sides of the business between TNS and INS and I guess to what extent you're worried on either of them. But also, I think you are underweight or under-indexed in Germany. So I was wondering when we think about, I guess, the risk of gas containment in Europe, how you think about your own supply base in Western Europe. Thank you.
spk09: Okay, well, I mean, firstly, our European business performed really well, again, in the quarter on a currency-neutral basis. It grew, I think, 27%. Our ingredients and specialties business grew nearly 30%. And so that business has continued to grow even through the current situation. And I think something like 40% of our business is in the ingredients and specialties business. We've got a big piece of that business in life sciences. That tends to be a bit more robust. through the cycle, so I think we are optimistic about our prospects in Europe. I think that clearly, yes, Germany is not a big position for us. The position we have in Germany is all in life sciences, and so we're not quite as exposed as others may be to the gas shortages in Germany. Having said that, there could be a knock-on effect to other suppliers. We have very, very strong supplier relationships. and a good asset footprint in Northern Europe. So we feel that we'll be able to continue to offer customers that security of supply that they come to rely on and that's a key part of our value proposition.
spk01: Thanks, David.
spk04: Thank you. The next question today comes from the line of David Begleta from Deutsche Bank. Please go ahead. Your line is now open.
spk02: Good morning. David and Nick, do you have any chemical price deflation embedded in your second half guidance?
spk09: Good morning, David, and thanks for the question. I mean, no, we don't. We think the prices are going to stabilize. I think we said on a couple of occasions we expect prices to be more of the 2021 levels than the 2019 levels that we assumed in our analyst day last year. So we think there will be a settling of prices, but no rapid deflation.
spk02: In 2023, how confident are you that it will reverse completely next year, or could it be an environment where chemical price deflation erodes over or comes back over a couple of years?
spk09: Again, I think the underlying supply-demand trends as well as the ongoing supply disruptions, as well as the kind of global trends that we're seeing around local sourcing, would suggest to me that we're going to see a robust pricing environment through 2023. I don't think it's going to crash. I don't see any way that you can get rapid deflation given just how tight the balance is and how tight the balance is know looks like it's going to be i mean you know we are really in a very very balanced supply demand situation and you know any you know a good storm could change that you know in a heartbeat so to be clear are you are you guiding for the entirety of the chemical price inflation benefit this year to reverse next year well we said that we made on some um And non-recurring profits, we set around $110 million. We expect not to be able to do that next year.
spk02: Thank you.
spk04: Thank you. The next question today comes from the line of Lawrence Alexander from Jefferies. Please go ahead. Your line is now open.
spk08: Good morning, everyone. It's Dan Rizwan for Lawrence. Thank you for taking my questions. I understand you have strong supply agreements, but I was wondering if there's any raw materials or products that you were unable to secure that led to a delay or possible cancellation of orders from your customers.
spk09: Thanks, Dan. Good morning, and thanks for the question. Look, we're really solely focused on growth and putting the customer at the center of all we do. And as such, making sure that we have adequate supplies to be able to keep that security of supply to customers reliably and safely is a core part of the value proposition. You know, certain products have been tight and we've been able to eke out products to keep customers going. I'm not aware of any orders that have been canceled because we haven't had products to supply. But between, you know, product tightnesses, between force majeures, between The rail infrastructure between the California kind of situation, I mean, there are a number of obstacles that are put in our and others' way. And so really focusing on that customer centricity and providing them with the reliability that we can get product to them, which our own asset fleet really gives us a high degree of control over, is a really important part of our value proposition.
spk08: All right, thank you. And then I think you mentioned possibly starting or starting a dividend in 2023. I was wondering if there's, if I, maybe I missed it, but if there's any color on the dividend policy, if there's, you know, what you're thinking about in terms of payout ratio or what kind of, um, you know, dynamics we should think about when it comes to that.
spk09: Well, look, I'm, you know, firstly, I'm delighted that we can start to talk about a dividend. It's a very positive thing. It demonstrates, I think our confidence in our company. And it demonstrates the progress that we've made, you know, really under Nick's guidance over the last couple of years to be able to generate, you know, 50% free cash flow and to be able to afford a dividend. And the board and the management will assess as we get closer to the end of the year what the level of that dividend will be. So, you know, we'll talk more about that towards the end of the year. Thank you very much.
spk04: Thank you. The next question today comes from the line of Josh Spector from UBS. Please go ahead. Your line is now open.
spk00: Yeah, hi. So I was wondering if you could talk about any major volume differences in the chemical and services versus the ingredients and specialties. I mean, I think we all appreciate the improved disclosures over the past couple quarters, but the numbers have generally been close enough that it's kind of hard to differentiate. So any added color there would be appreciated.
spk01: Thanks.
spk09: Well, I think, Josh, one of the things that we have, I mean, thanks for the question. One of the things that we have is a full line card of opportunities right across the portfolio that we have. So we have a really strong ingredients and specialties business now that's growing very well. And we're adding new supplier authorizations. Suppliers are coming to us. And we're building new supplier authorizations. So that customers are stickier in that. area. So it gives us confidence for our future. And that confidence leads into us bringing our 2024 targets into 2023. But we also have a great chemicals and services business. And we have our own trucking fleet and some of the best contiguous assets, you know, across the Americas. And there is great value we can drive from that as well. So I think that But by us managing those two businesses separately and focusing on the customers in those markets very separately means that we can actually grow, you know, successfully across all the portfolio. And so, you know, I'm very pleased with our industrial, our increasing specialties business. I think it's growing incredibly well and making some, you know, big strides. Foodology is a big step forward for us in that area. Suppliers are seeing that and supporting us. We've got great opportunities and we've got a great chemicals and services business, and we're taking share there. And, you know, I think there's a real growth story across both sides of the business.
spk00: Okay. All right. Thanks for that. I was just curious on the $80 million in value capture that you guys call out for 2023. Can you remind us, is that incremental versus 2022? I guess given inflation expectations are probably higher across the board versus what you guys expected at your investor day a while back. Are there any other moving pieces that are different than what you thought about versus, you know, nine months ago?
spk09: Yes. I mean, look, I think firstly, you know, we launched our S22 program over two years ago with some targets and we've meet and beat all of those. So I think we have a track record. not only in S22, but a range of targets, whether it's our next year, whether it's our growth, whatever it may be, of meeting or beating our estimates. So we feel very comfortable about the value capture program that we now have. That covers freight management, process optimization, our technology investments. You heard in the prepared remarks a number of areas where we're making investments to not only increase customer stickiness, but reduce costs and reduce transaction costs. So, you know, I think that our confidence overall is higher today than, you know, maybe nine months ago because of the quality of the execution that we're getting. And add to that, you know, pricing being more at 2021 levels to 2019, you know, we think the $80 million is very achievable and we don't think that the benefits are going to be eroded by, Inflation, we can manage that, I think, reasonably well.
spk06: Thank you.
spk04: The next question today comes from the line of Steve Byrne from Bank of America. Please go ahead. Your line is now open.
spk13: Yes, thank you. David, I wanted to ask you whether you thought higher fuel costs were a net benefit to you. More specifically, does it incent your suppliers to allocate more supply to you because you can move it and thus it's not a carbon footprint for them? But maybe more specifically, it just costs less for them to allocate to you and you can pass that on in price and whether you think any shifts that are caused by the costs of transportation are likely to be sticky.
spk09: Hi, Steve. Thanks for the question. Quite a lot in that one. So let me try and pass that one out. I mean, firstly, I think that owning our own transportation fleet is a distinct advantage to us. because it means that we can control our supply chain, and we can manage our costs better than if we were on the open marketplace, and it provides a degree of security and reliability to our customers, which I think is core to keeping customers happy and keeping them coming back. I think in terms of ESG, I think our supply chain and the integrated nature of our supply chain from rail cars through to to tankers through to last-mile delivery trucks means that we can offer improved ESG solutions for our suppliers. And we're already having those conversations, as I think you know. And that makes us, again, a much more attractive channel for our suppliers because we can help them reduce their carbon footprint through utilizing the network that we have. So I'm not sure rising fuel prices per se is an advantage to us, other than managing our own supply chain. I think we can control that much better and be much more competitive and reliable in the marketplace. But certainly owning that transportation fleet, as we do, allows us to take part in conversations with our supply partners, particularly around ESG, particularly about reducing carbon footprint, which many others can't. And I think that's a real... become a real source of competitive advantage and a competitive moat for us.
spk13: Thank you. And on the 9.7% EBITDA margin that you recorded in the quarter, can you split that between the two businesses, ingredients and specialties versus chemicals and services? And how would that split have been a year ago at a 150 basis point lower margin?
spk09: Yeah, I mean, we can't, Steve. I mean, you know, I think, you know, as you realize, we report across four geographic reporting segments. That's how we see the businesses. Customers behave locally. That's how we see it and review it locally. So we don't disclose that kind of number. What I will say is that we've seen, you know, improvements across all areas of the business. We reiterate what we said at analyst day. We think it's probably 400 basis points better for the ingredients and specialties business and the chemical services business. That's kind of how we look at it. But the drivers of share growth, the drivers of margin expansion have been equally spread across all areas of the business.
spk13: Thank you.
spk04: Thank you. The next question today comes from the line of Frank Misch from Freemium Research. Please go ahead. Your line is now open.
spk14: Thank you. Good morning. And for what it's worth, I like the foodology name. Sounds catchy. I want to come back to the comment about volumes being flat sequentially in the release and And on the call, there was a few comments regarding market share gains that the company was able to realize in the second quarter. So I'm trying to reconcile how you're gaining market shares and yet your overall volumes were flat sequentially. Can you offer some comments there?
spk09: Sure. Good morning, Frank. Thanks for the question. And I'm glad you like Foodology. I think if you look at our win-loss ratios, so the number of buying customers and skews per customer. If you look at our retention rates, if you look at our new customers, all of those are increasing, which says that we are selling more things to more people than we were. That to me is a growth in market share. Now, if we haven't got as much to sell to everybody, if people are buying a little less, if we are selling more of a specialty ingredient, and less of a high volume commodity, that's going to affect the overall volume numbers, which is why we never get turned on about volume. It is about gross margin growth and gross profit growth. But if I look at the underlying details, are more people buying more things from us month on month? The answer is absolutely yes. That to me is we're growing our market share.
spk14: Very helpful. Makes sense. Thank you. And you mentioned the cost inflation benefit year to date, $110 million. I'm wondering if there's any amount that you've embedded into the third quarter guide of $240 to $260 million. What's your expectations there?
spk09: No, I mean, it's very small. It's de minimis. I mean, you know, we think that the prices have now, you know, largely peaked, you know, know maybe gas supplies or a hurricane or something else but we don't predict those things um but but but no we think that any any um non-recurring price benefit in a second i think we think it's kind of done now so we don't build any of that in thank you so much thank you as a reminder if you would like to ask a question please press star followed by one on your telephone keypad
spk04: The next question today comes from the line of Mike Leethede from Barclays. Please go ahead. Your line is now open.
spk11: Great. Thanks. Good morning, guys. First question, just as we've now kind of gone through July, has there been any meaningful changes in your customers' underlying order patterns or changes in where you think their inventory levels currently stand?
spk09: Good morning, Mike, and thanks for the question. I think, as I said earlier, what we're starting to see is customers buying a little less but buying more often. There is a degree of uncertainty in the marketplace about what's going to transpire. We're seeing still strong demand, but I think people are being cautious about what's going to happen on pricing. Has it peaked? Will it go down? Will it go up? Therefore, we're seeing people buy a little less but come back and buy more often. We've observed that now for the last probably six weeks or so. So that's really the change in buying patterns that we see. Now, we're seeing some customers, and we're helping some customers reformulate into maybe lower-cost solutions. So we're looking at some of the premium products, some of the premium end brands be switched out for some of the more value brands. That plays into our solution center and technical differentiation because we're helping customers reformulate in those. But that's what we're really seeing in the buying patterns. Makes sense. Thank you.
spk11: And then just a quick follow-up for Nick on working capital. I appreciate it's very early to think about 2023, but if we assume chemical prices stay, I don't know, relatively flat from here, would working capital likely be a source of cash next year or relatively flat?
spk12: Thanks, Mike. Working capital, if we stayed relatively stable prices through next year, would always be a slight use. because you do grow the business, right? And so that proportionally increases, but it's not significant. Yet we obviously would expect some runoff of the working capital through the end of this year to be a benefit. And certainly we intend to continue to improve our metrics through the end of this year. But our view is that in a stable environment, working capital is not a significant use of cash as we grow. Got it.
spk06: Thank you.
spk04: Thank you. There are no additional questions waiting at this time, so I'd like to pass the conference back to Heather Koss for closing remarks.
spk07: 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.
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