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spk00: Good morning ladies and gentlemen and welcome to Univars Solutions third quarter 2021 earnings conference call. My name is Emma and I'll be your host operator on this call. Currently all participants are in listen only mode. After the presentation we will conduct a question and answer session. Instructions will be provided at that time. If at any time during the conference call you need to reach an operator please press star followed by zero. I will now turn the meeting over to your host for today's call, Heather Coz, Vice President of Investor Relations and Communications at Univar Solutions. Heather, please go ahead.
spk02: Thank you and good morning. Welcome to Univar Solutions' third 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 third quarter ended September 30th, 2021, and posted to our corporate website at univarsolutions.com a supplemental slide presentation to go with today's call. The slide presentation should be viewed along with the earnings release, which has also been posted on our website. During this call, as summarized on slide 2, we will refer to certain non-GAAP financial measures for which you can find the reconciliations to the most directly comparable GAAP financial measure 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 three, you will see the agenda for the call. David will start with third quarter highlights and end 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.
spk03: Thank you, Heather. Good morning, good afternoon, and good evening to everyone, and thanks for joining our call. With the hard work of integration and systems migration now well behind us, I'm delighted to report another exceptional quarter delivered by a business and a team that's clearly hitting its operational stride. Driven by strong commercial execution and supported by growing customer demand, We delivered strong year-over-year growth despite constrained supply and supply chain challenges. With a focus on growth by putting the customer at the center of all we do, we are fully realizing the value of the next-year acquisition and S22 program. And whilst remaining laser-focused on continued organic growth, we are now exploring inorganic growth opportunities to further leverage our cost structure and digital advantage. Key highlights from the quarter are we delivered exceptional Q3 adjusted EBITDA of $211 million with liquidity nearing $1 billion at quarter end. Our headline sales were up versus prior year as we continued to deliver organic growth. Market share grew in the quarter as evidenced by our positive win-loss ratio and higher retention levels for new customers. With Mexico going live yesterday, our entire SAP migration project has now been successfully completed. We remain on track to deliver on our commitment of $120 million of net synergies from the Nexio integration by quarter one 2022. Our digital investments are delivering real benefits, with 41% of our U.S. customers now registered on our e-commerce channels and able to utilize 24-7 self-service capabilities. Additionally, approximately 23% of U.S. customers are utilizing our digital tracking capabilities, and the amount of orders placed through our digital storefront increased by more than 38% quarter of a quarter. And we strengthened our position in our global specialty end market verticals with several new supplier authorizations in the quarter. With our strong performance and deleveraging goal achieved, we're pleased to announce that the board has authorized a $500 million stock buyback program, which Nick will talk about in detail later. In the third quarter, we continued our trend of outpacing prior year in both sales and margin, due in large part to our committed market position in key products, as well as our extensive network of facilities and the advantage of our own trucking fleet. We believe this quarter was a clear validation of our core value proposition, providing security supply safely to our customers and sound product stewardship to our suppliers. Industrial solutions saw accelerated double-digit growth with strong performance in lubes and metalworking and household and industrial cleaning due to demand and our strategic supply position. Despite challenges in automotive coatings as a result of the microchip shortage, we found new opportunities to grow our case business and deliver new solutions for our customers and suppliers. Personal care and food ingredients continued their trend of double-digit growth. Personal care demand has returned in color cosmetics and skin and beauty care, while in food, growth has come from increased demand in prepared foods and restaurants, as well as the steady shift of consumer preferences towards meatless options. Unforeseen shortages in certain key ingredients have really exemplified our value to customers in both industries, as we've been able to support them with our bespoke formulation capabilities and strong supplier partnerships. Within the general industrial portfolio, we've seen strong demand across the various markets with ongoing strength in chemical manufacturing and the electronics industry. We see increasing demand in mining chemistries from mis-suppressants to extraction chemistries as a result of global efforts to diversify away from fossil fuels. Our extensive organic chemistry portfolio has supported growth in these segments. while the ability to leverage our scale enables us to provide customers with continuity of supply. Although now a much smaller part of our business, we did see growth in energy and oil field chemistries as oil rig counts steadily increased and Brent and West Texas indices reached levels not seen since 2014. In support of their ESG goals, customers are turning to us for new and innovative ways to partner with to ensure sustainable solutions in this sector. Our services business was stable in Q3, despite the ongoing impact of automotive disruptions hampering our performance in this sector. And although waste services has been challenged due to capacity constraints in the industry, we are leveraging our network capabilities to continue to provide full lifecycle product management to the market. For 2021, given our confidence in our execution and our strong performance year-to-date, our adjusted EBITDA guidance for the fourth quarter is $180 to $190 million, and we're once again raising our full-year adjusted EBITDA guidance range to $770 to $780 million. We believe with integration and systems migration in the rearview mirror, we can now fully leverage our asset base, including private fleet and digital capabilities, our improved commercial execution, approach to sustainability, and our streamlined 2022 actions to further positions that continue success into 2022 and beyond. We believe we have the right people, products, tools, and strategy, which we expect will grow our gross profit at rates greater than general consensus of the economy. And as such, we believe we're in a strong position to deliver sustainable, long-term shareholder value. Now let me turn the call over to Nick. He will walk you through our third quarter results and our outlook before I make some closing comments and we get to your questions.
spk04: Thank you, David. Good morning and hello to all. I am pleased to share Universal Solutions Q3 financial results, update you on our business activities, and provide our outlook for the rest of the year. Sales were up 22.8% on a constant currency basis. Excluding results of the exited Canadian agricultural business and district poll from prior year's financials, we estimate net sales to be up 27.9%, whereas gross profit was up 25.1% on a constant currency basis. This growth is primarily due to the impact of chemical price inflation and higher industrial demand. Third quarter adjusted EBITDA of $210.9 million was up by 26.4% on a constant currency basis, adjusting for the exited businesses. The increase was primarily driven by the chemical price inflation, higher industrial demand, and the realization of net synergies. partially offset by higher WS&A. The WS&A was impacted by higher variable compensation, similar to the prior quarter, a higher environmental remediation cost, and certain severance costs. These incremental costs reflect our continued efforts to streamline the business, and all such costs will be embedded in our adjusted EBITDA. For our detailed schedules in the appendix, adjusted earnings per diluted share were 62 cents for the quarter, an increase from 30 cents in the prior year third quarter. Operating cash flows of $123.7 million were significantly higher versus the prior year period, primarily due to higher net income. Net working capital was a significant use as a result of the exceptional growth in sales due to the noted chemical price inflation, and end market demand. Capital expenditures for the quarter were $30 million, and Nexio integration-related expenses were on plan at $15 million. Our ROIC was 12.8% for the quarter, reflecting the strong performance and good asset utilization. And leverage now stands at 2.8 times, which is already below our original S22 year-end target of 3.0 times. On slide eight, we've aggregated the key metrics across our four reporting segments, and we provide further details in the appendix. Except for Canada, sales were higher across all geographies, benefiting from chemical price inflation and higher end market demand. Canada's reported decline was largely due to the exit from our agricultural businesses. We had strong gross profit and adjusted EBITDA growth across all regions. However, margin percentages were lower across all geographies, excluding Canada, primarily due to the higher chemical product costs, other costs as noted, and some inflationary impacts in operating costs. EMEA and LATAM comparative margin changes were greater due to the higher sales in Q3 of 2020 related to products sold in the essential end markets. We remain confident in our ability to execute on our strategies in 2021, and our teams are now fully focused on growth and margin improvement strategies. We have targeted delivered gross profit growth greater than general consensus of the economy, which is currently estimated at 5.8%, as we continue to execute well through supply chain disruptions while servicing robust customer demand amidst product shortages. In addition, our expected NexioNet synergies are $25 million for the year as planned. Accounting for all these factors, as well as Q3 performance, as David mentioned, we are increasing our expected adjusted EBITDA guidance to $770 to $780 million for fiscal year 2021, $60 million higher at the midpoint from our prior full-year guidance, and over 21% higher from the midpoint of our initial guidance for fiscal year 2021. Guidance for our Q4 2021 adjusted EBITDA is in the range of 180 to 190 million, which reflects continued strong trends, yet has two and a half less shipping days than Q3 and the seasonal slowdown. Let's review some of the cash flow highlights for our 2021 outlook. We continue to target networking capital in line with our guidance of 13 to 14% of annualized quarterly sales. However, stronger sales principally driven by chemical inflation in the second half of the year have and will continue to result in a higher use of cash for networking capital versus our prior guidance. While we expect Q4 to be a source of cash following normal seasonal trends, there is an overall higher networking capital requirement foreseen through the end of the year as we service customer demand and principally reflecting the higher values due to inflation. We expect that other expenses will be a cash source due to the higher variable compensation accruals in the current period tied to sales and profits, which will be carried into and paid in Q1 2022. This line item in our summary table of cash flow should typically have a cash use of $35 million as we've guided in the past. Next-year integration expenses, which are not included in our adjusted EBITDA forecast, are expected to be up to $64 million for the year. As mentioned before, this is the final year for our next-year integration expenses. We are expecting approximately $115 million worth of capital expenditures for the year, in line with our initiatives to invest in high ROI projects to increase competitiveness. Consequently, we are targeting net free cash flow of $200 to $210 million for 2021 versus a $290 million midpoint in our prior guidance. Clearly, this is primarily due to an additional $200 million use of cash from networking capital, partially offset by changes in some of the other line items. As we look to 2022 and beyond, and a more stable working capital environment, we continue to expect approximately 50% free cash flow conversion. The net leverage is now expected to be 2.6 times or lower by year 2021 versus our original S22 target of 3.0 times. Given our performance and the leveraging and expectations for good cash flow generation, we are pleased to be announcing an authorized $500 million share repurchase program over the next five years. Share repurchases will be viewed opportunistically, and at a minimum, we will buy back amounts related to executive compensation dilutions. Our strong results for the third quarter reflect solid execution throughout the businesses, and we are excited about our outlook for the full year and beyond. Our teams, every day, continue to drive good performance in challenging environments, and I'm also pleased to have reported the progress we have made against our S-22 and growth objectives. We are continuing to implement our plans to achieve a run rate adjusted EBITDA margin of 9% by the end of the year of 2022. And we intend to provide more details on our expected performance from 2022 through 2024 at our upcoming analyst day on November 16th. David?
spk03: Thank you, Nick. We're excited about the progress of our business strategy and continue to grow our market share in the quarter in both North America and across the globe, supported by a number of new product authorizations. Yesterday, we successfully migrated our Mexico business onto our SAP platform and delivered $5 million of net synergies during the quarter, remaining on track to deliver on our commitment of net synergies of $120 million by quarter one of 2022. Our sole focus now is delivering growth through an effortless experience for our customers, coupled with the technical differentiation and end market expertise that creates more values for customers and suppliers alike. Moving on to S22. To date, we've realized approximately $186 million in gross proceeds from disposals. In quarter four, we expect approximately $6 million from further asset sales in Europe and expect to realize most of our targeted total net pre-tax proceeds. With our strong earnings and our net leverage well below our original year-end goal of three times, we're developing strategies for selective tuck-in acquisitions, principally in the specialty product area. As a start, we've recently signed an agreement to acquire a specialty food ingredient case and pharma distributor in Brazil, subject to regulatory approval, which we will talk more about at our analyst day. We're also pleased to now have specific plans for returning capital to shareholders. Our commitment to being a digital leader continues as we accelerate the omni-channel approach that is essential in today's hybrid working environment, which we expect will accelerate our market share growth as well as drive efficiencies. Our single integrated digital commerce platform at univarsolutions.com enables customers to search, select, source, and self-serve whatever the time of day or night they choose. And it's delivering results as we continue to enhance its capabilities based on customer feedback. For customers seeking the convenience of real-time pricing and instant checkout, we've recently launched that capability for a limited number of products, allowing visitors to purchase from us directly online in less than five minutes. Based on the initial success, we now plan to quickly expand the number of products available. Quarter over quarter, sequentially, we've seen a 27% increase in document downloads and a 38% increase in orders placed through our digital commerce channels, with our platforms now active across the Americas and Northern Europe. Our digital vision is clear, and we're beginning to realize the benefits of these capabilities as a source of sustained competitive advantage as we follow our customers throughout their buying journey, meeting them wherever, whenever, and however they want to buy. We continue to invest in our customer experience, leveraging the insights from our net promoter scores. Our overall scores through September remain good, and we registered improvements across all regions in Q3. with the U.S. hitting their highest monthly score. We are listening to customers' feedback and adjusting or developing processes accordingly, whilst building out the effortless experience we believe our customers deserve. To support this, and using our advanced analytics capabilities, we've accelerated the development of our Customer 360 predictive insights tool, which allows us to follow an individual's customer experience and get ahead of any issues that might be surfacing. It also serves as a good guide for prioritizing overall process improvements and is already operating with 70% accuracy. Altogether, our digital investments and customer-centric approach is designed to maximize the effectiveness and scale of our operations, turning data into a strategic asset, making it easier for customers and suppliers to do business with us. Moving to ESG. We've made strides with our agenda and path towards carbon neutrality by 2050. Highlights this quarter include new supplier authorizations for a variety of more environmentally friendly ingredients and solutions, continued investments in projects to reduce our carbon footprint in line with our net zero commitments, raising consciousness by rolling out an all-employee sustainability training program, continuing to put safety first, which is evidenced by our world-class safety record, and continue to advance our diversity, equity, and inclusion goals by leveraging technology designed to mitigate unconscious bias from our hiring practices. ESG is a priority for us, understanding that it's our home, our responsibility. It touches each of our core values and aligns with our vision to redefine distribution and be the most valued chemical and ingredient distributor on the planet, as well as being better stewards of Earth's resources. So before we come to your questions and to summarize, we delivered exceptional Q3-adjusted EBITDA while realizing our purpose to help keep our communities healthy, fed, clean, and safe, even during challenging times. we have again raised our four-year adjusted EBITDA guidance, this time to $770 to $780 million. We remain on track to achieve our commitment of $120 million in net synergies by quarter one 2022. We're investing in furthering our digital advantage, which we believe is becoming increasingly attractive to customers as well as driving efficiencies. The S22 program is tracking very well toward delivering divestment proceeds, lower leverage, and 9% EBITDA margins by year-end 2022 through global and functional excellence. We plan to use our cash to fund growth initiatives through a combination of high ROI capital investments, selected, accretive, both on acquisitions and return of capital to shareholders, initially with our newly announced $500 million share repurchase. Our focus remains on our strategic priorities, bringing the customer at the center of all we do and working to take full advantage of every opportunity to drive growth. We believe this course's results again evidence that our strategy is working. getting momentum, and we see plenty of opportunities for both organic and inorganic growth right across our portfolio. We believe the company's position to deliver enhanced shareholder value and plan to provide a greater outlook on our strategy, as well as our plans beyond 2022 at our upcoming Virtual Analyst Day event on November the 16th. Thank you for your attention. Please stay healthy and safe. And with that, we'll open it up for your questions.
spk00: Thank you. At this time, if you'd like to ask a question, simply press star followed by number one on your telephone keypad. If you'd like to withdraw your question, please press star followed by the number two. Please limit yourself to one question and one follow-up. Please hold while we compile a Q&A roster. Our first question today comes from Bob Court from Goldman Sachs. Please go ahead, Bob. Your line is now open.
spk08: Thank you. Good morning. David, I'm curious on the share purchase, and you intimated it was an initial return of capital, maybe that's an ongoing effort in the future, but how do you balance that versus tuck-in deals? You know, when I look at your stock, it looks like it's a two- or three-turn discount to your nearest peer, so it seems cheap, but I would also guess the appeal of integrating tuck-ins is pretty high as well. So how do you compare and contrast what to do with that capital?
spk03: Thanks for the question, Bob. First of all, I think we're delighted that we're in this position, that we're having a conversation about what our options are with our cash. We've successfully got the leverage down to below three, which is our year-end target, and that 2.8 this quarter and 2.6 for the year-end is a very encouraging number. I mean, our focus has been on maintaining strong liquidity and deleveraging, and our priority now becomes looking at how we invest in growth in high ROI capital projects, and then accretive tuck-in M&A opportunities. But really, being in a position to return capital to shareholders, starting with that $500 million buyback is also a priority. We need to balance those two things. We'll talk a bit more about that in our analyst there on November the 16th, but I'm just delighted to be in this position.
spk08: Can I ask you on Nexio, when you look back on it now, What would you have done differently in hindsight?
spk03: I wouldn't have integrated it during the global pandemic, but we did. We migrated the systems very successfully. People didn't think we could do that. We did that very successfully to the teeth of a pandemic. We're now benefiting from that single SAP instance. I think we integrated that business pretty well given the conditions that we were in. And certainly we see that deal now really, you know, paying off. It's really, as we hit our operational stride, we really see the benefits of that deal paying off.
spk08: And one last quick one. You mentioned taking market share and you have a national presence that really gives you a competitive advantage. Can you quantify that market share capture? And then how do you ensure, I think, post-pandemic, you had some unique sales opportunity that maybe you didn't have the permanent traction on some of those sales. So how do you make sure you convert this market share gain during these supply chain problems into permanent market share? Thanks.
spk03: Well, we're very, very pleased with our commercial execution. I think we're very happy with how the organization is operating today. It's operating with much greater agility. And now with a singular focus on having the customer at the center all we do, that helps retain customers through the good and bad times. Our NPS score and our focus on customer experience, those predictive insights tools, those are all things to make sure that we really give customers a great experience. and that we become, you know, that effortless experience will become the easy button for them. So our win-loss ratio is improving. Our customer retention is improving. That's how we would demonstrate, you know, our market share. But really focusing on our customers and their experience with us and adjusting our processes accordingly. And then really adjusting our selling model because, you know, who knows how customers are going to want to buy today and in the future. It's a hybrid working environment. So adjusting our selling model so now we're meeting them where they want to buy, wherever that happens to be. I think that's a great driver of opportunity and share growth for us.
spk00: Our next question today comes from Josh Spector from UBS. Please go ahead, Josh. Your line is now open.
spk01: Hi, guys. Thanks for taking my question. I apologize if I missed this, but did you give any thoughts on what you'd say normalized EBITDA is here? I mean, clearly you broke that up separately last quarter. I don't know if any of your thinking has changed in terms of what's sustainable, what's not, and bridging into 22.
spk03: Josh, thanks for the question. I think that You know, giving guidance, we're not giving 2022 guidance, are they? That's something we'll share a bit more about at our Investor Day. But clearly, since Q2, chemical price inflation has continued demand. has remained strong and we've got more confidence in our commercial execution. So it's difficult to give an exact number, but we'd say something in the $7.25, $7.35 range of the base rate is probably where we'd think at the moment.
spk01: Great. No, that's really helpful. And I guess kind of related with that is your gross profit to EBITDA conversion increased pretty meaningfully sequentially in year over year. You're above 34% now versus you've averaged closer to 33. I guess kind of understanding there's a lot of moving pieces underneath that. Is there anything that you could point to that drove that step up in terms of your execution sequentially year over year? And where do you ultimately see that conversion perhaps getting to? I mean, your 9% target has something implied in there, but I think there's still a gap versus peers. So curious what you see in the runway on that metric.
spk03: Well, again, Josh, I think we're going to share a bit more about that at the Investor Day. We'll give you some ideas and some metrics on that. But we do see a tremendous opportunity to leverage our asset base. We have an installed asset base. We have our own fleet of trucks. And we see great opportunities to leverage that further, particularly as we think about providing more sustainable solutions and working with our supply partners to help them support their ESG goals. We also have a very fast-growing specialty and market business. I mean, our specialty business is growing incredibly well. We spoke about our food business and our beauty care business growing double digits. All that adds to the mix. But we'll share much more about that at the Investor Day.
spk01: Got it. Thanks. I'll look forward to that event in a couple weeks. Thank you.
spk03: And we look forward to seeing you, albeit virtually.
spk00: Thank you. Our next question today comes from Laurent Favre from Exxon BNP Paribas. Please go ahead, Laurent. Your line is now open.
spk07: Yes, good morning all. David, you just talked about the double digit growth in food and beauty. I was wondering if you had a number overall for, I guess, focused industries or for so-called specialties for Q3?
spk03: Yeah, thanks for the question. I think we're going to share a lot more about that and how we see the business and maybe the universe solutions that you don't know at the investor day. I think there are some interesting and some meaningful trends that we would like to share with you in some detail. So I think we'll share a lot more about that at investor day.
spk07: Are you thinking of getting a bit more disclosure around specialties versus non-specialties the way, I guess, most of your peers are doing it?
spk03: Well, I think it's a lazy and inaccurate description of us to put it in the commodity basket. We have a substantial specialty business, and we're going to be showing that and showcasing that at the investor day.
spk07: Excellent. Thank you. And maybe as a follow-up, When we look at a bridge between, I guess, the 695, which was the midpoint of the normalized EBITDA you provided three months ago, and the new one that's around 730, should we assume that your cruelty or viable compensation has also increased? Or is it mostly the better underlying structural, I guess, conditions that accounts for it?
spk03: I think, as we said some moments ago, The demand remains very strong. Chemical price inflation has continued through the end of the year. It looks like it will continue into 2022. And we're really hitting our operational stride. And so I think those things give us more confidence about the numbers that we will achieve in 2022 and beyond.
spk07: Excellent. Thank you, David. Thank you.
spk00: Our next question today comes from Kevin McCarthy from Vertical Research Partners. Please go ahead, Kevin. Your line is now open.
spk08: Yes, good morning. My first question relates to your earnings cadence. Obviously, the third quarter results came in quite a bit better than you would have anticipated in early August. And so I'm wondering, are there particular regions or product lines that performed much better in August or September than you had expected that would be worth calling out? Or is it rather the case that the macro forces on a top-down basis are lifting virtually all of your businesses to a higher level than you would have anticipated?
spk03: Thanks for the question, Kevin. I think we are executing very well across all our lines of business. Our commercial execution really is incredibly strong these days. And our installed asset base and our fleet of trucks really does give us an advantage. And, of course, our great supply relationship gives them an advantage when supply chains are dislocated. Now, Hurricane Ida dislocated supply chains, which is something we didn't anticipate going into Q3. And also, you know, we thought that maybe some of the supply chain disruption on globally traded products may have unblocked itself, and it didn't. It got worse. So I think we were in a very good position, and we now are commercially and operationally agile enough to make the best of that very good position to deliver what I think was a record performance.
spk08: And then as a follow-up, if I look at your guide for EBITDA in the fourth quarter, it seems to imply a sequential decline of between $20 and $30 million. Would you describe that as normal seasonality based on the portfolio as it's now configured, or are there particular headwinds or tailwinds that you see that would create a different sequential pattern than normal seasonality would suggest.
spk03: No, Kevin, I think we see very good, you know, continued good execution and continued strong demand, although, you know, clearly the supply chains are still challenged. And we got two and a half days less in Q4 than we had in Q3. And typical seasonality would add another 20 million roughish number on that. So if you take those two, we're actually, you know, slightly above what would be a normal run rate.
spk08: Okay. Thank you very much.
spk00: Thank you. Our next question today comes from David Beglota from Deutsche Bank. Please go ahead, David. Your line is now open.
spk05: Thank you, David. Good morning. Sorry to hop on this again, but I may have missed this. The chemical price inflation this year, what do you think it added or is adding to EBITDA? And if and when chemical prices moderate or roll over, do you give all that back?
spk03: Hi, David. Thanks for the question. I mean, it's hard to put a number on chemical price inflation for this year. You know, I think within our kind of normalized guidance of 725, 735, or not guidance, but kind of base mark, we're thinking of, you know, some stock profits, you know, offset by some one-time costs and some higher executive comps. So we think some of those stock profits go away into next year. But we've got some offset and we can still continue to grow our business. You know, I think that what we are right now is, you know, particularly agile and particularly commercially agile. So I feel very confident about our ability to manage price on the way down, as well as we've managed price on the way up. But, you know, clearly on the way up, there is some stock profits built into the number, but that's factored in this kind of offset of of higher executive comp and some other one-time costs is in that kind of 725, 735 baseline. Very good.
spk05: And just next year working capital, how much, what do you expect to be a source of working capital next year?
spk04: Well, I'll take that, David. Next year, we obviously expect to have a more normalized working capital level. The increase in the current period, obviously driven by the chemical price inflation, and the strong sales performance. As we go into next year, we would expect a normalized working capital flow and then the benefit from the other elements of the balance sheet. We do call out some of the puts and takes on the other expense item, which is benefiting us in this quarter, but will be a use next quarter. But our target is to very, very much get to a 50% free cash flow conversion off of an adjusted EBITDA, which we've spoken to and referenced over the last year plus. And certainly we expect that realization into next year. From a working capital standpoint, our target is to be in that 13% to 14% of each quarter's annualized sales. We're a little bit above that this quarter. We expect to get down below that 14% by the end of the year and stay in that range going into next year. Thank you very much.
spk00: Our next question today comes from Lawrence Alexander from Jefferies. Please go ahead. Your line is now open.
spk06: Good morning. Thanks for taking the question. It's for Lawrence. As you look for the EBITDA margin of 9% in 2022, is that still achievable if we do hit a inflationary environment next year?
spk03: Hi, Dan. Thanks for the question. We're very pleased with the way we're executing, very pleased with how the business is right now hitting its commercial stride and its operational stride. So we still feel very confident about achieving that 9% margin target.
spk06: And then you're kind of pivoting to cash deployment as your balance sheet is more in line with what you want. I mean, Has there been talk with the board of just about a dividend at all, or are you just sticking with M&A and sharing your purchases?
spk03: Well, as I think I said some moments ago, you know, our priorities, we'll share a bit more about our priorities for cash on the investor day. You know, our priorities, I mean, firstly, we're delighted to be in this position. I mean, to get to this target ahead of schedule is very credible. and just take a moment to enjoy that. We will prioritize high ROI capital investments. We see good opportunities for inorganic growth for tuck-in acquisitions like the one we just announced. We hope to be completing subject to regulatory approvals in Brazil. The share buyback is an initial share buyback, and then we'll consider dividends as part of that capital allocation strategy. But that's something we'll engage with our shareholders on more as we get through the process.
spk06: Thank you very much.
spk00: Our next question today comes from Steve Brands. Please go ahead. Your line is now open.
spk09: Yes, thank you. David, I wanted to ask you whether your view is that the suppliers that you have had relationships for a long time, whether there's a trend towards more outsourcing or maybe less outsourcing to third-party distribution. And I ask because some of the coding companies have been frustrated with transportation issues and have pulled more distribution in-house. And I was curious what you're seeing and whether that's a favorable trend for you.
spk03: Steve, yeah, thanks for the question. A couple of things. I mean, I think that we do see more opportunities for outsourcing for producers. You know, I do think there's a difference between distributors who own their own fleet and those who go out to third parties. We own our own fleet. That gives us a distinct advantage from so-called asset-light distributors who have to go out to third parties and fight in the marketplace. And so I think we have a distinct advantage there, and I think we've demonstrated that distinct advantage over recent months. I think also we have a big part to play in helping our supplier partners with their ESG strategies. And so we're thinking about how we align, how we realign supply chains to make them more sustainable. And I think that installed asset base we have, as well as having that fleet of trucks, really is an advantage for us.
spk09: And can you comment on your trends for share gains from both of your supplier end of the platform as well as the customer end? And which end is more effective for you to gain share by convincing your suppliers to allocate more products to you or to pursue more wallet share at your customers?
spk03: Steve, we have a full line card of opportunities and solutions. I mean, we have a lot of runway to drive growth. And so, you know, we like a new supplier authorization, particularly in that specialty area where the chemistry may be or the ingredient may be exclusive because, you know, it comes almost as an annuity because the molecule will be specified in a formulation. And so that gives us an instant hit of growth. But you only get those and you only keep those if you're growing with your customers. So really we have to do both. We have to grow on both sides. We can't dissatisfy our suppliers, otherwise they won't stay with us. As you appreciate, it's a competitive marketplace. But also by having that growth of customers, by having those strong customer relationships, it enables more business to come from suppliers. So we really have to be able to demonstrate and create value on both sides. And we wake up every day thinking about how we create value on both sides because it can't be just a one-sided game.
spk09: Thank you.
spk00: Our next question today comes from Michael McGinn from Wells Fargo. Please go ahead. Your line is now open.
spk08: Hey, morning, everybody. Thank you for the question, Greg Corder. I was wondering if I could ask about the ERP. Is there a framework that you guys think about following the full completion integration, whereas a dollar of sales previously would have led to you know, 20 cents of SG&A creep, or now that's more your fixed costs are more fixed in nature and, you know, how that plays into, you know, your long-term EBITDA margin guidance.
spk03: Hi, Michael. Thanks for the question. I think, you know, let's just celebrate that we've moved the Americas onto SAP and didn't crater the business in the process. And we did that in the teeth of a pandemic. I think that's, you know, I think that's a great thing. Now we have SAP. We now look to see how we can optimize that. And so that's the next phase of work that we do. I think we've already had some benefits by taking out manual intervention through our processes. But we see tremendous opportunities to get operating leverage through that SAP platform. And that was just part of our streamline and our digitalization efforts. And so we can really reduce our OPEX to gross margin as we continue to grow the business, but really focus on that customer experience. So I think there's real opportunities for us to streamline our processes. And as we streamline our processes, that reduces our costs, but also makes it easier to buy from. So it becomes entirely a virtuous thing to do. And that's a key priority for us right now.
spk08: Great. And then more of a simplistic modeling question. Can you talk – historically, you've seen a strong ramp into year-end with your Canadian business. Do you still see that with the pricing momentum, or is it potentially less of a sequential factor here given the recent divestitures?
spk03: Well, I think you're relating to cash. and that was prepayments in the ag business, which we no longer own, so we won't see that. So everything now is about our core chemicals and ingredients business and, you know, managing that business, you know, sequentially better and better every day.
spk08: Okay. And then maybe if I could sneak one more in on – The freight has been a big topic thus far. Is there a way to characterize your lead times or your transit times on time delivery relative to the industry? And has that gap sparked conversations for strategic account ads, someone who may have been a spot-by customer in the past?
spk03: So, I mean, I think on-time delivery into us from suppliers has been – has deteriorated through this year. But our on-time delivery to customers hasn't. So, you know, I think we've been challenged. We remain challenged by supply coming into us. But we have a network of operations, you know, nationally and internationally that means that we can move products, you know, I'm happy. Our NPS score, our customer experience is really important to us. And on-time delivery is a key metric that we track on-time against first commit as well as on-time against last commit. And so we have a lot of investments and efforts to improve that. and to turn an imperfect supply chain into us, into a perfect supply chain for our customers, that's part of the value proposition of managing the complexity of the chemical ingredient business that I think we do very well at.
spk08: Thank you. Appreciate the time.
spk00: Just as a reminder, if you would like to ask a question today, please press star followed by one on your telephone keypad. Our next question is a follow-up from Kevin McCarthy from Vertical Research Partners. Please go ahead, Kevin. Your line is now open.
spk08: Great. Thanks for taking my follow-up. I wanted to ask about your inventory balance. If I look at the last five years or so, what we've typically seen in the third quarter is a sequential decline of between 3% and 8%. And what happened this time was a sequential increase of 7%. So my question is, is that just simply the effect of inflation flowing through, Nick, or were you able to rebuild inventory levels at all on a unit basis to help ease some of the supply constraints that everyone's been talking about?
spk04: Yeah, a couple of things, Kevin. One, you've got the differential of ags. which had a significant seasonal effect in prior years. And then otherwise versus our expectations for the year, it's the chemical inflation, which has been value reflected in the inventory. We manage inventory very tightly, very close to customer demand, certainly making sure we can satisfy demand as needed in the marketplace. And we don't expect any variability, you know, beyond, you know, the historical levels going forward.
spk08: Okay. And then I had a clarification question on your new repurchase program, which is great to see, by the way. In the press release, it references a period of five years, and at the risk of hair splitting, is that your intended pace of execution, or is that simply a reference to the validity of the authorization and your pace of execution would be something different than that?
spk04: well kevin sick again i would say first and foremost this has been a great milestone for the company uh we're very pleased to be in position with our leverage our cash flow and operating execution uh to begin a program of returning capital to our shareholders so i would just take it on its face as represented uh clearly we expect to be opportunistic while we also balance all other capital requirements for the company, as David mentioned earlier, strategically, operationally, as well as other considerations, which we'll talk about in a couple weeks at our virtual investor day.
spk08: All right. We shall tune in. Thank you very much. Thanks, Kevin.
spk00: We currently have no further questions today, so I'll hand the call back to Heather Cos for any closing remarks.
spk02: Thank you, ladies and gentlemen, for your interest in Unibar Solutions. We hope to see many of you at our virtual analyst day on November 16th. If you have any follow-up questions, please reach out to the investor relations team. This does conclude today's call.
spk00: Thank you for joining today's call. You may now disconnect your lines.
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