Diversey Holdings, Ltd.

Greetings and welcome to Diversity Holdings Limited second 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 a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Grant Graver, Investor Relations for Diversity Holdings. Thank you. You may begin.

Thank you. Hello, everyone, and welcome to Diversity's second quarter conference call. With me today are Phil Whelan, 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 definition and reconciliation to the most closely comparable GAAP measures. And now I'm happy to pass it over to our CEO, Phil Whelan for his comments.

Thank you, Grant, and good morning to everyone. Let me start by saying we're very pleased to report another good quarter, bringing our H1 results in line with our IPO plan, despite a very difficult operating environment. Now, I'd like to share four overarching thoughts about our business. Firstly, we see a very bright future for diversity. As a leading provider of hygiene, infection prevention and cleaning solutions amidst the pandemic, we are well positioned to capture significant growth due to elevated cleaning standards. Further, through an ESG lens, we see customers getting hungrier and hungrier to save water, labour, energy and waste, which we are also well positioned to help them deliver. Within institutional, where reopenings are more advanced, we are seeing faster than expected recovery of our base institutional business. And our F&B business had a very strong quarter and first half as we continue to gain share in our core business and realize early success with our water treatment offering. Secondly, raw material inflation continues to be a theme for 2021. In response, we've implemented a series of interventions on top of what we had originally planned for the year, which has led to strong sequential quarter-over-quarter improvement in our margins. One of these interventions is pricing, where we've realized 2.5% top-line growth from pricing actions year-to-date and expect to reach mid-single-digit percent for the fourth quarter. We've also managed costs well, supporting sequential improvement in EBITDA margins Q1 over Q2, and very pleasing 38% adjusted EBITDA growth versus pre-COVID 2019 baseline. Thirdly, our M&A process is delivering well, and our pipeline remains very strong. Since we last reported, we have completed two deals to enhance our product portfolio and one deal to strengthen our supply chain. And fourthly, we are pleased to report continued progress against our strategic plan, which we laid out during the IPO process and again during our Q1 earnings call. Our new business conversion of our growing pipeline continues to power ahead as our strong product proposition and high service delivery continue to appeal to the market. I will come back to our progress against our strategic plan shortly, First, I want to address two of the short-term challenges which make the operating environment tougher than we planned in 2021. The first operating challenge is inflation. Inflation has been higher than we've experienced in recent years. Associated with the inflation is the challenge of availability of both raw materials and freight carriers. We're seeing extremely tight markets in many parts of the world as competition for constrained resources has increased. This remains an ongoing challenge which our procurement and supply chain team have so far done an excellent job of mitigating. We saw margin expansion quarter on quarter as expected, including the benefit of other savings driven by our operational excellence initiative. We take our responsibility as a market leader to price inflation very seriously. We have and will continue to take actions to minimize the impact of rising costs and continue to take pricing actions to meet our objective of maintaining and growing our margins. We anticipate pricing actions to step up through Q3 and more significantly in Q4, reaching mid-single-digit percent increases in Q4. Also this quarter, we signed a lease on a site for our new manufacturing facility in the U.S. As described in our IPO process, we see this as an important step to take customer service to a new level and is critically important to our margin journey. The second environmental operating challenge is, of course, COVID. Here we are very focused on what we call base business performance versus 2019. This is how our revenue, excluding infection prevention, is recovering against the pre-COVID baseline. You may remember that we lost over 400 million of revenue in this area in 2020, and we said we expected this all to recover over the 21 to 23 period. The first chart on page six shows the performance in the US and UK, two of our markets with higher vaccination rates, which have been at the front end of the reopening timeline. It's very encouraging that in countries where reopenings are more advanced, we are seeing faster than expected recovery of our base institutional business, with the US already ahead of 2019 and the UK tracking rapidly towards it. The second chart shows the same for India and Philippines. Here you see much lower levels of recovery. India started the year with an improving trend, but a massive second COVID wave has required tough lockdowns and a consequential impact on our core revenues. Philippines, like much of Southeast Asia, has seen similar COVID surges with low vaccination levels and prolonged lockdowns. When thinking about reopening around the world, more than 75% of our base revenues come from outside of the US and the UK. Reopening still has a long way to go on a global view. The takeaway here is that we anticipate our base revenues to recover more quickly than originally planned as lockdowns ease, but to remain subdued whilst lockdowns persist in low-vaccination countries. In fact, recovery to pre-COVID levels of base business revenues is not our ultimate objective. We expect to go further. The longer-term effects of COVID are very likely to include higher cleaning, hygiene, and disinfecting standards. On page seven, we summarized diversity shields. This is a global program designed to ensure that our customers are ready for reopening and the challenges of operating in a COVID world. We support our customers to choose the right product, cleaning regime, and frequency to ensure the appropriate ongoing efficacy. As our customers' awareness and compliance grows, this often results in a broader product portfolio being sold to the customer in order to deliver their hygiene needs for a clean and safe facility. We then award the Diversity Shield, which allows customers to demonstrate their cleaning standards to their end customers. This initiative is proving extremely helpful to customers all around the world. Now let me talk a little about our progress against our strategic plan, starting with the top line. Central to everything we do is the need to continue to deliver for customers. This underpins our ability to excel at customer retention, whether that's the day-in, day-out service or innovation that supports improving product efficacy or advances in dosing and dispensing to support operational efficiencies and ESG. This is reflected in our strong and improving customer MPS scores. Our entire organization is obsessed with further excelling in this area. We have described before how we wanted to grow our global accounts muscle under a new and dedicated leader. Following the double-digit millions food service win we reported for Q1, we have seen further success with a significant global convenience store operation, as well as meaningful wins in contract catering, building service contractors, and quick service restaurants. For North America Food Service, The reopening of the market has meant that future customers are once again active, and so our sales teams have been extremely busy. We have seen our conversion rates climbing again, as they were before the pandemic, which is exciting given the size of the pipeline here. For both Global Account and North America Food Service, our customers continue to see the benefits of our product efficacy combined with sophisticated dosing and dispensing equipment which means that customers can reliably achieve sustainable cost efficiency as well as tangible environmental benefits. This is a real differentiator against much of the market. In food and beverage, our focus on our core geographies is progressing well, and we continue to gain share. Further, under our new water treatment proposition, we reported our first global account win in Q1, and we have had further successes since then both in global accounts and local customers. This initiative is going extremely well, is ahead of expectations, and at this early stage seems to be validating our hypothesis that customers would be excited about our proposition. On infection prevention, we described before an expectation that we would hold on to the majority of our gains and in fact build on them within the healthcare market. This has been the case. I am not aware of any customer losses in this market, and we have continued to win new customers, which gives us reason to believe we can continue to enjoy above-market growth in the healthcare sector. We also said that outside of healthcare, we expect to see some normalization relative to peak COVID sales in 2020. This also looks to be true. Extended lockdowns are impacting disinfectant and sanitizer usage outside of healthcare. Conversations with our customers suggest that non-healthcare infection prevention sales will see accelerated penetration versus pre-COVID expectations in many sectors, including education, office buildings, retail, and food service. This reinforces our belief that demand for disinfectants and sanitizers will settle well in excess of pre-COVID levels. The opening of education in Q3 and the expected more widespread return to offices will provide useful insights here. Outside of North America, we saw the build out of our global infection prevention manufacturing sales platform earlier this year. We are starting to see momentum building in these new markets. In terms of M&A, we've seen very good progress, which is highlighted in more detail on the next page. Firstly, on the product side, our deal with halamine provides us the exclusive global rights to this new long-lasting disinfectant technology. This will allow customers to achieve a 30-day efficacy by using this new product alongside a chlorine-based disinfectant. This ultimately helps our customers further protect their working environment and saves customers chemical costs, labor costs, and contributes significantly to their ESG credentials. Secondly, SURE is a range of plant-based disinfectants, which we've been using for some time in selected geographies. We've now completed a global deal to include this product range in our portfolio. The environmental impacts of this are significant. Thirdly, we're very excited about our acquisition of Tasman Chemicals, which operates in the institutional and F&B markets in Australia and New Zealand. Given its location, this can be a challenging geography to deliver the right customer service outcomes and margin profile. Having our own manufacturing operation is therefore an important step, and we expect to deliver significant upsides for customers here. These deals are pro forma deleveraging against our approximately 11 million investment. We have been clear that we are focused in three areas for M&A. adding exciting products to our global portfolio, strengthening our supply chain, and doubling down in important geographies. Our M&A funnel is healthy, and we continue to see this as a real driver of value as we go forward. Now I'm going to pass over to our CFO, Todd Herndon, to discuss Q2 financial results in more detail.