Clearway Energy, Inc. (CWEN) Q2 2022 Earnings Conference Call August 2, 2022 9:00 AM ET
Company Participants
David Jukes – President & Chief Executive Officer
Heather Kos – Vice President of Investor Relations
Nick Alexos – Executive Vice President & Chief Financial Officer
Conference Call Participants
Kevin McCarthy – Vertical Research Partners
Operator
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. [Operator Instructions]
I would now like to pass the conference over to our host, Heather Kos, President of Investor Relations. Heather, please go ahead.
Heather Kos
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 Alexos, Executive Vice President and Chief Financial Officer.
Last night, we released our financial results for the second quarter ended June 30, 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 2, 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 2, we will make statements about our estimates, projections, outlook, forecasts 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 3, 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.
David Jukes
Thank you, Heather, and good morning, good afternoon and good evening to everyone, and thanks for joining our call. Coming off 8 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 NPS 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 [indiscernible], a specialty chemical distributor headquartered in Spain. In addition, we’re evaluating other promising acquisition opportunities. And 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 supply reliably and safely coupled with the sound product stewardship we provide to our suppliers has allowed us to win new and retain existing market share.
Looking at the end markets. Across all 4 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 managed 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 Pharmaceutical, a 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 solvent capabilities with our technical formulations, we grew our lubricants and metal working 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 saw growth as higher oil prices of accelerated production with increased customer demand for more sustainable solutions in this sector.
The ongoing conflict 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 life cycle 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 million to $260 million and increase our guidance for the full year 2022 to $1.04 billion to $1.08 billion, with resulting in 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 profit at rates greater than general economic consensus. And as such, we 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.
Nick Alexos
Thank you, David. I am pleased to share Univar 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 Nexeo net synergies.
For 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 net working capital use and timing of cash tax payments. Net working 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 2.2x within our stated goal range of 2.0 to 2.5x. 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 8, we’ve aggregated the key metrics across our 4 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.
[indiscernible] 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 U.S.A. and Canada due to operating leverage and declined in the other regions due to lower gross profit margins. Additionally, EMEA’s results were impacted by roughly $9 million in currency headwinds.
Our 2022 outlook reflects a stable end market demand through 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 nonrecurring 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 million to $260 million. And for fiscal year 2022, we’ve increased our adjusted EBITDA guidance to $1.04 billion to $1.08 billion.
We stand by our commitment to reach our 2024 financial goals in 2023, which includes our target of a $960 million adjusted EBITDA, 9-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 work streams which we expect will help moderate and offset downdrafts in the economy. And as we’ve demonstrated in previous downturns, 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 million to $145 million of capital expenditures for 2022. Consequently, we are targeting net free cash flow of $400 million 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?
David Jukes
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 are 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 to the peak 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 ecosurfactants 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 Univar 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 up 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 received in Q2, and we continue to leverage these insights in real time with our function and sales teams to drive an FLS experience while delivering what customers tell us matters most. Additionally, I’m proud to share that our CX efforts received 3 gold and 1 silver award at the first ever U.S. Customer Experience Awards for 2022. Sponsored by the Customer Experience Professionals Association and 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 Univar Solutions’ ongoing dedication to putting the customer at the center of all we do.
As Nick touched upon earlier, as we entered our S22 program, having hit and exceeded the targets we laid out over 2 years ago, we’ve launched the new value capture work streams and delivering optimization and productivity improvements that will reduce our outbound freight, handling and WS&A Additionally, we acquired [indiscernible], 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 2.2x, our borders continue 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 creates 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 site, 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.
At our 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 order tracking capabilities for our private fleet deliveries giving customers additional insights into their delivery and tracking status. And in a program that will improve the customer experience, reduce costs 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, weight tickets, invoices and [indiscernible] along with photos of products to customers electronically at the time of delivery. This is a hugely exciting development and we are rapidly scaling to run at 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 touch points throughout the customer journey that allow us to better understand the customers’ 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 capacitive [indiscernible] 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 addition. 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 investments 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 authorization 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 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, [indiscernible] uncertainties, we’re confident in our strategy, execution and operating agility and have increased our expected 2022 full year adjusted EBITDA guidance in the range of $1.04 billion to $1.08 billion, with resulting net free cash flow between $400 million to $450 million. Additionally, we expect to deliver our 2024 financial targets 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 Univar Solutions. Please stay healthy and safe. And with that, we’ll open it up for your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question today comes from the line of Kevin McCarthy from Vertical Research Partners.
Kevin McCarthy
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?
David Jukes
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 customer 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.
Kevin McCarthy
Okay. And then just a question on capital allocation. You seem to be looking overseas through bolt-on deals such as the [indiscernible] 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?
David Jukes
Well, I mean, we’re an international business. So 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. This is one of them, the Sweetmix 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, leveraging that Nexeo integration muscle that we flexed so successfully over the last few years.
Kevin McCarthy
Okay. And lastly, if I may, for Nick. It sounds like you’re anticipating higher cash conversion in 2023 versus ‘22. 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?
Nick Alexos
Yes. Kevin, thanks. The free cash flow conversion that we quote is create 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.
Kevin McCarthy
Okay. So less of a working capital drag next year kind of gets you back to a more normal glide path?
Nick Alexos
Certainly. Yes.
Operator
This concludes today’s conference. Thank you all for your participation. You may now disconnect your lines.
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