Q1 2021 Diversey Holdings Ltd Earnings Call
Yeah.
Greetings and welcome to ever see Holdings limited first quarter, 2020 One earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the flow of my presentation.
And anyone should require operator assistance during the conference. Please press Star Zero and your telephone keypad. Please note. This conference is being recorded I would now like to turn the conference over to grant Graver of Investor Relations. Thank you you may begin.
Thank you Hello, everyone and welcome to the diversity of first quarter Conference call with me today are Phil wheel, and our CEO and Todd earned and our CFO our earnings release and the slides we will reference on this call are available on diversity of the web site at IR that diversity of Dot com.
Please take a moment to read the cautionary statements and these materials, which state that this teleconference and the associated supplemental materials may include estimates of future performance. These are forward looking statements and actual results could differ materially from those projected factors.
Factors that could cause actual results to differ are described under the risk factors section and our filings with the SEC on.
On this call we will reference certain non-GAAP measures. Please see the accompanying slides and our filings with the SEC for definitions and reconciliations for the most closely comparable GAAP measures.
And now I'm happy to pass it over to our CEO, Phil we went for his comments.
Thanks Grant.
Fantastic to be giving off the earnings update as the public company, having come out of the guidance delivering a strong first quarter.
And we won't connected with diagnostic is proud of our company and a new.
The status is D. F E coli and were driven to see it reach its full potential as the leader in our market.
For those of you who invested of Ipi. Thank you I hope you've enjoyed the ride side saw what you'll hear today will be consistent with the expectations. We set and represented some great progress on our strategic themes.
Starting with our first quarter results, we saw 2% top line growth, especially as the 2019 pre COVID-19 baseline despite very heavy lockdowns impacting many of our customers in most parts of the world.
Margins continue to expand delivering very strong adjusted EBIT dark right about the 75% against the 2019 pre COVID-19 baseline and even modest growth against the pre locked down in 'twenty, and 'twenty, which benefited from significant infection prevention sales.
We were of course impacted by the Texas free resulting in raw material cost pressure, but we didn't experience any supply disruption of.
Procurement and commercial teams have been working incredibly hard to mitigate the financial impact.
We've seen significant net new customer wins in both the institutional and F&B segments, importantly, and accretive margins as cash.
Estimates of value, our product and service offerings.
We've been rewarded for our extra efforts during the difficult kind of the times by extremely low customer churn.
This is also reflected and our customer net promoter score which is at record levels.
Our strategic plan is bearing fruit with meaningful progress in all areas. We've seen some important launches from our innovation pipeline in particular and institutional we've launched the residual efficacy product to complement our infection prevention range and the nascent B, we've launched the system the expand.
The digital offering by providing real time insights on bike cleaning standards and water and energy usage for all the IP customers.
Recognizing that some of you may be needed for the diverse the story I want to cover some information that we share it on the roadshow to ensure everyone has the same base line starting on page five of the presentation.
Divesting its been growing for all makes of the hungry jazz we were at $2 6 billion and top line company and 'twenty tried and true weak.
We grew at constant currency on average over the 3% from 2017 to 2019 and none of it around 2% during the COVID-19 you're out of 2020.
We had adjusted EBITDA margins of around 15% and 2020, having grown an average of 160 basis points of Piranha since 2018.
Operating and estimates at 46 billion and all the total addressable market across 80 countries and have the number one or number two position and all nice all markets. We serve based on net sales in 2020.
The resilience during COVID-19 was also seen in the 2008 2009 financial crisis Central to this is our diversification by geography, where roughly a third of third across North America, Europe, and emerging market by end market and by customer.
No customer greater than two percentage of our revenue and the top 50 customers around 25% about revenue.
On the next page, you'll see why we're so excited about divestments of potential.
Firstly ex the market. We are one of only two global players and a GDP plus scrubbing market with highly recurring revenue and very sticky customer relationships.
Secondly, we have real momentum our teams are motivated by our mission to protect and cat. The people, we've made progress and a major transformation plan under which we've invested a lot and our team and infrastructure and all the values. This alongside our long heritage and our products.
Innovation service and the environment is delivering good growth top and bottom line.
Thirdly, we are executing against a clear plan to grow our top line through targeted initiatives.
Adjusted EBITDA margin to our target of 20% and Inorganically through tuck in acquisitions that enhance our business and strategic things.
Over the page, you'll see how we serve our customers by delivering business critical solutions across the two segments in the.
Attritional, which is roughly three quarters of our group revenue and.
Food and beverage, which is the remaining quarter.
And we win in our market place because we have number one the broadest product offering across chemicals dosing dispensing plus machines and we believe we are unique in this respect.
That's the pairing of infection prevention portfolio.
Three so at least the customers value and can rely on for strong distributor relationships to access all parts of the market cost effectively and five of team Hill of bolt into our mission to protect and kind of the people and of living our values to be inclusive customer driven to all.
And why is improved have bias for action and to be accountable for results.
Over on page eight we describe our market place, which is structurally very attractive because firstly, what we do is mission critical for our customers.
And Lee a marvel of installing equipment and really takes a product and can only be serviced by us produces high recurring revenues.
Lee the.
And our customers of the hygiene problem, such as the closing of that facility far outweighs the cost we represent of that business and for fleet customers increasingly want the comfort unsecured 80 of the respected brands, we compete on a product impact and customer service.
Our ex the 19th call serviceable addressable market is approximately $32 billion and growing at 3%.
We have one strong and respected global competitor, who we encounter and some parts of the market and then 75 per cent of the market. That's made up of much smaller local and regional competitors.
We have also been expanding our market opportunity into an estimated $14 billion of NIM of markets with such products as the residual efficacy infection prevention, and institutional and water treatment and food and beverage.
On the next page, we describe how sustainability has been central to the diagnostics operations for many years.
We are focused on people through our mission to protect and cash.
The planet by significantly reducing energy waste water and greenhouse gas emissions.
And customers by the use of our products to deliver energy waste and water reductions at customer sites, helping them to meet that own the environmental targets we.
We are driven by a desire to do the right thing, but the strategy also make sense financially I think supports our retention and March and plans.
We expect the issue of refresh vision of in this area later in 2021, reaching further to achieve even greater outcomes.
On page 10, you'll see our growth plan is built on the four pillars.
Firstly in our institutional segment, the recovery of around $400 million temporary decline in 2020 revenue due to the COVID-19 impacted sectors and the ongoing benefit of all of what over the last couple of years to build and grow and infection prevention to scale and north.
Erika and feature of this business to enhance our commercial excellence globally to expand and the fastest growing parts of the market, that's global customers and emerging market and two.
To accelerate the right innovation to support customer outcomes.
The second pillar in a and B segment, we intend to accelerate and core geographies, where we have of superior proposition and the cross sell of water treatment to provide a one stop shop for customers to buy cleaning and hygiene and water treatment together.
And the third pillar, we intend to expand adjusted EBITDA margin to 20% at and expected average rate of 50 to 100 basis points per annum through improved sourcing and strategic pricing supply chain improvements and operational excellence through SG&A cost and they.
Tips and all.
The fourth pillar, we intend to accelerate M&A by executing the best opportunities within a plentiful pipeline to add at accretive multiples businesses, the add strategically whether that's through supply chain capability product or technology capability or geography.
On the next page Q1 has been extremely busy and productive even leaving aside the IPR.
In terms of market recovery reopening has been slower than most people hyped, whilst the U S U K and China are progressing positively in Q2 other important markets like mainland Europe, Canada, India and other emerging market now appear unlikely to meaningfully reopen until Keith.
Right.
However, with respect to our institutional segment growth initiatives, we've completed our infection prevention and supply side rollout and seen a large volume of contracts signed a global.
The team they've been very busy winning significant new annualized business and the hunters introduced and our commercial excellence initiative are responsible for and accelerated wind right.
The SMB segment had a very strong quarter the accelerated on top of the stellar 2020, winning record levels of net new business and Q1 and the share.
It was all sort of exciting to watch the launch of water treatment, where we have recorded several small wins and encouraging the our first global accounts and success. This is ahead of schedule.
In terms of margin, we were pleased to see the accretion and despite the difficult locked down environment.
We saw early benefits from consolidating supply sources, having completed the first phase of our plan to align formulaic.
Implementing strong price increases and Q1 with further increases planned thereafter in response to raw material inflation.
Continued good progress without G and a walk of the kitchen and I was the establishment of the new captive Finance center, and Eastern Europe, and the transactional finance processes and.
We have seen good pipeline progress and M&A with two deals now and formal diligence processes and a number of others and develop discussions with vendors.
Now I'll pass over to Todd our CFO to discuss Q1 financial results and a little more detail.
Thanks, Bill and I'm excited to speak with everyone today to review our strong results for the first quarter.
And Q1 revenue was two 2% above pre COVID-19 2019, while delivering significant adjusted EBITDA improvement of 77, 9% or $41 million of growth.
This was driven by a combination of growth and our long term focus on margin improvement.
Compared to Q1 and 2020, our organic sales declined four 4% due to strict lockdowns that are lasting longer than expected, particularly impacting our institutional segment.
As Phil mentioned, the Lockdowns and some parts of the world have been tighter and longer than expected materially impacting our foodservice and hospitality sectors.
We're seeing a smaller impact of Lockdowns and our F&B segment, but we're also cycling over a tough year on year comparison as the majority of of Lockdowns didn't start until Q2, 2020.
We are seeing some mixed pressure at the standard margin with foodservice and hospitality sectors, and lockdown, which tend to have higher standard gross margins with a more service intensive SG&A cost to serve.
We've been able to manage our SG&A to effectively mitigate the downward pressure on mix and gross margin to ultimately deliver higher adjusted EBITDA margin and the quarter versus prior year.
Our adjusted EBITDA was 93 million of.
0.5% versus prior year and despite the revenue pressure from Lockdowns and higher inflation, we were able to improve adjusted EBITDA margin year over year growing 60 basis points to 14, 7% and versus 2019 growing 630 basis points, thanks to growing and.
Section prevention pricing and cost control measures, both and supply chain and SG&A.
On page 14, and digging into the segments, a little deeper let's talk about our institutional segment and.
Institutional revenue of $468 million was one 7% above Q1, 2019 with gains and infection prevention more than offsetting the negative impact from Lockdowns.
Third of 2020 revenue declined modestly in the quarter due to COVID-19 impact as previously referenced counterbalanced by continued strength and North America, driven by infection prevention games.
At the bottom right hand side of the presentation you see an example of and innovation and the infection prevention space that we are proud to highlight the IRA journey 'twenty for shield.
This product uses advanced polymer technology to provide continuous disinfection of frequently touched surfaces for up to 24 hours.
Given higher levels of the hygiene standards and infection risk awareness. This product will be of great complement to our existing world class of infection prevention offerings.
We believe we are the market leader and infection prevention and customers come to us for our differentiated products and value proposition.
And our food and beverage segment, our revenue of 164 million and the quarter grew one 3% versus Q1, and 2020 and three 7% versus 2019, while adjusted EBITDA margin grew 350 basis points versus 2020 and.
560 basis points versus 2019.
We continue to win accounts and this segment based on our scale service execution and the technical expertise globally.
The example of our continued innovation, we're very excited to have launched our until a CIP digital system. The.
And this system translate the CIP measured data and the statistical proven actions for reduction of water energy and cleaning time, while ensuring high quality food standards.
It is being used by customers and all F&B and markets feed.
Feedback has been extremely positive and we have a list of further implementations booked as customers are excited to take advantage of this offering.
We expect to have a solid outlook for growth given our recent success and closing new business around the world, assuming lockdowns don't get stricter as we move through the year and markets reopened.
And as Phil mentioned, we have been training our teams and water treatment and are starting to see opportunities beginning to percolate as our workforce globally gets trained up throughout 2021.
We estimate the water treatment opportunity it could be roughly 20% of our core F&B cleaning and hygiene products, we sell into existing accounts.
Page 16 shows the bridge for Q1 2021 versus Q1 2020.
Revenue declined primarily and institutional is offset by favorable FX given the weakening U S dollar against the euro and other currencies versus prior year.
Additionally, we have some marginal inorganic growth coming from the <unk> acquisition closed in December of 2020, and some carry from the life Tech acquisition, which closed in July of 2020.
Adjusted EBITDA growth of $1 million quarter on quarter was negatively impacted by institutional top line and mix offset by F&B margin accretion and a small benefit from FX and M&A and corporate management of costs from our earnings improvement program initiatives.
Q1 tends to be our weakest quarter from a seasonality perspective, and we would expect our adjusted EBITDA to grow throughout 2021 on a quarter over quarter basis.
So let's shift to the balance sheet cash flow and liquidity on page 17.
As you would imagine the cash flow and balance sheet of some noise in them and Q1 due to our IPO.
However, we can highlight the reduction of net debt leverage as we used roughly $650 million of IPO net proceeds to pay down debt or $720 million, including the proceeds from the green shoe option exercised in April.
Our net debt to adjusted EBITDA ratio was four seven times at the end of Q1 and four five times. If you include the proceeds from the shoe, which was executed and the first part of April.
We expanded our revolving credit facility from $250 million to $450 million and can.
Conjunction with going public to expand our liquidity profile to $548 million at the end of Q1.
Typically diversity of tends to utilize cash and the first half of the year due to seasonality builds and tends to generate cash and the back half of the year.
We would expect that to be the same and 2021.
And 2020, we were able to grow adjusted EBITDA. Despite the challenges brought on by the pandemic.
We believe 2021 full year adjusted EBITDA will be in line with our expectations at the time of the IPO.
While some markets opened a little earlier than expected, helping Q1 other markets have been slower to open which will influence Q2, bringing our H one expectations back in line with our original plan.
We expect H two or the second half to also be in line with our original plan at the time of the IPO.
The outlook with respect the market share gains and growth initiatives and focus on commercial excellence and leaves us positioned to be taking advantage of market recovery and potential tailwind and the back half of 2021.
As previously referenced we expect adjusted EBITDA growth throughout 2021 on a quarter on quarter basis, assuming markets open as expected.
We remain committed to margin expansion and expect to show margin accretion in 2021.
With that I'll give it back to Phil for a reminder of our long term outlook before Q&A.
Thanks, Todd, Yes for Q&A I'd like to leave you with a quick summary of diversity of gross algorithms on page 18.
We look forward to building on the estimated long term market growth of around 3% with market share gains on top from the drive of the I discussed earlier and the cool we target to grow another 2% per annum, so accretive M&A and.
We target to expand adjusted EBITDA margins to 20% at the average rate of 50 to 100 basis points per annum to our improved sourcing strategic pricing supply chain improvements and operational excellence to SG&A cost initiatives and this should generate strong free cash flow that we can use to.
The lap of over time with the medium term net debt goal of three times adjusted EBITDA.
That concludes our formal remarks operator, please when you begin the question and as the parent.
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Our first question is from P. J, Jeff Carr with Citi. Please proceed.
Hey, good morning, Phil and Todd.
Hey, good morning.
And I know a question on your North American share and share of games, what's the share now and can you distinguish between it between you and efforts to gain share with bigger customers like what you did with aramark, whereas the smaller mom and pop businesses what is the bigger the opportunity for you.
Sure let me.
And he saw that it's.
It's certainly true that we've taken.
The nice share over the last couple of years, particularly I'd say in the infection prevention and why we think we've got something like a 20% share.
And of the of the market in North America, and also taken some nice share outside of that to thinking about the overall.
The opportunity in terms of larger customers, both the smaller I think honestly, we target all parts of the market.
It was great.
The windows large customers and you know that gave us the ability to to put in place the infrastructure and the sales and service for US right across North America, and we're using that and I wish we went out of the customers, but it sort of stay true to say that.
We're picking up a lot of smaller customers to and where.
No we don't discriminate in that respect with Mccain as long as the the custom husband and wife attributes. We can build of long term partnership at the right margins and then.
And then we work with all customers.
Okay. Thank you and.
And it was good to see you go to the new global the wind and water treatment.
Can you talk about this win and what's in the pipeline with two or so and then as partnership. Thank you.
Yeah. So look I mean, we would realize it honestly, we had a number of smaller wins and very early and.
And we haven't actually expected to start winning by this point and then as part of.
And the existing business process, we were able to start a conversation about water treatment with mm and a large customer of large existing customer in Africa.
And and once we explain the proposition and the products and the service.
And that customer was was was really excited and I would and we close that deal to.
Two or three weeks.
Weeks ago, so yeah.
Three promising start.
It is only a start and there's a huge amount of more work to do as Todd said you know, we're rolling out of the training right across all of our F&B work for us, but the we're ahead of the way we plan today and you know I think to some extent and sort of validates our approach here, but.
Of course, I feel much better when we've got a few more and drop out.
Great. Thank you.
Thank you.
Our next question is from Vincent Andrews with Morgan Stanley. Please proceed.
Thanks, and good morning, I'm wondering if you can just provide a little bit more color about the segment margins and the quarter, obviously institutional it was down a fair amount both sequentially and year over year, whereas food and beverage was up a lot of both sequentially and year over year. So so what was the divergence there.
You mentioned, a few things and the prepared remarks, but could you speak a little bit more specifically about what was what was happening there and how do you expect it to progress.
Ross the balance of the year debt will get you to a margin expansion for the total company.
Yeah.
And then let me do that and let me start.
Where that can be right as you said the the margins were particularly strong.
You know I've said before we had we had a really great 2020, and food and beverage was one of lot of new business and the.
That is carried on into 2021.
We actually were able to implement some of the new wins a bit earlier than we originally anticipated. We also saw a bit of reopening and <unk>.
Some of the African markets.
And that also helped.
Our top line and actually the this extra top line from nice for me I named the North side.
And from implementing these wins the area that's slowed down very nicely.
And and and that's it that's the critical reason of why our margins, but the the <unk>.
Strong and F N b.
On the other side from institutional.
You know the obviously impacted by bought by Lockdowns and as we said we did see the.
The infection prevention opportunity and North America the team.
The strong we are we were able to Saturday and high of all games than we originally expected the some of the markets like education and infection prevention I extend a bit faster and we did incur some additional costs and getting the much higher volumes and anticipated out of area.
Take for example, and some products and around the world and we had to pay some of all third parties. Some additional overtime costs et cetera. So those things had a small impact.
On the institutional margin progression, but those things will all short term in nature of the impact of Q1, and we've now been able to grow our supply chain. So that we can now manage are the high of volume levels on the sustainable basis. So we don't expect any more of those are those costs going forward.
That makes some sense.
Sure and maybe just as a follow up.
Could you give us a little bit of a sense of price versus volume and the segments and.
And what's you're anticipating for the for the for the balance of the year and then maybe more specifically as it relates to you know how much price work do you think you need to do to offset raw material inflation.
Yeah, No look I can't I can say and you do that.
And maybe let me start just talking about inflation and come back into price. So.
It's certainly true that we saw him you know real inflation and the market above the long term averages, we did predict coming into the U S and higher inflation and.
That's where we came out of the gates implementing pricing.
More than we might otherwise and the Dom but as it turned out inflation has been and even higher than we predicted and therefore, we had to action and.
Additional measures.
To mitigate that I think it's also worth remembering.
Remembering though that if you're looking at the overall input cost inflation. There is a real geographical spread here in the Americas and saw the highest inflation and it was obviously the most impacted by the Texas phrase.
The lower inflation in the emerging markets and also in Europe, So given our business mix.
And it's important to remember that the U S inflation headlines and not necessarily a good indicator of what we're saying and our overall global position. The amendment of the U S because that only about 25.
Certain of our businesses do you get back the gave you see more numbers, we saw actually and the first quarter.
Somewhat of a bit less and 2% on cost.
And we saw a similar amount of <unk>.
Price and not.
And might drift a little bit up.
In the second quarter and.
And then we expect to see that moderating before coming down again and.
And the back half of the year, probably the other thing I would just say.
On this topic, it's worth noting the our sourcing initiatives and really been really helpful. Here.
I think we mentioned and in the presentation would be consolidating formula and that's allowed us to bundle the volume.
For them, which we haven't been able the day before and therefore move that volume around between suppliers and that has helped us significantly and it.
True on input costs and that overall, it's going to be really helpful. As the guys, who the best of the show as well.
Okay. Thanks very much.
Our next question is from Manav Patnaik with Barclays. Please proceed.
Good morning, So I just wanted to follow up on the you know the water treatment and cross sell opportunity you called out and the slide just hoping you could size that a bit more and you know kind of how you cross sell into that cleaning and hygiene category.
Yeah, So so that way and is somewhere between a one of the half and $2 million.
Once fully rolled out and take them.
And there's none of that revenue in the Q1 numbers. It takes some time to.
To do that.
In terms of how we got of a basket I think the beauty of the relationship that we have.
With the late in the season, but we are the single point of contact.
With the customer so what we now effectively half of you know is ex.
Total range of the water treatment and wastewater treatment products that we can take the customers alongside our other cleaning and hygiene products. So it's a real kind of seamless offer.
With only one touch point for the customer with the diagnostic sales team to get the full breadth of the New York, the and that seems relevant and and insignificant and that's certainly been a real.
The interesting dynamic for customers and something that we've had a lot of early positive feedback of that.
Okay got it and.
And and Todd I, just wanted to follow up and it sounds like the organic growth was.
Slightly worse, driven by institutional but then you know the FX and M&A of a bedroom. So I was just hoping you could help US you know what we should be assuming for the M&A contribution for the rest of the year and perhaps how you're thinking about FX as well.
Yeah, well, let me start with.
The FX I think clearly in the year to date, we have favorable FX for.
For the total of business and at spot rates, we would expect that trend to continue as we look out into the year and the first quarter FX had and you can see and the Q1 and I think page 46, and consolidated basis, roughly two 4% impact favorable on the business.
And in the quarter and I think of as we think about M&A.
The M&A going forward.
We're excited about the opportunity.
And M&A is probably the first start with we're pleased with how our recent acquisitions are progressing and particular, we closed on Santa come.
At the end of the year of roughly five months ago Thats developing as expected both in terms of underlying performance and synergies.
As a reminder for those of maybe new the diversity, we look for a number of things and and acquisition beyond the financials first strategic control of the supply chain for a market. So we can deliver with excellence for our customers.
Also of product or technology additions for the whole group.
And we're strengthening of the core geography and or acquiring talent.
And Santa Cam check the box there on the geographical objective is as you've heard Paul and just one of our seven target growth geographies for F&B.
In terms of of our funnel, we're really happy about where it is right now we would expect to do some reasonable M&A this year and our roadshow, we called out long term that we wanted the roughly a couple of points of growth.
The coming out of M&A annually.
We're ramping that up as we speak this is probably the heart of the hardest year to do that because we're ramping.
And we're extremely excited about the implication of the profile of those types of deals going forward and how they can be extremely shareholder value accretive on a tuck in basis.
So we expect to have some positive news and the very near future with respect to M&A, but and I wouldn't want to comment on those before we close those deals.
Alright, thank you.
Our next question is from George Tong with Goldman Sachs. Please proceed.
Good morning, and.
And your food and beverage segment, you mentioned record net new business wins and the quarter can you elaborate on what's driving the new wins and how much is coming from water treatment.
Yeah, Yeah, I certainly can let me first and say you know water treatment.
It is and the very early days and as I said, we're ahead of schedule.
For a small wins and one global account win but.
You know that is not yet a significant part of.
And of what we're what we're winning them.
If you go back to why are we winning look I think it's a combination of.
Of great product and service a service that we deliver consistently day in day out we can we count to customers. The the fact of the where we all of that for the whenever they need us.
And that builds a real trust and testing.
Testing and as more and more and seeing the differentiation that diverse he can offer and that space, we're becoming increasingly good of explaining it to potential new customers and making commitments around that and we're seeing that having a real impact and.
And the market, we're basically delivering on the promises and.
That is I think increasingly understood and the market.
Debt that that'd be really the key reasons.
But and I guess, just the follow up on the what what's the specific product areas within food and beverage are you seeing the most traction with them that's driving the net new business wins.
You know George and the the most encouraging thing is that it isn't really specific areas. You know, we weighted with strong and processed food and dairy and alcoholic beverages and non alcoholic beverage was strong you know round the world and you know, we've really seen and nice.
This threat of wins and.
If if I used the point to the most pleasing thing.
I'd say its the amount of new business of one in North America, because that has traditionally been our weakest market place and we're working hard the AR to build of our infrastructure to make sure that we can deliver.
Deliver the best possible service and that seems to be working but the nice true to say that we've won in all of our sectors on and all of our regions.
So you know, we feel really good or bad debt.
Got it thank you.
Okay.
Our next question is from Gary Bisbee with Bank of America. Please proceed.
Yeah, Hi, good morning, guys.
I guess could you give us a progress update on the on the global rollout of the infection prevention and portfolio did all of the capacity you were looking to bring online as that on line for for for the.
The liquid and the wipes solutions and how is that going trying to get that out into the marketplace.
Yeah sure. So the short answer is yes. So we're now and we're now able to manufacture and sell right around right around the world. So we've rolled out in addition to what we were already doing and North America and as you know we reacted wiped out the last year, we're now manufacturing and.
And Brazil.
Turkey, and the UAE, India, and China, and I'm of course, and Europe and in the in the Netherlands. So we've got the supply chain now that we wanted them and we're starting to see sales happening too. It's yeah, it's tough.
Launching some of these businesses around the world and I fully locked down environment.
Particularly in Europe, and the other people you wouldn't be speaking to the the businesses and the operating with people on for a lot of etc, but.
We are starting to see some really quite interesting upturns and all.
<unk> sales.
So yeah, we feel really well positioned actually as the market reacts and to leverage the like the selling teams.
And on the manufacturing infrastructure and.
And the and the regulatory approvals the actually a significant amount of work went into last year. So yeah, we feel quite well set.
And and just digging a little deeper into that.
Is the play really the sell these these.
Better offerings into the existing base of customers and relationships and maybe replacing something you were providing or having it be incremental or are there. Other market segments that are the key users of these products, where you know you need to build the relationships that really drive the goal of penetration of that product category.
Yeah. Good question and it's really fun to eat like for example, you know with existing customers. So let's take for example, the business service contracting.
And.
And that we are helping those customers to further differentiate it.
As they look to compete in that market. So we're able to to build new propositions for them to health of that and when using the IH pay technology, but you know and then there are other areas. So we've had some nice success with distributors and.
For example in their warehouses and they are using our products.
And increasingly many of the use of new customers to us.
But they you know they've been really interested in in both the efficacy and the safety of our product and it's being used and I you know high intensity environments I look at its.
It's price and.
And pushing hard on bikes actually of the amendment and yeah.
Expect that the continued to accelerate.
Thank you.
Yeah.
As a reminder, and the interest of time. Please ask one question and one follow up question and re queue for additional questions.
Our next question is from Andy Wittmann with Baird. Please proceed with your question.
Great. Thank you for taking my questions. Good morning, I guess, where do you want to start.
We were just talking about net new and the food and beverage side, maybe Phil if you could just touch on what Youre seeing on the institutional side of the business I heard some cash.
Comments from your prepared remarks overall about you know great retention levels clearly that was a factor all through last year. It sounds like the factor here and I'll comment on the net new and that side. So it's hard to give you a chance to took off and talk about what you're seeing there.
Yeah and he has.
And for that.
So the institutional has been going strongly on that from to and if I look at the at the new wins.
Pad to any losses, you know the there's a very significant ratios that are in fact, you know I I struggled to point and any.
The significant losses that.
We've been saying on the new win side.
And.
We've really seen some nice feature of this wins and I don't just mainly in North America business, you had a very significant win in Europe of them.
The digit million win that we completed them over the over the first few months.
On one side, we've been pushing more and more of them into cash homes, we're having some nice success. The so you know again, none of the stage is in our numbers as you know these things take some time to implement.
But it does suggest that the propositions working well and it does suggest that we're building some really nice momentum.
That's helpful. And then just for my follow up maybe this one's for you.
We've talked you've talked here and there's been questions on the margins of raw materials, obviously isn't focused on people's minds, but I wanted to go a little bit different direction, just talk about given that we're still a little bit of a under our line.
COVID-19 cloud here at least from the quarter was there anything in the margins that would be unusually beneficial.
And though the depths of last year's had seen some net.
Yeah.
Sorry, I cut out there for a second.
There were some chan.
Challenges, but you know lots of companies had furloughs and other things like that.
I was wondering if there was anything in the quarter of this year that you did that would be considered over the unusual that would come back next quarter or maybe next year at this time.
And just that you had to do because some of the COVID-19 challenges certainly travel has been something and lots of companies Cup of called out but I was wondering if there's anything besides that that's that's notable and the margin profile there.
And maybe it's worth talking just for a moment about gross margin.
You know you've heard bill talk about how we're dealing with the raw material inflation and pricing and other.
And actually I think when you look down at the gross margin mix and the quarter Youll see some degradation VP of why year on year, and that's really driven by mix and certain.
Certain sectors like foodservice and hospitality you know given the lockdowns tend to have higher gross margins because they also have some higher service requirements on those applications and.
And that probably is the most of the due with the gross margin.
Challenges and the quarter, along with some of the the weather related and and and supply related challenges to get our customer service and North America and infection prevention and those are the two kind of main drivers of gross margin and in the quarter and as a result at times of significant mix changes and if it you know it.
It's less informative to look at gross margin because we also then had much more favorable SG&A management.
As you'll see.
Which allowed us to improved 60 basis points year on year and Q1 with the I'd say really good cost discipline. There was of one there.
And there was a.
Charge related to the IPO that kind of the 80 basis point impact approximately on a gross margin of negative in the quarter in relation to our comp charges related to the IPO. So that's worth noting are the other way for versus what you're saying so.
I think that's you know.
Probably the color and I and I would agree you know as the $400 million and the base comes back we will need to add some discretionary spend like for any back end of the business but.
But the bulk of the furlough.
Out of the numbers right now are at and that's mainly supported of last year and Q2 and some end of Q3.
And so you know I just think we are kind of at.
The pretty disciplined quarter debt balance some of that mix change with the cost to serve and those.
And this application service intense kind of sectors. So it makes sense.
It does very much. Thank you very much for the context, there have a good day guys Yep.
Yep. Thanks, so much.
Our next question is from Jeff Zekauskas with J P. Morgan. Please proceed.
Oh, thanks very much.
Why are your inventories up so much that is it looks like they went up 12% sequentially and maybe they're 40% up year over year and your volumes are down.
And what's going on there.
Yeah, maybe I can.
Yeah, He's talking to you guys.
And that was going to say America take that one I'd say, the but you know the uneven demand and extended lockdowns and related to COVID-19 have not helped our inventory situation. You know our number one objective is the service our customers and so we during this time of wanted to make sure of that we had the right inventory.
Specific to those COVID-19 related type of Skus, but also I'll come back to my introductory point of seasonality Q.
Q1 is tends to be our lighter quarter and so we always have of build quarter on quarter and.
Especially this year as theres, some uncertainty of the to the pace at which markets reopen we've chosen to invest and inventories so that as those markets open and we're able to reel.
And really quickly service the demands of those sectors that have been down and so we've made it a priority would be ready and have the right products and the right place at the right time.
And what our customers need us and so I would also caveat that by also saying it all by the second half. We would also expect to make progress and bringing that inventory down prior to year and is reflected in and how we're thinking about cash flow for the year.
And your outlook and you said that your 2021 full year will be in line with your expectations at the time of the IPO can you remind me what your expectations for and what are your expectations for the year and.
Terms of EBIT.
We didn't provide a specific.
Specific a guidance.
On absolute numbers and not respect we just talked about the fact the.
And what we'd expect on the top line and that we would expect the margins food.
The continued to expand and I think the point of describing it as we did was to explain to you the.
You know, we all trading and the first quarter above.
Our expectation and whilst the lockdowns are going to be tougher in Q2 than we expected, we think that'll balance out and we will still be making the progress that we hit the halfway point yeah.
And we expected really to make sure that you understand the overall.
The.
The the Lockdown situation, we don't think of something that's going to cause us ultimately more pain this year and.
And the high input costs, the Texas free isn't something that we can't overcome.
This year, we feel good about them managing through the nice situations.
The only thing that we did because the you know we grew.
18% in 'twenty, and 'twenty versus 2019, and we expect to see some sort of the Greg and.
And 21 of adjusted EBITDA and this is a 20 and of course, we'll we'll continue to keep you updated view on that as we go see the yet.
Great. Thanks, so much.
Our next question is from Laurence Alexander with Jefferies. Please proceed.
Good morning could you just sort of give updated views on how quickly you grow your sales force this year and over the next three years.
And also how you're thinking about the degree of differentiation you have in chemistry software or machinery for the water treatment value proposition.
Yeah sure let me.
Now let me let me start.
And look in terms of the sales folks.
The significant.
Strategic drive the commercial excellence and.
And that is leading us to really change the mix of.
Our sales force.
And maybe between what we call pharma is on hunches.
So that doesn't necessarily result, and a significant increase in the number of our people and our core business, just a mix and the skills and talent and experience of those people that all of those some areas, where we do expect to increase the number of salespeople sorry, not global.
Counts area, we would.
Expect to grow a little bit and some of the emerging market. We think we have a real opportunity.
And I know side of it we you know we've identified certain geographies and the food and beverage business, where we expect to grow but we're not talking about enormous.
The increases and cost over all of that pretty targeted and focused where we think we can get really great and return on that.
If I come to your second question, which.
Which I think was around you know the diff.
French nation and water treatment.
Think we feel really really well and.
Position and the whole of the food and beverage area irrespective of what we bring the customers I talked about the service a bit of Elliot, but if I look at the old Guard system.
And that we that we have that we get from Sylvanus, if I look at the Italian key I think.
The Todd mentioned debt that we launched where you know, we feel really well positioned against all of our competitors.
Well thank you.
Thank you.
Our next question is from Iran, and the Swanson with RBC capital markets. Please proceed.
Great. Thanks for taking my question and congrats on a good first quarter here.
So I guess.
And I don't know if this has been addressed yet the apologies but.
I was just looking at slide 29, and you know many of the improvement plans you have for margins longer term I think are going to that 17 per cent range could you provide and update on how you're tracking on some of those I think it was $100 million and total and if COVID-19 and some of the lockdowns or.
And maybe even the reopening of <unk>.
The affected the that trajectory at all thanks.
And Todd do you want to pick that one up and the first instance.
Yeah sure well first I'd start with you know, we're making the margin progression you know that.
We hope to and the first quarter, we saw the improvement at the bottom line to it all.
60 basis points so.
This year, starting out and that range of 50 to 100 that we.
Suggested we would target that's going to change quarter on quarter, depending on different variables, but and we're off to a start there that that is in line with what we expect.
We do believe the as we've stated earlier, our long term EBITDA margin target.
Is <unk> 20 per cent or above.
Which is roughly 500 basis points higher than where we landed and 2020.
We have high confidence and making meaningful headway towards our long term potential and the next three to four years.
We do have strong capabilities in place to drive.
<unk> margin expansion through strategic pricing and sourcing.
And we also have a detailed the plan to drive supply chain savings through additional in sourcing and.
And optimizing delivery frequency through better order pan plant patterns and fulfillment discipline.
Youre right to reference page 29 that gives you more detail about some of the specifics that we're working on.
With respect of sourcing.
Phil mentioned.
<unk> with Formula Harmonization, and Q1, which is helping us a.
Through this time of interesting.
The challenge with some inflation and and and provide an offset there.
I would also suggest the R.
Roughly 70% of that.
And those four buckets.
And of supporting and improvement in gross margin going forward.
With respect to the supply chain and we're making significant.
Progress on looking at our footprint.
Which work, which is where we see some significant opportunities as the number one and source and put things and places where they should be the optimize not just cogs in terms of the product cost, but also logistics optimization around freight and warehousing.
That's the that's moving on as planned and then our earnings improvement program, which is really more focused on.
The general and administrative kind of opportunities.
And is on track.
Ah versus our plan for this year are the.
COVID-19 and markets haven't affected that at all.
Been able to focus down.
COVID-19 is actually presenting some new ideas for us.
Because we're now learning how to operate.
Honestly with our customers and a more remote fashion, which going forward should also provide some real opportunities and how we service customers leveraging some technology that we have to.
To provide remote service, which over time is another opportunity for us to really improve our efficiency and the business. So overall I'd say we're on track.
Haven't changed our outlook and the opportunity and we hope to deliver as we said and the.
And upfront margin accretion this year.
With our guidance.
Great. Thanks, a lot.
Okay.
Our next question is from Kevin Mcveigh with Credit Suisse. Please proceed.
Great. Thanks, so much.
And if it keeps up to kind of the number of strikes at the potential of order opportunities 20 per cent of the core and base.
Any sense of how that comes in I guess number one the margin impact of why the mall.
How does the board of opportunity at the institutional they contributed about <unk>.
20% of potential SMB, you know how it goes.
And that that within the context of the institutional business.
Yeah.
So Luke.
We have and existing.
Water business in institutional.
There's certainly more we could day I'm working with our partner, but we made of very conscious decision.
Start with accent day, why we saw the the opportunity was the most significant.
And that's the basketball we've done so you know, we we may well together and come back and push harder and into institutional but we saw the if it was right of sign up and day. So.
So that's what we've done the first part of it just remind me the first part of your question.
You still have any sense of the.
And it sounds like it could potentially you know the opportunities 20 per cent of the existing F&B business and he said sort of how that comes in and is that a three year build of five year and bills just how should we think about the scale.
Yeah sure. So I think I said Elliott and the.
And the fact, we've won the first global the counties of little bit ahead of what we expected. We think this will take time.
Because we focused initially on existing customers and the.
Significant amount of our business with large global accounts and they tend to be under contract.
For for maybe on average two or three years and therefore, it will naturally take some time for us the have the opportunity to win all of the vast global accounts business. So you know I think at the <unk>.
Same time, and we feel enormously excited about the proposition and what it's going to do for us I wouldn't be assuming that this is going to be tens of millions.
In the first year or even the second deal I think the she's going to take some time and build somewhat modestly.
And then really start to accelerate as we get into the third year.
Yeah.
That's helpful and then could.
Could you put some numbers of sitting back and the Texas region and the quarter, maybe around the revenue, we're just margin and.
You know just any thoughts on that and if there's any lingering impact I don't think so over the balance of year.
Yeah. So there's no as I said earlier the.
You know the the the overall input and.
Cost inflation.
We're somewhere between one and a half and 2% and.
And in the first quarter and we think it may go up and little bit from that and it's it's it's pretty hard for me to.
Determine the impact of the Texas free versus other things and all.
All of them and I guess to some extent of it doesn't matter, but that's.
That's what we sold in Q1 and.
Do you think it'll kind of touch more in Q2, which is why we see now making sure that went and adjusting prices.
Accordingly, and then we think and it'll abate and that once we get more into the third and particularly the fourth quarter.
Thank you.
<unk>.
Our final question is from John Roberts with UBS. Please proceed.
Thank you on slide 25, if I compare the middle of Renormalization bridge with the left side 2000, Twenty's surge bridge it looks like the personal care of hand sanitizer.
K comes down more and a percentage basis as it renormalization is that just because he and sanitizers went up more on a percentage basis or maybe in other words did hard surface and personal care. Both go up similar percentages in 2020.
So.
Thank them the way to think about this is the in the hard surface space, we have a very differentiated.
Ugh.
And you know it remains and my view the market, leading product and Nashville, the growth that we saw the AD I think he's very sticky okay on.
On the personal cash side.
And the products in general are less differentiated and we did a really good job with availability of product last year and.
And we you know, we we organized the supply chain and adjusted it very quickly and.
But we're able to take advantage of that expanding market I think that it's also harder to retain all of that growth given the products in general of just less differentiated than what we see them on the hearts of side.
I'll leave it there for sure.
Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to Phil for closing remarks.
Thank you David Thank you all of them for.
Joining us today I would just say I know it was slightly ahead of the time in conclusion and.
We feel really good about the quarter that we've posted we're managing the challenges of COVID-19 and the Texas freeze.
Input costs are appropriately.
We're really making some nice progress on delivering the strategic plan that we that we laid out again for you today and we feel we're really firmly on track to go live of the 2020, one plan and to deliver further adjusted EBITDA growth on top of the 18 per cent that we deliver.
We didn't have it last year, so with that I'd like to thank you all I wish you all the good day. Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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