Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Nexeo Solutions, Inc.  (NASDAQ:NXEO)
Q1 2019 Earnings Conference Call
Feb. 07, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to today's webcast. My name is Amanda, and I'll be your web event specialist today. (Operator Instructions)

It is now my pleasure to turn the webcast over to Michael Everett, Vice President, Investor Relations and Treasurer for Nexeo Solutions. Mr. Everett, the line is yours.

Michael Everett -- Vice President, FP&A & Investor Relations

Thank you, operator, and good morning, everyone, and welcome to Nexeo's First Quarter Fiscal Year 2019 Corporate Update. With me today are David Bradley, Chief Executive Officer; and Ross Crane, Chief Financial Officer.

We have released our financial results for the period ended December 31, 2018, including a supplemental slide presentation to accompany this morning's conference call. Both of these items can also be found on our website in the Investor Relations section at nexeosolutions.com.

For today's call, David will begin by providing a brief overview of our operations for the quarter and Ross will then touch on the key financial results. After which, David will return to provide a few closing comments. Immediately after their prepared remarks, we will open the line for Q&A.

As a reminder, on Slide 4, this conference call and webcast presentation may contain forward-looking statements, including statements addressing future financial and operating results of Nexeo and are based on management's current expectations. Actual results may vary materially from the expectations contained in the forward-looking statements. More information about the factors that could cause results to vary from those expressed in the forward-looking statements is set forth in the Company's filings with the SEC.

In addition to disclosing financial results that are determined in accordance with Generally Accepted Accounting Principles or GAAP, the Company also provides certain non-GAAP financial measures. Management believes that providing this additional information is useful to investors to allow them to better assess and understand the operating performance and trends of the business. Reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures can be found in the appendix at the end of the slides.

With that, I will turn the call over to David for his opening comments.

David Bradley -- President & Chief Executive Officer

Thank you, Michael, and good morning, everyone. This quarter, we reported net income of $16 million or $0.21 per diluted share. Adjusted net income was $9.8 million or $0.13 per diluted share. I am pleased to report that we posted our second best fiscal first quarter adjusted EBITDA in Nexeo's history of $40.4 million. While this is down 9% from last year, which was our best fiscal first quarter adjusted EBITDA ever, the pricing cycles for propylene-based products and industrial chemicals were very different last year.

This year, during the first fiscal quarter, our margins for these products were at a cyclical low versus the strong pricing tailwinds we experienced this time last year. Given the difference in pricing environment, the quarters are not directly comparable. It also masks some of the underlying strength of our business. For perspective, over the last five years, Nexeo's first quarter adjusted EBITDA has ranged from 17.5% to 22.5% for the full year total. Given this math, we are confident in our ability to deliver differential adjusted EBITDA growth this fiscal year.

Revenue growth of 1% was achieved through continued strong commercial execution, in an environment where market pricing was mixed, with some commodities experiencing deflation after a sustained period of inflation. We also had some other headwinds during the quarter. At the end of the quarter, we experienced lower demand from customers. Part of the demand weakness was caused by uncertainty in the pricing direction of certain commodities influenced by the decline in propylene and crude oil prices. In addition, macroeconomic factors played a role, including the government shut down, trade uncertainties, and weak industrial production activity in China.

The good news is that demand slowdown we experienced in the last half of December seems to have been temporary as our order patterns in January improved and the pricing environment has improved as well. We remain confident in our business model, powered by our proprietary centralized operating platform, that it will continue to outperform the broader market over long periods of time. As we've said in the past, our business is subject to numerous variables that can cause volatility in any single period, but over the long run, we will continue to outperform.

I'll return for my closing comments shortly, but, first, I'll turn the call over to Ross to take you through the financial results for the quarter in more detail.

Ross Crane -- Executive Vice President and Chief Financial Officer

Thanks, David. Good morning, everyone. Total revenue for the quarter was up slightly, as average selling prices increases in both Chemicals and Plastics were offset by volume declines. The factors David discussed collectively resulted in a gross profit decline of 8%. However, much of this decline was offset by operating expense reductions, which I will come back to later.

In Chemicals, revenue increased 2% as a 5% increase in average selling prices, driven predominantly by specialties or partially offset by volume decrease of 3% year-over-year. Volume decreases were primarily in certain specialty products where there continues to be a shortage of supply, and energy where the significant decrease in crude oil price caused a slowdown in exploration and production activity. Chemicals' gross profit decreased 8% and gross profit margin contracted 130 basis points year-over-year. As David mentioned, we experienced demand slowdown in the second half of December and we benefited last year from the effects of the hurricanes.

In the Plastics business, revenue declined 1% as 3% higher average selling prices were offset by a volume decrease of 4%. Volumes were down 1% in North America as customers waited to determine pricing direction on polypropylene in the second half of December. We also had a strong prior year comparable as a result of the hurricanes. Volume declines of 7% in EMEA and 12% in Asia were the result of both our conscious decision to shed unprofitable business as well macroeconomic factors in those regions. These factors also contributed to Plastics' gross profit decrease of 8% and gross profit margin contraction of 60 basis points.

Total SG&A for the quarter was $80 million, a decrease of 6% or $5 million from the prior year. The decrease was primarily driven by variable incentives and consulting services. As variable incentives reset with the new year-over-year performance targets, SG&A is lower and tracking in line with the normalized run rate I illustrated in our last call. Finally, this quarter's SG&A includes an expense of $2 million related to the Univar merger.

Working capital was $549 million at the end of the quarter, a decrease of $1 million year-over-year and as a percentage of revenue for the trailing 12 months was within our target range at 13.6%. Capital expenditures net of proceeds from asset sales were $5 million in the quarter. We continue to invest in safety and compliance related CapEx until the closing of the merger.

At the end of the quarter, we had total debt outstanding of approximately $854 million and net debt of approximately $800 million. Net leverage was at the high side of our target range at 3.9 times, which is up from 3.5 times in the prior quarter and down from 4.4 times last year. Due to the volume slowdown at the end of December, we finished the quarter with higher inventory levels than we anticipated. However, our leverage is already trending down again in January and we expect to be at 3.5 times or better by the time the transaction closes. Leverage reduction remains our only priority use for free cash flow while the Univar merger remains pending.

At the end of the quarter, total liquidity was approximately $313 million, consisting of $55 million of cash on hand and $250 million of borrowing capacity under our revolving credit facility. Cash paid during the period for interest was $12 million while cash taxes paid during the quarter, net of refunds, were $3 million.

With that, I'll turn it back over to David for his closing comments.

David Bradley -- President & Chief Executive Officer

Thank you, Ross. Posting a strong fiscal Q1 in an environment that includes deflationary pressures and the macroeconomic impacts that have played out in recent months, shows the strength of our operating model and the focus of our employees. Our operating platform and business processes are designed to manage this type of environment and directly contribute to the confidence we have in our outlook.

Shifting gears, I would like to provide an update on the pending merger with Univar. With the most significant regulatory milestones behind us, our team's excitement and eagerness grows in anticipation of combining the most powerful elements of these two businesses. Our next milestone Univar's Special Meeting for a shareholder vote has been scheduled for February 27. Our teams continue to have productive collaboration and integration planning and they are laser-focused on day one priorities, foremost of which is providing a seamless transition for our suppliers and customers.

The merger with Univar comes at a critical time and by combining the best of the best, the united Company will be well positioned strategically and financially to deliver increased value to our shareholders and worldwide industry partners. On the back of the industry-leading proprietary platform, these two outstanding teams will be equipped to provide a differentiated experience for suppliers and customers by delivering true end-to-end solutions.

With that said, until we close, it's business as usual at Nexeo and our partners can rely on the industry's leading service and performance they've grown to expect. Lastly, I want to thank all of our suppliers, shareholders, customers, and employees for their support over the past eight years. It's been an honor to represent their great work as a CEO of this Company.

I'll now turn the call back over to Michael to facilitate the Q&A process.

Michael Everett -- Vice President, FP&A & Investor Relations

Thank you, David. Operator, will you please explain the Q&A process for our listeners.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Jim Sheehan of SunTrust. Your line is open.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Good morning.

David Bradley -- President & Chief Executive Officer

Good morning, Jim.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Can you guys break out -- could you please break out how much of the gross profit decline you had in the quarter was due to lower volumes and how much was due to narrowing spreads?

David Bradley -- President & Chief Executive Officer

Yes, sure. So if you go back to the comments we were making on Chemicals and Plastics, in Chemicals, there was a 5% increase in ASP and a 3% decline in volume and on the spreads, I believe they contracted 130 basis points. So there was a 130 basis points of margin compression. But most of that was volume related, because we couldn't get our hands on some specialty products, primarily in Mexico and the US. They are still on allocation. So there was a bit of a mix issue in Chemicals as well.

On the Plastics side, there was 3% higher ASPs and a 4% volume decrease and that was largely in polypropylene. And a lot of that was volume-driven as you can tell. In EMEA and China, it was just macroeconomic issues. China industrial production is weak and EMEA, it's very mixed with Brexit and all the uncertainty that's going on around that. So -- and their margin contracted 60 basis points and most of that was polypropylene pricing. Does that help?

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Yes, thanks. And on the volume declines, can you comment just qualitatively on how much of the volume decline you think was due to inventory destocking versus lower primary demand levels?

Ross Crane -- Executive Vice President and Chief Financial Officer

Jim, I wouldn't say we've seen a significant change in primary demand levels. Our view is that the back half of December was fairly weak, which we've seen that in the past about five years ago. We saw longer holiday shutdowns leading to lower demand as people let some of that uncertainty play out in the market. Certainly the trade conversations, the drop in crude, the drop in propylene in the back half of the quarter, all played into people's psyche on their buying patterns. And as I said on the call, the reason we believe that is because as we've looked at our January order books and as the New Year has started, it seems to be returning to normal.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Great. And could you explain the impact of commodity price inflation on your margins? Is rapid deflation always negative for margins, all else being equal, or do you recover some margin as sharp pricing decline starts to moderate?

David Bradley -- President & Chief Executive Officer

No, I think what happened this quarter, if you go back over the last six or eight quarters, our margins are running at or higher than our historical average as we capitalized on volatility in the marketplace. When we experienced in the last half of this quarter the rapid deflation, we did see a sequential squeeze due to a couple of reasons. One is, obviously carrying the prevailing inventory value as we run about a 30 day inventory cycle on most of our commodities. And then also, we weren't able to execute our normal playbook in the marketplace with suppliers and it's impossible for me to understand why. I would guess it's one of two things. One, either it was their fiscal year-end and this just hit at a bad time. So they weren't giving us the usual pricing concessions that we would typically get. Or two, quite frankly since the deal was announced, we are no longer a strategic concern from their perspective and so they capitalized on that to hold our buying prices little higher and maximize their profitability. I don't know which, but it's one of those two.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Okay. And then regarding new specialty supplier authorizations, can you share with us any wins in the first quarter and has the merger sped up or slowed down your win rate?

David Bradley -- President & Chief Executive Officer

Yes, we've seen the trend continue. I mean, obviously suppliers are picking and choosing their reaction to the merger. And what I would tell you is that, I think both the Nexeo and Univar team had high expectations for supplier reactions, and their reactions exceeded. Generally people have been extraordinarily positive. We've continued with new authorizations, we've landed four post the merger announcement, which is quite frankly more than I expected going in. So, I am very pleased about the overall market reaction. I do expect that, as this continues, you will see some portfolio shuffling, but by and large, the momentum there is quite good and I'm very satisfied with the response.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thank you very much.

Ross Crane -- Executive Vice President and Chief Financial Officer

Welcome.

Operator

Thank you. And our next question is from the line of the Ian Bennett of Bank of America. Your line is open.

Ian Bennett -- Bank of America -- Analyst

Hi, thanks, guys. And I'm sure it must be kind of bittersweet here as the last public call as a public company and wanted to -- it's been a little bit of a challenge here recently, in this quarter, but wanted to congratulate the whole management team on taking a business and doubling EBITDA under your tenure which is not insignificant. So, hats off to all of you and I look forward to continuing to follow your success.

David Bradley -- President & Chief Executive Officer

Thanks, Ian. I appreciate the comments.

Ian Bennett -- Bank of America -- Analyst

Yes. Wanted to follow-up just on kind of current trends. You mentioned that the softness you had in December, you've seen a rebound and improving in January. Is that becoming less severe declines in volume growth or is it actually improvement here and now we're starting to see better year-over-year comps?

David Bradley -- President & Chief Executive Officer

I think, our position on industrial production over the last two or three years is unchanged. We've been pretty consistent with our view. We've seen periods of what you call a destocking or people holding purchases because of an anticipation of price deflation. Those things happen. We see pretty strong underlying demand. It's not big robust growth, but there are pockets in markets that are performing well. There are pockets in markets that are struggling. It's just the high degree of variability out there. But overall when you look at it, as I've said, our January order book looks pretty good across our portfolio and we think it's kind of returning to that flat to slight growth that we've seen over the last few years and you will make progress in end markets that are stronger and with your overall value proposition.

Ross Crane -- Executive Vice President and Chief Financial Officer

Yes, Ian, I would add that the growth in specialties is still very, very good, which we're encouraged by and pricing has returned to normal, which means comps are up in pricing. So we're very encouraged because we can really leverage our spreads on those higher prices. So we're pretty satisfied with the way January turned out and February looks good, too.

Ian Bennett -- Bank of America -- Analyst

Okay. And some of the margin degradation you called out earlier in terms of some of the specialty allocations, are those still ongoing or expected to be resolved? Just little bit of an outlook on that area of the business?

David Bradley -- President & Chief Executive Officer

Yes, for the most part, they have resolved themselves, either because of high prices creating alternatives in the industry, or new supply coming into geographic regions that were otherwise short. And so I think our view on the overall specialty environment going forward, as Ross said, you'll see a nice mix of strong pricing in growth, but it won't be constrained growth and high-high prices like we've seen probably over the last six months.

Ross Crane -- Executive Vice President and Chief Financial Officer

Yeah. And, Ian, I would add, the very, very specialized products, many of those are still on some sort of allocation or sales control. What I would call the more commoditized specialties, if I can use that term, VAP supply has returned to normal, but those are while still specialties, a little bit lower margin, but at the very high end, there is still sales control and allocation, primarily in North America.

David Bradley -- President & Chief Executive Officer

Yes. We see good specialty demand across both chemicals and plastics, so that just goes to the reinforcing the underlying strength of the market.

Ian Bennett -- Bank of America -- Analyst

Okay. And, Dave, you've made some comments earlier about and granted Nexeo is very unlikely to be a stand-alone company soon, but if Nexeo was confident in being able to grow EBITDA this year and is there anything you'd call out outside of the kind of traditional drivers of this business model in terms of new supplier authorizations and just kind of general growth that would be Nexeo-specific that you would call out as an earning driver for this year?

David Bradley -- President & Chief Executive Officer

No, I think the things that we've talked about to drive earnings this year are the playbook that we've been running. On the commercial side , it's sales force excellence and commercial excellence, winning new supplier authorizations and continue to executing our pricing methodology in the marketplace and supporting our philosophy of the brand extension of our key suppliers. I think the cost side of our business also gives us confidence. As we told you last year, we had a fabulous year from a growth perspective and that we had SG&A resets coming. Ross commented on those. We did see those in the first quarter and we expect them to continue. And then, quite frankly, we are always leveraging our proprietary operating platform to increase our overall productivity. And so I think that will continue, albeit, not in Nexeo, but I think Univar has made a strong commitment to take the best of the best and leverage those Nexeo capabilities to help the combined company succeed and I'm optimistic that they will.

Ross Crane -- Executive Vice President and Chief Financial Officer

And, Ian, I wouldn't discount the fact that we're seeing specialty momentum in both businesses, Plastics and Chemicals. So while we've had most of the authorizations in chemicals, Plastics is growing specialties right now at double digits. And so we're seeing great momentum in specialties.

Ian Bennett -- Bank of America -- Analyst

Excellent. Thanks again, guys, and congrats. Thanks.

Ross Crane -- Executive Vice President and Chief Financial Officer

Sure. Appreciate it, Ian.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Adam -- Laurence Alexander of Jefferies. Your line is open.

Laurence Alexander -- Jefferies -- Analyst

Good morning. Laurence, speaking.

David Bradley -- President & Chief Executive Officer

Hi, Laurence.

Laurence Alexander -- Jefferies -- Analyst

So I guess two questions. One, can you characterize the more exclusive or strategic account wins in terms of what sort of run rate you are seeing or as a tailwind for 2019 compared to 2018? And secondly, can you characterize the level of staff turnover that you are seeing and if there's been any change in the churn since the announcement of the merger?

David Bradley -- President & Chief Executive Officer

Good morning, Laurence. Thank you. From a new authorization, the guidance that we gave people was 1% to 2% unique growth. I don't see any change in that guidance. As I mentioned, we had four new authorizations. We see that being the right level. And as I've told people in the past, if we ever thought that we were accelerating or decelerating, we would change that guidance and we haven't. So I think the 1% to 2% unique growth based on new authorizations is the right way to think about that.

From an employee perspective, I think the reaction to the merger has been phenomenal. I mean, I think they've recognized the strategic opportunity to really create a true global market leader. That's been a key part of our mission since the beginning of Nexeo. I can tell you that David Jukes and his team have done a great job communicating their vision as we work through the planning process toward integration. And the alignment of the two companies has never been better. This is the right time in the history of these two companies this merger to happen and I think you'll see it from all perspectives, including the benefit to the shareholders, the retention of the employees, and most importantly, the value proposition to our suppliers and customers.

Ross Crane -- Executive Vice President and Chief Financial Officer

To put more directly, Laurence, we haven't seen any increase in staff turnover at all. It's actually normal or below normal so far, so we've been very pleased with the response from the team and the hard work they're doing to make this happen.

Laurence Alexander -- Jefferies -- Analyst

Okay, great. Thanks.

David Bradley -- President & Chief Executive Officer

Sure.

Operator

Thank you. And that does conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Michael Everett.

Michael Everett -- Vice President, FP&A & Investor Relations

Great. Thank you, Amanda. As we conclude today's call, I want to remind you that the reconciliations of the non-GAAP measures discussed during our presentation today to the most comparable GAAP measures are included in the appendix to this presentation. A copy of this presentation was included as an exhibit to our current report on Form 8-K we filed with the SEC yesterday afternoon and is also available on our Investor Relations website If you have any questions or feedback regarding the material presented today, please contact Nexeo Investor Relations personnel by email at investor.relations@nexeosolutions.com.

We would, again, like to thank you for your participation in our quarterly update. Now back to the operator.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

Duration: 27 minutes

Call participants:

Michael Everett -- Vice President, FP&A & Investor Relations

David Bradley -- President & Chief Executive Officer

Ross Crane -- Executive Vice President and Chief Financial Officer

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Ian Bennett -- Bank of America -- Analyst

Laurence Alexander -- Jefferies -- Analyst

More NXEO analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.