Univar Solutions Inc (UNVR) Q3 2021 Earnings Call Transcript

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Univar Solutions Inc (UNVR)
Q3 2021 Earnings Call
Nov 2, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Univar Solutions' Third Quarter 2021 Earnings Conference Call. My name is Emma, and I will be your host operator on this call. [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 Anne Kos -- Vice President of Investor Relations

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 2, we will refer to certain non-GAAP financial measures for which you can find the reconciliations to the most directly comparable GAAP financial measure in our earnings release and the supplemental slide presentation. As referenced on Slide 2, we will make statements about our estimates, projections, outlook, forecasts and/or expectations for the future. All such statements are forward-looking, and while they reflect our current estimates, they involve risks and uncertainties and are not guarantees of future performance. Please see our SEC filings for a more detailed summary of the risks and uncertainties inherent in our business and our expectations for the future. On Slide 3, you will see the agenda for the call. David will start with third quarter highlights and end market trends. Nick will walk through our financial update, and then David will close with progress on our business strategy. Following that, we will take your questions. With that, I'll now turn the call over to David for his opening remarks.

David C. Jukes -- President, Chief Executive Officer & Director

Thank you, Heather. Good morning, good afternoon and good evening to everyone, and thanks for joining our call. With the hard work of integration and systems migration now well behind us, I'm delighted to report another exceptional quarter delivered by a business and a team that's clearly hitting its operational stride. Driven by strong commercial execution and supported by growing customer demand, we delivered strong year-over-year growth despite constrained supply and supply chain challenges. With a focus on growth by putting the customer at the center of all we do, we are fully realizing the value of the Nexeo acquisition and S22 program. And while remaining laser focused on continued organic growth, we're now exploring inorganic growth opportunities to further leverage our cost structure and digital advantage. Key highlights from the quarter are: we delivered exceptional Q3 adjusted EBITDA of $211 million, with liquidity nearing $1 billion at quarter end. Our headline sales were up versus prior year as we continue to deliver organic growth. Market share grew in the quarter as evidenced by our positive win-loss ratio and higher retention levels for new customers. With Mexico going live yesterday, our entire SAP migration project has now been successfully completed. We remain on track to deliver on our commitment of $120 million of net synergies from the Nexeo integration by quarter one 2022. Our digital investments are delivering real benefits with 41 percent of our U.S. customers now registered on our e-commerce channels and able to utilize 24/7 self-service capabilities. Additionally, approximately 23 percent of U.S. customers are utilizing our digital tracking capabilities and the amount of orders play through our digital store front increased by more than 38 percent quarter-over-quarter. And we strengthened our position in our global specialty end market verticals with several new supplier authorizations in the quarter. With our strong performance and deleveraging goal achieved, we're pleased to announce that the Board has authorized a $500 million stock buyback program, which Nick will talk about in detail later. In the third quarter, we continued our trend of our pace in prior year in both sales and margin due in large part to our committed market position in key products as well as our extensive network of facilities and the advantage of our own trucking fleet.

We believe this quarter was a clear validation of our core value proposition, providing security supply safely to our customers and sound product stewardship to our suppliers. Industrial solutions saw accelerated double-digit growth with strong performance in lubes and metalworking and household industrial cleaning due to demand and our strategic supply position. Despite challenges in automotive proceeds as a result of the microchip shortage, we found new opportunities to grow our case business and deliver new solutions for our customers and suppliers. Personal Care and Food Ingredients continued their trend of double-digit growth. Personal care demand has returned in color cosmetics and skin and beauty care, while in food, growth has come from increased demand in prepared foods and restaurants as well as the steady shift of consumer preferences toward meatless options. Unforeseen shortages in certain key ingredients have really exemplified our value to customers in both industries as we've been able to support them with our bespoke formulation capabilities and strong supplier partnerships. Within the general industrial portfolio, we've seen strong demand across the various markets with ongoing strength in chemical manufacturing and the electronics industry. We see increasing demand in mining chemistries, from mist 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 to provide customers the continuity of the supply. Although now a much smaller part of our business, we did see growth in energy and oilfield chemistries as oil rig counts have steadily increased and Brent and West Texas indices, which 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 life cycle product management to the market. For 2021, given our confidence in our execution and our strong performance year-to-date, our adjusted EBITDA guidance for the fourth quarter is $180 million to $190 million and we are once again raising our full year adjusted EBITDA guidance range of $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 for continued success into 2022 and beyond. We believe we have the right people, products, tools and strategy, which we expect will grow deliver gross profit that brings greater than general consensus of the economy. And as such, we believe we're in a strong position to deliver sustainable, long-term shareholder value. Now let me turn the call over to Nick, who will walk you through our third quarter results and our outlook, before I make some closing comments, and we get to your questions.

Nicholas William Alexos -- Executive Vice President & Chief Financial Officer

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 percent on a constant currency basis. Excluding results of the exited Canadian agricultural business and Distrupol from prior year's financials, we estimate net sales to be up 27.9 percent, whereas gross profit was up 25.1 percent 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 percent 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 Nexeo net synergies, partially offset by higher WS&A. The WS&A was impacted by higher variable compensation similar to the prior quarter, a higher environmental remediation 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 were $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 on plan at $15 million. Our ROIC was 12.8 percent for the quarter, reflecting the strong performance and good asset utilization and leverage now stands at 2.8 times, which is already below our original S22 year-end target of 3.0 times. On Slide 8, we have aggregated the key metrics across our four reporting segments, and we provide further details in the appendix. Except for Canada, sales were higher across all geographies, benefiting from chemical price inflation and higher end market demand. Canada's reported decline was largely due to the exit from our agricultural businesses. We had strong gross profit and adjusted EBITDA growth across all regions, However, margin percentages were lower across all geographies, excluding Canada, primarily due to the higher chemical product costs, other costs, as noted and some inflationary impacts in operating costs.

EMEA and LATAM comparative margin changes were greater due to the higher sales in Q3 of 2020 related to products sold in the essential end markets. We remain confident in our ability to execute on our strategies in 2021, and our teams are now fully focused on growth and margin improvement strategies. We have targeted delivered gross profit growth greater than general consensus of the economy, which is currently estimated at 5.8 percent as we continue to execute well through supply chain disruptions, while servicing robust customer demand amid 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 percent 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 our guidance of 13 percent to 14 percent of annualized quarterly sales. However, stronger sales, principally driven by chemical inflation in the second half of the year, have and will continue to result in a higher use of cash from net working capital versus our prior guidance. While 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 that other expenses will be a cash source due to the higher variable compensation accruals in the current period tied to sales and profits, which will be carried into and paid in Q1 2022. This line item in our summary table of cash flow should typically have a cash use of $35 million as we've guided in the past. Nexeo integration expenses, which are not included in our adjusted EBITDA forecast, are expected to be up to $64 million for the year. As mentioned before, this is the final year for our 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. Clearly, this is primarily due to an additional $200 million use of cash from net working capital, partially offset by changes in some of the other line items. As we look to 2022 and beyond, and a more stable working capital environment, we continue to expect approximately 50 percent 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. Given our performance and deleveraging and expectations for good cash flow generation, we are pleased to be announcing an authorized $500 million share repurchase program over the next five years. Share repurchases will be viewed opportunistically. And at the minimum, we will buy back amounts related to executive compensation dilution. Our strong results for the third quarter reflect solid execution throughout the businesses, and we are excited about our outlook for the full year and beyond. Our teams every day continue to drive good performance in challenging environments, and I'm also pleased to have reported the progress we've made against our S22 and growth objectives. We are continuing to implement our plans to achieve a run rate adjusted EBITDA margin of nine percent by the end of the year of 2022, and we intend to provide more details on our expected performance from 2022 through 2024 at our upcoming Analyst Day on November 16. David?

David C. Jukes -- President, Chief Executive Officer & Director

Thank you, Nick. We're excited about the progress of our business strategy and continue to grow our market share in the quarter in both North America and across the globe, supported by a number of new product authorizations. Yesterday, we successfully migrated our Mexico business onto our SAP platform and delivered $5 million of net synergies during the quarter, remaining on track to deliver on our commitments of net synergies of $120 million by quarter one for 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've realized approximately $186 million in gross proceeds from disposals. In quarter 4, 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 down net leverage well below our original year-end goal of 3 times, we're developing strategies for selective tuck-in acquisitions, principally in the specialty products area. As a start, we've recently signed an agreement to acquire a specialty food ingredients, case and pharma distributor in Brazil, subject to regulatory approval, which we will talk more about at our Analyst Day. We're also pleased to now have specific plans for returning capital to shareholders. Our commitment to being a digital leader continues as we accelerate the omnichannel approach that is essential in today's hybrid working environment, which we expect will accelerate our market share growth as well as drive efficiencies. Our single integrated digital commerce platform at univarsolutions.com enables customers to search, select, source and self-serve whatever the time of day or night they choose and is delivering results as we continue to enhance its capabilities based on customer feedback. For customers seeking the convenience of real-time pricing and instant checkout, we've recently launched that capability for a limited number of products, allowing visitors to purchase from us directly online in less than five minutes. Based on the initial success, we now plan to quickly expand the number of products available.

Quarter-over-quarter sequentially we've seen a 27 percent increase in document downloads and a 38 percent increase in orders placed through our digital commerce channels with our platforms now active across the Americas and Northern Europe. Our digital vision is clear, and we're beginning to realize the benefits of these capabilities as a source of sustained competitive advantage as we follow our customers throughout their buying journey meeting them wherever, whenever and however they want to buy. We continue to invest in our customer experience, leveraging the insights from our Net Promoter Scores. Our overall score through September remained good, and we rented under improvements across all regions in Q3, with the U.S. hitting the highest monthly score. We are listening to customers' feedback and adjusting or developing processes accordingly, while building out the effortless experience, we believe, our customers deserve. To support this and using our advanced analytics capabilities, we've accelerated the development of our Customer 360 Predictive Insights tool, which allows us to follow an individual 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 percent accuracy. Altogether, our digital investments and customer-centric approach is designed to maximize the effectiveness and scale of our operations setting data into a strategic asset, making it easier for customers and suppliers to do business with us. Moving to ESG. We've made strides with our agenda and part toward carbon neutrality by 2050. Highlights of this quarter include new supplier authorizations for a variety of more environmentally friendly ingredients and solutions, continued investments in projects to reduce our carbon footprint in line with our net zero commitment, raising consciousness by rolling out an all-employee sustainability training program, continuing to put safety first, which is evidenced by our world-class safety record, and continue to advance our diversity, equity and inclusion goals by leveraging technology designed to mitigate unconscious bias of our hiring practices. ESG is a priority for us.

Understanding that it's our home, our responsibility. It touches each of our core values and aligns with our vision to redefine distribution and be the most valued chemical and ingredient distributor on the planet as well as being better stewards of Earth's resources. So before we come to your questions and to summarize, we delivered exceptional Q3 adjusted EBITDA while realizing our purpose to help keep our communities healthy, fed, clean and safe, even during challenging times. We have, again, raised our full year adjusted EBITDA guidance this time to $770 million to $780 million. We remain on track to achieve our commitment of $120 million in net synergies by quarter one 2022. We're investing in furthering our digital advantage, which we believe is becoming increasingly attractive to customers as well as driving efficiencies. The S22 program is tracking very well toward delivering divestment proceeds, lower leverage and nine percent EBITDA margins by year-end 2022 through global and functional excellence. We plan to use our cash to fund growth initiatives through a combination of high ROI capital investments selected, accretive 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, bring the customer at the center of all we do and working to take full advantage of every opportunity to drive growth. We believe this quarter's results again evidence that our strategy is working, getting momentum, and we see plenty of opportunities for both organic and inorganic growth right across our portfolio. We believe the company is positioned to deliver enhanced shareholder value and plan to provide a greater outlook on our strategy as well as our plans beyond 2022 at our upcoming virtual Analyst Day event on November 16. Thank you for your attention. Please stay healthy and safe. And with that, we'll open it up for your questions.

Questions and Answers:

Operator

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

Robert Andrew Koort -- Goldman Sachs Group, Inc. -- Analyst

Thank you. Good morning. David, I'm curious on the share repurchase, and you intimated it was an initial return of capital, maybe that's an ongoing effort in the future. But how do you balance that versus tuck-in deals? When I look at your stock, it looks like it's a 2- or 3-turn discount to your nearest peer, so it seems cheap, but I would also guess the appeal of integrating tuck-ins is pretty high as well. So how do you compare and contrast what to do with that capital?

David C. Jukes -- President, Chief Executive Officer & Director

Thanks for the question, Bob. First of all, I think we're delighted that we're in this position that we're having a conversation about what our options are with our cash. We've successfully got the leverage down to below 3, which is our year-end target, and that's 2.8 percent this quarter and 2.6 percent at the year-end is a very encouraging number. I mean our focus has been on maintaining strong liquidity and deleveraging, and our priority now becomes looking at how we invest in growth, in our high ROI capital projects and then accretive tuck-in M&A opportunities. But really being in a position to return capital to shareholders starting with that $500 million buyback is also a priority. We need to balance those two things. We'll talk a bit more about that in our Analyst Day, on November 16, but I'm just delighted to be in this position.

Robert Andrew Koort -- Goldman Sachs Group, Inc. -- Analyst

Can I ask you on Nexeo? When you look back on it now, what would you have done differently in hindsight?

David C. Jukes -- President, Chief Executive Officer & Director

I wouldn't have integrated it during a global pandemic, but we did. We migrated the systems very successfully. People didn't think we could do that. We did that very successfully to the teeth of a pandemic. We're now benefiting from that single SAP instance. I think we integrated that business pretty well given the conditions that we were in. And certainly, we see that deal now really paying off. It's really -- as we hit our operational stride, we really see the benefits of that deal paying off.

Robert Andrew Koort -- Goldman Sachs Group, Inc. -- Analyst

And one last quick one. You mentioned taking market share and you have a national presence that really gives you a competitive advantage. Can you quantify that market share capture? And then how do you ensure, I think post-pandemic, you had some unique sales opportunity that maybe you didn't have the permanent traction on some of those sales. So how do you make sure you convert this market share gain during the supply chain problems into permanent market share?

David C. Jukes -- President, Chief Executive Officer & Director

Well, we're very, very pleased with our commercial execution. I think we're very happy with how the organization is operating today. It's operating at much greater agility. And now with a singular focus on having the customer at the center of all we do, that helps retain customers through the good and bad times. Our NPS score and our focus on customer experience, those predictive insights tools, those are all things to make sure that we really give customers a great experience, and that we become -- that effortless experience to 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 want to buy today and in the future. It's a 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 share growth for us.

Operator

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

Joshua David Spector -- UBS Investment Bank -- Analyst

Yes. Hi guys. Thanks for taking my question. I apologize if I missed this, but did you give any thoughts on what you'd say normalized EBITDA is here? I mean, clearly, you broke that up separately last quarter. I don't know if any of your thinking has changed in terms of what's sustainable, what's not and bridging into '22?

David C. Jukes -- President, Chief Executive Officer & Director

Josh, thanks for the question. I think that, giving guidance, we're not giving 2022 guidance today. That's something we'll share a bit more about at our Investor Day. But clearly, since Q2, chemical price inflation has continued. Demand has remained strong, and we've got more confidence in our commercial execution. So it's difficult to give an exact number, but we'd say something in the $725 million, $735 million range at the base rate is probably where we think at the moment.

Joshua David Spector -- UBS Investment Bank -- Analyst

Great. No, that's really helpful. And I guess kind of related with that is your gross profit to EBITDA conversion increased pretty meaningfully sequentially and year-over-year. You're above 34 percent now versus you've averaged close to 33 percent. I guess, kind of understanding there's a lot of moving pieces underneath that. Is there anything that you could point to that drove that step up in terms of your execution sequentially year-over-year? And where do you ultimately see that conversion perhaps getting to -- I mean your nine percent target had something implied in there, but I think there's still a gap versus peers. So curious what you see as the runway on that metric?

David C. Jukes -- President, Chief Executive Officer & Director

Well, again, Josh, I think we're going to share a bit more about that at the Investor Day. We'll give you some ideas and some metrics on that. But we do see a tremendous opportunity to leverage our asset base. We have an installed asset base. We have our own fleet of trucks, and we see great opportunity 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'll share much more about that at the Investor Day.

Joshua David Spector -- UBS Investment Bank -- Analyst

Got it. Thanks. I'll look forward to that event in next couple of weeks, Thank you.

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 Guy Favre -- Exane BNP Paribas -- Analyst

Yes, good mornig all. David, you just talked about the double-digit growth in food and beauty. I was wondering if you had a number overall for, I guess, focused industries or for so-called specialties for Q3?

David C. Jukes -- President, Chief Executive Officer & Director

Yes. Thanks for the question. I think we're going to share a lot more about that and how we see the business, and maybe the 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'll share a lot more about that at Investor Day.

Laurent Guy Favre -- Exane BNP Paribas -- Analyst

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

David C. Jukes -- President, Chief Executive Officer & Director

Well, I think it's been -- I think it's a lazy and inaccurate description of us to put us in the commodity basket. We have a substantial specialty business, and we're going to be showing that and showcasing that at the Investor Day.

Laurent Guy Favre -- Exane BNP Paribas -- Analyst

Excellent. 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 that's around 730, should we assume that viable -- being accrual for variable compensation has also increased? So is it mostly the better underlying structural, I guess, conditions -- accounts...

David C. Jukes -- President, Chief Executive Officer & Director

I think as we said some moments ago, the demand is -- remains very strong. Chemical price inflation has continued through the end of the year. It looks like it will continue into 2022. And we're really hitting our operational stride. And so I think those things give us more confidence about the numbers that we will achieve in 2022 and beyond.

Laurent Guy Favre -- Exane BNP Paribas -- Analyst

Thanks. Thank you David.

Operator

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

Kevin William McCarthy -- Vertical Research Partners, LLC -- Analyst

Yes, good morning. My first question relates to your earnings cadence. Obviously, the third quarter results came in quite a bit better than you would have anticipated in early August. And so I'm wondering, are there particular regions or product lines that performed much better in August or September than you had expected that 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 C. Jukes -- President, Chief Executive Officer & Director

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 supplier relationships 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, we thought that maybe some of the supply chain disruption on globally traded products may have unblocked itself and it didn't, it got worse. And so I think we were in a very good position -- and we now are commercially and operationally agile enough to make the best of that very good position to deliver what I think was a record... on performance.

Kevin William McCarthy -- Vertical Research Partners, LLC -- Analyst

And then as a follow-up if I look at your guide for EBITDA on 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 different sequential pattern than normal seasonality would suggest?

David C. Jukes -- President, Chief Executive Officer & Director

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've got 2.5 days less in Q4 than we had in Q3. And typical seasonality would add another $20 million roughly number on that. So if you take those 2, we're actually slightly above what would be a normal run rate.

Kevin William McCarthy -- Vertical Research Partners, LLC -- Analyst

Ok. 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 L. Begleiter -- Deutsche Bank AG -- Analyst

Thank you. Good morning. It sort of happens again, but I may have missed this. The chemical price inflation this year, what do you think it added or is adding to EBITDA? And if and when chemical prices moderate or roll over, do you give all that back?

David C. Jukes -- President, Chief Executive Officer & Director

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're thinking of some stock profits with some -- offset by some onetime costs and some higher executive comps. So we think some of those stock profits go way into next year, but we've 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've 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 in the kind of offset of higher executive comp and some other onetime costs is in that kind of $725 million, $735 million baseline.

David L. Begleiter -- Deutsche Bank AG -- Analyst

Very good. And just next year working capital, how much -- what do you expect to be a source of working capital next year?

Nicholas William Alexos -- Executive Vice President & Chief Financial Officer

Well, I'll take that, David. Next year, we obviously expect to have a more normalized working capital level. The increase in the current period, obviously driven by the chemical price inflation and the strong sales performance. As we go into next year, we would expect a normalized working capital flow and then the benefit from the other elements of the balance sheet. We do call out some of the puts and takes on the other expense item, which is benefiting us in this quarter but will be used next quarter. But our target is to very much get to a 50 percent free cash flow conversion off of an adjusted EBITDA, which we've spoken to and referenced over the last year plus. And certainly, we expect that realization into next year. From a working capital standpoint, our target is to be in that 13 percent to 14 percent of each quarter's annualized sales. We're a little bit above that. This quarter, we expect to get down -- below that 14 percent by the end of the year and stay in that range going into next year.

David L. Begleiter -- Deutsche Bank AG -- Analyst

Thank you very much.

Unidentified Speaker

Emma, 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.

Daniel Dalton Rizzo -- Jefferies LLC -- Analyst

Good morning. Thanks for taking the question. Its Dan Rizzo on for Lawrence. As you look for EBITDA margin of nine percent in 2022, is that still achievable if we do hit a deflationary environment next year?

David C. Jukes -- President, Chief Executive Officer & Director

Hi, Dan. Thanks for the question. So 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 nine percent margin target.

Daniel Dalton Rizzo -- Jefferies LLC -- Analyst

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 C. Jukes -- President, Chief Executive Officer & Director

Well, as I think, I said some moments ago, our priorities will -- we will share a bit 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 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 to 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.

Daniel Dalton Rizzo -- Jefferies LLC -- Analyst

Thank you very much.

Operator

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

Steve Byrne -- BofA Securities -- Analyst

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 toward more outsourcing or maybe less outsourcing to third-party distribution? And I asked because some of the coatings companies have been frustrated with transportation issues and have pulled and more distribution in-house. And I was curious what you're seeing and whether that's a favorable trend for you?

David C. Jukes -- President, Chief Executive Officer & Director

Steve, thanks for the question. A couple of things. I mean I think that we do see more opportunities for outsourcing for producers. I do think there's a difference between distributors who own their own fleet and those who go out to third parties. We own our own fleet. That gives us a distinct advantage from so-called asset-light distributors who have to go out to third parties and fight in the marketplace. And so I think we have a distinct advantage there. And I think we're demonstrating that distant advantage over recent months. I think also, we have a big part to play in helping our supplier partners with their ESG strategies. And so we're thinking about how we align -- how we realign supply chains to make them more sustainable. And I think that installed asset base we have as well as having our fleet of trucks really is an advantage for us.

Steve Byrne -- BofA Securities -- Analyst

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 at your customers?

David C. Jukes -- President, Chief Executive Officer & Director

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 the chemistry may be or the ingredient may be exclusive, because it comes almost as an annuity, because the molecule will be specified in a formulation. And so that gives us an instant hit of growth. But you only get those and you only keep those if you're growing with your customers. So really, we have to do both. We have to grow on both sides. We can't dissatisfy our suppliers, otherwise, they won't stay with us. As you appreciate, it's a competitive marketplace. But also by having that growth with customers by having those strong supply of 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 it can't be just a one-sided game.

Steve Byrne -- BofA Securities -- Analyst

Thank you.

Operator

Our next question today comes from Michael McGinn from Wells Fargo. Please go ahead, your line is now open.

Michael Lawrence McGinn -- Wells Fargo Securities, LLC -- Analyst

Hey morning everybody thank you for taking my question [Indecipherable] 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 $1 of sales previously would have led to $0.20 of SG&A creep or now that's more your fixed costs are more fixed in nature? And how that plays into your long-term EBITDA margin guidance?

David C. Jukes -- President, Chief Executive Officer & Director

Hi Michael, thanks for the question. I think let's just celebrate that we've moved the Americas on to SAP and didn't crater the business in the process. And we did that in the teeth of the pandemic. I think that's a great thing. Now we have SAP. We now look to see how we can optimize that. And so that's the next phase of work that we do. I think we've already had some benefits by taking out manual intervention through our processes. But we see tremendous opportunities to get operating leverage through that SAP platform. That is part of our streamline and our digitization efforts. And so we can really reduce our opex to gross margin as we continue to grow the business, but really focus on that customer experience. So I think there's real opportunities for us to streamline our processes. And as we streamline our processes, that reduces our 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 Lawrence McGinn -- Wells Fargo Securities, LLC -- Analyst

Great. And then more of a simplistic modeling question. Can you talk -- historically, you've seen a strong ramp into year-end with your Canadian business. Do you still see that with the pricing momentum? Or is it potentially less of a sequential factor here given the recent divestitures?

David C. Jukes -- President, Chief Executive Officer & Director

Well, I think you're relating to cash and that was prepayments in the ag business, which we no longer own. So we won't see that. So everything now is about our core chemicals and ingredients business, and managing that business sequentially better and better every day.

Michael Lawrence McGinn -- Wells Fargo Securities, LLC -- Analyst

Okay. And then maybe if I could sneak one more in on the freight. It's been a big topic thus far. Is there a way to characterize your lead times or your transit times, on-time delivery relative to the industry? And how is that gap, sparked the conversations for strategic account adds to someone who may have been a spot-buy customer in the past?

David C. Jukes -- President, Chief Executive Officer & Director

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've been challenged. We remain challenged by supply coming into us, but we have a network of operations nationally and internationally, that means that we can move products very long distances to keep customers happy. Our NPS score, our customer experience is really important to us, and on-time delivery is a key metric that we track. On time against first commit as well as on time against last commit. And so we have a lot of investments and efforts to improve that and to turn an imperfect supply chain into us into a perfect supply chain for our customers. That's part of the value proposition of managing the complexity of the chemical ingredient business that I think we do very well at.

Michael Lawrence McGinn -- Wells Fargo Securities, LLC -- Analyst

Thank you. Appreciate the time.

Operator

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

Kevin William McCarthy -- Vertical Research Partners, LLC -- Analyst

Great. Thanks for taking my follow-up. I wanted to ask about your inventory balance. If I look at the last five years or so, what we've typically seen in the third quarter is a sequential decline of between three percent and eight percent. And what happened this time was a sequential increase of seven percent. 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?

Nicholas William Alexos -- Executive Vice President & Chief Financial Officer

Yes. A couple of things, Kevin. One, you've 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 William McCarthy -- Vertical Research Partners, LLC -- Analyst

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?

Nicholas William Alexos -- Executive Vice President & Chief Financial Officer

Well, Kevin, it's Nick again. I would say, first and foremost, this has been a great milestone for the company. We're 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'll talk about in a couple of weeks at our virtual Investor Day.

Kevin William McCarthy -- Vertical Research Partners, LLC -- Analyst

Alright, we shall tune in. Thanks very much.

Nicholas William Alexos -- Executive Vice President & Chief Financial Officer

Thanks Kevin.

Operator

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

Heather Anne Kos -- Vice President of Investor Relations

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 16. If you have any follow-up questions, please reach out to the Investor Relations team. This does conclude today's call.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Heather Anne Kos -- Vice President of Investor Relations

David C. Jukes -- President, Chief Executive Officer & Director

Nicholas William Alexos -- Executive Vice President & Chief Financial Officer

Unidentified Speaker

Robert Andrew Koort -- Goldman Sachs Group, Inc. -- Analyst

Joshua David Spector -- UBS Investment Bank -- Analyst

Laurent Guy Favre -- Exane BNP Paribas -- Analyst

Kevin William McCarthy -- Vertical Research Partners, LLC -- Analyst

David L. Begleiter -- Deutsche Bank AG -- Analyst

Daniel Dalton Rizzo -- Jefferies LLC -- Analyst

Steve Byrne -- BofA Securities -- Analyst

Michael Lawrence McGinn -- Wells Fargo Securities, LLC -- Analyst

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