Q4 2021 Diversey Holdings Ltd Earnings Call

March 9, 2022

[music].

Welcome to the diversity holdings fourth quarter and full year 2021 earnings conference call.

At this time all participants are in a listen only mode.

Question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

Now my pleasure to introduce your host Greg Greater Investor Relations.

You may begin.

Okay.

Thank you Hello, everyone and welcome to diverse these fourth quarter and year end 2021 conference call with me today are Phil we lend our CEO and Todd Herndon, our CFO as a reminder, during this call we will make forward looking statements.

Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC.

The company does not undertake any duty to update such forward looking statements. Additionally, during today's call. The company will discuss certain non-GAAP measures and make references to certain supplemental data, which we believe can be useful in evaluating our performance.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP are.

A reconciliation of these non-GAAP measures and are well and referenced supplemental data can be found on our website at IR that diversity dot com and in our most recent annual report.

And now I will pass the call over to Phil.

Thank you grant and good morning to all of you joining us.

There are several areas that I would like to highlight this morning, as well as providing some additional context regarding our outlook on how we see our company navigating these unique times, specifically I'd like to highlight our results provide a brief update regarding our long term expectation and how we are positioned to.

Our EBIT and margin goals, along with some of the global dynamics, we are managing and how our business model is uniquely built to tackle. These challenges I will then turn it over to Todd to provide further details on the quarter and our 2022 guidance.

Firstly, it's important to say that we can live with a fourth quarter target. Despite the increasingly tough operating environment.

On the topline, we grew 1% versus fourth quarter, 2020, and our base institutional and food and beverage businesses, which together represent more than 85% of our revenue grew 17% and 14% respectively.

On adjusted EBITDA, we delivered approximately 14% growth versus the fourth quarter of 2020, as we expanded margins to 16, 3%.

For the full year, we reported flat revenues versus the pre pandemic.

The 19, demonstrating the resilience of the business with significant additional recovery remaining.

Within this we have seen an acceleration of market share gain having one net new business equivalent to approximately 3% annualized topline.

Both segments, while retaining 99% of our top customers revenues.

We delivered industry, leading adjusted EBITDA growth of more than 20% against 2019, and we saw adjusted EBITDA margin expansion of 40 basis points against 2020, and 270 basis points against 2019.

We leave 2021 with solid momentum on strategic drivers.

Whilst we've seen encouraging recovery as markets open up we still have the 220 million post COVID-19 market recovery in front of us.

We're accelerating our market share growth from 2% net new business wins in 2020.

3% annualized in 2021 and are seeing further improved improvements to net new business in the first 10 weeks of 2022.

We have also added five new businesses through M&A over the last 15 months.

We strengthened our overall business and our most important geography, and bolster our supply chain efficiencies and customer service excellence.

Have a full pipeline of further opportunities under review.

We are pricing smartly, but firmly to cover inflation, we took an average of over 3% in 2021 over 4% in Q4, 2021 and anticipate taking over 6%.

In 2022.

Reflecting the essential nature of our products and services our price increases.

Well accepted across our institutional and F&B businesses.

We expect these increases to remain intact.

We also remain committed to lowering fixed and variable costs.

As such we expect margins to accelerate when inflation begins to subside.

Whilst we cannot accurately predict the timing and speed of future inflation, we do anticipate maintaining our pricing discipline.

We were pleased to deliver further margin accretion in 2021, despite the very tough environment.

The opening of our new factory and warehouse in Kentucky at the end of 2022 will be another important milestone, adding 100 basis points to a group margins.

We remain fully committed to our long term target of 20% adjusted EBITDA margins.

As a reminder, that diversity is one of only two large global players to offer a full suite of hygiene and infection prevention and cleaning solutions in an industry that remains highly fragmented.

We've spent the last three years transforming our business strengthening our team driving pricing discipline, delivering operational excellence implementing a clear strategy to take market share and strengthen our business through M&A.

This leaves us increasingly well positioned to take advantage of our growth full yet fragmented 32 billion dollar addressable market.

Now, let me go back and unpack some of the headlines a little more.

Base institutional business, excluding infection prevention grew by 17% in Q4 and 15% in the full year 2021, we.

We previously explained that we temporarily lost approximately 400 million basically food service and hospitality revenues in 2023.

The reopening of markets in some geographies, along with our pricing and market share guidance is driven extra magic upswing.

Our share gains are driven by our investments in U S foodservice hospitality commercial excellence and global accounts as well as our innovation pipeline and recently upgraded ESG plan, which becomes more important to customers with each passing quarter.

Todd will provide more color around the institutional base recovery, a little bit like that.

Separately, we gained over $420 million of growth in 2020 institutional infection prevention.

This has normalized since Q2 2021.

Level more than 20% ahead of the pre pandemic level. We believe this represents a permanent step change in a growing market.

Q1, 2022 is therefore anticipated to be the last quarter of normalization this new run rate level.

We see good growth prospects for infection prevention supported by a range of new and soon to be launched products for example, especially production wipes and hand care wipes as.

As well as our recently announced expanded distribution agreement with Reckitt benckiser to bring that trusted brands to our portfolio in more parts of the world.

Our F&B business has been gaining share over a sustained period. We anticipate this to continue supported by our water treatment offering which continues to be well received by the market on Fireeye acquisition of book in the U S. We strengthened our north American F&B presence so that we can.

Now believe we're the number one or number two player in every region around the world.

And M&A our plan remains unchanged at 2% to the top line annually with targeted multiples ranging from six to 10 times EBITDA on a trailing 12 month basis and less than six times on a fully synergize the basis.

During the last 15 months, we acquired summit in Poland as more in Canada Tasman in Australia.

In the U S and sharp <unk> in the U K.

These acquisitions, all met the financial criteria above and strengthen our presence supply chain customer service and important geographies. We are pleased to report that progress with integration is good and synergies are being delivered in line with the acquisition plans.

During the fourth quarter, we completed the acquisition of the Corporation. This acquisition enhances our scale and competitive position in the global food and beverage market and transforms our north American food and beverage sales manufacturing and technical service footprint, which has been a strategic priority for.

For us.

Additionally in January of 2022, we acquired Shaw, which strengthens a leading institutional market position in the UK.

The acquisition expands our portfolio of products and services, including innovative sustainability solutions. It also enhances diversity sales and service capability through shocks experienced employees and distribution infrastructure.

I'd like to give a brief update on the use of funds from the equity issuance in November .

Consistent with the rationale explained at the time, we have invested in the <unk> transaction as described above but kind of in shock, which is strategically important to the U S and U K, our two largest geographies.

Secondly, we're investing in the new factory and warehouse in Kentucky, which as described earlier.

Charity talk global margins.

And thirdly, we're investing in an increased level of new business growth, which will become evident as we go through 2022.

Now we are clearly off pricing in an unprecedented environment with COVID-19 virus impacting global economies rising inflation and supply chain bottlenecks in other operating expenses that can be difficult to predict and challenging to manage against that background I am extremely pleased with the resiliency of our business.

Module on our management team's ability to be agile in the short term, whilst maintaining focus on our long term goals.

We remain confident that diversity is positioned to maintain its targeted gross goes up double digit percentage adjusted EBITDA growth.

We are encouraged by the ongoing recovery in our institutional base business.

<unk> to build as the markets around the globe stabilized and re Iceland.

We enter 2022 with a larger sales force and more products that can drive growth as we realize the benefits from our acquisitions completed over the last few years.

I would like to thank all of our dedicated and hardworking people at diversity, including our new employees from Buck, having short, but that dedication and delivery and uniquely tough times. This is a great time for diversity to shine and we thank you for everything you do.

With that let me now pass it over to Todd to further discuss our fourth quarter financial results and our outlook for 2022.

Thanks, Phil let me start with a summary of our consolidated net results.

Net sales for the quarter were $672 4 million and increased as expected up $7 5 million or one 1% versus third quarter and $5 million or 0.7% versus prior year.

I'd like to take you through our segment performance and you can reference page eight of the supplemental presentation posted today to our website for additional color.

Our institutional segment, which represents approximately three fourths of our business and revenue saw revenue declined three 5% versus Q4 2020.

However, as Bill mentioned this decline is not reflective of our run rate revenue and underlying growth rate as we head into 2022.

Our base institutional business continues to recover with 17% revenue growth in the quarter as compared to fourth quarter 2020.

However, this was offset by infection prevention is 51% decline as compared to the elevated demand in fourth quarter 2020, although it was still more than 20% above 2019 levels.

As depicted on slide 10, we are encouraged by the recovery of our base business as markets reopen from Covid.

We believe we have further opportunities to recapture at least $220 million of revenue that was lost during COVID-19 .

We also expect to continue to win market share, while focusing on our pricing to cover rising input costs.

I'd also like to note, how we see the infection prevention business normalizing in 2022.

As shown on page 11 of the presentation, we continued to experience normalization after the first quarter of 2021.

At the start of the pandemic, we saw our infection prevention business grow significantly in 2020 by more than $420 million in revenue.

While we anticipated and communicated demand would moderate during 2021, the normalization occurred much sooner and deeper than we expected.

We expect a roughly $360 million year over year revenue decline for this line of business between the second quarter of 2021 through the end of the first quarter of 2022.

The majority of this decline approximately 80% has already occurred and is captured in our 2021 reported revenue results.

We expect the remaining 20% or approximately $70 million to occur in the first quarter of 2022.

However for the balance of 2022, we anticipate a return to growth in infection prevention, driven by our expanding share with HP ox severe and healthcare the further globalization of our market leading products.

Our new product innovation launches and our recently expanded partnership with Reckitt Benckiser.

Note the combination of the post COVID-19 reopening of over $220 million and the remaining infection prevention normalization of 70 million makes up a $150 million of net post COVID-19 market recovery to come.

Turning to our F&B segment compared to Q4 2020 revenue grew by 14% and adjusted EBIDTA grew by 15, 8%.

When comparing to Q4 19.

Revenue expanded by 16, 4% and our adjusted EBITDA grew by 13, 8%.

We're very pleased that our F&B business continues to grow its customer base and revenues through new business wins acquisitions, and increasing traction in water treatment.

Okay.

<unk> adjusted EBITDA of $109 5 million for the fourth quarter was $13, 7% above 2020, and $16, 1% above 2019.

We are clearly operating in an unprecedented environment with COVID-19 variance impacting our global economies.

Rising inflation supply chain bottlenecks and other operating expenses that can be difficult to predict and challenging to manage.

We've been extremely pleased with the resilience of your business model and our management team's ability to be agile in the short term, while maintaining focus on controlling our fixed costs and leveraging our scale.

This is reflected in our adjusted EBITDA margin, which was 16, 3% in the fourth quarter up 30 basis points sequentially and up 190 basis points compared to fourth quarter of 2020, and 200 basis points higher than fourth quarter 2019.

For the full year, we increased adjusted EBITDA margin by 40 basis points versus 2020 at 270 basis points versus 2019 through operational efficiency programs and effective pricing.

Okay.

Now, let me touch specifically on costs for a moment.

The current reality is that inflation is both difficult to predict and presents unique challenges to manage.

This was already the case before the conflict in Eastern Europe and is now magnified further.

This cost volatility can put pressure on margins in the short term, but over time. It will eventually turn positive as inflation receipts and we continue to price for the value we provide to our customers.

To offset and get ahead of costs, our full year pricing expectation for 2022, there is an increase of more than 6%.

Combined with our steady productivity gains, we anticipate offsetting inflation first in dollars and as inflationary pressures moderate we believe we can capture long term margin improvement.

From a free cash flow perspective in Q4, we took what we believe to be a prudent and conservative approach relative related to working capital.

We maintained elevated inventory levels to be able to continue to service our customers, while the supply chain environment remains under pressure.

We also had higher receivables in the quarter, which are transitory in nature due to regional mix and a decision to end our European factoring program, which was expensive to maintain and our needs were better met through optimization of our securitization program.

We see expanded securitization in 'twenty, two as a cash flow opportunity along with the portion of the increase in working capital experienced in Q4, which should reverse and provide a tailwind in 2022 as the environment normalizes.

Moving to our balance sheet, we successfully secured additional capital to support our infrastructure build out and to support future growth opportunities, both organic and through accretive acquisitions by raising $215 million of net proceeds in our November 2021 follow on.

Our net debt leverage ended the year below four five times, which triggers a step down of our interest rate saving roughly $14 million per year in cash interest when compared to our rates before refinancing the.

The seasonality of our business typically drives free cash outflow in the first half of the year, but we're focused on generating increased cash flow for the full year of 2022.

We maintain a strong liquidity profile with over $600 million available as of year end, which we view as a position of strength as we continue to selectively consider accretive M&A opportunities and generated operating free cash flow in 2022.

We've completed two transactions funded by our follow on stock offering in November which Phil described earlier.

Combined these acquisitions are estimated provide approximately $80 million of revenue and double digit percentage adjusted EBITDA margin in 2022.

Synergy opportunities are expected to improve profitability and accelerate growth over the next 24 to 36 months.

Finally, let me provide our view on the general outlook for our business.

We expect revenue to grow by high single digit percentage from our full year 2021 revenue of approximately $2 six 2 billion.

This reflects the post COVID-19 recovery pricing accelerating new business and the M&A already described.

We continue to operate in a challenging environment, which was further impacted by the conflict we are seeing in Ukraine.

We previously anticipated that these challenges will persist through the first half of 2022.

Again to show improvements towards the back half of the year.

However in light of the concerns related to the impact on oil and oil linked to raw materials, we are including an additional 25% to $35 million for what could be the adverse impact of oil prices on the business.

Accordingly, our 'twenty two adjusted EBITDA guidance is $380 to $420 million.

This guidance range is also inclusive of the approximately $30 million of adjusted EBITDA headwind in Q1 related to the normalization of $70 million of our infection prevention revenue previously outlined.

While we're confident we can continue to address these challenges over time through pricing and rigorous cost management, where we land within the range will be dependent on timing and which the current environment begins to abate and the impact of actions, we have or will be implementing to mitigate take effect.

We're managing this business for the long term and remain confident that diversity is positioned to maintain its targets to the goal of double digit percent adjusted EBITDA growth.

Our business model has shown resiliency during the past few years and we're encouraged by the ongoing recovery in our institutional base business that continues to build as the markets around the globe stabilize and reopen.

This forecast assumes for the balance of the year, a moderation of inflation by the end of the year and we expect pricing and continued company country reopening will create a great platform for sales and earnings growth as we launch into 2023 with pricing carryover, our new plant in Kentucky in full swing and continued growth.

<unk> of new business, we are currently experiencing.

While it's not our intention going forward to provide quarterly guidance given the timing of when we are reporting the challenges with inflation in our year over year comp, we wanted to try and provide some context on our revenue and adjusted EBITDA outlook for the first quarter.

At this time, we expect revenue to be approximately flat to Q1, 'twenty, one driven by the last quarterly headwind lap of infection prevention normalization.

Adjusted EBITDA for the first quarter will be $56 million to $60 million, assuming no further changes in the current environment. The last three weeks of the quarter.

This outlook reflects approximately 7% to 15% growth over Q1, 2019 baseline and is similar to the pre pandemic phasing of our business for Q1 relative to the remainder of the year.

As a reminder, Q1 2022 will be the final year over year compare challenge from the normalization of infection prevention and our institutional segment and we expect the opening of the markets and other key strategic growth initiatives to provide a nice tailwind for the remainder of fiscal 2022.

And with that operator would you. Please begin the Q&A session.

Thank you we will now be conducting a question and answer session.

I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is open the question queue.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star Q1 moment. Please while we poll for questions.

Okay.

Yeah.

Okay.

Yeah.

Thank you.

It comes from Vincent Andrews with Morgan Stanley . Please proceed with your question.

Thank you and good morning, everyone.

I was wondering if you could just give a little more detail on the 25% to $35 million, you're anticipating for oil and respecting. The fact that it's very difficult to make these types of projections right now I'm, just really asking sort of what what range of oil prices does that assume.

And what in particular are the actual derivative products that you are buying that youre. Most concerned about seeing inflation in and then maybe just wanted to talk broadly about raw materials and freight and what that overall picture looks like even the ones that are not necessarily tied to oil and sort of what's embedded in the guidance.

Yes sure. Thanks, Vincent Thanks for coming on the call.

As you guys know, where an exceptional time right now and the environment is changing daily.

This was our guidance was our best view as of inputs actually through yesterday.

<unk> been floating around $125 a barrel since this past weekend.

What we did was we extrapolated that impact across our basket.

Of oil and energy related materials raw materials.

We looked at pricing and tried to factor in a typical price cost lag and we generated that range given what we know today.

I think we've done a really excellent job delivering incremental pricing through excellent execution over this past year.

Maybe to provide a little bit more color.

On direct materials and incremental cost in materials.

Our direct materials are about 33% of net sales.

Direct material costs were up about 10% in Q3, 2021 and about 16%.

In Q4 2021.

Direct material costs are up roughly about 30% based on the latest insights.

It goes from here of course is dependent on what happens.

With Ukraine, and continuing things, there and the market environment.

Fiscal 'twenty two estimated direct material cost inflation is about 24%.

Based on what I mentioned earlier on the assumption on oil and oil based derivatives and products that are affected by that materials.

And that includes our current view on Russia.

Ukraine as we sit here today.

Based on all the work we've done and communicated we are confident in at least 6% price growth.

Based on the recent news of this past couple of weeks, we're planning on going again with further pricing now that we've seen the impacts of this last several weeks.

And our work in those plans as we speak.

Historically, we've talked about.

<unk> materials.

That are linked to energy and.

Oil based.

Price per barrel like caustic like <unk>.

Celine propylene and the derivatives come off those products.

Historically those have.

It's been about 45% of our raw material purchases.

The remainder of the tail of raw materials arent necessarily linked to that.

Market basket of commodities and there's a long tail.

Outside of that so hopefully that provides you some color.

On an issue that is.

Everybody is wondering about.

Yes, no that's great obviously very challenging to forecast right now just as a follow up.

Thank you for the color on the working capital in the fourth quarter, but maybe you could help bridge us to 'twenty. Two is how we should think about.

Getting to a free cash flow number from your EBITDA forecast.

Yes sure.

You guys can take the range you want for starting with adjusted EBITDA, but.

Our cash interest given the refinancing.

It should come in around <unk>.

$71 million with couple of $2 million to $3 million for securitization cost of $74 $75 million there.

Our Capex if you look at <unk>.

Base Capex number around 100 billion and you know we have the finishing of our significant plants investment, which if you use about $30 million, you'll get to the right.

<unk> ballpark on Capex.

We.

Have a range of cash taxes, probably around $45 million to $50 million based on a range of EBITDA. We gave you guys here on the call.

I think our cash onetime cost next year will be around seven.

$75 million to $80 million.

And I do think we will have positive impacts on working capital.

And the 20% to $30 million range.

Resulting from some securitization benefit.

Some inventory benefit because I do think as we move through this year the supply chain challenges will relieve in the back half of this year, which will allow us to take.

A more aggressive actions in the inventory area and we're working on a number of things in the working capital area to help us really drive improvement.

In the next 12 months. So all of that gets you Vincent to a number that our free cash flow number I think thats.

Floating around $100 million.

Okay. Thank you very much I'll pass it along.

Yeah.

Thank you. Our next question is from Manav Patnaik.

Barclays. Please proceed with your question.

Thank you good morning, I, just wanted to touch a bit on.

Some of the comments you made on the map.

And just focusing on the institutional business and a lot of the growth might be part of it because the part of new sales I was hoping you could help us.

Great.

We know that growth by pricing the new standards, and just just as with housing and kind of the visibility going forward.

Yeah Manav.

Firstly, let me.

Let me do that so let me start then with the with the new business.

We added about 3% of new business.

Last year, that's what we won in a number probably a fraction less and we won that really consistent.

Consistent with the strategy, we've talked about before.

The U S foodservice focus we did well there.

One while.

Also we're not global accounts business.

The the extra energy.

Commercial excellence across the world is really starting to.

As we also alluded to we've seen that number accelerates that we were more like 2% in 2023% last year, our customer really nice step up.

And the first part of this year.

In terms of price really a similar trend.

We saw.

Over 3% across the full year.

But we were more like four 5% in the fourth quarter size.

We've seen that accelerate as well in terms of recovery, we tried to give some extra insight that we said.

As we as we tend to yet thats something lie.

More than $220 million.

<unk> I think the critical point there is that we are seeing it come all the way back and if you refer to I think it's page nine on the supplemental you'll see that in North America.

We went back to 97% of pre pandemic volumes and that's of course before offices reopened to any great extent. So we think we're going to be.

It really fully recovered as offices reopen whenever that is hopefully in the next few months.

Well, it's a bit behind but it's coming back we see it now we see it starting to recover.

Already this year. So hopefully that helps you can see the different elements of what's driving the growth.

Okay. That's helpful. And then just the other question I had.

You guys, obviously have a very active M&A pipeline.

Hopefully you'll scale helps you in a better position than some of the time.

But you are going after so does that mean, the pipeline potentially get bid and try to be more active.

Are we going to see a slowdown in some choice.

Well look I think the first thing to say is.

The M&A that we've done has been entirely consistent with the strategic drivers.

Around key geography, strengthening supply chain, adding in the <unk>.

Areas of technology product.

Consistent with.

Financial targets six to 10 times EBITDA with a post synergy number of below six so we feel really good about that the pipeline is just as strong.

We.

We completed these five transactions, but we have a very long pipeline of.

Possible deals that fit the strategic rationale.

The financial rationale so I cant give you any more indication of exactly what we'll invest Wang.

You know that we said, we'd do at least 2% top line.

We certainly have a pipeline that would support a number well north of that.

Thank you.

Thank you. Our next question comes from Christopher Parkinson with Mizuho. Please proceed with your question.

Hi, Good morning, this is kieran on for Chris.

I was just wondering I think it was slide nine you broke out.

<unk> on kind.

Kind of abates institutional business by region.

Can you just give us your insights into how we should think about growth by region into 2022, and how you see that progressing throughout the year specifically.

If you can highlight Europe , and North America that would be helpful.

Yes.

Let me do that so.

As you can see from the chart on page nine much recovery in North America.

It's happened already.

Set there is more to come specifically around offices and also some of our contract caterers still have some volume to come back.

But I think more of the growth there is going to be from new business.

And as I said, we've had some.

Really good activity based in the backend of last year and also in the start of this year. So we will see more growth coming in North America, driven by new business, if I look at Europe .

That's a lot all recovery coming through now so whilst we averaged eight 1% as you can see on the chart last year at volume versus pre pandemic that number would be getting into the nineties now so really a significant.

Bounce back.

The same is true of rest of the rest of the world. They certainly behind Europe Southeast Asia for.

For example, if I think of India.

And also Australia, New Zealand they started reopening late to the in Europe , but we're now starting to see the upswing coming.

Yeah.

Great and then maybe just a really quick follow up on the pricing.

If you have the numbers available like where did you exit the year and how should we think about that pricing flowing through throughout the course of the year and then.

As we think towards the second half of 2023.

How do you how do you view the stickiness of those prices at some of these costs kind of subside. Thank you yes.

Yeah sure good question.

In terms of exiting the year.

We were about four and a half.

<unk>.

In the in the quarter and the fourth quarter of last year.

We expect the first quarter this year to be getting up close to the 6% number that we described.

And what we said earlier now when we when we were building our plan for the year.

With the expectations using that.

The forward view.

We thought that that would be a good place to be of course, given the wall and everything else thats going on even when a few weeks before the wall. We are now going out.

Pricing side of the city.

6%.

You should think of that as a floor.

We will be getting out globally and pushing that inflation is.

He is in the market through the business into customers and therefore would expect to see that.

Continuing to go up as we go through the year.

Great. Thank you.

Okay.

Thank you. Our next question comes from Ed Marine Rodriguez with Jefferies. Please proceed with your question.

Thank you good morning, guys, just a follow up on the pricing question.

So as you go through to your customers.

Able to.

Change of contract terms like to waste prices whenever or are those prices like I said like once or twice a year.

Yes.

The truth is there's a mix.

So.

Some of our contracts.

Able to change prices simply by giving a period of notice at any stage.

There are a number of price when it does.

And in a relatively smaller number there.

Rob.

A single annual opportunity.

And therefore, we.

<unk> got a.

Through all of those contracts and what we have seen even with values that just have an annual view actually a lot of customers understand whats going on here.

The.

Pretty amenable to having a <unk>.

<unk> contract discussion.

Okay and is your sense that by the end of the year as we exited 2022, you would have caught up.

With was if oil prices don't move much higher from where they are right now.

I think not quite so.

In the guidance, Tom described at $25 million to $30 million gap I think thats our view.

Absent the wall, we ask that you would've been.

Ahead of price versus cost with the wall, giving.

Giving an extra large surge in inflation if that continued right through the yet we werent quite.

<unk> got a full recovery on a dollar basis within the year to the tune of the 25 to 30 million.

Okay. Thank you very much.

Thank you. Our next question comes from George Tong with Goldman Sachs. Please proceed with your question.

Alright, thanks, good morning.

The supply chain issue is currently difficult to predict can you provide a state of the union on the supply chain and steps that you're taking to mitigate headwinds.

Yeah, George Let me, let me do that.

Let me start.

With raw materials.

I think the bottom line as raw materials have not constrained.

But they have created a huge amount of extra effort and energy perhaps at times.

We've been a bit hand to mouth, but we've we've tended to have life to get that in the end.

Labor.

Has been less of an issue for us than others that we are.

Read about across the market really frightens beam.

Our biggest challenge.

We are.

Somewhat dependent on that.

Party fright.

Freight carriers.

<unk> been a little bit disruptive for us would be let down late in last minute.

Vessels have driven a lot of cost and as we sort to make sure that we saw appropriate insurance in place. So all in all.

I Couldnt sit here and say, we've got millions of dollars of revenue.

But it certainly.

Tough to manage.

Driving a lot of cost.

Cost into the business.

Got it.

Then within the food and beverage business can you describe trends youre seeing with new business, what's driving the performance. There and then also discuss traction with your water treatment business.

Yes sure.

So in terms of the trends on new business. It really is a continuation of what we've been seeing for over two years now.

We have a we have a sweet spot with.

Products.

Service that is just really appealing to customers.

We have customers often they trial with us they like what they see.

But product service and then they buy more fully across that.

Across the sites and we've seen that consistently over the period that would be to say and that applies really to the different sectors and different geographies.

And we think as we look at our pipeline, we see no reason why that why that shouldn't continue.

In terms of water treatment.

We're about sort of double digit millions of revenue.

On a new water treatment proposition, which is a bit of hedges.

What we said I think we said when we launched we've got a few million one would be more like this 0.2, and then we'd get bigger growth rates that we're ahead of where we want it to be but that just reflects that.

Customers like it they really they.

They love the concept of being able to.

By cleaning and hygiene products alongside water treatment from a single contact that seems to really resonate in the market and the quality of the product and service.

As additive side.

Yes.

To go from strength to strength.

Yeah.

Very helpful. Thank you.

Okay.

Thank you. Our next question comes from David Whitman with Baird. Please proceed with your question.

Oh, great. Thanks for taking my question guys I wanted to just get a little bit of detail on the guidance.

Here.

You guys mentioned that there is a degree of M&A, that's baked into the guidance I just wanted to clarify that to start out with Todd.

Excuse me is that does that include M&A that has not been yet closed or does the M&A contribution in your guidance from deals that have been announced and close including this one that you did.

January just trying to get at that component as well as the organic growth maybe wanted to comment on.

The FX headwind that you're that you are guiding with here as well as the volume impact of recognizing that you've already said that you're getting at least 6% price.

Yes, yes sure.

What I would say to you is that the.

M&A that we've got in our forecast in the upper single digit kind of revenue growth guidance includes.

The two transactions that were.

Closed both berko and sure.

December and January .

Those are roughly $80 million in topline or about 3% M&A in terms of the guidance for top line, we've not assumed.

And that in that revenue guide incremental M&A in year that has not been closed yet and just again to talk about kind of the bridge.

Year on year, we think there is.

Sure.

You know, 3% growth from new business as Phil mentioned about 3% M&A.

Phil referenced about 6% pricing and we do have some.

Reopening.

Markets.

Range, 2% to 4%.

But then we are giving back some.

3% to 4% likely negative currency year on year impacts.

And then that $70 million of infection prevention normalization that we referenced in Q1 is another 2% to 3% give backs. So if you want a wreck kind of at a high.

The single upper single digits kind of revenue, we're guiding to that's the kind of high level revenue bridge from our perspective.

Great. That's really helpful. And then just maybe a clarification to follow up on the on the EBITDA margin side here. So.

Just want to make sure I heard this correctly in your prepared remarks, I think you said that 33% of your revenue goes to direct cost of materials and I think you said that your expectation was 24% increase in those costs for 'twenty two so.

$24 33, it's about 8% margin headwind, if I calculate that correctly.

You said you were talking about 6% at least price increase so that's suggesting just on raw materials alone you've got maybe a couple of hundred basis points of margin. It looks like thats pretty consistent with the margin guidance that you've given here, but is that kind of a way of thinking about the implied.

Adjusted EBITDA margins and why they are down and the reasons why they're down does that methyl Todd.

I think it does.

Or you could do the math in dollars right, 30% times, our revenue times, 24% and Thats also why Phil.

<unk> suggested we're also going back for more pricing given that guide includes a view towards the latest impact from Russia, Ukraine right. So even.

One of our values is bias for action. So even this next week, we're sitting down with the team talking about incremental pricing. In addition to what we just.

Talked about the 6% level to make sure that we can go get those dollars covered at a minimum and then see margin accretion beyond that.

Okay, Great I think I think to clarify yes.

I think the I think the good news too maybe one last comment on that as well.

The.

The Roes in that picture is that we believe that.

If and when inflation receipts. This is a business that doesn't historically give back a lot of the pricing it takes so.

Mid term.

That's actually good good thing for our business from our perspective.

Thank you.

Hi.

Thank you. Our next question comes from Arun Viswanathan with RBC. Please proceed with your question.

Great. Thanks for taking my question so two questions.

I think.

When we were going through the IPO there was some commentary that.

You guys built in 65 or $70 oil price assumption.

And I apologize if you touched on this but how are you thinking about that now obviously theres a lot of volatility out there but do.

Do you feel that your guidance.

Currently or at least.

Somehow kind of captures the current environment.

Okay.

Yeah look.

65 <unk>.

Slightly old fashioned math isn't that right the guidance that Tom described.

It's based on.

Seeing our continuing view of the current sort of $125, but it's been bouncing around.

Of course, the other thing that's true is we didn't talk about pricing at 6% plus in the Ipi sorry. This is just a different world.

There's different dynamics that has higher inflation on that but we are reacting and pricing accordingly, and that will always be a bit of a lag.

But over time that will turn out to be to be a positive.

But we've just got to get through it.

Right, Okay, and then thanks for that and then if you think about the full year guidance.

380 to $4 20.

It's about again, maybe I think down maybe about 10%.

From from when we were thinking back then.

Yes.

Is that is that mostly reflective of that 220 recovery. So said another way is that it comes back do you expect kind of to get back into that mid 400 range.

Maybe in 'twenty, three or 'twenty, four or how are you thinking about getting back to kind of.

Fully loaded earnings power.

Yes, really good question I'd start by saying look it's got more to do with this price cost thing that that we were just talking about.

If you would if you were to add the 25 to 30 back on to our guidance for the Ukraine situation that makes that makes quite a difference I think if I step back and say Wow.

This is the ipi.

The recovery.

Has been a bit.

<unk> because.

Obviously more variants and stuff, but now it's coming through really strongly I think we are pricing more as I said, we've done more M&A and better M&A than we might have believed and we've got more momentum on our strategic volume drive this asset water treatment is ahead.

I think the U S. Foodservice is ahead, I think commercial excellence and global accounts or ahead.

Thank you.

There's some some delays.

It also probably more momentum.

In the business as we go forward.

So sorry, just to clarify so it actually it sounds like when you do get full recovery of that just given the pieces that you've you've added the wins the potential margin. The pricing as you said you don't give it back you could actually be potentially beyond your earlier.

I mean, I don't want to be aggressive, but it sounds like youre exiting this period with a better position is that a fair characterization.

Yes, we feel we've got really good momentum and when this price cost thing on lines and the recovery comes back we think we're going to be really really well positioned in that kind of double digit EBITDA, yes, that's why we're going to get.

Great. Thanks, a lot.

Okay.

Thank you. Our next question comes from Matthew.

Round scheme.

Please proceed with your question.

Thanks can you just walk us through how we should be thinking about margin cadence as we roll through the year. Once we're past the first quarter, just trying to think of the price versus raws dynamic there and how that flows down to margins.

I can think I can say I can take a shot at that.

We're not we're.

We're not giving quarterly guidance at this point, but clearly the inflation in the hyper inflation.

War is on us now and so.

It's likely.

Likely that the first quarter the second quarter are much more challenged than the third quarter and the fourth quarter, primarily driven by this price cost lag that we've talked quite a bit about so.

I would expect that as we make our way through the year you would see.

Margin improvement.

As the price starts to catch the costs.

Given what we know today, which again.

Theoretically could change tomorrow, but.

That would be the way I would think about margin progression.

Likely.

Likely lowest in Q1, but hopefully recovering quarter on quarter as we go through the year. There is some seasonality in the business. We tend to have Q2 and Q3 pre COVID-19 .

Our bigger quarters.

But.

With that caveat I would say I think price catching cost.

Accelerates through the year.

In general.

Okay. That's helpful. Thank you and then you've made a couple of acquisitions since the last call can you just give us details on the seasonality of sales for these businesses, particularly <unk> and <unk>.

And if this will skew typical sales cadence we've seen in the past.

Okay.

Talk to you on apparel.

Sure.

We haven't guided as to quarterly seasonality of those acquisitions, but I would tell you that they're probably not material enough to swing any of our seasonality. It's about $80 million in total as I mentioned, so $2.78 billion, it's not going to have any any material impact on our quarterly phasing.

Thanks.

Yes.

Okay.

Thank you there are no further questions at this time I'd like to turn the floor back over to Bill Wheeler for any closing comments.

Yes. Thank you very much for that and thanks to everyone for joining I guess in closing I would just say the highlights delighted to hit Q4, great to have strong momentum with the base coming back.

With $220 million in front of us new business accelerating from 3% last year price accelerating 6%.

This year in rising and the M&A coming through strongly in addition, the U S factory and warehouse coming online towards the end of this year that we feel good about the plan that said of course.

These are very tough times.

The was a horrific situation.

And it's driving a lot of inflation into our business and that is going to be a price cost lag, but we feel confident that we'll come out of that.

Over time so.

Thank you for listening and participating and have a good day.

This concludes today's conference disconnect your lines at this point. Thank you for your participation.

Yeah.

[music].

Yeah.

[music].

And welcome to the diversity holdings fourth quarter and full year 2021 earnings conference call.

At this time all participants are in a listen only mode.

First question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

Now my pleasure today to introduce your host Greg Greater Investor Relations. Thank you you may begin.

Okay.

Thank you Hello, everyone and welcome to the various these fourth quarter and year end 2021 conference call with me today are Phil Wieland, our CEO and Todd Herndon, our CFO as a reminder, during this call we will make forward looking statements.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP are.

A reconciliation of these non-GAAP measures and are.

And referenced supplemental data can be found on our website at IR dot diversity dot com and in our most recent annual report.

And now I will pass the call over to Phil.

Thank you grant and good morning to all of you joining us.

Several areas that I would like to highlight this morning, as well as providing some additional context regarding our outlook on how we see our company navigating these unique times, specifically I would like to highlight our results provide a brief update regarding our long term expectation and how we are positioned to do.

Our EBIT.

Margin goals, along with some of the global dynamics, we are managing and how our business model is uniquely built to tackle. These challenges I will then kind of obviously tough to provide further details on the quarter and our 2022 guidance.

Firstly, it's important to say that we delivered a fourth quarter targets. Despite the increasingly tough operating environment.

Top line, we grew 1% versus fourth quarter, 2020, and our base institutional and food and beverage businesses, which together represent more than 85% of our revenue grew 17%.

14% respectively.

On adjusted EBITDA, we delivered approximately 14% growth versus the fourth quarter of 2020, as we expanded margins to 16, 3%.

For the full year, we reported flat revenues versus the pre pandemic up 2019, demonstrating the resilience of the business with significant additional recovery remaining.

Within this we have seen an acceleration of market share gain having one net new business equivalent to approximately 3% annualized topline on.

Both segments, while retaining 99% of our top customers revenues.

We delivered industry, leading adjusted EBITDA growth of more than 20% against 2019, and we saw adjusted EBITDA margin expansion of 40 basis points against 2020, and 270 basis points against 2019.

We leave 2021 with solid momentum on strategic drivers.

Whilst we've seen encouraging recovery as markets open up we still have over $220 million of post COVID-19 market recovery in front of us.

We're accelerating our market share growth from 2% net new business wins in 2020.

3% annualized in 2021 and are seeing further improved improvements in net new business in the first 10 weeks of 2022.

We have also added five new businesses through M&A over the last 15 months, the strengthen our overall business and our most important geography.

Pulse to our supply chain efficiencies and customer service excellence, we have a full pipeline of further opportunities under review.

We are pricing smartly, but firmly to cover inflation, we took an average of over 3% in 2021 over 4% in Q4, 2021 and anticipate taking over 6%.

In 2022.

Reflecting the essential nature of our products and services our price increases.

Well accepted across our institutional and F&B businesses.

We expect these increases to remain intact.

We also remain committed to lower in fixed and variable costs.

As such we expect margins to accelerate when inflation begins to subside.

Whilst we cannot accurately predict the timing and speed of future inflation, we do anticipate maintaining our pricing discipline.

We were pleased to deliver further margin accretion in 2021, despite the very tough environment.

The opening of our new factory and warehouse in Kentucky at the end of 2022 will be another important milestone, adding a 100 basis points to accrete margins, we remain fully committed to our long term target of 20% adjusted EBITDA margins.

As a reminder, diversity is one of only two large global players to offer a full suite of hygiene and infection prevention and cleaning solutions in an industry that remains highly fragmented. We have spent the last three years transforming our business strengthening our team driving pricing.

Delivering operational excellence implementing a clear strategy to take market share and strengthen our business through M&A.

This leaves us increasingly well positioned to take advantage of our growth full yet fragmented 32 billion dollar addressable market.

Now, let me go back and unpack some of the headlines a little more.

Our base institutional business, excluding infection prevention grew by 17% in Q4 and 15% in the full year 2021.

We previously explained that we temporarily lost approximately $400 million, mostly food service and hospitality revenues in 2020.

The reopening of markets in some geographies, along with our pricing and market share gains is driven extra market upswing.

Share gains are driven by our investments in U S foodservice and hospitality commercial excellence and global accounts as well as our innovation pipeline and recently upgraded ESG plan, which becomes more important to customers with each passing quarter total.

Todd will provide more color around the institutional base recovery a little bit later.

Separately, we gained over $420 million of growth in 2020 institutional infection prevention.

This has normalized since Q2 2021 at the level of more than 20% ahead of the pre pandemic level. We believe this represents a permanent step change in a growing market.

Q1, 2022 is therefore anticipated to be the last quarter of normalization this new run rate level.

Thereafter, we see good growth prospects for infection prevention supported by a range of new and soon to be launched products for example, especially as production wipes and hand care wipes as well as our recently announced expanded distribution agreement with reckitt benckiser to bring that trusted brands.

Our portfolio in more parts of the world.

Our F&B business has been gaining share over a sustained period. We anticipate this to continue supported by our water treatment offering which continues to be well received by the market and via our acquisition of <unk> in the U S. We strengthened our north American F&B presence so that we.

Now believe we're the number one or number two player in every region around the world.

During the last 15 months, we acquired <unk> in Poland as more in Canada Tasman in Australia.

In the U S and sharp <unk> in the UK.

Acquisitions, all met the financial criteria above and strengthen our presence supply chain customer service and important geographies.

We are pleased to report that progress with integration is good and synergies are being delivered in line with the acquisition plans.

During the fourth quarter, we completed the acquisition of <unk> Corporation. This acquisition enhances our scale and competitive position in the global food and beverage market and transforms our north American food and beverage sales manufacturing and technical service footprint, which has been a strategic priority for us.

Yes.

Additionally in January of 2022, we have acquired shock, which strengthens a leading institutional market position in the U K. This acquisition expands our portfolio of products and services, including innovative sustainability solutions. It also enhances diversity sales and service capabilities.

Through sharks experienced employees and distribution infrastructure.

I'd like to give a brief update on the use of funds from the equity issuance in November .

Consistent with the rationale explained at the time, we have invested in the <unk> transaction as described above current Charlotte, which is strategically important to the U S and U K, our two largest geographies.

Secondly, we're investing in the new factory and warehouse in Kentucky, which as described earlier.

Charity talk global margins.

And thirdly, we're investing in an increased level of new business growth, which will become evident as we go through 2022.

Now we are clearly operating in an unprecedented environment with COVID-19 virus impacting global economies rising inflation supply chain bottlenecks in other operating expenses that can be difficult to predict and challenging to manage against that background I am extremely pleased with the resiliency of our.

MS model on our management team's ability to be agile in the short term, whilst maintaining focus on our long term goals. We remain confident that diversity is positioned to maintain its targeted growth goals of double digit percentage adjusted EBITDA growth.

We are encouraged by the ongoing recovery in our institutional base business.

Tenuous to build as the markets around the globe stabilize and re Iceland.

We enter 2022 with a larger sales force and more products that can drive growth as we realize the benefits from our acquisitions completed over the last few years.

I'd like to thank all of our dedicated and hardworking people at diversity, including our new employees from <unk> chart, but that dedication and delivery and uniquely tough times. This is a great time for diversity to shine and we thank you for everything you do.

And with that let me now pass it over to Todd to further discuss our fourth quarter financial results.

For 2022.