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Edited Transcript of UNVR earnings conference call or presentation 22-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Univar Inc Earnings Call

Downers Grove Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Univar Inc earnings conference call or presentation Wednesday, February 22, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Lim

Univar Inc. - VP of Corporate Development and IR

* Steve Newlin

Univar Inc. - CEO

* Carl Lukach

Univar Inc. - CFO

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Conference Call Participants

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* Allison Poliniak

Wells Fargo Securities - Analyst

* Robert Koort

Goldman Sachs - Analyst

* Andrew Buscaglia

Credit Suisse - Analyst

* Laurence Alexander

Jefferies & Co. - Analyst

* Jim Sheehan

SunTrust Robinson Humphrey - Analyst

* Karen Lau

Deutsche Bank - Analyst

* Ian Bennett

BofA Merrill Lynch - Analyst

* Matt DeYoe

Vertical Research - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Univar fourth-quarter 2016 earnings conference call. My name is Sharon, and I will be your host operator on this call.

(Operator Instructions)

I will now turn the meeting over to your host for today's call, David Lim, Vice President of Corporate Development and Investor Relations at Univar. David, please go ahead.

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David Lim, Univar Inc. - VP of Corporate Development and IR [2]

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Thank you, and good morning. Welcome to Univar's fourth-quarter 2016 conference call and webcast. Joining our call today, are Steve Newlin, President and Chief Executive Officer; Carl Lukach, Executive Vice President and Chief Financial Officer.

This morning, we released our financial results for the quarter and year ended December 31, 2016, along with a supplemental slide presentation. The slide presentation should be viewed along with the earnings release, both of which have been posted on our website at univar.com. During this call, we will refer to certain non-GAAP financial measures, for which you can find the reconciliation to the comparable GAAP financial measures in our earnings release and a supplemental slide presentation.

As referenced on slide 2, we may make statements about our estimates, projections, outlook, forecast or expectations for the future. All such statements are forward-looking, and while they reflect our current estimates, they will involve risks uncertainties, and are not guarantees of future performance. Please see our SEC filings for a more complete listing of the risks and uncertainties inherent in our Business and our expectations for the future.

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

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Steve Newlin, Univar Inc. - CEO [3]

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Thank you, David, and welcome to Univar's fourth-quarter earnings call. We appreciate your interest in Univar. I will start this call with some remarks on our fourth-quarter performance and the market conditions, and then discuss our actions to drive growth through commercial greatness and operational excellence.

I'm very pleased to report that after six consecutive quarters of year-over-year adjusted EBITDA decline, we've achieved our first quarter of year-over-year growth. We reported adjusted EBITDA of $135 million, which is an increase of 4% over last year, and we increased margins in all of our segments. We posted double-digit adjusted EBITDA growth outside the US, with strong performances in Canada, Europe and Latin America. In the US, we are cautiously optimistic that we are beginning to see some early signs of execution gains.

I normally would not get excited about 4% growth, but this is quite a reversal for us and I believe it is an inflection point as we build momentum to become a strong and reliable growth company. We generated strong free cash flow during the quarter, and reduced our net debt for the full year by $320 million, exiting the year at 4.7 times net debt to adjusted EBITDA. That's an improvement from 4.9 times a year ago.

While we are encouraged by our results, it still early, and much work remains before we see consistent double-digit profitability growth. Overall, market conditions remain sluggish from a volume perspective, but we are seeing signs of optimism and confidence from our customers and suppliers, particularly in the US. And chemical price inflation is well underway.

We have a number of key building blocks from which to develop a strong foundation for growth. We are the number-one chemical distributor in North America and number two in Europe, with tremendous global scale that can be leveraged to provide added value to our supplier partners and our customers.

We have the broadest product and service offerings in the chemical distribution industry. We have supplier relationships that span decades and carry strong renowned brands. We give our supplier partners the opportunity to capture more growth for their products by accessing markets and customers they don't reach on their own.

Our short order lead times and on-time delivery rates are among the industry's best. We are in an industry where commercial fundamentals present the opportunity to deliver superior earnings growth. We have opportunities to lower unit transaction costs through operational excellence and digitization, as well as e-commerce and consolidation opportunities.

We have a superb record on safety, finishing the year with a global TCIR or total case incident rate of 0.69, which is a valued differentiator for us with suppliers and our customers. And we have wonderfully dedicated employees at Univar and a high-energy leadership team, with a strong commitment and work ethic.

So, this all adds up to a strong base from which we can build competitive advantage, increase our profitability, and increase our share in a growing market. We are committed to driving growth as the top priority, and are laser focused on our execution to do so.

Let me talk about our markets a bit and some of the many actions we are taking to drive growth. We have a small share of an addressable market that today is over $100 billion, and that number is growing every year.

In order to capture more of that market, we are changing our culture and transforming Univar to improve our execution, and drive commercial greatness and operational excellence. This will benefit our customers and supplier partners and encourage them to do more business with us.

During the past two quarters, we've taken steps to improve our sales force execution. We implemented new controls and processes to drive accountability and rigor within our sales management and reset expectations for profitability. We held our first ever North American sales leadership conference last fall, and during the third and fourth quarters invested in sales training for our commercial organization to move to a value-based selling approach.

On January 1, we redefined our sales incentive plan in the US to reward performance that drives profitable growth and aligns our sellers with our growth objectives. We are addressing some very unhealthy business arrangements that consume excessive resources and limit our ability to pursue attractive, profitable business, and create value for all constituents. We are investing in sales force talent, including hiring and training, and changing the mindset and expectations of our organization to drive sustainable, profitable growth.

We really create a lot of value in the supply chain for our customers and supplier partners, and by moving to a value-based selling approach, we provide our customers the help they need, and the products and services and dedication they are looking for. When we demonstrate to our customers the value we create for them, we not only win in the short term, we forge partnerships that will produce outsized returns for Univar in the future. Our customers are already beginning to take notice of our changes.

While we are encouraged by what we are seeing so far, our sales force productivity has not nearly reached its full potential. We are upgrading our capabilities through training, and have open positions we need to fill. As we reset expectations and improve our skills, we will sell more new business and lose less, driving value in growth for our customers and supplier partners, as well as our shareholders.

We can deepen our supplier-partner relationships to earn more new product authorizations, which presents tremendous upside for us. Sales force execution is clearly the biggest lever we have. The good news is our supplier partners have already noticed a change at Univar, but we still have a long way to go.

We are working to build a culture where discipline and rigor are a way of life, and this is the basis for strong execution. We are instilling discipline in our approach to doing business, making sure we're well prepared, understand our customers, and anticipate their needs. Our employees are responding, and we are starting to see signs of improvement in our performance.

In North America, we compete in the $30 billion-plus market, with more than 80% of that market in the hands of our competitors. Our sales force sees this as a golden opportunity to win new profitable business at a much faster pace. We are starting to become more holistic and strategic in how we evaluate the attractiveness of specific market opportunities, as well as how we approach them.

On February 1, under David Jukes's leadership, we launched our new US commercial organization structure, organized to win. Which better reflects our end-market opportunities and the way our customers and supplier partners operate.

Our US commercial team is structured along the four distinct lines of business, focused industries, local chemical distribution, bulk chemical distribution, and services. Making each of our sellers specialists in their respective businesses.

Our focused industries team provides expertise by industry vertical, including coatings and adhesives, food ingredients, personal care, pharmaceuticals, and energy. This will help us better diagnose customer needs and prioritize end markets, so that we can deploy our resources to the highest value growth opportunities.

Local chemical distribution will focus on customers within a 200-mile radius of key sites, with local knowledge, a competitive cost structure, and the pace and responsiveness to better compete with local and regional competitors. Bulk chemical distribution will combine deep single-product value chain knowledge, with efficient and economical delivery of high-volume commodity chemicals. In our services business, we will continue to provide complete storage and delivery systems, as well as waste management services that enhance customer productivity and safety.

We expect to improve our mix and become more specialized with dedicated sellers aligned to customer end markets, including industry, product, geography, and service. This will improve our value to our customers by providing deeper industry expertise and market insights to address their needs. And in parallel with organized to win, we're driving operational excellence by redesigning our supply chain to better fit the needs of our different lines of business.

Our new organization will allow us to serve our customers and suppliers in a unique way by bringing the right expertise in a tailored supply chain to meet their needs. We are also undertaking a comprehensive effort to improve our supply chain, and go from good to great. We believe we can improve the efficiency and the effectiveness of our branches and warehouses.

At the same time, we're looking to increase the flexibility and competitiveness of our inbound and outbound logistics, target greater asset productivity, and develop more efficient relationships with our external providers. We continue to re-evaluate our network on an ongoing basis to make sure that we have the right footprint and the right products in the right locations across all our businesses.

Finally, we have many opportunities to simplify, automate and lean out processes. We are implementing digitization projects to simplify and lower our transaction costs, reduce errors and improve our customer experience.

For example, in the US, we currently have an order entry process which can be frustrating and disruptive to our customers and create unnecessary costs for us. We can deploy technology tools to streamline this process, reduce rework and cost, and improve the customer experience, and that's what we are doing. We are executing on our growth strategy by building commercial greatness, driving operational excellence, and improving our balance sheet, while pursuing scalable acquisitions. We see many opportunities to make accretive acquisitions, but we will be strategic, selective and disciplined in our process, seizing opportunities that will make Univar better and can be leveraged across our platform.

We are focused on sustainable value creation and making investments and decisions that last longer than any CEO. With that backdrop, I will now turn the call over to our CFO, Carl Lukach, who will walk you through our fourth-quarter results. Carl.

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Carl Lukach, Univar Inc. - CFO [4]

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Thank you, Steve, and thanks, everyone, for joining. I will begin on slide 3.

Let me first address our earnings-per-share results. Today, reported a $0.43 GAAP EPS loss for the fourth quarter. As we highlighted for you last quarter, our fourth-quarter GAAP results were impacted by a $0.35 per share non-cash pension mark-to-market charge, largely due to a decline in the discount rate used to estimate the net present value of our three frozen defined benefit plan obligations.

We also incurred a $0.35 per share charge for the non-cash revaluation of deferred tax assets, resulting from a December 7, 2016, change in US tax law. Excluding the impact of these two non-cash charges, fourth-quarter earnings were $0.27 per share.

For the full-year 2016, we reported a GAAP EPS loss of $0.50 a share. This includes the two non-cash charges in the fourth quarter, and the $0.63 per share impairment charge we took in the third quarter, associated with our upstream oil and gas business. Excluding the impact of these non-cash charges, our full-year earnings per share were $0.83.

Adjusted EBITDA in the fourth quarter increased $5 million, or 4%, from $130 million in 2015 to $135 million. Adjusted EBITDA increased $10 million outside the US, but was partially offset by a $5 million decline in the US. Despite the decline in the US, we are seeing early signs of progress and increased profitability from the actions we have underway.

While modest, I'm pleased to report that our USA delivered gross profit increased 2%, the first quarter of year-over-year improvement after six quarters of declines. That's gross profit, less delivery expenses.

Our cash flow for the year and for the fourth quarter was robust, reflecting net working capital efficiency gains, and lower cash outflows for pension, taxes and interest. Adjusted operating cash flow was 7% of sales for the year, and 12% of sales in the fourth quarter. We calculate that as adjusted EBITDA, less change in networking capital, less CapEx, divided by sales.

Turning now to our consolidated results on slide 4. Fourth-quarter net sales were down 8%, 4% from lower volumes, and 5% from lower average selling prices, partially offset by a 1% benefit from acquisitions. Of the 4% global volume decrease in the quarter, about 1.5% can be attributed to one less billed day versus last year, with the rest largely due to lower volumes in the US and Latin America oil and gas markets.

Average selling prices globally were 5% lower than last year, reflecting a significant drop in prices for a handful of bulk commodity chemicals in our portfolio. Our gross profit dollars declined $7 million or 2% from last year, as a result of lower volumes and lower average selling prices. However, our gross profit percentage increased 150 basis points to 22.8%.

Adjusted EBITDA margins increased 80 basis points to 7.4%. Productivity gains and FX translation helped keep our warehouse selling and administrative expenses flat with the prior year.

Let me take you through each of our segments, beginning with the USA on slide 5. In our USA segment, adjusted EBITDA of $78 million declined $4.4 million, or 5%, primarily due to lower volume and lower average selling prices. Volumes declined 6% due to one less billing day in the quarter, and a 26% decline in our upstream oil and gas business.

USA volumes, excluding oil and gas, and adjusted for the one less bill day, declined 1%. Average selling price in the quarter was down 5%, impacted by larger decreases in several commodity products. However, we saw progress with our delivered gross profit dollars, reflecting favorable product and market mix, lower delivery costs, and early gains from our margin management efforts.

Our US-centric service businesses grew revenues 10% in the quarter, reflecting the acquisitions of Weavertown and Bodine. Excluding acquisitions, organic top-line growth was 3%. Delivered gross profit dollars increased 20% in the quarter, driven largely by organic growth at ChemPoint and acquisitions.

In aggregate, our three service businesses comprised 13% of our US sales in the quarter, versus 11% last year, showing solid advancement. USA EBITDA margin increased 30 basis points to 7.2%.

Let's move then to Canada on slide 6. Our Canadian segment had a strong finish to the year. The end of a strong ag season, along with favorable product mix and margin management efforts offset the impact of soft industrial demand and weakness in Western Canada energy markets.

While sales were down 6% on lower average selling prices, our gross profit margin increased 150 basis points to 22.8%, as a result of a favorable change in product and market mix, and the benefit of acquisitions. Industrial demand in Canada remained sluggish in the fourth quarter, as it has all year.

We are pursuing mix enrichment initiatives focusing on personal care, pharmaceuticals, and food ingredients, and are starting to see signs that a bottom may have been reached in our Western Canada energy business. We continue to see upside from productivity initiatives in Canada, with a 7% decline in delivery and operating costs. Adjusted EBITDA grew 10%, and adjusted EBITDA margins increased 150 basis points to 10.2%, driven by lower delivery and operating expenses.

Moving then to slide 7 and the results in Europe, Middle East, and Africa. We had strong 19% growth in adjusted EBITDA, despite overall stagnant demand from industrial markets and foreign currency translation headwinds, as we continued to realize the benefit of lower operating costs from our 2015 restructuring actions. Sales declined 2%, largely due to FX headwinds of 4%. Volumes increased 1.4%, and average selling price increased 0.005% on a currency neutral basis.

Our gross margin increased 40 basis points to 23.3%, reflecting our mix enrichment strategy and the facility shutdowns we completed last year. Gross profit dollars declined 0.005%, but increased 3% on a currency neutral basis, as we saw gains for the quarter in the pharmaceutical, personal care, food, and case end markets, all key Univar focus areas. Our EMEA adjusted EBITDA margin increased 130 basis points to 7.3%, due to gross margin improvements, 6% lower delivery expenses, and 8% lower operating expenses.

Moving then to slide 8 and our rest of the world segment, of which approximately 85% of our revenues are from Brazil and Mexico. Sales declined 10% or 6% on a currency neutral basis, reflecting lower demand in Mexico from oil and gas, and overall weak Brazilian industrial demand. However, gross profit dollars were flat with last year, despite the lower sales, reflecting favorable product and market mix, and margin enhancement actions.

Adjusted EBITDA of $8 million increased $4 million, due to a focused effort to reduce costs in light of the weak market demand. Including lower operating costs in our modest Asia-Pacific unit, lower operating costs in Mexico and lower delivery costs.

Our three segments outside the US in aggregate grew adjusted EBITDA in the quarter 21% on a reported basis, and 24% on a currency neutral basis. This performance was largely driven by gross margin improvement, and lower delivery and operating costs.

Slide 9 provides an overview of our cash flow in the fourth quarter. Seasonal working capital release and working capital efficiency gains generated a $106 million cash inflow in the fourth quarter, and a $124 million cash inflow for the full year.

For 2017, we expect to rebuild working capital, and have included cash flow guidance in our appendix. Our CapEx was $90 million for the full year, down 38%, as planned. For 2017, we expect CapEx to be slightly higher at $110 million, as we reinvest our cash flow in specific projects for growth, cost savings, and to advance our digitization goals.

Cash taxes of $4 million in the quarter were in line with last year. For the full year, cash taxes were less than $1 million, as we benefited from tax refunds and utilizing tax loss carry forwards. We expect our cash taxes in 2017 to remain low at less than $25 million.

Our effective tax rate for the quarter on a GAAP basis was impacted by the non-cash pension mark-to-market adjustment, and the non-cash deferred tax revaluation. Excluding the impact of these two charges, our effective tax rate for the quarter was a benefit of 6%. For the full year, our effective tax rate was 8%, when you exclude the impact of the third and fourth quarter non-cash charges. For 2017, we expect our GAAP effective tax rate to be in a range of 20% to 25%, excluding the impact of any new tax legislation.

With regard to uses of cash, our priorities continue to be; first, to reinvest for growth in our asset-light business model, including digital projects that will lower our transaction cost per unit, and enable e-commerce, as well as sales force training and commercial investment. Second, to make targeted, attractively priced, and scalable bolt-on acquisitions. And third, to pay down debt. In 2017, we have $90 million of scheduled debt amortization payments, that's up from $40 million last year.

Slide 10 details our debt profile. Net debt at quarter end was $2.6 billion, down $320 million from 2015 year end. Our leverage ratio of 4.7 times was down from 4.9 times last year.

Our total liquidity remains strong at $858 million, an improvement from $677 million last year, and our cash interest coverage was 3.9 times, up from 3.6 times a year ago. In November 2016, we successfully executed attractively-priced interest rate swaps that economically convert approximately 80% of our floating-rate debt to fixed rate for the next three and a half years.

In January 2017, we re-priced $2.2 billion of our term loans, lowering annual interest costs by 50 basis points, or approximately $11 million per year for the next five and a half years. Pro forma for the re-price, our weighted average interest rate on debt is now 4.25%. Our return on assets the point in the quarter was 20%, well above our cost of capital.

Let me now address our outlook for 2017, on slide 11. Our operating plan for 2017 includes, further advances in and executing our commercial greatness and operational excellence initiatives. These expected gains, however, will likely be partially offset by selective commercial and technology investments, and FX translation headwinds. As a result, we expect low-single-digit EBITDA growth in the first half of this year, accelerating in the second half to near double-digit growth by year end, as our initiatives take hold.

Overall, for the full year, we expect to deliver mid-single-digit adjusted EBITDA growth. For the first quarter of 2017, we expect our adjusted EBITDA to be slightly above last year's $134 million, as we invest in and execute on our plans, and build our growth profile. With that, I'll turn it back to you, Steve.

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Steve Newlin, Univar Inc. - CEO [5]

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Thanks, Carl. Let me conclude by sharing with you what we see in our future.

Our absolute priority is to drive growth, and do so in a manner that is reproducible and lasting. We have a truly exciting and unique opportunity here at Univar to grow the profitability and size of our Company.

As you know, we have three powerful drivers for growth working in our favor. First, the distributed chemicals market is a growing market, and we expect it to grow even faster. This gives us ample opportunity to continue to invest in our customer and supplier partner value propositions to make it more compelling to do business with us, and increase our number of new product authorizations.

Second, Univar's market share, even as the North American leader is low in the highly fragmented distributed chemicals market. As we improve our operational and commercial execution, leverage our large and growing scale, and capture more new business, we will increase our market share. And third, we are absolutely laser focused on execution. And Univar's margins and profitability are rising.

By focusing on better sales force execution, improving our mix by selling more specialties, pruning unprofitable business, developing smarter and strategic marketing, and reducing transaction costs, we will capture more of the value we create for our customers and supplier partners, and generate superior returns for our shareholders. In order to make the most of these drivers, in the US, we've adjusted our sales incentive structure. We are investing in training and hiring, changing expectations, and instilling rigor and discipline across every task and function in the organization.

We're investing in marketing resources, to better guide us to more attractive organic growth opportunities. We are investing in digital tools that will accelerate growth through more e-commerce, and lower our transaction costs. We are organizing to win in the US, and continue to grow double digits in EMEA, Canada and Latin America.

We are taking actions to optimize our asset footprint and cost structure. And improve our return on capital, and we are strengthening our position and have fortified our Management team. During the quarter, we successfully recruited Eric Foster as our new CIO to drive e-commerce and technology strategy, and we made great progress on our search for a Chief Marketing Officer, and we expect to announce that very shortly.

Our growth imperatives will be accomplished within our current economic framework, and we will use our strong, stable cash flow to fund our CapEx and acquisitions, remain asset-light, reduce debt, and begin to deliver attractive year-on-year earnings growth. While we have much work to do, we expect adjusted EBITDA growth to build throughout the year, and hope to approach our target for double-digit adjusted EBITDA growth by the end of 2017.

Note, culture change is some of the hardest work an organization can take on, and that's why it offers such great rewards for all associated with it. It takes time, experience and thought, and while we have a solid grasp of the changes we need to make, there are normally some bumps along the way. We are closely monitoring the pace at which we make our changes and the impact they have on our employees, customers, and supplier partners.

We are moving quickly, but thoughtfully, and we are making the changes needed to build a foundation that delivers consistent sustainable earnings growth, and we are doing so with an extreme sense of urgency. We have a tremendous opportunity to create significant value for our customers, supplier partners, employees, and shareholders, and intend, with full force, to capture that opportunity. I want to thank you for your attention, and with that, we will open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Allison Poliniak, Wells Fargo.

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Allison Poliniak, Wells Fargo Securities - Analyst [2]

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Hi, guys, good morning. In the US, you had talked about a 1% sales revenue decline, ex -- adjusting for the day and ex the oil and gas, you've also talked about addressing some of these unhealthy business arrangements, was there a headwind in the quarter, and if so, could you help to quantify that a little bit?

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Carl Lukach, Univar Inc. - CFO [3]

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Good morning, Allison, thanks for that. Yes, I would start with oil and gas, the volumes are still down, it is much lower level, our sales in the quarter are nearly 50% below where they were in last year's fourth quarter in upstream price and volume, so that put that to the side. Margin management continues to be a high focus area in the US, and we have made some advances there, as you can see in our margins, so I'd say those are probably the two headwinds around sales.

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Allison Poliniak, Wells Fargo Securities - Analyst [4]

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Okay, and then on accelerating EBITDA growth in the back half of 2017. Are you assuming a lift from the volume side, or is this really purely with stuff that's within your control at this point? [I just guess] confidence around that acceleration.

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Steve Newlin, Univar Inc. - CEO [5]

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Allison, it is Steve. I think we are being very cautious about talking volumes right now, because I don't want that to get in the way of us making some important decisions about customer relationships. So, we are not expecting a bunch of lift from the macroeconomic environment, we are looking at steady-state on that front, if we get help there, so much the better.

But really, what this is about is giving a little more, giving some time for these actions we have been taking to pay off. For example, we still have open positions in sales, and there's a time to productivity from when we hire new until they begin to understand exactly where their territory account prospects are, to get out and make the calls, develop relationships.

The good news is, in our Business, it is a pretty short sales cycle, probably in the neighborhood of 9 to 12 months, so that means time to productivity is relatively fast, but there is still a period of time from the day that person gets their bag to go call, and starts bringing in new business, so, some of that will start paying off in the latter part of the year. I think the same thing is true on some of the productivity initiatives, and some of the digitization plans that, while they are underway, they are not going to benefit us until later in this year.

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Allison Poliniak, Wells Fargo Securities - Analyst [6]

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Great, thank you.

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Operator [7]

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Robert Koort, Goldman Sachs.

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Robert Koort, Goldman Sachs - Analyst [8]

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Thank you, guys, good morning.

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Steve Newlin, Univar Inc. - CEO [9]

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Hi, Bob.

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Robert Koort, Goldman Sachs - Analyst [10]

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Two questions. Firstly, you mentioned, and it seems to be pretty pervasive, that there is a feeling that things could be getting better. Can you give us some hard anecdotes of what you have seen, I don't know if it's daily sales trends so far in 2017, but where are you actually seeing explicit improvement, versus maybe just some better attitudes or better feelings from your customer base?

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Steve Newlin, Univar Inc. - CEO [11]

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So, we do look at our gross profit per unit, whatever that unit is, whether it is dollars or whether it is pounds, whatever, and that is growing for us, so that's a sign that some of the pricing actions we are taking are beginning to pay off, and that pricing is such a key driver to improve our profitability. We create all this value, but we have not consistently captured our fair share of that value that we create, so we worked hard on this, David Jukes and his team, in particular, have identified tactical and strategic levers that we are addressing, and we will address them through 2017 and into 2018, in an effort to bring pricing in line with the value that is delivered to those customers. And we are seeing the early signs of that coming in.

Where we have a lot of work to do yet is to increase the amount of new business that we are gaining, and that has more to do with skill sets and the training and the expectations of the sales force. So, we've invested in those areas that haven't paid off yet, but they will, we're getting more activity, and the new business generally has a lag between the sales call activity and when we actually land the accounts. And lastly, as you are talking about what kind of anecdotes do you have, I'm getting input from customers and suppliers, it is very positive.

I just received an email last week from a customer talking, really, it couldn't have been a better testimonial for what we are trying to do, talking about our sales rep, and how valuable they are to them, and how they do so much more than just make sure that the chemicals get there on time. So, those are the kinds of indicators that give me a lot of optimism for the future.

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Robert Koort, Goldman Sachs - Analyst [12]

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My follow-up, it seems your pricing dynamic in the US was a little more punishing than in Europe. Is that just a function of having more bulk chemical sales in the US, or why would we have seen such variance in the pricing development?

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Carl Lukach, Univar Inc. - CFO [13]

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It is Carl. I jumped on the oil and gas point, again.

It some of the largest decreases in prices are focused [and obviously growing] oil and gas area, a hydrochloric to name one, but also methanol and a few others. That outside of oil and gas and the industrial markets also exacerbate the price decline in the US versus the other segments.

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Steve Newlin, Univar Inc. - CEO [14]

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This is Steve Newlin, [being corrected], we've got some really good discipline around this, Bob, and we're not perfect by any means yet, but we think this is self-correcting.

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Operator [15]

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Andrew Buscaglia, Credit Suisse.

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Andrew Buscaglia, Credit Suisse - Analyst [16]

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Hey, guys, thanks for taking my question. Can you talk a little bit about, you talked about the pricing a little bit, I know last quarter you said you are trying to see if there was any volume pickup ahead of potential price increases. Are you seeing that in any of the regions, any pre-buying, or you would think with inflation here, we should be able to get some pricing at some point?

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Steve Newlin, Univar Inc. - CEO [17]

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Andrew, it is a great question, and we really are not seeing that. We are seeing pretty steady-state.

I think that the very early signs of inflation in chemical products are occurring, and I'm not sure that the customers have figured out to get out in front of that just yet. We are not seeing evidence of taking on added inventory or premature orders, et cetera, which is just fine with us, because those things give you a little hiccup for a short period of time, and of course, then you have to deplete that inventory, but we are not seeing any evidence that would suggest that.

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Andrew Buscaglia, Credit Suisse - Analyst [18]

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Okay. Then in your guidance, we are assuming there is no bolt-on M&A in that, correct?

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Carl Lukach, Univar Inc. - CFO [19]

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We do not include M&A -- no M&A in the guidance.

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Andrew Buscaglia, Credit Suisse - Analyst [20]

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How about is there any update on activity, are you guys looking at any deals imminent, or is anything -- any updated thoughts on that?

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Steve Newlin, Univar Inc. - CEO [21]

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We have, obviously, have to be really careful about what we say with regard to M&A, because, believe it or not, some other people might be listening to this call, but we are pretty active in looking at the right kind of acquisitions. I would say our activity is as high as it has been in some time. We are just being more selective than we have been in the past, and we are looking for opportunities that we find are leverageable.

So, rather than just be simply a bolt-on, and we get a little bit of synergy, and we buy it at a low multiple, and squeeze a little bit more out of it, we are looking at acquisitions that have some -- that can fill some holes for us, that have some niche markets that we are trying to enter, and we could enter faster. That we could take around the country, and even around the globe, in terms of technology, as well as knowledge of an industry. So, I think we're trying to be more patient and prudent in the process, but it is not for lack of effort, and our line is in the water, that's for sure.

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Andrew Buscaglia, Credit Suisse - Analyst [22]

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These are acquisitions that potentially could get you to maybe some adjacent product lines that you are not currently selling right now?

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Steve Newlin, Univar Inc. - CEO [23]

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It could be. Adjacent products, perhaps, but also deeper penetration into the more attractive markets that we are pursuing.

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Andrew Buscaglia, Credit Suisse - Analyst [24]

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Okay. Got it, thanks, guys.

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Operator [25]

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Lawrence Alexander, Jefferies.

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Laurence Alexander, Jefferies & Co. - Analyst [26]

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Good morning. Two quick ones.

I guess first of all, can you walk through what you expect, in terms of non-cash items in 2017, so interest pension, restructuring costs, anything else that we should be thinking about for the cash flow bridge?

And secondly, for the four growth areas that you characterize, can you give us some feel for what percentage of sales they represent in North America, and how much of a drag you see the underperformance in those selling strategies having on cash flow to sales?

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Carl Lukach, Univar Inc. - CFO [27]

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Let me take the first one Laurence, good morning. On the bridge, the non-cash items. I wish we could forecast mark-to-market pension accounting for the fourth quarter of 2017, we have not, it is not in our guidance, and it will depend on interest rates mostly, so that is one.

Modest amount of restructuring, you see it lower in 2016, it will be lower again in 2017 is our expectation, but not zero. Low-single digits there is the goal.

We've got, I think that is pretty much it. I think if you racked it up, I think it might be mild double digits, but down from the prior year.

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Steve Newlin, Univar Inc. - CEO [28]

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Laurence, could you repeat the second part of your question, please? I'm not sure I tracked it, exactly.

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Laurence Alexander, Jefferies & Co. - Analyst [29]

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You sketched four different selling strategies, or focus groups, in North America. Could you clarify, can you give some sense for how much they represent of sales, and to the extent that there's been excess churn in the customer base because of those strategies not being -- or needing to be realigned, how much of a drag has that been on cash flow to sales?

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Steve Newlin, Univar Inc. - CEO [30]

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We have not really spun out publicly the breakdown of these various four lines of business. We've got the bulk chemical distribution, and that's a business that's working well for us, and we know what it is, we know that's not our highest margin business, but it is really good business for us. I think what is new is that we've broken out the local chemical distribution, and what I really love about what David Jukes has done here is, this is a head-to-head opportunity to tackle the locals and regionals, who, by the way, have the biggest share of the market out there, so it gives us responsiveness, it gives a speed, it gives us unlimited logistical circle around the concentrated site, and it is going to allow us to be more responsive and compete a lot better with the locals and the regionals.

I think where the real -- and all these are good opportunities, but the real opportunity, I think, is in our focused industries group, because that is a more specialized arena. We are now looking into very specific vertical markets, like food ingredients, like personal care, our case business, pharmaceuticals, energy, and really start to better understand those markets and the behaviors that customers want today and tomorrow, and then fill out our product line and work on, specifically with dedicated sellers, those applications.

And I think you will see margin expansion, probably the most prominent in that business. And of course, you know about our service businesses, and we've continued to work on nurturing that business, it is a nice business, a good margin business, a much more predictable steady stream business, but we have not broken down publicly the elements of all these.

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Laurence Alexander, Jefferies & Co. - Analyst [31]

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Thank you.

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Operator [32]

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Jim Sheehan, SunTrust Robinson.

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Jim Sheehan, SunTrust Robinson Humphrey - Analyst [33]

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Morning, could you discuss the proposal for a border tax adjustment, would that be positive or negative for Univar?

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Carl Lukach, Univar Inc. - CFO [34]

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Hey, Jim, good morning, thanks for that question. Tax reform in the USA. I think the key point to understand is that the vast majority of our business in the US is of chemicals made in the US.

We have a relative very small percentage of our sales are products that are imported, they are concentrated in a few products, and an even smaller percentage of sales that are exported. When you take those two facts into consideration, it is not a zero effect, but if border adjustment went through, it would be rather minor, compared to the other topics being discussed with tax reform right now.

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Jim Sheehan, SunTrust Robinson Humphrey - Analyst [35]

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Terrific. And when you talk about the tone of business picking up in sentiment picking up, can you talk about what you are seeing in January and February that's almost done here, have you have seen an inflection in those trends or is it more or less a continuation of what we saw maybe in December?

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Carl Lukach, Univar Inc. - CFO [36]

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I'd say in short, it's the latter, Jim. We are seeing selling price increases in all the regions, as Steve mentioned, continuing into the year as planned, as we are working on.

So, our cost to consult, those of you follow the chemical producers, that know about chemical price increases that are more and more talked about, our profitability per pound is rising through the actions of our commercial greatness initiatives. But in terms of the volume demand, not yet, it is still, more or less, chugging along at exit levels from 2016.

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Jim Sheehan, SunTrust Robinson Humphrey - Analyst [37]

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Great, and in your 2017 outlook, what would you say is the currency headwinds contained in your outlook?

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Carl Lukach, Univar Inc. - CFO [38]

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Good question. The short answer is that it is a little over 2% of 2016 full-year EBITDA is what we think.

What we think is we took the top 20 banks on January 3, and averaged their forecasts, and the three relevant rates to us are the euro and the Canadian dollar, and now more so the British pound, because of what's happening there. When you look at those 20 banks average, compare it to 2016's actual, you should get something like a little over 2% of full-year EBITDA last year.

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Jim Sheehan, SunTrust Robinson Humphrey - Analyst [39]

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Thanks a lot, Carl.

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Operator [40]

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Karen Lau, Deutsche Bank.

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Karen Lau, Deutsche Bank - Analyst [41]

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Thanks, good morning, everyone. Just a housekeeping for Carl. The $50 million to $100 million of working capital drag for this year, is that more of a conservative placeholder, or is it driven by fundamentally, maybe expected increase in pricing and some restocking, and are there any offsets to that on the receivable and payable side?

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Carl Lukach, Univar Inc. - CFO [42]

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I would not want to label it one way or the other there, but let me give you the insights behind what's happening in working capital. First of all, competitively, we are in good shape here. Our metrics compare to the best, and all the productivity working capital metrics.

It is a focus area for us, we harvested a lot of cash in the fourth quarter. We continue to focus on it, and we think that we've got some opportunities to further improve our working capital.

At the same time, a prime focus of our commercial excellence initiatives is to increase our win rates out in the marketplace. Success there will require investment in working capital, and I would say what you are seeing in our guidance there reflects all of that together. So, some productivity improvement, plus our goals around win rate and an increase in market share.

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Karen Lau, Deutsche Bank - Analyst [43]

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Okay, got it. Could you provide a quick update on the pricing in oil and gas? I think you were in renegotiations, pricing renegotiations with some of your customers, any update on that? Are you now more likely to participate more meaningfully or just getting more benefit from the recovery on that business, or are you still looking at maybe exiting some of that upstream business?

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Carl Lukach, Univar Inc. - CFO [44]

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Let me be clear, we are not exiting the upstream oil and gas market, for sure. We had learned a lot from the rise in demand from that market space in 2013 and 2014, and we will apply those learnings when the market recovers, which it will. I think that's really the headline, Steve.

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Steve Newlin, Univar Inc. - CEO [45]

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I would just say we're going to be more selective about applications, and we are going to be involved in applications where we make a respectable living, and if we cannot do that, it doesn't make a lot of sense for us to throw energy into it. There are lots of other places to pursue opportunities for value creation, but we will be in this marketplace, we will just be niched into, I think, the better applications, where we have some degree of differentiation.

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Carl Lukach, Univar Inc. - CFO [46]

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Karen, these comments are really focused at US fracking. We have a very different energy business in Canada that is doing quite well.

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Karen Lau, Deutsche Bank - Analyst [47]

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Got it. And then so net-net do you expect the US upstream business to grow, in terms of GP or volume this year? Is it a growth contributor --?

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Steve Newlin, Univar Inc. - CEO [48]

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It is not in our plan to have any significant growth in that business this year. We would love to have some, there may be some upside if things develop and move faster, but we are not counting on things that we have such little control over.

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Karen Lau, Deutsche Bank - Analyst [49]

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Got it, thank you.

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Operator [50]

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Steve Byrne, Bank of America.

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Ian Bennett, BofA Merrill Lynch - Analyst [51]

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Thanks, this is Ian Bennett, on for Steve Byrne. EBITDA margins in Canada have been about 10% now for two consecutive quarters, can you talk a little bit about any of the structural differences between Canada and other regions that would prevent a similar level of margin? And then any best practices or strategies that similarly could be applied in other regions?

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Steve Newlin, Univar Inc. - CEO [52]

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Let me start, and Carl you can pile on. Basically, we have a well-run Business up in Canada. Some of this is mix, but a lot of it is the discipline and rigor with which that Team goes to market and they are savvy, they are experienced, they know what they are doing.

They have really, I think, instilled some great business practices. I see this as an opportunity for other parts of our Company to lift our performance to their level. They have some ag business, they have some energy business, and ag business, of course, can be very seasonal, but they seem to manage through all that.

I just think we have a really strong team, and I think it shows you what can happen when you've got talent out there, and you make good decisions about your business over a long period of time. Carl?

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Carl Lukach, Univar Inc. - CFO [53]

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I think that's it. It is really comprises three almost independent businesses, the ag space covering most of the central country, and a bit seasonal, as you know. And the industrial East, and then the energy business, which is on its rebound right now. So, structural, I can't point to it, I think it is execution.

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Ian Bennett, BofA Merrill Lynch - Analyst [54]

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Thanks. Then as a follow-up, you mentioned earlier that some of the sales force being excited about the 80% of the market in the US, that Univar does not have as well as some streamlining of an optimization of supply chain, is the current infrastructure in the US warehouses and distribution, is that too high or too low or about right, or is that still being worked through?

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Steve Newlin, Univar Inc. - CEO [55]

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We are still working through that. It's not too low, I can tell you that. We are really well positioned.

There may be some aspects where it's a little high, and we are weaving through that with some outside help, but going back to the way you framed the question, the sales force is becoming really energized. We are paying attention to them, we are recognizing them, we are giving them, we are nurturing them with a lot of training, and we are trying to make the job fun for them again. We are trying to reward them differently, but the standards are higher, and not all will make it, and so the cream is rising to the top and there's a lot of excitement.

That 80%, 85% of the market that we don't own, that's always been there. But what I think is different is how we are directing and leading and organizing the sales force to go after it and go get it, and how we are rewarding them. They should make more money this year.

If they deliver, they are going to make more money than they have in the past, they are going to get more recognition than they have in the past. The job is getting more challenging and tougher, and with that comes a greater sense of rewards and fulfillment. And that's really what's changed.

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Ian Bennett, BofA Merrill Lynch - Analyst [56]

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Thank you very much.

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Operator [57]

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(Operator Instructions)

Kevin McCarthy, Vertical Research.

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Matt DeYoe, Vertical Research - Analyst [58]

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Good morning, this is actually Matt on for Kevin. Just wanted to ask you a question on margins. [Should we] look over the past few years, how much compression do you think you saw from general deflation passing through your inventory, and then as we see inflation move back through the system, how much do you think you can expect to get back?

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Steve Newlin, Univar Inc. - CEO [59]

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That has that backward look, Carl. I don't know.

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Carl Lukach, Univar Inc. - CFO [60]

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That's tough, the deflation was most visible in the first eight months of 2016. The compression in the margins.

By the remaining five months of the year, we pulled out from that compression. In gross profit margins, I will say, Matt, is less than 100 basis points of gross profit margin.

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Steve Newlin, Univar Inc. - CEO [61]

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I would add to that, I think if your game is really on, and you've positioned your company to deal with the environments, you should not have the margin compression in deflation. I've seen it done before, very successfully, and that's our mantra, and that's what we are working to build our Company around so that we don't have margin compression under any circumstances.

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Matt DeYoe, Vertical Research - Analyst [62]

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Okay, and one more, if I may. As you look at the 2017 guidance for mid-single-digit EBITDA growth, and the various factors that contribute, where do you expect the most volatility come from, and what is driving that range of outcomes?

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Steve Newlin, Univar Inc. - CEO [63]

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I think the one thing we really have to be on top of is the chemical price inflation, so that we don't get surprised and find out in a month or a quarter that we had our margin decline, because we did not get the pricing out there fast enough. We've got some early warning systems, but it is not perfected yet to understand all of these costs going into our pricing models, so we are careful about that. I think we are on it, but I cannot promise you that we are perfect with it by any means.

So, that is the one thing I worry about right now is some inflation running so fast that we have not positioned ourselves to capture it, and I don't want to squeeze in a month or certainly in a quarter. Carl, I don't know if you have anything else?

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Carl Lukach, Univar Inc. - CFO [64]

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Just a minor (inaudible) with fuel costs, but the big one is the chemical price inflation.

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Matt DeYoe, Vertical Research - Analyst [65]

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Okay, thank you.

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Operator [66]

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There are no further questions at this time. I will turn the call over to David Lim.

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David Lim, Univar Inc. - VP of Corporate Development and IR [67]

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Thank you for your continued interest in Univar. Before we conclude, I'd our like to announce the date for our Investor Day. Based on investor feedback, will be made May 15, in New York City, to lay out our intermediate and long-term financial targets, and share with you our road map for success and growth. We will be sending out additional details on the event shortly, but in the meantime, if you have any questions, please feel free to reach out. Thank you, and have a great day.

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Operator [68]

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