Diversey Holdings, Ltd.

Greetings. Welcome to Versi Holdings Limited first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A 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. Please note this conference is being recorded. I would now like to turn the conference over to Grant Graver, Investor Relations. Thank you. You may begin.

Thank you. Hello, everyone, and welcome to Diversity's first quarter conference call. With me today are Phil Wieland, our CEO, and Todd Herndon, our CFO. Our earnings released and the slides we'll reference on this call are available on Diversity's website at ir.diversity.com. Please take a moment to read the cautionary statements in 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 that could cause actual results to differ are described under the Risk Factors section in our filings with the SEC. 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 to the most closely comparable GAAP measures. And now, I'm happy to pass it over to our CEO, Phil Wieland, for his comments.

Thanks, Grant. It's fantastic to be giving our first earnings update as a public company, having come out of the gate delivering a strong first quarter. Everyone connected with diversity is proud of our company and its new status as DSEY, and we're driven to see it reach its full potential as a leader in our market. For those of you who invested at IPO, thank you. I hope you've enjoyed the ride so far. What you will hear today will be consistent with the expectations we set and represent some great progress on our strategic themes. Starting with our first quarter results, we saw 2% top-line growth versus the 2019 pre-COVID baseline, despite very heavy lockdowns impacting many of our customers in most parts of the world. Margins continued to expand delivering very strong adjusted EBITDA growth of over 75% against the 2019 pre-COVID baseline, and even modest growth against the pre-lockdown 2020, which benefited from significant infection prevention sales. We were, of course, impacted by the Texas freeze, resulting in raw material cost pressure, but we didn't experience any supply disruption. Our procurement and commercial teams have been working incredibly hard to mitigate the financial impact. We've seen significant net new customer wins in both our institutional and F&B segments, importantly at a creative margin, as customers have valued our product and service offering. We've been rewarded for our extra efforts during the difficult COVID times by extremely low customer churns. This is also reflected in 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, in institutional, we've launched a residual efficacy product to complement our infection prevention range. And in F&B, we've launched a system that expands our digital offering by providing real-time insights on both cleaning standards and water and energy usage for our CIP customers. Recognizing that some of you may be new to the diversity story, I want to cover some information that we shared on the roadshow to ensure everyone has the same baseline, starting on page five of the presentation. Diversity has been growing for almost 100 years. We were a 2.6 billion top line company in 2020. We grew at constant currency on average over 3% from 2017 to 2019, and then around 2% during the COVID year of 2020. We had adjusted EBITDA margins of around 15% in 2020, having grown on average 160 basis points per annum since 2018. We operate in an estimated $46 billion total addressable market across over 80 countries and have the number one or number two position in almost all markets we serve based on net sales in 2020. Our resilience during COVID was also seen in the 2008-2009 financial crisis. Central to this is our diversification by geography, We're roughly a third, a third, a third across North America, Europe, and emerging markets. By end market and by customer, no customer greater than 2% of our revenue and the top 50 customers around 25% of our revenue. On the next page, you'll see why we're so excited about diversity's potential. Firstly, it's the market. We are one of only two global players in a GDP-plus growing 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 care for people. We've made progress in a major transformation plan under which we've invested a lot in our team, our infrastructure, and our values. This, alongside our long heritage in our product, 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 team. Over the page, you'll see how we serve our customers by delivering business-critical solutions across two segments. Institutional, which is roughly three-quarters of our group revenue, and food and beverage, which is the remaining quarter. And we win in our marketplace because we have, number one, the broadest product offering across chemicals, dosing, dispensing, plus machines. We believe we are unique in this respect. a superior infection prevention portfolio. Three, service that customers value and can rely on. Four, strong distributor relationships that access all parts of the market cost-effectively. And five, a team who are bought into our mission to protect and care for people and are living our values to be inclusive, customer-driven, to always improve, to have bias for action, and to be accountable for results. Over on page 8, we describe our marketplace, which is structurally very attractive because, firstly, what we do is mission critical for our customers. Secondly, our model of installing equipment that only takes our product and can only be serviced by us produces high recurring revenues. Thirdly, the cost to our customers of a hygiene problem, such as the closing of their facility, far outweighs the cost we represent to their business. And fourthly, customers increasingly want the comfort and security of their respective brands. We compete on our product impact and customer service. Our estimated core serviceable addressable market is approximately $32 billion and growing at 3%. We have one strong and respected global competitor who we encounter in some parts of the market, and then 75% 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 newer markets with such products as residual efficacy infection prevention in institutional and water treatment in food and beverage. On the next page, we describe how sustainability has been central to diversity's operations for many years. We are focused on people through our mission to protect and care the planet by significantly reducing our own 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 their own environmental targets. We are driven by a desire to do the right thing But this strategy also makes sense financially, as it supports our retention and margin plan. We expect to issue a refreshed vision 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 four pillars. Firstly, in our institutional segment, the recovery of around $400 million temporary decline in 2020 revenue due to the COVID impacted sectors, and the ongoing benefit of our work over the last couple of years to build and grow in infection prevention, to scale our North American food service business, to enhance our commercial excellence globally, to expand in the fastest growing parts of the market, that's global customers and emerging markets, and to accelerate the right innovation to support customer outcomes. The second pillar in our F and B segment, we intend to accelerate in core geographies where we have a superior proposition and to cross-sell water treatment to provide a one-stop shop for customers to buy cleaning, hygiene, and water treatment together. In the third pillar, we intend to expand adjusted EBITDA margins to 20% at an expected average rate of 50 to 100 basis points per annum to improve sourcing, strategic pricing, supply chain improvement, and operational excellence through SG&A cost initiatives. On our fourth pillar, we intend to accelerate M&A by executing the best opportunities within our plentiful pipeline to add, at accretive multiples, businesses that 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 IPO. In terms of market recovery, reopening has been slower than most people hoped. Whilst the US, UK, and China are progressing positively in Q2, other important markets like mainland Europe, Canada, India, and other emerging markets now appear unlikely to meaningfully reopen until Q3. However, with respect to our institutional segment growth initiative, we've completed our infection prevention supply-side rollout and seen a large volume of contract signs. Our global accounts team have been very busy winning significant new annualized business, and the hunters introduced in our commercial excellence initiative are responsible for an accelerated win rate. The F&B segment had a very strong quarter. They accelerated on top of a stellar 2020, winning record levels of net new business in Q1 this year. It was also exciting to watch the launch of water treatments, where we have recorded several small wins and encouragingly our first global account success. This is ahead of schedule. In terms of margin, we were pleased to see the accretion despite the difficult lockdown environment. We saw early benefit from consolidating supply sources having completed the first phase of our plan to align formulae. Implementing strong price increases in Q1 with further increases planned thereafter in response to raw material inflation. Continued good progress with our G&A work. Of particular note was the establishment of a new captive finance centre in Eastern Europe for the transactional finance processes. And we have seen good pipeline progress in M&A, with two deals now in formal diligence processes and a number of others in developed discussions with vendors. Now I'll pass over to Todd, our CFO, to discuss Q1 financial results in a little more detail.

Thanks, Phil. I'm excited to speak with everyone today to review our strong results for the first quarter. In Q1, revenue was 2.2% above pre-COVID-19, 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 2020, our organic sales declined 4.4% due to strict lockdowns that are lasting longer than expected, particularly impacting our institutional segment. As Phil mentioned, the lockdowns in some parts of the world have been tighter and longer than expected, materially impacting our food service and hospitality sectors. We're seeing a smaller impact of lockdowns on our F&B segment, but we're also cycling over a tough year-on-year comparison as a majority of lockdowns didn't start until Q2 2020. We are seeing some mixed pressure at standard margin with food service and hospitality sectors in 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 in the quarter versus prior year. Our adjusted EBITDA was 93 million, up 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 infection prevention, pricing, and cost control measures both in supply chain and SG&A. On page 14, digging into the segments a little deeper, let's talk about our institutional segment. Institutional revenue of $468 million was 1.7% above Q1 2019, with gains in infection prevention more than offsetting the negative impact from lockdown. Compared to 2020, revenue declined modestly in the quarter due to COVID-19 impact as previously referenced, counterbalanced by continued strength in North America driven by infection prevention gains. At the bottom right-hand side of the presentation, you see an example of an innovation in the infection prevention space that we are proud to highlight, Dagger Germ 24 Shield. This product uses advanced polymer technology to provide continuous disinfection of frequently touched surfaces for up to 24 hours. Given higher levels of hygiene standards and infection risk awareness, this product will be a great complement to our existing world-class infection prevention offerings. We believe we are the market leader in infection prevention, and customers come to us for our differentiated products and value proposition. In our food and beverage segment, our revenue of $164 million in the quarter grew 1.3% versus Q1 2020 and 3.7% versus 2019, while adjusted EBITDA margin grew 350 basis points versus 2020 and 560 basis points versus 2019. We continue to win accounts in this segment based on our scale, service execution, and technical expertise globally. As an example of our continued innovation, we're very excited to have launched our Intelli-CIP digital system. This system translates CIP measured data into statistical proven actions for reduction of water, energy, and cleaning time while ensuring high-quality food standards. It is being used by customers in all F&B end markets. 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 in closing new business around the world, assuming lockdowns don't get stricter as we move through the year and markets reopen. As Phil mentioned, we have been training our teams in 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 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 decline primarily in 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 Sanicam acquisition closed in December of 2020, and some carry from the White 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'd imagine, the cash flow and balance sheet have some noise in them in Q1 due to our IPL. However, we can highlight the reduction in 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 4.7 times at the end of Q1 and 4.5 times if you include the proceeds from the shoe, which was executed in the first part of April. We expanded our revolving credit facility from 250 to 450 million in conjunction with going public to expand our liquidity profile to 548 million at the end of Q1. Typically, diversity tends to utilize cash in the first half of the year due to seasonality builds and tends to generate cash in the back half of the year. We would expect that to be the same in 2021. In 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 H1 expectations back in line with our original plan. We expect H2 or the second half to also be in line with our original plan at the time of the IPO. Our outlook with respect to market share gains, growth initiatives, and focus on commercial excellence leaves us positioned to be taking advantage of market recovery and potential tailwinds in 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, before Q&A, I'd like to leave you with a quick summary of diversity's growth algorithm 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 drivers that I discussed earlier in the call. We target to grow another 2% per annum through 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 through our improved sourcing, strategic pricing, supply chain improvements, and operational excellence to SG&A cost initiatives. This should generate strong free cash flow that we can use to de-lever over time with a medium-term net debt goal of three times adjusted EBITDA. That concludes our formal remarks. Operator, please will you begin the question and answer period.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question and re-queue for additional questions. Our first question is from PJ Javkar with Citi. Please proceed.

Hey, good morning, Phil and Todd. Hey, good morning. Good morning. You know, a question on your North American share and share gains. What's your share now? And can you distinguish between your efforts to gain share with bigger customers, like what you did with Aramark, versus smaller mom-and-pop businesses? What is the bigger opportunity for you?

Sure, let me start there. So look, it's certainly true that we've taken some nice share over the last couple of years, particularly I'd say in infection prevention, where we think we've got something like a 20% share of the market in North America. I've also taken some nice share outside of that too. Thinking about the overall opportunity in terms of larger customers versus smaller. I think, honestly, we target all parts of the market. It was great to win those large customers. That gave us the ability to put in place the infrastructure and the sales and service force right across North America. We're using that now as we win other customers. But it's also true to say that that we're picking up a lot of smaller customers too. And we don't discriminate in that respect. We're keen, as long as the customer has the right attributes, we can build a long-term partnership at the right margins, then we work with all customers.

Okay, thank you. And it was good to see you got a new global win in water treatment. Can you talk about this win and what's in the pipeline with your Solennis partnership? Thank you.

Yeah, look, I mean, we were delighted, honestly. We had a number of smaller wins very early. We hadn't actually expected to start winning by this point. And then as part of an existing business process, we were able to start a conversation about water treatment with a large existing customer in Africa. And, you know, once we explained the proposition, the products and the service, that customer was really excited and we closed that deal two or three weeks ago. So, yeah, look, it's a very promising start. It is only a start. There's a huge amount more work to do. As Todd said, you know, we're rolling out the training right across our F&B workforce. But, look, we're ahead of where we plan to be. And, you know, I think to some extent it sort of validates our approach here. But, you know, of course, I feel much better when we've got a few more under our belt.

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 in the quarter. Obviously, institutional was down a fair amount, both sequentially and year over year, whereas food and beverage was up a lot, both sequentially and year over year. So what was the divergence there? You mentioned a few things in the prepared remarks, but could you speak a little bit more specifically about what was happening there and how you expect this to progress across the balance of the year that will get you to margin expansion for the total company?

Yeah, no, let me do that. Let me start, you know, with F&B, where, as you said, the margins were particularly strong. You know, I said before we had a really great 2020 in food and beverage. We won a lot of new business, and that has carried on into 2021. We actually were able to implement some of these new wins a bit earlier than we originally anticipated. We also saw a bit of reopening in some of the African markets, and that also helped our top line. And actually, this extra top line from those reopenings and also from implementing these wins earlier, you know, that flowed down very nicely. And that's the critical reason why our margins were particularly strong in F&B. On the other side, on institutional, obviously impacted by lockdown, as we said. We did see the infection prevention opportunity in North America particularly strong. We were able to sell in higher volumes than we originally expected as some of the markets like education, infection prevention opened a bit faster. and we did incur some additional costs in getting the much higher volumes than anticipated out earlier. So we had to, for example, air freight some product around the world. We had to pay some of our third parties some additional overtime costs, et cetera. So those things had a small impact on the institutional margin progression, but those things were all short-term in nature. They impacted Q1. We've now been able to grow our supply chain so that we can now manage the higher volume levels on a sustainable basis. So we don't expect any more of those costs going forward. I hope 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 in the segment and what you're anticipating for the balance of the year? And maybe more specifically, is it related to, you know, how much price work do you think you need to do to offset raw material inflation?

Yeah, no, look, I can certainly do that. You know, maybe let me start, we were talking about inflation and come back into price. So, you know, it's certainly true that we saw, you know, real inflation in the market above the long-term averages. We did predict coming into the year some higher inflation. And therefore, we came out the gate implementing pricing more than we might otherwise have done. But as it's turned out, inflation has been even higher than we predicted. And therefore, we've had to action additional measures to mitigate that. I think it's also worth remembering, though, that if you're looking at the overall input cost inflation, there is a real geographical spread here. The Americas saw the highest inflation. It was obviously the most impacted by the Texas freeze, with lower inflation in emerging markets and also in Europe. So given our business mix, it's important to remember that the U.S. inflation headlines are not necessarily a good indicator of what we're seeing in our overall global position. Remember, the U.S. is only about 25%. percent of our business so to give maybe give you a few more numbers we know we saw actually in the first quarter somewhere a bit less than two percent on cost we saw a similar amount on price that might drift a little bit up in the second quarter and then we expect to see that moderating before coming down again in the back half of the year Probably the other thing I would just say on this topic, it's worth noting that our sourcing initiatives have been really helpful here. I think we mentioned in the presentation we've been consolidating formulae, and that's allowed us to bundle volume, which we haven't been able to do before, and therefore move that volume around between suppliers. And that's helped us significantly improve on input costs, and that overall is going to be really helpful as we go through the rest of this year as well.

Thanks very much.

Our next question is from Manav Patnik with Barclays. Please proceed.

Thank you. Good morning. Phil, I just wanted to follow up on the water treatment cross-sale opportunity you called out in the slide. Just hoping you could size that a bit more and kind of how you cross-sell into that cleaning and hygiene category.

Yeah. So that win is somewhere between $1.5 and $2 million once fully rolled out. So to be clear, there's none of that revenue in the Q1 numbers. It takes some time to do that. In terms of how we go about it, I think the beauty of the relationship that we have with Solanus is that we are the single point of contact with the customer. So what we now effectively have is a full range of the water treatment and wastewater treatment products that we can take customers alongside our other cleaning and hygiene products So it's a real kind of seamless offer with only one touchpoint for the customer with the diversity sales team to get the full breadth of the new offer. And that seems relevant and significant, and that's certainly been a really interesting dynamic for customers and something that we've had a lot of early positive feedback about.

Okay, got it. And Todd, I just want to follow up. It sounds like the organic growth was slightly worse driven by institutional, but then, you know, FX and M&A were better. So I was just hoping you could help us, you know, what we should be assuming for, you know, the M&A contribution for the rest of the year and perhaps how you're thinking about FX as well.

Yeah, let me start with FX. I think clearly in the year to date, we have favorable FX growth. for the total business. And at spot rates, we would expect that trend to continue as we look out into the year. In the first quarter, FX had, and you can see in the queue on, I think, page 46, in consolidated basis, roughly 2.4% impact favorable on the business in the quarter. And I think as we think about M&A going forward, You know, we're excited about the opportunity in M&A. It probably should first start with, you know, we're pleased with how our recent acquisitions are progressing. You know, in particular, we closed on Sanicum, you know, at the end of the year, roughly five months ago. That's developing as expected, both in terms of underlying performance and synergies. As a reminder for those that may be new to diversity, you know, we look for a number of things in an acquisition beyond the financials. First, strategic control of supply chain for a market so we can deliver with excellence for our customers. Also, product or technology additions for the whole group, you know, or strengthening of a core geography and or acquiring talent. You know, and Sanikem, check the box there on geographical objective as you've heard, Poland is one of our seven target growth geographies for F&B. You know, in terms of our funnel, we're really happy about where it is right now. You know, we would expect to do some reasonable M&A this year. You know, in our roadshow, we called out long term that we wanted, you know, roughly a couple of points of growth coming out of M&A annually. You know, we're ramping that up as we speak. This is probably the hardest year to do that because we're ramping. 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 in the very near future with respect to M&A. But, you know, I wouldn't want to comment on those before we close those deals.

All right, thank you.

Our next question is from George Tong with Goldman Sachs. Please proceed.

Good morning. In your food and beverage segment, you mentioned record net new business wins in 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 um let me firstly say um you know water treatment uh is in the very early days and i said we're ahead of schedule we've had a number of small wins and one global account win but um you know that is not yet a significant part um of what we're what we're winning um if you go back to why are we winning look i think it's a combination of great product and service, a service that we deliver consistently day in, day out, week in, week out to customers. The fact that we are there for them whenever they need us and that builds real trust and customers more and more are seeing the differentiation that diversity can offer in that space. We're becoming increasingly good at explaining it to potential new customers, making commitments around that, and we're seeing that having a real impact in the market. We're basically delivering on the promises, and that is, I think, increasingly understood in the market. That's been really the key reason.

Right, and I guess just to follow up on that, what specific product areas within food and beverage are you seeing the most traction with that's driving the net new business wind?

You know, George, the most encouraging thing is that it isn't really specific areas. You know, we're strong in processed food, in dairy, in alcoholic beverage, non-alcoholic beverage. We're strong, you know, around the world. And, you know, we've really seen a nice breadth of wins. If I was to point to the most pleasing thing, I would say it's the amount of new business everyone in North America, because that has traditionally been our weakest marketplace. You know, we're working hard there to build up our infrastructure to make sure that we can, you know, deliver the best possible service. And that seems to be working but you know it's true to say that we've won in all of our sectors and in all of our regions um so you know we feel really good about that got it thank you our next question is from gary bisbee with bank of america please proceed

Yeah, hi. Good morning, guys. So I guess, could you give us a progress update on the global rollout of the infection prevention portfolio? Did all of the capacity you were looking to bring online, is that online for the liquid and the wipes solutions? And how is that going, trying to get that out into the market?

Yeah, sure. So the short answer is yes. So 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 in North America as you know we added white tech last year we're now manufacturing in in Brazil in Turkey in the UAE India in China and of course in Europe in the Netherlands so we've got the supply chain now that we wanted and we're starting to see sales happening to and It's tough launching some of these businesses around the world in a fully locked down environment, particularly in Europe. You see a lot of people you want to be speaking to, the businesses are not operating with people on furlough, etc. But we are starting to see some really quite interesting upturns in our sales. So, yeah, we feel really well positioned, actually, as the markets reopen to leverage both the selling teams and the manufacturing infrastructure and the regulatory approvals that actually a significant amount of work went into last year. So, yeah, we feel quite well set.

And just digging a little deeper into that, is the play really to sell these better offerings into the existing markets? space 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 new relationships to really drive the goal penetration of that product category?

So, yeah, good question. It's really both. So, you know, for example, you know, with existing customers, so let's take, for example, the business service contracting segment. There, we are helping those customers to further differentiate as they look to compete in their market. So we're able to build new propositions for them to help them win using the AHP technology. But then there are other areas. So we've had some nice success uh, with distributors, uh, for, for example, in their warehouses as they are using our products, um, increasingly, uh, many of those are new customers to us. Um, but they, you know, they've been really interested in, in both the efficacy and the safety of our product. Um, as it's being used in a, you know, high intensity environment. So look, it's, it's both. And, um, We're pushing hard on both actually at the moment, and we expect that to continue to accelerate.

Thank you.

As a reminder, in 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 Whitman with Baird. Please proceed with your question.

Great. Thank you for taking my questions. Good morning. I guess where do I 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 you're seeing on the institutional side of the business. I heard some comments in your prepared remarks overall about great retention levels. Clearly, that was a factor all through last year. It sounds like a factor here. There are no comments on the net new on that side, so I thought I'd give you a chance to talk about what you're seeing there.

Yeah, Andy, look, thanks for that. So the institutional has been going strongly on that front too. You know, if I look at the new wins compared to any losses, you know, there's a very significant ratio there. In fact, you know, I struggle to point at any significant losses that we've been seeing. On the new win side, we've really seen some nice food service wins. I don't just mean the North America business. We had a very significant win in Europe, a double-digit million win there that we completed over the first few months. Also, we've been pushing more and more into care homes. We're having some nice success there. You know, again, none of this is in our numbers. As you know, these things take some time to implement, but it does suggest that the proposition's 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, Todd, this one's for you. You've talked here. Others have been questions on the margins. Raw materials, obviously, is 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 under a COVID cloud here, at least in the quarter, was there anything in the margins that would be unusually beneficial? I know the depths of last year had seen some – sorry, I cut out there for a second. There were some challenges that lots of companies had furloughs and other things like that. I was wondering if there's anything in the quarter this year that you did that would be considered a little unusual that would come back next quarter or maybe next year at this time just that you had to do because some of the COVID challenges. Certainly travel has been something lots of companies have called out, but I was wondering if there's anything besides that that's notable in the margin profile here.

Yeah, maybe it's worth talking just for a moment about gross margin. You know, You've heard Phil talk about how we're dealing with raw material inflation and pricing. And actually, I think when you look down at the gross margin mix in the quarter, you'll see some degradation, VPY year on year. And that's really driven by mix. Certain sectors like food service and hospitality, given the lockdowns, tend to have higher gross margins because they also have some higher service requirements on those applications. And, you know, that probably has the most to do with the gross margin, you know, challenges in the quarter along with some of the weather-related and supply-related challenges to get our customer service in North America on infection prevention. Those were the two kind of main drivers of gross margin in the quarter. You know, as a result, at times of significant mix changes, you know, 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 improve 60 basis points year-on-year in Q1 with, I'd say, really good cost discipline. There was a charge related to the IPO that had an 80 basis point impact approximately on gross margin negative in the quarter in relation to... comp charges related to the IPO. So that's worth noting the other way versus what you're saying. So I think that's probably the color. And I would agree, as that $400 million in the base comes back, we will need to add some discretionary spend like T&E back into the business. But the bulk of the furlough is out of the numbers right now. It was mainly supportive last year in Q2 and some into Q3. And so, you know, I just think we had a pretty disciplined quarter that balanced some of that mix change with the cost to serve in those, you know, application service intents kind of sectors. Does that make sense?

It does very much. Thank you very much for the context there. Have a good day, guys. Yep, thanks much.

Our next question is from Jeff Sakakis with JP Morgan. Please proceed.

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. What's going on there?

I was going to say, maybe I could take that one.

I'd say to you that You know, the uneven demand and extended lockdowns related to COVID have not helped our inventory situation. You know, our number one objective is to service our customers. And so we, during this time, have wanted to make sure that we had the right inventory, you know, specific to those COVID-related type SKUs. But also, I'll come back to my introductory point on seasonality. You know, Q1 tends to be our lighter quarter. And so we always have a build quarter on quarter. And, you know, especially this year, as there's some uncertainty to the pace at which markets reopen, we've chosen to invest in inventory so that as those markets open, you know, we're able to relatively quickly service the demands of those sectors that have been down. So, you know, we've made it a priority to be ready, have the right products in the right place at the right time, you know, when our customers need it. And so I would also caveat that by also saying, you know, by the second half, we would also expect to make progress in bringing that inventory down, you know, prior to year and as reflected in how we're thinking about cash flow for the year.

In your outlook, 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 were and what are your expectations for the year in terms of EBITDA?

We didn't provide specific guidance on absolute numbers. In that respect, we just talked about the fact that what we'd expect on the top line and that we'd expect that margins would continue to expand. I think the point of describing it as we did was to explain to you that we are trading in the first quarter above our expectation. And while the lockdowns are going to be tougher in Q2 than we expected, we think that'll balance out and we'll still be making the progress as we hit the halfway point of the year that we expected. Really to make sure that you understand that overall, you know, the lockdown situation we don't think is something that's going to cause us ultimately more pain this year and the high input costs or Texas freeze isn't something that we can't overcome. this year. We feel good about managing through both of those situations. The only thing that we did add was that we grew 18% in 2020 versus 2019, and we expect to see some further growth in 21 of adjusted EBITDA versus 20. And of course, we'll continue to give you an updated view on that as we go through the year.

Great. Thanks so much.

Our next question is from Lawrence Alexander with Jefferies. Please proceed. Lawrence Alexander Good morning.

Could you just give updated views on how quickly you'll 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 start. So look, in terms of the sales force, we've had a significant strategic driver on commercial excellence. And that is leading us to really more change the mix of our sales force. So really between what we call farmers and hunters. So that doesn't necessarily result in a significant increase in the number of people in our core business, just a mix in the skills and talent and experience of those people. There are, though, some areas where we do expect to increase the number of salespeople. So in our global accounts area, we would expect to grow a little bit in some of the emerging markets. we think we have a real opportunity and I'm and also it we you know we've identified seven geographies in the food and beverage business where we expect to grow but we're not talking about enormous increases in cost overall a pretty targeted and focused where we think we can get a really great return on that if I come to your second question which I think was around you know, the differentiation in water treatment. Look, I think we feel really, really well positioned in the whole of the food and beverage area in respect of what we bring to customers. I talked about the service a bit earlier, but, you know, if I look at the on-guard system that we have, that we get from Solanus, if I look at the IntelliCIP that Todd mentioned that we launched earlier, we're, you know, we feel really well positioned against all our competitors. Well, thank you. Thank you.

Our next question is from Arun Biswasan with RBC Capital Markets. Please proceed.

Great. Thanks for taking my question. Congrats on a good first quarter here. So I guess, I don't know if this has been addressed yet, apologies, but I was just looking at slide 29, you know, many of the improvement plans you have for margins longer term, I think going to that 17% range. Could you provide an update on how you're tracking on some of those? I think it was 100 million in total. And if COVID and, you know, some of the lockdowns or maybe even the reopenings have have affected that trajectory at all. Thanks.

Todd, do you want to pick that one up in the first instance?

Sure. Well, first I'd start with, you know, we're making the margin progression, you know, that we hoped to in the first quarter. We saw that improvement at the bottom line to, you know, 60 basis points. So this year starting out, you know, in that range of 50 to 100 that we suggested we would target, you know, that's going to change quarter on quarter depending on different variables. But, you know, we're off to a start there that, you know, is in line with what we expect. You know, we do believe that, you know, as we've stated earlier, our long-term EBITDA margin target is 20% or above, you know, which is roughly 500 basis points higher than where we landed in 2020. You know, we have high confidence in making meaningful headway towards our long-term potential in the next three to four years. We do have strong capabilities in place to drive gross margin expansion through strategic pricing and sourcing. And we also have a detailed plan to drive supply chain savings through additional insourcing and optimizing delivery frequency through better order patterns and fulfillment discipline. You're right to reference page 29. That gives you more detail about some of the specifics that we're working on. With respect to sourcing, Phil mentioned progress with formula harmonization in Q1, which is helping us migrate through this time of interesting challenge with some inflation and providing us offset there. I would also suggest that roughly 70% of those four buckets will end up supporting improvement in gross margin going forward. With respect to the supply chain, we're making significant progress on looking at our footprint, which is where we see some significant opportunity as the number one insourced and put things in places where they should be to optimize not just COGS in terms of the product cost, but also logistics optimization around freight and warehousing. That's moving on as planned. And then our earnings improvement program, which is really more focused on general and administrative kind of opportunities, is on track versus our plan for this year. The COVID markets haven't affected that at all. We've been able to focus down. COVID is actually presenting some new ideas for us because we're now learning how to operate honestly with our customers in a more remote fashion, which going forward should also provide some real opportunities in how we service customers, leveraging some technology that we have to provide remote service, which over time is another opportunity for us to really improve our efficiency in the business. So overall, I'd say we're on track. We haven't changed our outlook on the opportunity, and we hope to deliver, as we said, an upfront margin accretion this year, consistent with our guidance. Great.

Thanks a lot.

Our next question is from Kevin McVeigh with Credit Suisse. Please proceed. Kevin McVeigh Great.

Thanks so much. If we could talk to, if I had the numbers right, the potential water opportunities, 20% of the core F&B. Any sense of how that comes in? I guess number one, the margin impact of that, and then how does the water 20% of potential F&B, you know, how should you think about that within the context of the institutional business?

Yeah. So, look, we have an existing water business in institutional. There's certainly more we could do working with our partners. But we made a very conscious decision to start with F&B, where we thought the opportunity was the most significant. So that's what we've done. So, you know, we may well together come back and push harder into institutional, but we thought it was right to start in F&B. So that's what we've done. The first part of it, just remind me the first part of your question.

Philip, any sense of, because it sounds like it could potentially, you know, the opportunity is 20% of the existing F&B business. Any sense of how that comes in? Is that a three-year build, a five-year build? How should we think about the scale?

Yeah, sure. So, look, as I said earlier, the fact we've won a first global account is a little bit ahead of what we expected. We think this will take time. Because we're focused initially on existing customers and a significant amount of our business is large global accounts, they tend to be under contract for maybe on average two or three years. And therefore, it will naturally take some time for us to have the opportunity to win all of our global account business. So I think At the same time as 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 year. I think this is going to take some time and build somewhat modestly and then really start to accelerate as we get into the third year.

That's helpful. And then could you put some numbers as to the impact of the Texas freeze in the quarter, maybe around revenue or just margin? And, you know, just any thoughts on that and if there's any lingering impact that will be sold over the balance of the year?

Yeah. So, look, I said earlier the, you know, the overall input cost inflation was somewhere between 1.5% and 2%. um in the first quarter and we think it may go up a little bit from there it's it's pretty hard for me to um determine the impact of the texas freeze versus other things going on and i guess to some extent it doesn't matter but um that's that's what we saw in q1 um i do think it it'll get a touch more in q2 which is why we've been out making sure that we're adjusting prices accordingly, and then we think it will abate as we get more into the third and particularly the fourth quarter. Thank you.

Our final question is from John Roberts with UBS. Please proceed.

Thank you. On slide 25, if I compare the middle renormalization bridge with the left side 2020 surge bridge, it looks like the personal care or hand sanitizer comes down more on a percentage basis as it renormalizes. Is that just because hand 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 I think the way to think about this is that in the hard surface space, we have a very differentiated product. And it remains, in my view, the market-leading product. And therefore, the growth that we saw there, I think, is very sticky. On the personal care side, I think the products in general are less differentiated. We did a really good job with availability of product last year. We organized our supply chain, adjusted it very quickly, and therefore we were able to take advantage of that expanding market. I think, though, it's also harder to retain all of that growth, given the products in general are just less differentiated than what we see on the hard surface side.

I'll leave it there.

Thank you.

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. Thank you all for joining us today. I would just say I know we're slightly over time. In conclusion, we feel really good about the quarter that we've posted. We're managing the challenges of COVID and the Texas freeze stroke input costs. appropriately. We're really making some nice progress on delivering the strategic plan that we laid out again for you today. And we feel we're really firmly on track to deliver the 2021 plan and to deliver further adjusted EBITDA growth on top of the 18% that we delivered last year. So with that, I'd like to thank you all and wish you all a 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.