Univar Inc (UNVR) Q4 2018 Earnings Conference Call Transcript

UNVR earnings call for the period ending December 31, 2018.

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Univar Inc  (NYSE:UNVR)
Q4 2018 Earnings Conference Call
March 04, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Univar's Special Investor Call to review its Fourth Quarter and Full Year 2018 Earnings and also highlight the closing of the Nexeo Acquisition and expected 2019 Results.

My name is Emily, and I'll be your host operator on this call. At this time, 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, David Lim, Vice President of Corporate Development and Investor Relations at Univar. David, please go ahead.

David Lim -- Vice President of Corporate Development and Investor Relations

Thank you, and good morning. Welcome to Univar's Solutions Investor conference call and webcast.

Joining our call today are David Jukes, President and Chief Executive Officer; and Carl Lukach, Executive Vice President and Chief Financial Officer.

On February 8th, we released our financial results for the fourth quarter and fiscal year ended December 31st, 2018, as well as our first quarter and full year 2019 guidance, excluding the acquisition of Nexeo. On February 21, we filed our 10-K for the fiscal year ending December 31st, 2018 and last Thursday, February 28th, we closed on the acquisition of Nexeo Solution.

Today, we released a supplemental slide presentation that should be viewed along with the news release covering the comments on this call. Both have been posted on our website at univarsolutions.com.

During this call, we will refer to certain non-GAAP financial measures for which you can find the reconciliation to the comparable GAAP financial measures in our earnings release and the supplemental slide presentation.

As referenced on Slide two, we will make statements about our estimates, projections, outlook, forecasts and 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 complete listing of the risks and uncertainties inherent in our business and our expectations for the future.

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

David Jukes -- President and Chief Executive Officer

Thank you, David and good morning everyone and welcome to our first conference call as Univar Solutions. As many of you have seen, we closed our acquisition of Nexeo Solutions on February 28th, and we'll doing business as Univar Solutions going forward, reflects a new company that combines the best of the best of Univar and Nexeo Solutions.

I'll have more to say on that later, but first let me briefly summarize Univar's fourth quarter and full year 2018 results. And the stand-alone Univar guidance that we provided to you three weeks ago. We made the decision to give you stand-alone guidance to be transparent with our projections provide investors with a detailed update on how we're seeing the year progressing. As you saw in that report, 2018 was a year of progress and challenges as we move toward our goal to be the most valued chemicals and ingredient distributor in the world.

In 2018, we grew sales 4.6% to $8.6 billion and expanded our gross profits and adjusted EBITDA margins. Adjusted earnings per share grew 16.5% and adjusted EBITDA increased by 7.8% to $614 million. Our asset-lite resilient business model allowed us to report another year of solid profitability growth, free cash flow generation and cash return on capital. Whilst our 2018 financial results were solid, they were modest compared to our goals. This is due and part to a number of challenges we faced throughout the year, which our teams worked hard to successfully manage. Capacity constraints in the transportation markets lead to higher costs and lower availability. Whilst an uncertain economic environment especially from September through December, led to cautious customers and oscillating demand during the latter part of the year. Through these challenges our supply chain teams performed well as they focused on keeping our customers in stock by delivering product safely and on-time.

In Canada, adverse weather conditions in our agriculture business and softness in the Western Canadian energy markets led to an 8% decline in segment EBITDA for the year. Our outlook for 2019 includes an expectation to uncertainty and sluggish demand for most of our end markets will persist, as customers remain wary of building that finished product inventory. In the fourth quarter demand fluctuated in the U.S., sometimes on a weekly basis as a soft October was followed by relatively solid November only to see December soften again. In Europe we saw business conditions weaken progressively as uncertainty in the economy led to cautious behavior from customers.

We've seen this uncertainty in many markets continue into January and February, and as a result are being restrained and prudent with our discretionary spending and measured in our outlook. However, against this tepid economic backdrop, we remain excited and focused on executing against our strategy and successfully integrating Nexeo. We have made significant progress on numerous fronts and have clear plans in place to address areas that are taking longer to advance.

One of the places where we have been most successful is the optimization of our supply chain, we've made significant improvements since embarking on our transformation plan. Under Jennifer McIntyre leadership, we have implemented Lean programs and indirect procurement optimized our logistics network and reduced warehouse costs. We closed the number of Univar sites, utilizing a well developed playbook created over the past two years to execute on our site consolidation plan.

Since 2016 these improvements have continued to contribute to a 200 basis point increase in our USA segment conversion ratio defined as adjusted EBITDA divided by gross profits. As we look forward, we see even greater opportunity to drive efficiencies as Univar Solutions. Over the past few years you've heard us talk about digitizing our business moving from manual processes, the technology enabled company that can provide unparalleled service while lowering transaction costs.

We have made meaningful progress and with the acquisition of Nexeo, we expect a significant jump forward. The Nexeo platform allows us to accelerate our digital transformation by providing an ERP system optimized for chemical distribution that we know and understand well, that it's almost identical to the Univar System in Europe. The familiarity and efficiency of the systems design allows us to migrate the Legacy Univar business on to Nexeo's platform in a seamless and efficient manner, significant reducing a key risk inherent in any ERP upgrade.

The global chemical supply chain is digitally immature, integrating Univar's industry leading e-commerce capability onto Nexeo's advanced ERP systems opens the door for us to create sustainable, competitive advantage by making it easier for customers and supplier partners to do business with us and lower our transaction costs. It will allow us to redefine the supply chain with our partners forming an optimized ecosystem that will accelerate growth opportunities.

The U.S. sales transformation which we embarked upon in 2017 is advancing, so it's taking longer than expected. As we track our internal performance metrics by line of business and individual seller there is no denying we had hoped for a faster pace of improvement. Similarly to us, Nexeo started a sales force transformation program in mid-2015, 18 months before we began our own. The Nexeo team is in many respects further along in their journey, and we intend to take the learning's from their experience to accelerate growth.

Moving forward, our combined product portfolio which is stronger, which gives us greater strength in our focus industries for food ingredients, personal care, pharmaceutical ingredients and case. In addition, we now have the scale to stand up two new focused industries in the U.S., home care and industrial cleaning and lubricants and metal working. In conjunction with our greater reach we will relentlessly drive our sales force execution. Succeeding on each of these fronts accelerates our opportunity for growth and profitability.

Now let me turn the call over to Carl, who will walk you through our 2018 results and 2019 guidance in detail. And then I will close some comments about the Nexeo transaction and where the combined company is headed.

Carl Lukach -- Executive Vice President & Chief Financial Officer

Thanks, David and good morning everyone. While we reported three weeks ago our fourth quarter and full year results. Let me start by briefly giving you a refresher on those results as a baseline for understanding our revised 2019 guidance that now includes Nexeo Chemicals. In the fourth quarter last year, we reported net income of $1.2 million and GAAP earnings per share of $0.01. This included a non-cash pension mark-to-market loss of $0.24 per share and acquisition-related expenses of $0.10 a share.

Adjusted earnings per share of $0.33 and adjusted EBITDA of $144 million were essentially flat with the prior year fourth quarter. Pricing trend lines and profitability per transaction continued upwards in the fourth quarter, but were offset by a significant decrease in earnings from Canada and lower demand from global industrial markets.

For the full year, consolidated gross margin expanded by 10 basis points, improving gross profit by $95 million compared to last year. This combined with disciplined cost management led to an adjusted EBITDA increase of 8%. In the U.S. 2018 was a year of measured progress, our adjusted EBITDA grew by 7.5% and the segment increased it's volumes for the first time since 2014. Our focus on sales force effectiveness continued as more than 300 sales team members completed advanced training courses designed to increase their selling skill set and know-how. After significant change and reorganization in 2017, we were successful in stabilizing and transforming our sales team into a more effective, motivated growth force. Yet, we know there is much more to do.

For the full year, nearly 80% of our growth in delivery gross profit dollars flowed through to adjusted EBITDA and our conversion ratio increased 80 basis points to 33.4% of solid improvement. In Canada, 2018 was a very challenging year for us, particularly in the fourth quarter. Double-digit growth in our core industrial chemicals business for the year was more than offset by a second consecutive year of adverse weather conditions that significantly reduced demand for Agrochemicals.

In addition, reduction in demand from the Canadian energy sector led to an overall decline in adjusted EBITDA of 23% in the fourth quarter and down 8% for the year. Recognizing the challenging market conditions, our teams in Canada prudently reduced spending and working capital. By comparison, our Europe, Middle East and Africa segment had a very strong year and grew adjusted EBITDA by 17%. Customer and supplier acceptance of our go-to-market strategy remained strong and our focused industry approach has been well received.

Our supplier partners trust our ability to drive higher customer engagement and sales. In the fourth quarter EMEA was our strongest growth region as adjusted EBITDA grew 8% currency-neutral, despite some signs of economic slowdown as a result of Brexit worries and tempered macro growth expectations for the Eurozone. Our rest of the world segment grew adjusted EBITDA by 16% in 2018, as our leadership team executed well with Mexico showing improvement and Brazil posting a solid year. In the fourth quarter however, strong performance in Mexico was offset by softness, particularly late in the quarter in Brazil. Adjusted EBITDA grew 4% on a currency-neutral basis, but fell 6% on a reported basis due to change in FX translation rates versus last year.

Moving now to cash flow. Net working capital was a cash inflow in the fourth quarter of $197 million reflecting our usual back end of the year release of working capital. Excluding Canadian agriculture our 13-month average net working capital as a percentage of sales was an industry leading 12.3% in line with the third quarter and the prior year.

CapEx was $35 million in the quarter and $95 million for the year, an increase of about $12 million from 2017. Our effective tax rate for adjusted EPS in the fourth quarter of 28% was higher than the prior year fourth quarter of 18%, largely due to recognizing for book purposes more benefit in 2017 from utilization of net operating loss carryforwards than in 2018, along with certain impacts from the 2017 U.S. Tax Act. The higher tax rate was a headwind of $0.05 per share in the quarter and $0.27 per share for the full year.

We continue to earn a superior return on investment. Our return on assets deployed increased 190 basis points to 24.7% from 22.8% a year ago. Other return on capital metrics like ROIC, CROIC and our internal Univar value-added metric also improved from last year. We expect these metrics to continue to increase as we implement our plan and proceed with our integration and value capture activities associated with the Nexeo Acquisition. We continue to allocate cash flow heavily toward deleveraging. And Univar's IPO in 2015, our leverage ratio has declined from around five times to 3.5 times at the end of last year.

As a reminder, we paid approximately $1.8 billion for Nexeo in cash and stock. Consistent with our focus on our core strengths in chemical and ingredients distribution, we latter process to evaluate strategic alternatives for Nexeo's Plastics business, which resulted in an agreement on February 8th, sell the business for $640 million subject to customary closing conditions. We expect the transaction will close sometime in the second quarter and we will use the net proceeds of approximately $615 million before transaction costs to immediately pay down debt. We expect our consolidated net debt to be approximately $2.9 billion after the acquisition of Nexeo and the sale of plastics.

Following that announcement on February 8th, Moody's and Standard & Poor's both upgraded our credit rating. In addition, Fitch launched its review of Univar with the rating comparable to S&P. Including the acquisition of Nexeo and the sale of plastics, we now see leverage at around 3.5 times by the end of this year. We plan on delevering to below 3.0 times and we'll reassess at that time our capital deployment priorities to maximize value for shareholders. Whether it is through increased investment in digitization, sales force effectiveness, additional smaller scale Bolt-on acquisitions, further reducing our debt or directly returning cash to shareholders, our focus will be on achieving the highest risk adjusted return.

Let me finish them by addressing our revised outlook for 2019, which now includes 10 months of earnings from Nexeo Chemicals. As a reminder, three weeks ago we provided our forecast for Univar on a stand-alone basis to generate adjusted EBITDA about in line with 2018 results of $640 million. With the next year transaction closed, we have begun the integration now of customers, suppliers and products and we will lose the ability to track historic Univar or historic Nexeo results. Therefore, we will not provide updates on stand-alone guidance going forward.

We laid out our assumptions in the earnings press release on February 8th, so I won't go through them one-by-one, but I do want to highlight a few key points. First, we are forecasting slower, flattish, industrial production demand for chemicals across all of our segments, down from the historical projections of 1% to 2% growth. Based on what we've seen from customer ordering patterns in the fourth quarter, and now again in the first quarter, we think it's prudent to expect continued malaise (ph) in demand. Secondly, and as David mentioned, we are forecasting modest improvement in sales force efficiency. We see positive signs of improvement and remain confident in our ability to improve the effectiveness of our sales force, but we have more work to do. As we make progress here, we are mindful of the challenges our sales force will face from an uncertain demand environment.

Thirdly, higher transportation costs were a meaningful challenge to us in 2018 and we are estimating sustained, high outbound freight cost per pound for this year as well. We've undertaken a range of actions to mitigate the impact of these costs. And while we have already seen improvements in the fourth quarter as a result of these actions, progress was partially offset by a shift in mix to more bulk chemicals, where we rely heavily on common carriers for transportation.

With these assumptions in mind, we expect to earn adjusted EBITDA in a range of $740 million to $760 million in 2019. This reflects 10 months of earnings from the Nexeo chemicals business and approximately $10 million in realized synergies. We expect to generate $300 million to $350 million in free cash flow, excluding one-time integration costs of approximately $70 million.

As a reminder, we expect one-time cost to be approximately $150 million over the three year period 2019 through 2021. However, we also expect to largely offset these costs with one-time gains from the sale of excess real estate and working capital improvements. Regarding adjusted earnings per share, we are in the early stages of measuring the impact of purchase accounting on GAAP EPS for 2019 and therefore are not providing EPS guidance at this time. We expect the first quarter of 2019 to be the weakest comparison quarter of the year, reflecting continued sluggish demand from most end markets, different FX translation impact and tougher comparisons due to a one-time benefit in the first quarter of last year that we call to your attention at that time.

Our management team is fully cognizant of the challenges that can arise in the downturn. We have to find the right actions to take if that scenario develops and we will move quickly, while simultaneously reaping the benefits of the Nexeo acquisition.

David, I'll turn it back to you.

David Jukes -- President and Chief Executive Officer

Thank you, Carl. In 2018, we made significant strides on our journey to become the world's most valuable chemical and ingredient distributor. And the acquisition of Nexeo is a major milestone for us. Since announcing the deal on September the 17th, joined Univar and Nexeo teams have worked hard to prepare for the close and plan for integration. We created an integration managements office, staffed with senior, proven executives, with complementary skills in cross-functional expertise from both companies; laying out detailed plans and timetables, so we could hit the ground running.

To ensure that we are building sound, comprehensive plans, we hired world-leading consultants in mergers and acquisitions, human resources and supply chain managements. Further, the Compensation Committee of our Board has evaluated Senior Management Compensation and it's linking variable incentive compensation, the success of this integration, including our capture of the synergies and importantly, our return on invested capital.

As Carl mentioned earlier, we completed our evaluation of strategic alternatives for Nexeo's plastics business and have reached an agreement to sell it to focus on our core chemical ingredient distribution business. Our team continues to evaluate the possibility of further divestitures to accentuate this focus and ensure we maintain the appropriate business mix long-term.

Over the past few months, we have developed detailed plans. summoned leaders to work streams to capture the $100 million in net annual operating synergies, net of any customer and supplied synergies. These synergies were identified and confirmed through a detailed bottoms-up analysis on a function-by-function, line-by-line basis where our integration team has been able to lay out the specific tasks and time lines to achieve them. With Nexeo officially a part of Univar, let me walk you through the plans we have in place to integrate the business. In many respects, the Nexeo, integration is an extension of programs we already have in place.

Our Chief Integration Officer is Jen McIntyre. To several years now, Jen has led Univar's extensive internal operational improvements and site (ph) consolidation programs. In her Chief Integration Officer role, she now has drawn on her experience at Univar and her earlier career in the chemical industry and has been supported in schools by the senior partners of on the world's leaders in acquisition integration. To ensure we have a robust pressure tested, and proven execution plan. As I mentioned earlier, Jen also oversaw the efficient closure of a number of Univare's sites over recent years and now have the benefit of a proven team and playbook to execute on our site consolidation plans.

Nexeo provides another significant opportunity to further optimize our overall supply chain footprint. We estimate over a course of our combined sites in North America, our candidates for closure. Our plan is to start with some smaller sites first and work in manageable waves over the next two years to do this in a methodical way, but in full transparency with our employees. With Jen's leadership and expertise in this area, we are confident we will achieve this. We also see the ability to reduce transportation costs by increasing the density of our routes and utilization of our -- our enlarged fleets and we will implement on lean programs across the combined organization.

I have every confidence in Jen's ability to lead this integration well. We've already made meaningful progress on our INT integration. We completed a roadmap, the systems integration that ensures business continuity, manages migration risk and meets the needs of the combined business. We are well into the process of analyzing and mapping master data in preparation to the load Univar's data onto Nexeo's platform. We expect this process to take a few months, and it will run concurrently with our training and change management work streams that we're preparing Univar employees to convert to the Nexeo Systems.

The Nexeo IT team also has prior experience successfully integrating acquisitions onto their systems platform including CST, Archway, and Ultrachem. For our current situation we'll be rolling the Univar locations onto the platform in multiple ways of manageable groups of Univar districts and branches. Our commercial integration is also under way. Brian Harrington who previously led Nexeo's chemical business has taken a leadership role as Univar Solutions, Chief Commercial Officer. In this new role, Brian will lead product management, salesforce excellence and programs to work with our suppliers on a global basis.

Brian has been leading integration planning for our commercial organization, leveraging his prior experience successfully integrating the large-scale acquisition, one which combine a 1,000 person sales force. And we've been clear all along during this process with the sales force is one area, we are not looking at the synergies and we will manage our sales force transition carefully. We spent the first part of this year and mapping up a sales leadership and have announced changes deep into the organization to align for growth and success, using the robust, data driven selection process to ensure we have leaders who epitomized the values of Univar's Solutions and bring together the best of the best.

We expect to have our remaining organizational changes completed by the end of the second quarter, once our key leaders have a chance to work in their new roles in the combined organization. When the claim seems analyzed our combined customer data, we found there are minimal overlaps in customers who purchases the same products at the same locations from Univar and Nexeo. We have created processes to resolve any potential conflicts to reduce the risk of disruption in our sales force, most importantly the efficiencies we create will result in significant additional capacity within our combined sales force to prospect the new business and deliver growth.

We are encouraged so far by the excitement we're seeing from our sellers and I'm pleased to report the sales force churn in both companies has declined since we announced the transaction. Our sellers see the power of the combined platform and are excited about the opportunity for each of them to grow their carrier and their business.

Finally, I must make comments. We are acutely aware of the magnitude of asset this integration is going to take, and are not taking that challenge lightly. As I previously said, we have been supported by recognized leaders in acquisition integration to make sure we have the most thorough, detailed and robust plan and the work with our team has been outstanding. Together with them this team is committed to getting it right, and it's intensely focused on achieving an efficient and thorough integration with Nexeo with the absolute minimum of disruption to customers and suppliers. Of course this will not be completed overnight. We will update you each quarter on our progress.

Overall 2018 was an exciting year and the fundamental elements of our strategy, is stronger than ever. With Nexeo we have even greater line of sight and even more levers to create value for our customers, suppliers and shareholders. While there has been and will be bumps along the way. We are making meaningful progress in our initiatives and our model is proving its ability to generate cash flow through the cycle. Now with Univar Solutions we have the ability to streamline and further reduce our costs to innovate and lead the digitization of the industry and grow and creating long-term sustainable advantage.

Thank you for your attention. And with that we'll open it up to questions.


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Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Robert Koort with Goldman Sachs. Your line is open.

Robert Koort -- Goldman Sachs -- Analyst

Thank you. Good morning. Two questions if I could, David, first you mentioned that the sales force effectiveness has been maybe behind plan. Can you give us some more specifics on what measurables or what symptoms, you see that are causing those conclusions and how to rectify it. And then secondly, it seems your outlook on the economy, the chemical economy, seems far more dour than maybe some of your suppliers. And so I guess I'm wondering, can you characterize it is careful and prudent conservatism or do you think maybe the rest of the world's not seeing things that you guys see more on the front lines as a distributor, maybe help me reconcile what seems to be -- maybe a little bit of a parallax in views? Thanks.

David Jukes -- President and Chief Executive Officer

Thanks and good morning, Bob. Let stress the sales force first. I mean -- I think what we've got evidence that our plan is working and we've made significant progress on a number of the key metrics, the financial metrics over the last couple of years. We've said before, I think the U.S. transformations lagging probably a couple of quarters behind where it -- where it needs to be. We faced a number of challenges on that, I think firstly the velocity of price changes last year -- that sellers really have to deal with price rather than I'm talking about an extra product to sell or seeing a new customer. And I think also the legacy Univar internal processes and systems were more complicated than probably I appreciated a couple of years ago and that sets up time from our sellers to go prospect.

Having said that, we did improve the quality of the sellers we turned over the -- almost all the sales force and our retention levels have been good, we trained several 100 of them, I think 300 went through the development program last year. We've increased the call rates for the sellers by around 20%, 25% and that's all trending in the right direction and very positive. I think as far as the new organization is concerned, Nexeo allows us to streamline those back-end processes, which will create more capacity in the sales organization that will allow us to grow. And I think secondly with the degree of overlap that we're seeing between the Legacy Nexeo and Legacy Univar customers, given that we are committed to maintaining the size of the sales force, where it is today the combined companies. We're going to create, I don't know 20% 25% free capacity in that sales organization to go grow and go sell to new customers. And I think most encouragingly since we announced the deal, we have seen a reduction in the attrition of the sales force on both sides, so we have a lot of engagement from all our people I mean just a huge amount of optimism and huge amount of engagement from all our people and particularly our sellers are excited about the opportunities that Univar solution brings and the ability for them to grow their business and to grow the paycheck.

As far as the demand is concerned, I mean demand is up and down demand is apparently right across -- right across the globe. I don't know whether we're seeing something before other people or not. I think certainly looking through a producer lens they see different things then we see typically. But the markets are getting more difficult because of uncertainty in the market.

For the European markets, our trick here with Brexit, Ji Li Jiong (ph) Italy, Spain, Germany that they're all more difficult market then they were this time last year. And the U.S. some weeks are good some weeks are less good this is certain amount of uncertainty in the U.S. market as well. We have good strategies to approach that, we have good strategies to deliver on that and what we are seeing with the big bulk chemical supplies, our customers slowing down a little we're seeing good mix enrichment from the focused industry starting to pick up and we're seeing that reflecting in our margins in the first quarter so far.

So I think that we will ride the market the best where we possibly can and are pretty encouraged by how we are doing that. I think the other thing to say is we're going to pretty prudent about how we outlook. I think that our previous outlook were based on us running at ten-tenths (ph) I don't think we're going to run at ten-tenths things happened and we're going to factor those ends. So you'll see us being very prudent in our forecast going forward.

Robert Koort -- Goldman Sachs -- Analyst

Got it. Thanks for the help.

Operator

Your next question comes from the line of David Begleiter with Deutsche Bank. Your line is open.

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Good morning. Hi David just on how does the implied Nexeo guidance compared to what they did last year and are you expecting any business loss at Nexeo or Univar in the combination?

David Jukes -- President and Chief Executive Officer

Well let's address the business loss first and I think their outlook is pretty their outlook is pretty flat with last year. But in terms of the customer and supplier reaction we're seeing -- we just now getting first sight of the data, the data has been in a clean room. So we're seeing first light of the data and the de-synergy risk that we see in that is about what we expected in the due-diligence.

On our supply side, we have been out and we surveyed 30 something suppliers as part of the due diligence to see what they wanted to see what they were looking for, to see what their thought was, that has been at the upper end of our expectations. So most suppliers are optimistic about the new company and believe that the enhanced capabilities of both organizations really provide a compelling opportunity.

They are excited about the digitalization of the business and what that can bring and the ability that we're going to have to bring them transparency through the supply chain something that they longed look forward and it's been inhibitory of growth. So from what we've seen so far, it's pretty much in line with where we expected in due-diligence and the outlook for Nexeo is roughly flat with last year.

Carl Lukach -- Executive Vice President & Chief Financial Officer

Yes, I'll add on to that David it's Carl, where we see this (inaudible) the industrial production outlook at Nexeo prior to the acquisition was very comparable to what we see going forward in terms of this oscillating demand that we have seen month by month so very much aligned there.

David Begleiter -- Deutsche Bank -- Analyst

Very good. And just on the synergies, $10 billion this year, how should they ramp up in 2020 and 2021?

Carl Lukach -- Executive Vice President & Chief Financial Officer

Well, we -- I'll just repeat what we said I guess back in September, we're very much on track with what we said back in September when we signed the contract on September 17th. Ramping up to 100, we should be cumulatively at -- in your savings of about $60 million 2020, that was our previous guidance, we stick with that. And then in year 2021 about $90 million to $100 million, so. And I think, as David said, everything we've seen since September gives us even higher confidence in achieving that.

David Begleiter -- Deutsche Bank -- Analyst

Thank you very much.

David Lim -- Vice President of Corporate Development and Investor Relations

Thanks Dave.

Operator

Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is open.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Yes, good morning. Trying to bridge to your new guidance you put out the $640 million on February 8th and you're calling out $10 million of synergies. So is it correct to say that you're baking in about $90 million to $110 million for the 10-months period you'll own Nexeo in 2019?

Carl Lukach -- Executive Vice President & Chief Financial Officer

Yes, that's exactly right, Kevin, it's Carl. That's about $100 million for the Nexeo chemical operations. Just to remind everyone that excludes your plastics business, which will report as a discontinued operations, and about $10 million in synergies between now and the end of 2019.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Okay. And then would you comment on what you are baking in for a volume growth forecast in 2019?

David Jukes -- President and Chief Executive Officer

Generally flattish, Kevin, I mean based on what we've seen in the fourth quarter and continuing in January, February in that zero to 1% range, which -- is a notch down from where we were. So as we were saying earlier we think customers, we sell to the manufacturing sector of the economy, people, that makes things add versus the headlines in the media and we think people are playing a cautious and adjusting their inventory levels.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Okay. Then last one would be in the housekeeping category on Slide number 15 in the second footnote, that appears there. I think you indicated about 92 million Nexeo shares. I was under the impression that would be tracking closer to 90 million. And so I'm wondering if you could refresh us on what happens with the warrants and how those are being treated in the share count, if there's any change there or otherwise that would cause a little bit of upward tension in that number.

Carl Lukach -- Executive Vice President & Chief Financial Officer

Yeah, OK. The 92 million versus 90 million, Kevin. Let me get back to you on that. I think it's 92 million, the warrants we've reserved 7.6 million Univar shares to account for or be prepared for the potential exercise of those warrants. Today those warrants to remind you have a limited term to expire in June of 2011 and 2021 I'm sorry, 2021. So that two and half years out and on an equivalent Univar strike price are around $27.80 as the strike price.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Okay. I'll circle back. Thank you so much.

David Lim -- Vice President of Corporate Development and Investor Relations

Okay. Thanks.

Operator

Your next question comes from the line of Jim Sheehan with SunTrust. Your line is open. Jim, your line is open.

Jim Sheehan -- SunTrust -- Analyst

Thank you. Sorry about that. In talking about your outlook for flattish industrial production. Could you just talk about what you're seeing currently and what you've seen over the past couple of years in terms of an outsourcing tailwinds for your business?

David Jukes -- President and Chief Executive Officer

Sure. I think that's this is one of the questions that we address fairly frequently, I think across the course of my career in the chemical industry, the outsourcing trend has been inexorable, sometimes it just feels glacial. One of the things that is really inhibited to outsourcing is the ability to execute consistently well across a range of geographies. And secondly, the visibility of the business wants business passes across to distribution, one of the things that we have seen is because we are now more able to execute or consistently across a range of regions and geographies -- becoming more attractive to suppliers and that's driving the supplier authorizations.

And secondly, with the digitization that we're about to bring, unable to bring, we are able to bring a transparency along the supply chain, which is something which supply is really value because they can see exactly what's happening to that business, it doesn't disappear into a black hole. So we think that's going to be a source of competitive advantage for us as we continue to grow and develop and will help us win more than our fair share of the outsourcing trend.

Jim Sheehan -- SunTrust -- Analyst

Thank you. And..

Carl Lukach -- Executive Vice President & Chief Financial Officer

Jim, in terms of the impact on our guidance. We are pursuing new authorization, some of those are outsourcing taking business that was previously sold by the supplier directly into the market and some it's winning business from other distributors, but we have dialed into our guidance, a modest increase in earnings from new authorizations including that factor of additional outsource.

Jim Sheehan -- SunTrust -- Analyst

Thanks, Carl. And also on your free cash flow guidance, does that include debt amortization?

Carl Lukach -- Executive Vice President & Chief Financial Officer

That does not include debt amortization. We have about $6 million of debt amortization to pay under the new debt structure in 2019.

Jim Sheehan -- SunTrust -- Analyst

Thanks, Carl.

Carl Lukach -- Executive Vice President & Chief Financial Officer

(inaudible) It's about $6 million for this calendar year.

Operator

Your next question comes from the line of Steve Byrne with Bank of Montreal. Your line is open.

Steve Byrne -- Bank of Montreal -- Analyst

David I have question for you on your comment about a quarter of the distribution the stories were tentative for closure. Did I hear that correctly and is that just based on the overlap of the footprint of the two sector distribution facilities and maybe what would you see an optimal number of closures to achieve (ph) a highest throughput in utilization efficiency of the existing facilities?

David Jukes -- President and Chief Executive Officer

So what we've done is looked, what we are giving is looking at the each facility and the capabilities of each facility, the technical capabilities of each facility, the capacity of each facility, the customer density around those facilities, the permitting around those facilities. And so if it makes sense to combine facilities and not disrupt service in fact, if we can enhance service, then that's what we'll -- that's what's we will do. And so the -- the 25% of the sites that we considering, I mean we're looking at all the sites that we have and then deciding which ones are going to be key anchor sites for us to drive growth for the future.

And that just some of the things that we're looking around that some of them will require some capital expenditure if we want to do that. But some sites will have some unique capability, which we want to retain if the business through there is profitable. I think going forward, I don't know what the ultimate number is -- I think that as we -- as we -- we what we look to do is to provide a differentially high level of service to customers. So our on time and full rates are roughly in the high 90s and we want to keep them there that service requirement, that reliability that easy to buy from is core parts of our value offerings for customers. So I don't have a number that's an optimal in mind, but we'll continue to invest in those key sites now, we'll be able to afford to invest in really making them technically more competent and digitally more capable, which allow us to capture a lot more growth at a higher service level.

Steve Byrne -- Bank of Montreal -- Analyst

And can you comment on how much cost synergy you could achieve from some fraction of those closures and I assume none of that is in your $100 million guidance?

David Jukes -- President and Chief Executive Officer

Well, I think it is.

Carl Lukach -- Executive Vice President & Chief Financial Officer

It is in there.

David Jukes -- President and Chief Executive Officer

So in a $100 million of synergy guidance there is a proportion around asset closures. I think it's a little under a third of the $100 million is around asset closures. So that's what we've disclosed. (Multiple Speakers) I'm sorry go ahead.

Carl Lukach -- Executive Vice President & Chief Financial Officer

It's one of our top three areas of synergy capture, cost capture, yes.

Steve Byrne -- Bank of Montreal -- Analyst

How much of that is in that quarter of the facilities. Can you comment on how many facilities that is?

David Jukes -- President and Chief Executive Officer

Well, we said that we have, round numbers about 100 facilities in the United States and the Nexeo has about 40 X plastics, when we're done, we should have about 100 facilities. And I think that it's important to recognize that we also, -- we've got great density. We don't need to add to any territories and we also operate generally one shift a day that we have plenty of capacity to increase volume in this business plan and we intend to do so.

Steve Byrne -- Bank of Montreal -- Analyst

Okay. Just one last one. Are you considering the merits of staying in that Canadian ag business given the potential for disintermediation by some e-commerce platforms that are in development in ag?

David Jukes -- President and Chief Executive Officer

Well I know this is one that you have been keen on for a while. Look, I mean I think that we're really laser focused on being the most valued chemical ingredient distributor on the planet, that's our focus, the new device solutions mission is to redefine distribution and be the most valuable chemical ingredient distributor on the planet. And so that's what we're going to be laser focused on. And to the degree that -- that any of our businesses, that's all we'll traction that, then we'll look at what the future of those businesses are based on their profitability, their growth, and the return on capital.

Carl Lukach -- Executive Vice President & Chief Financial Officer

Yeah, I would add to it I know that you referenced there. I wouldn't attributed to disintermediation, that's a great business that we have in ag that earns a wonderful return on capital and provides a great service to the consumers of agrochemicals in Canada and so we continue to focus on that and we will continuously evaluate our portfolio of all businesses including ag.

Steve Byrne -- Bank of Montreal -- Analyst

Thank you.

Carl Lukach -- Executive Vice President & Chief Financial Officer

Thanks, Steve.

Operator

(Opeator Instructions) Your next question comes from Duffy Fischer with Barclays. Your line is open.

Duffy Fischer -- Barclays -- Analyst

Yeah, good morning. First question is just around free cash flow in the change in guidance from original, your EBITDA went up $100 million at the midpoint. But the free cash flow only went up $50 million at the midpoint. Why is the conversion so poor on that incremental new EBITDA because you're excluding the cash cost for restructuring?

Carl Lukach -- Executive Vice President & Chief Financial Officer

Yeah, that's right, Duffy, we're adding about $50 million. We don't have a good field sense yet for the working capital ups and downs of that added chemical business from Nexeo once as of Friday, these two businesses emerged and there is no longer historical Nexeo and historical Univar, so we'll get a better handle on the workings of their receivables and payables and steady cash flow, your observation is correct. It's a bit lower than what we would expect from our chemicals business. But we'll work through that in the coming months.

Duffy Fischer -- Barclays -- Analyst

Okay. And then could you bucket for me, if you go back to the original $208 million of LTM EBITDA that you got with Nexeo. How much of that goes in the sale? How much of that is kind of in the pro forma and then how much of that gets eaten up by say stranded costs when you made the plastic sale?

Carl Lukach -- Executive Vice President & Chief Financial Officer

Okay, roundly, roundly, Duffy is that one-third, two-third is the split of that LTM between Plastics and Chemicals. As far as training costs go, we've got a -- we've got with the buyers of plastics, we've got a transitional services agreement in place that will provide what's needed to the buyer, and our management of those services in the cost to deliver them will be very focused on eliminating or avoiding stranded costs, maybe the most difficult area will be IT. The IT area where it's hard to really a step -- disengaged from the fixed costs associated with IT, but for the other services provided they're much more people related and we've got a dedicated resources in place to provide those services and we'll adjust as that TSA agreement expires.

Duffy Fischer -- Barclays -- Analyst

So, OK, just to clarify. So if you use your two-thirds of the original that would be about $135 million of EBITDA that's pro forma still with you. But if you back into the guide like we did a little bit earlier in the call, you're kind of running at a 110 rate this year. Is that $25 million delta that's come down is that the stranded cost is that the way we should think about it and that will go away over time?

Carl Lukach -- Executive Vice President & Chief Financial Officer

No that's just two months, you're dealing with 12-month numbers and we bought it last Friday. So that's we're just including in our guidance 10 months worth of Nexeo accounts.

Duffy Fischer -- Barclays -- Analyst

No, but the two months of the two smallest months of the year and you're getting $10 million of synergies. So I'd argue that those roughly offset that the run rate for Nexeo in your number, it sure looks like $110 million to $115 million.

Carl Lukach -- Executive Vice President & Chief Financial Officer

I think it little high, but it's we're really just prorating 10 months of the year into our guidance.

Duffy Fischer -- Barclays -- Analyst

Okay. Thank you.

Operator

There are no further questions at this time. I will now turn the call back to the presenters.

David Lim -- Vice President of Corporate Development and Investor Relations

Thank you, ladies and gentlemen, for your interest in Univar Solutions. This does conclude today's call. If you have any follow-up questions, please reach out to the Investor Relations team. Have a great day.

Operator

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

Duration: 55 minutes

Call participants:

David Lim -- Vice President of Corporate Development and Investor Relations

David Jukes -- President and Chief Executive Officer

Carl Lukach -- Executive Vice President & Chief Financial Officer

Robert Koort -- Goldman Sachs -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Jim Sheehan -- SunTrust -- Analyst

Steve Byrne -- Bank of Montreal -- Analyst

Duffy Fischer -- Barclays -- Analyst

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