Earnings Transcript for UNVR - Q3 Fiscal Year 2021

Operator: Good morning, ladies and gentlemen. And welcome to Univar Solutions Third Quarter 2021 Earnings Conference Call. My name is Anna, and I will be your host operator on this call. Currently, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] I will now turn the meeting over to your host for today’s call, Heather Kos, Vice President of Investor Relations and Communications at Univar Solutions. Heather, please go ahead.

Heather Kos: 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 30, 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 two, 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 two, 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 updates. And then David will close with progress on our business strategy. Following that, we will take your questions. With that, I will now turn the call over to David for his opening remarks.

David Jukes: 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 citizen’s migration now well behind us, I am delighted to report another exceptional quarter, driven by a business and a team that’s clearly getting its operational stride. Driven by strong commercial execution and supported by growing customer demand, we have delivered strong year-over-year growth, despite constrained supply and supply chain challenges. And the focus on growth by putting the customer at the center of all we do, we are fully realizing the value of the Nexeo acquisition, an excellent teaching program and whilst remaining largely 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 have 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 continue to deliver organic growth. Market share grew in the quarter as evidenced by our positive win loss ratio and high 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 commitments the $120 million of net synergies from the Nexeo 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 24x7 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 store fronts increased by more than 38% quarter-over-quarter. And we strengthened our position in a global specialty end market with several new supplier authorizations in the quarter. With our strong performance and deleveraging gold achieved we are 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 continue 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 facilities and the advantage of our own trucking fleet. We believe this course 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 metal working and household and industrial cleaning due to demand in our strategic supply position. Despite challenges in automotive due to the result of the microchip shortage, we found new opportunities to grow our case business and deliver a 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 food growth has come from increased demand in prepared foods and restaurants, as well as a steady shift in consumer preferences towards meatless options. Unforeseen shortages in certain key ingredients have rally exemplified our value to customers’ in both industries, as we have been able to support with our bespoke formulation capabilities and strong supplier partnerships. Within the general industrial portfolio, we have 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 mix 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 could see growth in energy and oil field chemistry as oil rig counts steadily increased and Brent on West Texas indices reach levels not seen since 2014. In support of their ESG goals, customers are turning to us for new and innovative ways to partner with them 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 and our execution and our strong performance year-to-date, our adjusted EBITDA guidance for the fourth quarter is $180 million to $190 million and we are once again raising our full year adjusted EBITDA guidance range to $770 million 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 position us for continued success into 2022 and beyond. We believe we have the right people, products, skills and strategy, which we expect will grow the gross profit of range greater than the general consensus of the economy, and as such, we believe we are 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 will get to your questions.

Nick Alexos: Thank you, David. Good morning and hello to all. I am pleased to share Univar 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 Distrupol from the 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. WS&A was impacted by higher variable compensation similar to the prior quarter, a higher environmental remediation costs 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 a detailed schedules in the appendix adjusted earnings per diluted share was $0.62 for the quarter, an increase from $0.30 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 Nexeo integration related expenses were unplanned at $15 million. Our ROIC was 12.8% for the quarter reflecting the strong performance and good 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 have aggregate 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 have 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 compared 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 Nexeo net 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 million 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 million to $190 million, which reflects continued strong trends yet has 2.5 plus 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 net working capital in line with, 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 from net working capital versus our prior guidance. But we expect Q4 to be a source of cash following normal seasonal trends, there is an overall higher net working 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 these 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 have guided in the past. Nexeo integration expenses, which are not included in our adjusted EBITDA focus are expected to be up to $64 million for the year. As mentioned before, this is the final year for our Nexeo 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 million to $210 million for 2021 versus a $290 million midpoint in our prior guidance. Really 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, in 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 end 2021 versus our original S22 target of 3.0 times. Expectations for good cash flow generation, we are pleased to be announcing and authorize $500 million share repurchase program over the next five years. Share repurchase will be viewed opportunistically, and at a minimum, we will buyback amounts related to executive compensation dilution. Our strong results in 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 am also pleased to have reported the progress we have made against our as S22 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 to 2024 at our upcoming Analyst Day on November 16th. David?

David Jukes: Thank you, Nick. We are 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 products 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 commitments 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 value for customers and suppliers alike. Moving on to S22, to-date we have realized approximately $196 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 our net leverage is well below our original year end goal of 3 times we are developing strategies for selective tuck-in acquisitions principally in the specialty products area. As a start we have 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 are also pleased to now have specific plans for returning capital to shareholders. Our commitment to being a digital leader continue as we accelerate the omnichannel approach that is essential in today’s hybrid working environment and which we expect to accelerate our market share growth, as well as drive efficiencies. Our single integrated digital commerce platform univarsolutions.com enables customers to search, select, source and self-serve whatever the time of day or night they choose and its 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 have 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 see a 27% increase in document downloads and a 38% increase in orders placed through our digital commerce channels, but our platforms now active across the Americas and Northern Europe. Our digital vision is clear and we are 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 score through September remained good and registered improvements across all regions in Q3, with the U.S. hitting the highest monthly score. We are listening to customers’ feedback and adjusting all developing processes accordingly, whilst building out the effortless experience we believe our customers deserve. To support this and using our advanced analytics capabilities we have accelerated the developments 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 strategic assets, making it easier for customers and suppliers to do business with us. Moving to ESG, we have made strides with our agenda and path towards carbon neutrality by 2050. Highlights this quarter includes, 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 evidence by our world-class safety record and continue to advance on diversity, equity and inclusion goals by leveraging technology designed to mitigate unconscious bias from our hiring practices. ESG is a priority for us, understanding with our home, our responsibility, it touches each of our core values and aligns with our vision to really find distribution and be the most valued chemical and ingredients distributed 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 focus to help keep our communities healthy, fed, clean and safe even during challenging times. We have again raised our full year adjusted EBITDA guidance, this time to $770 million to $780 million. We remain on track to achieve our commitments of $120 million in net synergies by quarter one 2022. We are 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, selective accretive bolt-on acquisitions and return of capital to shareholders initially with our newly announced $500 million share repurchase. Our focus remains on our strategic priorities, putting the customer at the center of all we do and working to take full advantage of every opportunity to drive growth. We believe this causes result, again, evidence that our strategy is working, getting momentum and we see plenty of opportunities of both organic and inorganic growth right across our portfolio. We believe the company’s decision 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 events on November the 16th. Thank you for your attention. Please stay healthy and safe. And with that, we will open it…

Operator: [Operator Instructions] Our first question today comes from Bob Koort from Goldman Sachs. Please go ahead, Bob. Your line is now open.

Bob Koort: Thank you. Good morning. David I am curious on the…

David Jukes: Hi, Bob.

Bob Koort: …on the share purchase and you intimated it was an initial that versus tuck-in deals, when I look at your stock, it -- look, it’s a 2 turn or 3 turn discount to your tuck-in is pretty high as well, so how do you compare and contrast, what to do with that capital?

David Jukes: Hey. Thanks for the question, Bob. First of all and I think we are delighted that we are in this position, that we are having a conversation about what our options are with our cash. We have successfully value and target and that’s 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 and high ROI capital projects and accretive tuck-in M&A opportunities. But really being in a position to return capital to shareholders starting with about $500 million buyback is also a priority. We need to balance those two things. We will talk a bit more about that in our Analyst Day on November the 16th, but I am just delighted to be in this position.

Bob Koort: Can I ask you on Nexeo, when you look back on it now, what would you have done differently in hindsight?

David Jukes: 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 receive SAP instance pretty well given the conditions that we were in. And certainly, we see that they are now really paying off. It’s really -- as we hit our operational stride, we really see the benefits of that deal paying off.

Bob Koort: And one last quick, 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 didn’t -- 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 in the permanent market share? Thanks.

David Jukes: Well, we are very, very pleased with our commercial execution. I think we are very, very happy with how the organization is operating today. It’s operating with much greater agility and now with a singular focus [Technical Difficulty] times. Our NPS score [Technical Difficulty] 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 -- that effortless experience become the easy button for them. So our win loss ratio is improving, our customer retention is improving, that’s how we would demonstrate 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 who knows how customers are going to the hybrid working environment, so adjusting our selling model. So now we are meeting them what they want to buy, wherever that happens to be. I think that’s a great driver of opportunity and shared growth for us.

Operator: Our next question today comes from Josh Spector from UBS. Please go ahead, Josh. Your line is now open.

Josh Spector: Yeah. Hi, guys. Thanks for taking my question. I apologize if I missed this. But did you give any thoughts on what you would say normalized EBITDA is here? I mean clearly you brought that up separately last quarter. I don’t know if any you were thinking has changed in terms of what’s sustainable, what’s not and breaking into 2022?

David Jukes: Josh, thanks for the question. I think that giving guidance. We are not giving 2022 guidance today, that’s something we will share a bit more about at our Investor Day. But clearly since Q2 chemical price inflation has continued, demand has remained strong and we have got more confidence in our commercial execution. So it’s difficult to give an exact number, but we would say, something in the $725 million, $735 million range as a base rate is probably where we think at the moment.

Josh Spector: Great. That’s really helpful. And I guess kind of related with that is, your gross profit-to-EBITDA conversion increased pretty meaningfully sequentially and year-over-year down 34% now versus the average closer to 33%. I guess kind of understanding there is 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 9% target has something implied in there. But I think there’s still the runway on that metric?

David Jukes: Well, again, Josh, I think, we are going to share a bit more about that at the Investor Day. We will 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 fleets 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 provide to help them support their ESG goals. We also have a very fast growing specialty end 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 will share much more about that at the Investor Day.

Josh Spector: Got it. Thanks. I look forward to that event in a couple of weeks. Thank you.

David Jukes: And we look forward to seeing you albeit virtually.

Operator: Thank you. Our next question today comes from Laurent Favre from Exane BNP Paribas. Please go ahead, Laurent. Your line is now open.

Laurent Favre: Yes. Good morning, all. David you just talked about a double-digit growth in food and beauty. I was wondering if you have a number overall for, I guess, focused industries or for so-called specialties for Q3?

David Jukes: Yeah. Thanks for the question. I think we don’t share more about that and how we see the business and maybe the Univar 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 will share a lot more about that at Investor Day.

Laurent Favre: Are you thinking of getting a bit more disclosure around specialty versus non-specialty the way I guess most of your peers are doing it?

David Jukes: Well, I think, it’s been -- I think it’s a lazy and an accurate description of us to put it in the commodity basket. We have a substantial specialty business and we are going to be showing that and showcasing that at the Investor Day.

Laurent Favre: Excellent. Thank you. And maybe as a follow-up, when we look at the bridge between, I guess, the 695, which was the midpoint of the nominated EBITDA you provided three months ago and the new one at around 730. Should we assume that viable your accruals will be mostly the better underlying structural like I said conditions accounts …

David Jukes: Yeah. Value -- 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 are 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.

Laurent Favre: Thanks. Thank you, David. Thank you.

Operator: Our next question today comes from Kevin McCarthy from Vertical Research Partners. Please go ahead, Kevin. Your line is now open.

Kevin McCarthy: 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 am wondering, are there particular regions or product lines that performed much better in August or September than you had expected that it 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?

David Jukes: Thanks for the question, Kevin. I mean, look, 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 fleets of trucks really does give us an advantage, and of course, our great supply relationships gives us -- gives them an advantage when supply chain is dislocated. Now Hurricane Ida dislocated supply chains, which is something we didn’t anticipate going into Q3. And also have unblocked itself and it didn’t it got worse. And so I think we were -- we are just -- 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.

Kevin McCarthy: 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 million and $30 million. Would you describe that as normal seasonality based on the portfolio as is now configured or are there particular headwinds or tailwinds that you see that would create a season -- different sequential pattern than normal seasonality would suggest?

David Jukes: No. Kevin, I think, we see very good -- continued good execution and continued strong demand, although clearly the supply chains are still challenged and we got 2.5 days less in Q4 than we had in Q3 and typical seasonality would add another $20 million rough-ish number on that. So if you take those two, we are actually slightly above what would be a normal run rate.

Kevin McCarthy: Okay. Thank you very much.

Operator: Thank you. Our next question today comes from David Begleiter from Deutsche Bank. Please go ahead, David. Your line is now open.

David Begleiter: Thank you, Dave. Good morning. It’s sort of happens again, but I may have missed it. The chemical price inflation this year, what do you think it added or is adding to the EBITDA, and if and when chemical prices moderate or rollover, do you give all that back?

David Jukes: Hi, David. Thanks for the question. I mean, it’s hard to put a number on chemical price inflation for this year. I think within our kind of normalized guidance of $725 million, $735 million or not guidance but kind of benchmark, we are thinking of some stock profits plugged with some offset by some one-time costs and some higher executive comp. So, we think some of those stock profits go away into next year, but we have got some offsets and we can still continue to grow our business. I think that what we are right now is 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 have managed price on the way up. But clearly on the way up there is some stock profits built into the number, but that’s factored and kind of offsets of higher executive comp and some of the one-time cost is in that kind of $725 million to $735 million baseline.

David Begleiter: Very good. And just next year working capital how much -- what expect would be a source of working capital next year?

Nick Alexos: Well, I will 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 we will be a use next quarter. But our target is to very much get to a 50% free cash flow conversion off of an adjusted EBITDA, which we have spoken to in reference 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 the 13% to 14% of each quarter’s annualized sales, we will either 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.

David Begleiter: Thank you very much.

David Jukes: Anna, do we have any more questions?

Operator: Our next question today comes from Laurence Alexander from Jefferies. Please go ahead. Your line is now open.

Dan Rizzo: Good morning. Thanks for taking the question. It’s Dan Rizzo on for Lawrence. As you look for EBITDA margin of 9% in 2022, is that still achievable if we do hit a deflationary environment next year?

David Jukes: Hi, Dan. Thanks for the question. We are very pleased with the way we are executed and very pleased with how the business is riding out into its commercial strides and its operational strides. So we feel very confident about achieving that 9% margin target.

Dan Rizzo: And then you are 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 share repurchases?

David Jukes: Well, as I think, I said some moments ago, our priorities will be -- we will share more about our priorities to cash on the Investor Day. And our priorities, I mean, first, we are delighted to be in this position and to get to this target ahead of schedule is very credible and takes a moment and should just take a moment to enjoy that. We will prioritize high ROI capital investments. We see good opportunities for inorganic growth, tuck-in acquisitions like the one we just announced, we hope we will be completing such as the regulatory approvals in Brazil. The share buyback is an initial share buyback and then we will consider dividends as part of that share -- part of that capital allocation strategy. But that’s something we will engage with our shareholders on more as we get through the process.

Dan Rizzo: Thank you very much.

Operator: Our next question today comes from Steve Byrne. Please go ahead. Your line is now open.

Steve Byrne: Yeah. 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 coatings companies have been frustrated with transportation issues and have pulled more transfers and more distribution in-house and I was curious what you are seeing and whether that’s a favorable trend for you?

David Jukes: Steve, yeah. Thanks for the question. A couple of things, I think, that the -- that we do see more opportunities for outsourcing for producers. I do think the difference between distributors who own their own fleets and those who go out to third-party. We all know 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. I think we are demonstrating that distinct advantage of the recent months. Having also we have a bit power supply in helping our supplier partners with our ESG strategies. And so we are 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 our fleets of trucks really is an advantage for us.

Steve Byrne: And can you comment on your trends for share gains from both of your -- the 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 than your customers?

David Jukes: Steve, we have a full line card of opportunities and solutions. I mean, we are -- we have a lot of runway to drive growth and so we like a new supplier authorizations, particularly in that specialty area where -- what the chemistry maybe or the ingredient maybe exclusive, because it comes as an 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 take those if you are growing with your customers. So really we have to do both. We have to grow on both sides. We can’t satisfy our suppliers otherwise they won’t stay with us, as you appreciate it’s a competitive marketplace, but also by having that growth in customers, by having those strong supply and customer relationships it enables more business to come from suppliers. So you really have to -- 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 we can’t be just at one side of game.

Steve Byrne: Thank you.

Operator: Our next question for today comes from Michael McGinn from Wells Fargo. Please go ahead. Your line is now open.

Michael McGinn: Hey. Good morning, everybody. Thank you for the questions. Great quarter. 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 $0.20 of SG&A creep or now that’s more your fixed costs or more fixed in nature and how that plays into your long-term EBITDA margin guidance?

David Jukes: Hi, Michael. Thanks for the question. Okay. I think, let’s just celebrate that we have 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 a great thing. Now we have SAP. We now look to see how we can optimize that. So we are -- that’s the next phase of work that we did. I think we have 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. Now, this part of our streamline in our digitization efforts, so we can really reduce our OpEx to gross margin as we continue to grow the business, but really focused 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 cost, 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.

Michael McGinn: Great. And then more of a simplistic modeling question. Can you talk -- historically, you have 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?

David Jukes: Well, I think, you are 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 managing that business sequentially better and better every day.

Michael McGinn: Okay. And then maybe if I could sneak one more in on the freight has been a big topic thus far, any way to characterize your lead times or your transit times on-time delivery relative to the industry and has that gap sparked the conversations for strategic account ads, someone who may have been a spot-buy customer in the past.

David Jukes: 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 I think we have been challenged. We remain challenged by supply coming into us. But we have a network of operations nationally and internationally, I mean, that we can move products very long distances to keep customers whole and to keep customers happy. Our NPS score -- customer experience is really important to us and on-time delivery is a key metric that we track on time against first comment, as well as on-time against last comment and so we have a lot of investments and assets to improve that and to turn an imperfect supply chain 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.

Michael McGinn: Thank you. Appreciate the time.

Operator: [Operator Instructions] Our next question is a follow-up from Kevin McCarthy from Vertical Research Partners. Please go ahead, Kevin. Your line is now open.

Kevin McCarthy: 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 have 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?

Nick Alexos: Yeah. A couple of things, Kevin, one, you have got the differential of ag, 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 our 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 beyond the historical levels going forward.

Kevin McCarthy: 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?

Nick Alexos: Well, Kevin, it’s Nick again. I would say, first and foremost, this has been a great milestone for the company. We are very pleased to be in a position with our leverage, our cash flow and operating execution to begin a program of returning capital to our shareholders. So I would just take it on its face as represented. 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 will talk about in a couple of weeks at our virtual Investor Day.

Kevin McCarthy: All right. We shall tune in. Thank you very much.

Nick Alexos: Thanks, Kevin.

Operator: We currently have no further questions today. So I will hand the call back to Heather Kos for any closing remarks.

Heather Kos: Thank you, ladies and gentlemen, for your interest in Univar 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.

Operator: Thank you for joining today’s call. You may now disconnect your lines.