Diversey Holdings, Ltd.

Greetings 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. A brief 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. It is now my pleasure to introduce your host, Grant Graver, Investor Relations. Thank you, Grant, and you may begin.

Thank you. Hello, everyone, and welcome to Diversi's 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. 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. A reconciliation of these non-GAAP measures and referenced supplemental data can be found on our website at ir.diversity.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 and 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 expectations and how we are positioned to deliver our EBITDA 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 delivered our fourth quarter targets, despite the increasingly tough operating environment. On 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% 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 year of 2019, demonstrating the resilience of the business with significant additional recovery remaining. Within this, we've seen an acceleration of market share gains having one net new business equivalent to approximately 3% of annualized top line 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 market recovery in front of us. We're accelerating our market share growth from 2% net new business wins in 2020 to 3% annualized in 2021, and have seen further improvements to net new business in the first 10 weeks of 2022. We have also added five new businesses to M&A over the last 15 months. These strengthen our overall business in our most important geographies and bolster 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 were well accepted across our institutional and F&B businesses. and 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 our group 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 that offer a full suite of hygiene, 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 discipline, delivering operational excellence, implementing our clear strategy to take market share and strengthen our business through M&A. This leaves us increasingly well positioned to take advantage of our growthful yet fragmented $32 billion 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 of mostly food service and hospitality revenues in 2020. The reopening of markets in some geographies along with our pricing and market share gains, has driven this dramatic upswing. Our share gains are driven by our investments in U.S. food service 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. Todd will provide more color around the institutional base recovery a little bit later. Separately, we gained over 420 million of growth in 2020 in our institutional infection prevention. This has normalized since Q2 2021 at a 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 at 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, specialist food production wipes and hand care wipes, as well as our recently announced expanded distribution agreement with Reckitt Benckiser to bring their 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, and via our acquisition of Berco in the US, which 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. In M&A, our plan remains unchanged. to add 2% to the top line annually, with targeted multiples ranging from 6 to 10 times EBITDA on a trailing 12-month basis, and less than 6 times on a fully synergized basis. During the last 15 months, we acquired Sanachem in Poland, Avmor in Canada, Tasman in Australia, Berco in the US, and Shorrock Trichem in the UK. These acquisitions all met the financial criteria above and strengthen our presence, supply chain, and customer service in 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 Berco 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. Additionally, in January of 2022, we acquired Shorrock, which strengthens our leading institutional market position in the UK. This acquisition expands our portfolio of products and services, including innovative sustainability solutions. It also enhances diversity sales and service capability through Shorrock's 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've invested in the two transactions described above, Berco and Shorrock. which are strategically important to the US and UK, our two largest geographies. Secondly, we're investing in the new factory and warehouse in Kentucky, which, as described earlier, will add materially to our 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 variants impacting global economies, rising inflation, supply chain bottlenecks, and other operating expenses that can be difficult to predict and challenging to manage. Against that background, I'm extremely pleased with the resiliency of our business model and 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 based business that continues to build as the markets around the globe stabilize and reopen. We enter 2022 with a larger sales force and more products that can drive growth as we realise the benefits from our acquisitions completed over the last few years. I would like to thank all of our dedicated and hard-working people at Diversity, including our new employees from Berco and Shorrock, for their dedication and delivery in 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 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 1.1%, 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 in revenue, saw revenue decline 3.5% versus Q4 2020. However, as Phil 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's 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 opportunity to recapture at least 220 million of revenue that was lost during COVID. 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 continue 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 AHP Oxivir in 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 reopening of over 220 million and the remaining infection prevention normalization of 70 million makes up 150 million of net post-COVID market recovery to come. Turning to our F&B segment, compared to Q4 2020, revenue grew by 14% and adjusted EBITDA grew by 15.8%. When comparing to Q4 2019, 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. Consolidated 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 variants 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 our 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 and 270 basis points versus 2019 through operational efficiency programs and effective pricing. 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 has 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 recedes 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 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 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 2022 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 a November 2021 follow-on. Our net debt leverage ended the year below 4.5 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 seasonality of our business typically drives free cash outflow in the first half of the year, but we are focused on generating increased cash flow for the full year 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 generate 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 to 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 2.62 billion. This reflects the post-COVID recovery, pricing, accelerating new business, and the M&A already described. We continue to operate in a challenging environment, which is further impacted by the conflict we are seeing in Ukraine. We previously anticipated that these challenges would persist through the first half of 2022 and begin 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 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 22 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 in 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 target 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 based 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 country reopenings 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 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 21, driven by the last quarterly headwind lap of infection prevention normalization. Adjusted EBITDA for the first quarter will be 56 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 in our institutional segment, and we expect the opening of the markets and other key strategic growth initiatives to provide nice tailwinds 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. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that 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 key. One moment, please, while we poll for questions. Thank you. Our first question comes from Vincent Andrews with Morgan Stanley.

Please proceed with your question. Thank you, and good morning, everyone. Todd, 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 range of oil prices does that assume and what in particular are the actual derivative products that you're buying that you're most concerned about seeing inflation in? And then if maybe you just want to talk about 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.

Yeah, sure. Thanks, Vincent, and thanks for coming on the call. You know, as you guys know, we're in exceptional time right now, and the environment's changing daily. This was our – this guidance was our best view as of inputs actually through yesterday. You know, oil's been floating around $125 a barrel since this past weekend. What we did was we extrapolated that impact across a 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, you know, given what we know today. I think we've done a really excellent job delivering incremental pricing through excellent execution over this past year. And, you know, maybe to provide a little bit more color on direct materials and incremental costs in materials, you know, our direct materials, you know, are about 33% of net sales. You know, direct material costs were up about 10% in Q3 2021 and about 16% in Q4 2021. you know, direct material costs are up roughly about 30% based on the latest insights. You know, where it goes from here, of course, is dependent on what happens, you know, with Ukraine and continuing things there and the market environment. You know, at fiscal 22, estimated direct material cost inflation is about 24%, you know, based on what I mentioned earlier on the assumption on oil. and oil-based derivatives and products that are affected by that and materials. And that includes our current view on Russia, you know, Ukraine as we sit here today. You know, based on all the work we've done and communicated, we are confident in at least 6 percent price growth. You know, based on the recent news of this past couple of weeks, you know, we're planning on going again with further pricing. now that we've seen the impacts of this last several weeks and are working those plans as we speak. Historically, we've talked about materials that are linked to energy and oil-based price per barrel like caustic, like ethylene, propylene, and the derivatives that come off those products Historically, those have been about 45% of our raw material purchases, and the remainder of the tail of raw materials aren't necessarily linked to that market basket or commodities, and there's a long tail outside of that. So hopefully that provides you some color, I know, on an issue that everybody's wondering about.

Yeah, 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 22 is how we should think about getting to a free cash flow number from your EBITDA forecast.

Yeah, sure. You guys can take the range you want starting with adjusted EBITDA, but You know, our cash interest, given the refinancing, you know, should come in around, you know, $71 million with a couple, $2 million, $3 million for securitization costs, so $74 million, $75 million there. Our CapEx, you know, if you look at, you know, a base CapEx number around $100 million, and you know we have the finishing of our significant plant investment, which if you use about $30 million, you'll get to the right, you know, ballpark on CapEx. We, you know, have a range of cash taxes, probably around $45 to $50 million, based on the range of EBITDA we gave you guys here on the call. I think our cash one-time cost next year will be around $75 to $80 million. And I do think we'll have positive impacts on working capital, you know, in the $20 to resulting from some securitization benefit, some inventory benefit, because I do think, you know, 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, you know, more aggressive actions in the inventory area. And, you know, we're working on a number of things in the working capital area to help us really drive improvement, you know, in the next 12 months. So all that gets you, Vincent, you know, to a number that, a free cash flow number, I think that's, you know, floating around $100 million. Okay.

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

Thank you. Our next question is from Manav Patnia with Barclays. Please proceed with your question.

Thank you. Good morning. I just wanted to touch a bit on, you know, some of the comments you made on the net new sales and just focusing maybe on the institutional business. You know, a lot of the growth might be, you know, part of the recovery, part of, you know, new sales. So I was hoping you'd just help us break down, you know, that growth by, you know, pricing the new sales and just the recovery and kind of the visibility going forward.

Yeah, my name is Phil here. Let me do that. So let me start then with the new business. We added about 3% of new business last year. That's what we won in our number, probably a fraction less. And we won that really consistent with the strategy we've talked about before. So the US food service focus, we did well there. We won well also in our global accounts business. And then the extra energy on commercial excellence across the world is also really starting to help. As we also alluded to, we've seen that number accelerate. So we were more like 2% in 2020, 3% last year. And we've had some really nice step up in the first part of this year. In terms of price, really a similar trend. We saw a bit over 3% across the full year, but we were more like 4.5% in the fourth quarter. So we've seen that accelerate as well. In terms of recovery, we tried to give some extra insight there. So we said, as we turn the year, there's something more than $220 million recovery 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 9 on the supplemental you'll see that in North America we're about we were back to 97% of pre pandemic volumes and that's of course before offices reopen to any great extent so we think we're going to be you know really fully recovered as offices reopen whenever that is hopefully in the next few months and the rest of the world's a bit behind but it's coming back we see it now and we see it starting to recover already this year. So hopefully that helps you to see the different elements of what's driving the growth.

Okay, yeah, that's helpful. And then just the other question I had was, you know, you guys obviously have a very active M&A pipeline. You know, hopefully your scale helps you in a better position than some of these targets you're going after. So does that mean the pipeline potentially gets bigger and you try to be more active or – Are we going to see a slowdown in some shorts?

Look, I think the first thing to say is, you know, the M&A that we've done has been entirely consistent with the strategic drivers, you know, around key geography, strengthening supply chain, adding in the right areas of technology and product, and consistent with our Financial target so, you know six to ten times EBITDA with a post synergy number of below six So we feel really good about that. The pipeline is just a straw You know, we We completed these five transactions, but we have a very long pipeline of Possible deals that fit both the strategic rationale and the financial rationale so, you know, I can't give you any more indication of exactly what we'll invest when and But we said we'd do at least 2% top line, and 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. Good morning. This is Kieran. I'm for Chris. I was just wondering, I think it was slide nine, you broke out volumes on kind of the base 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 progression throughout the year? Specifically, you know, if you can highlight Europe and North America, that would be helpful.

Yeah, let me do that. As you can see from the chart on page nine, much of the recovery in North America has happened already. As I just said, 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 both in the back end 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, you know, there's a lot of recovery coming through now. So, you know, whilst we averaged 81%, as you can see on the chart last year at volume versus pre-pandemic, you know, that number would be getting into the 90s now. So, you know, really a significant bounce back. And the same is true of the rest of the world. The rest of the world is certainly behind Europe. If I think of Southeast Asia, for example, if I think of India and also Australia and New Zealand, they started reopening later than Europe, but we're now starting to see the upswing coming.

Great. And then maybe just a really quick follow-up on the pricing. Where, 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, you know, as we think towards the second half or 2023, you know, how do you view the stickiness of those prices as some of these costs kind of subside? Thank you.

Yeah, sure.

Yeah, no, sure.

It's a good question. So in terms of exiting the year, We were about 4.5% in the fourth quarter of last year, and we expect that the first quarter of this year to be getting up close to the 6% number that we described in what we said earlier. Now, when we were building our plan for the year, with the expectations using the forward view, we thought that that would be a good place to be. Of course, given the war and everything else that's going on, even a few weeks before the war, we are now going out for further pricing. So the 6%, you should think of that as a flaw. And we'll be going out globally and pushing that inflation that is in the market through the business into customers. And therefore, we'd expect to see that, you know, continuing to go up as we go through the year.

Great. Thank you.

Thank you. Our next question comes from Adelaine Rodriguez with Jeffery.

Please proceed with your question. Thank you. Good morning, guys. Just a follow-up on the pricing question. So, as you go to your customers, like, are you able to change the contract terms to raise prices whenever or are those prices set once or twice a year?

The truth is there's a mix. In some of our contracts, we're able to change prices simply by giving a period of notice at any stage. In some, there are a number of price windows And in a relatively smaller number, there are a single annual opportunity. And therefore, we've got to work through all of those contracts. And what we have seen, even with those that just have an annual view, actually a lot of customers understand what's going on here and have been pretty amenable to having an ex-contract discussion.

And is your sense that by the end of the year, as we exit 2022, like you would have caught up with wars if war prices don't move much higher from where they are right now?

I think not quite. So, you know, in the guidance, Todd described a 25 to 30 million gap. I think that's our view of, you know, absent the war, we absolutely would have been ahead of price versus cost, with the war giving an extra large surge in inflation. If that continues right through the year, we won't quite get 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.

Hi, thanks. Good morning. You acknowledged that 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 do that. So let me start with raw materials. Look, I think The bottom line is raw materials have not constrained us, 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 tended always to get there in the end. Labour has been less of an issue for us than others that we've read about across the markets. Really, freight has been our biggest challenge. We are somewhat dependent on third-party freight carriers, and at times that has been a little bit disruptive for us. We've been let down late and last minute. So that's also driven a lot of cost in as we've sought to make sure that we've got appropriate insurance in place. So all in all, I couldn't sit here and say we've got millions of dollars of missed revenues. But it's certainly tough to manage, and it's certainly driving a lot of cost into the business.

Got it. And then within the food and beverage business, can you describe trends you're seeing with new business, what's driving the performance there, and then also discuss traction with your water treatment business?

Yeah, sure.

So, look, 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 sweet spot with our products and our service that is just really appealing to customers. We have customers often, they trial with us, they like what they see. on both product and service, and then they buy more fully across their sites. And we've seen that consistently over the period that we've been seeing. And that applies really to the different sectors and the different geographies. And we think, as we look at our pipeline, we see no reason why that shouldn't continue. In terms of water treatment, we're about double-digit millions of revenue on our new water treatment proposition, which is a bit ahead of what we said. I think we said when we launched, we'd get a few million year one, we'd be more like this point year two, and then we'd get bigger growth in year three. So we're ahead of where we wanted to be, but that just reflects that customers like it. They're really open to it. They love the concept of being able to you know, buy both the 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 is additive. So, yeah, you know, that continues to go from strength to strength.

Very helpful. Thank you.

Thank you. Our next question comes from Barry Whitman with Baird. Please participate in your questions.

Okay, 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's a degree of M&A that's baked into the guidance, and I just wanted to clarify that to start out with. Todd, excuse me, 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 closed, including this one that you did in January? Just trying to get at that component as well as the organic growth. Maybe you wanted to comment on the FX headwind that you're guiding with here as well as the volume impact, recognizing that you already said that you're getting at least 6% price.

Yeah, 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 Berco and Shorrock, in December and January. Those are roughly $80 million in top line or about 3% M&A. In terms of the guidance for top line, we've not assumed in that revenue guide incremental M&A in-year that's not been closed yet. And just again, talk about kind of the bridge, you know, year on year. You know, we think there's, 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, you know, of markets that, you know, range, you know, 2% to 4%. But then we are giving back some you know, 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%, 3% giveback. So if you want to wreck kind of to the high, you know, the upper single digits kind of revenue, you know, 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 EBITDA margin side here. So I 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 22. So 24 of 33 is about 8% margin headwind, if I calculated that correctly. And then you said you're talking about like a 6% at least price increase. So that's suggesting just on raw materials alone, you've got maybe a couple hundred basis points of margin. It looks like that's 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're down and the reasons for why they're down? Does that math hold, Todd?

I think it does. Or you could do the math in dollars, right? 30% times our revenue times 24%. And that's also why, you know, Phil 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 at, you know, 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 you know, talked about at 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. Thanks for clarifying that. Oh, yeah. I think the good news, too, maybe one last comment on that is, you know, the rose in that picture is that, you know, we believe that if and when inflation recedes, this is a business that doesn't historically give back a lot of the pricing it takes. So, you know, midterm, that's actually a good thing for our business from our perspective. Thank you.

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. You know, I think when we were going through the IPO, there was some commentary that you guys built in a $65 or $70 oil price assumption. And apologies if you touched on this, but how are you thinking about that now? Obviously, there's a lot of volatility out there, but do you feel that your guidance accurately or at least somehow kind of captures the current environment?

Yeah, look, 65 looks slightly old fashioned now, doesn't it?

Right.

The guidance that Todd described earlier is based on us seeing a continuing view of the current sort of $125 that 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 IPO. So this is just a different world. with different dynamics, there is higher inflation. And therefore, we are reacting and pricing accordingly. And there'll always be a bit of a lag. But over time, that'll turn out to be a positive. But, you know, 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, you know, 380 to 420 is You know, it's about, again, maybe I think down maybe about 10% from when we were thinking, you know, back then. Is that mostly reflective of that 220 recovery? So is that another way as that comes back, do you expect kind of to get back into that mid-400 range maybe in 23 or 24? Or are you thinking about getting back to kind of fully loaded earnings power?

Yeah, look, it's a really good question. I start by saying, look, it's got more to do with this price-cost thing that we were just talking about. You know, if you were to add the 25 to 30 back onto our guidance for the Ukraine situation, you know, that makes quite a difference. I think if I step back and think, you know, where are we versus the IPO? The recovery has been a bit later because obviously COVID, 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 drivers. You know, I said water treatment is ahead. I think the U.S. Food Service is ahead. I think commercial excellence and global accounts are ahead. So I think, you know, There's some delays, but also probably more momentum in the business as we go forward.

So, sorry, just to clarify, so it actually sounds like when you do get full recovery of that, just given the pieces that 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 you're exiting... this period with a better position. Is that a fair characterization?

Yeah, we feel we've got really good momentum. And, you know, when this price-cost thing unwinds and the recovery comes back, we think we're going to be really, really well positioned in that kind of, you know, double-digit EBITDA year after year. That's where we're going to get to. Great.

Thanks a lot.

Thank you. Our next question comes from Matthew Skowronski with UBS. 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 raw dynamic there and how that flows down to margins.

I can take a shot at that. You know, we're not We're not given quarterly guidance at this point, but clearly the inflation and the hyperinflation of the war is on us now. And so it's 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, you know, given what we know today, which, again, theoretically could change tomorrow. But that would be the way I would think about margin progression, you know, 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 be our bigger quarters. But with that caveat, I'd 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 acquisitions. since the last call. Can you just give us details on the seasonality of sales for these businesses, particularly Burko and Shorrock, and if this will skew typical sales cadence we've seen in the past?

Todd, do you want to carry on?

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

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

Yeah, look, thank you very much for that. And thanks to everyone for joining. I guess in closing, I would just say the highlights delighted to have 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% in this year and rising and the M&A coming through strongly. In addition, the US factory and warehouse coming online towards the end of this year. So look, we feel good about the plan. That said, of course, these are very tough times. You know, the war is a horrific situation and it's driving a lot of inflation into our business. And there's going to be a price cost lag, but we feel confident that we'll come out of that, you know, over time. So thank you for,

listening and participating, and have a good day.

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