Diversey Holdings, Ltd. (NASDAQ:DSEY) is a global leader in providing high-performance hygiene, infection prevention, and cleaning solutions. The company's diverse portfolio of products, services, and technologies cater to the needs of customers across the Institutional and Food & Beverage markets. Despite facing headwinds, Diversey has demonstrated resilience and a commitment to driving growth and operational efficiency.

Business Overview

Diversey's Institutional segment offers a comprehensive range of solutions, including infection prevention and personal care, floor and building care chemicals, kitchen and mechanical warewash chemicals and machines, dosing and dispensing equipment, and floor care machines. These solutions are designed to enhance cleanliness, safety, environmental sustainability, and efficiency for customers in the healthcare, education, food service, retail, grocery, hospitality, and building service contractor industries.

The company's Food & Beverage segment provides products, solutions, equipment, and machines that maximize the hygiene, safety, and efficiency of customers' production and cleaning processes while minimizing their impact on natural resources. Diversey's offerings in this segment include chemical products, engineering and equipment solutions, knowledge-based services, training, and water treatment solutions. These solutions are tailored to enhance food safety, operational excellence, and sustainability for customers in the brewing, beverage, dairy, processed foods, pharmaceutical, and agriculture industries.

Diversey operates globally, with manufacturing facilities, sales centers, administrative offices, and warehouses located throughout the world. The company has a global team of approximately 9,000 employees as of the latest reporting period.

Financials

Diversey's financial performance has been impacted by various macroeconomic and industry-specific challenges. For the fiscal year ended December 31, 2022, the company reported annual net income of -$169.3 million, annual revenue of $2,765.9 million, annual operating cash flow of $33.7 million, and annual free cash flow of -$103.2 million.

In the latest reported quarter, the three months ended March 31, 2023, Diversey generated net sales of $696.0 million, a 5.5% increase compared to the same period in the prior year. This growth was driven by a 12.0% increase in organic sales, partially offset by a 7.1% negative impact from foreign currency translation.

The company's Institutional segment reported net sales of $477.1 million in the first quarter of 2023, a 1.0% increase compared to the same period in 2022. This growth was primarily attributable to organic sales increases of 6.6%, partially offset by a 6.3% negative impact from foreign currency translation. The Food & Beverage segment delivered net sales of $218.9 million in the first quarter of 2023, a 16.6% increase compared to the same period in the prior year. This growth was driven by a 25.8% increase in organic sales, partially offset by a 9.2% negative impact from foreign currency translation.

Gross profit in the first quarter of 2023 was $219.6 million, with a gross margin of 31.6%, compared to $236.1 million and a gross margin of 35.8% in the same period of 2022. The decrease in gross margin was primarily due to $18.1 million of non-recurring costs related to consolidating certain manufacturing and warehousing facilities, $17.2 million of unfavorable foreign currency translation, and a $1.8 million increase in share-based compensation. These factors were partially offset by higher sales volumes and price increases.

Segmental Performance

Diversey's Institutional segment reported Adjusted EBITDA of $37.6 million in the first quarter of 2023, a 29.1% decrease compared to the same period in 2022. This decline was primarily attributable to a 21.3% decrease in constant-dollar Adjusted EBITDA, driven by increased inflation, higher freight costs, higher manufacturing costs, and higher labor costs, partially offset by volume growth and price increases. The Adjusted EBITDA margin for the Institutional segment decreased from 11.2% in the first quarter of 2022 to 7.9% in the first quarter of 2023.

The Food & Beverage segment delivered Adjusted EBITDA of $25.7 million in the first quarter of 2023, a 16.3% increase compared to the same period in the prior year. On a constant-dollar basis, Adjusted EBITDA increased by 29.9%, driven by volume growth and price increases, partially offset by high input cost inflation, particularly in Europe due to the Russia-Ukraine war. The Adjusted EBITDA margin for the Food & Beverage segment decreased from 11.8% in the first quarter of 2022 to 11.7% in the first quarter of 2023.

Liquidity

As of March 31, 2023, Diversey had cash and cash equivalents of $125.7 million and unused borrowing capacity of $444.5 million under its Revolving Credit Facility. The company believes that its cash flow from operations, available cash on hand, and available borrowing capacity will be adequate to service its debt, meet its liquidity needs, and fund necessary capital expenditures for the next twelve months.

Diversey's debt capitalization as of March 31, 2023 included a $1,481.2 million 2021 U.S. Dollar Term Loan, $500.0 million in 2021 Senior Notes, and other short-term borrowings and financing obligations. The company was in compliance with all covenants under the agreements governing its debt as of the latest reporting period.

Risks and Challenges

Diversey faces several risks and challenges that could impact its financial performance and growth prospects. These include:

1. Macroeconomic and geopolitical uncertainties: The company's operations are subject to changes in regional and local economic conditions, including inflationary pressures and the ongoing impact of the Russia-Ukraine war.

2. Supply chain disruptions: Diversey has experienced supply chain challenges, including delays, shortages of certain materials, and increased transportation costs, which have affected its ability to receive goods on a timely basis and at anticipated costs.

3. Regulatory compliance: The company's industry is highly regulated, and compliance with new and existing regulations has increased its cost of doing business.

4. Competitive landscape: Diversey operates in a competitive market, and its success is dependent on its ability to develop and market innovative products and solutions that meet the evolving needs of its customers.

5. Integration of acquisitions: The company's growth strategy includes strategic acquisitions, and the successful integration of these acquisitions is critical to realizing the expected benefits.

Outlook

Diversey has not provided specific financial guidance for the upcoming fiscal year. However, the company has stated that it remains committed to driving growth, improving operational efficiency, and maintaining its market-leading position in the Institutional and Food & Beverage segments.

The company's recent acquisition of NSS Enterprise, Inc., a manufacturer of floor cleaning machines, is expected to enhance its scale, presence, and support in the North American market. Additionally, Diversey continues to focus on its strategic initiative to consolidate certain manufacturing and warehousing facilities within Europe and North America, which is expected to expand production capacity and improve inventory, supply chain, and workforce management.

Conclusion

Diversey Holdings, Ltd. (NASDAQ:DSEY) is a global leader in the provision of high-performance hygiene, infection prevention, and cleaning solutions. Despite facing various macroeconomic and industry-specific challenges, the company has demonstrated resilience and a commitment to driving growth and operational efficiency. While the company's financial performance has been impacted by factors such as inflation, supply chain disruptions, and regulatory compliance costs, Diversey remains focused on leveraging its market-leading position, innovative product portfolio, and strategic initiatives to navigate these challenges and deliver value for its shareholders.