希悅爾 (SEE) 2009 Q4 法說會逐字稿

Good morning. My name is Geri. And I will be your conference operator today. At this time, I would like to welcome everyone to the Diversey Inc. and Diversey Holdings Inc. fiscal 2009 earnings conference call.

(Operator Instructions).

Thank you. Now, it gives me great pleasure to introduce the President and the CEO of Diversey Inc., Mr. Ed Lonergan. Sir, you may begin your conference.

Thank you. Good morning, everybody and I appreciate your participation in this call. I'm accompanied today by our Executive Vice President and Chief Financial Officer, Norm Clubb. And as you know, Norm joined our Company in January of 2010. Norm is new to our management team, but I want you to know he's not new to Diversey. He joins from Unilever where he was most recently serving as President and Chief Operating Officer for the food -- for the Company's food solutions business in the Americas.

Norm has well served on our Board of directors from 2007 to 2009 as an Unilever appointee, which until November of last year as you know, was a one-third shareholder in our company. Earlier in his career, Norm served as Senior Vice President of Finance and Operations for the former Diversey corporation, one of the legacy businesses of today's Diversey. He later held the position of Senior Vice President of Finance and Supply Chain for Diversey Lever, another legacy business. Suffice it to say, Norm knows our Company and industry well. And we are pleased to have his expertise and institutional knowledge to our leadership team. I would like to turn it over to Norm to say a few words, and provide some important disclosure information for today's call. And then I will come back and provide an overview of our strong performance and fiscal year 2009.

Thanks, Ed. Before I begin, I would like to make a few comments on the transition we are going through with the Chief Financial Officer role within the Company. As Ed mentioned, I had the benefit of coming into this role with a lot of experience with this Company in the past, and the transition has gone very, very effectively. Joe Smorada has done a great job being available to me for the past couple months, as we have gone through the transition. And I think it's been a seamless transition, and we are all up now and running fully.

Now I would like to turn to the disclosure information. On this call, we intend to provide an update on the general status of the business and the financial results for the fiscal year ended December 31, 2009. Also an overview of the balance sheet at December 31, 2009, and an update on the results of Diversey Holdings. Some the statements will be made in this presentation are not historical facts, and are forward looking. These forward-looking statements are subject to risks and uncertainties, some of which are beyond our control. Please refer to the risk factors and cautionary statement concerning forward-looking statements in our Form 10-Q, and Form 10-K reports for certain risks and uncertainties that we face.

The discussion today includes references to EBITDA for various periods. EBITDA is a non-GAAP measure within the meaning of the SEC's Regulation G. In accordance with Regulation G, our Form 10-K reports, includes a reconciliation of EBITDA for the fiscal year ended December 31, 2009 to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to EBITDA. Except for our comments regarding EBITDA, net income or cash flow, or where specifically indicated, today's discussion reflects the results of continuing operations, excluding the divested due by chemical and chemical methods associates businesses, which are accounted for as discontinued operations in our financial statements.

Our Form 10-K reports for diversity and diversity holdings were filed with the Securities and Exchange Commission on March 18, 2010. They are also posted on our web site at Diversey.com and can be accessed by clicking on the Investors link, and looking under the public reporting section. Filings for both Diversey Inc. and Diversey Holdings Inc. are available for viewing. Diversey Holding is a holding company whose sole asset is it's shares of Diversey. The main differences between the results of Diversey Holdings and Diversey are interest expense, financing costs and the provision for income taxes. Accordingly, we will address the results of both companies on this call. I would like to turn the call back over to Ed for a general business update.

Thanks, Norm. Today I will provide an overview of 2009 results, and share some perspectives of how we are navigating the challenges of the global recession. I will explain how we are protecting our margin in the face of topline pressures, and we will discuss the power of our customer focus. And then I am going to hand it off to Norm, who will give you a more detailed financial review. I'm very pleased to report Diversey met the global economic crisis head on in 2009, maintaining our top line, and delivering improved margins and EBITDA. While many companies saw significant sales erosion in the year, Diversey's customer focus and compelling value propositions protected our sales position for a nearly flat performance, minus 0.2%, in the face of the toughest economy in our generation. And as we delivered these solid results, we also undertook a full recapitalization of our Company, and entered into a new shareholder agreement with a premier private equity partner, Clayton, Dubilier & Rice.

As a result of our 2009 actions, the Company is now well capitalized, stable and poised for growth. We removed the uncertainty of the Unilever put. We built a much stronger balance sheet, and we reaffirmed our ongoing business relationships with Unilever and SC Johnson, and are building joint business plans to grow our sales through competitively differentiated offerings. We remain enthusiastic about the long-term potential of our business, in the highly fragmented industry where demand is driven increasingly by public expectations for sustainable cleaning and hygiene solutions that protect lives and preserve the earth.

The transition to a new Board and new shareholder agreement has gone smoothly. We value the additional expertise that CD&R brings to the table, and are collaborating well with our shareholders on opportunities for value creation. The transition to our new name has also gone well. In fact just this week we launched our new web site, Diversey.com. We encourage you to take a look. This transition will take some time to fully execute, as we change signage, product labels, and other materials over the next coming months. But I have been encouraged to our employees and stakeholders around the world embrace our new identity, and what Diversey stands for.

In particular, our new tag line for a cleaner, healthier future is providing -- is proving to be an effective framing of our commitment to sustainability, both in our own operations and in what we do for our customers. Sustainability continues to be a major influence on our industry, driving us to continually enhance our sustainable business practices, and partner with our customers to make their operations more efficient and sustainable. For example, in 2009, we tripled our commitment to reducing greenhouse gases, targeting a 25% reduction. And this commitment isn't just to feel good about ourselves. Our participation in the World Wildlife Fund's Climate Savers program is proving to be one of the best financial investments of any program in our Company, delivering $2.00 of savings for every $1.00 of investment.

Our approach to climate change is fairly simple. We treat greenhouse gas as waste, and waste is the energy of the environment, and the enemy of profit. Likewise, we are proving we can significantly reduce solid waste, water, and energy that are used in our own Company, and at our customers' sites. This operational savings focus is a big part of what protected our sales in a year of dramatic economic decline. When many of our customers sought to reduce costs in the face of a challenging economy, we successfully helped them achieve these savings, through our value-added solutions that improve efficiency while reducing waste.

In late 2008 when it was clear we were heading into a period of extraordinary economic turmoil. We concluded that our path through these difficult days was to maintain a keen focus on our customers. So our redesign and efficiency efforts were all built around making service to our customers central to all we do. In 2009, we developed new customer management tools that bring all of the resources of our Company to the table to deliver value for our customers. Serving our customers is not the sole responsibility of our sales and service teams, whether it's a logistics expert from our value chain organization, a working capital expert from Norm's finance team, or sustainability expert from our environmental team, we bring all of the best thinking into the customer management process, in order to uniquely meet our customer needs.

Our customer focus has been enabled by new streamlined organizations within our region operations. In 2009, we moved from five regions to three, and reorganized around customers and industry sectors. Beginning in 2010, we will report our financial results, based on the three segments of Europe, Middle East and Africa, and Americas and greater Asia Pacific. This new structure has created more nimble, accountable operations, that can respond much more quickly and effectively to customer needs, as well as external challenges such as raw material inflation. As a result, we've seen no significant customer losses, and have succeeded in capturing major new accounts.

In any given year, we will lose some contracts, and we'll gain others, with the objective of a net increase of customer growth. In 2009, we resigned all major contracts up for renewal, while growing, selling contributions from the business. This reflects the business value of the significant investment we have made in market and customer research, which we believe is at the leading edge of the industry. An example of the key customer win is our success with the large global lodging chain, with thousands of sites across the globe. This one is significant, in that it was a global deal, and it was in response to our sustainability value proposition.

Our promise to this customer is to provide a cleaner, healthier setting for guests, while simultaneously lightening the impact of their operations on the environment. We fulfill this promise through products and expertise that improve all aspects of their cleaning and hygiene operations, from linen life and water usage, to energy consumption, food safety and labor intensity. This global customer win demonstrates that we can grow our business through sustainable solutions that leverage our unique capabilities to address the total cost of clean in our customers' facilities.

Another example of how our customer intimacy is driving our results was a successful renegotiation of a contract with a global retail chain. We delivered a solution that simplified our product range, and improved sustainability at the stores, and significantly reduced labor costs through our trail blazer, floor care system. We ultimately signed an agreement that improved our margins, while also improving efficacy, and saving money for our customer. So even at a time when consumer retail sales have been lagging, we have been able to protect and expand our business with a differentiated model, filter on deep insights with deep collaboration with our customers. Now, I would like to share some highlights, and then turn the call over to Norm who will provide additional financial detail.

Turning to net sales, we experienced essentially flat net sales after adjusting for currency, divestitures and consumer product sales under our agreement with Unilever. We did see a volume decline. But I should note part of this decline, is the result of our concerted efforts to shift our partners from ready-to-use or slightly concentrated products to super concentrates. While chemical volumes declines, super concentrates deliver a more cost effective and differentiated customer offer, while enhancing both our margins, and the carbon footprint of our value chain. These differentiated products capitalize on our liquids and powders formulating and dosing and dispensing capabilities to offer better cost and use and sustainability profiles.

While we believe the move to concentrates impacted our volume in the year, a portion of the volume decline was clearly driven by reduced consumption throughput, including lower occupancy in lodging, fewer meals and food service, and reduced output in food and beverage sectors resulting from the recession. As well as reduction in machine and utensil sales driven by tightening customer capital spending. We should also note that 2009 had two fewer selling days than 2008. These declines were virtually offset by effective pricing and positive customer wins in all regions. In 2007 and 2008, we put in a place new pricing disciplines as well as systems to enhance visibility of profitability by customer, and by SKU. These capabilities prepared us for the challenging environment of 2009.

Now, regarding our sales, I would like to make it clear that we are never satisfied with any performance short of growth. But considering the magnitude of the economic crisis in 2009, I'm proud of our performance, the resiliency of our business, and the passion of our employees to protect our business. As the recession continues in markets that are critical to our Company, I'm encouraged to maintain our sales in very challenging times. In addition to protecting our top line, we also improved our margins in 2009, thanks to the success of our pricing and business strategies, as well as effective raw material sourcing. Our global sourcing group, working in close collaboration with our portfolio team and suppliers to simplify our ingredients portfolio has well positioned us to mitigate raw material inflation that may occur in the future.

Excluding the impact of our Unilever agreements, our margin percentage improved 140 basis points over 2008. This margin improvement is one of the true success stories of 2009, positioning the Company well for the future. The combination of improved margins and continued cost controls on sales, general and administrative spending delivered an EBITDA increase of about $56 million after currency adjustments. Our 2005 restructuring plan, which comes to an end in mid 2010, drove our strongest SG&A performance in recent years, with SG&A as a percentage of net sales declining from 31.3%, to 31% after adjustments for period costs and our Unilever agreement. And these SG&A savings do not come at the expense of our customer pacing capabilities.

Our new regional structures and streamlined global support functions have allowed us to save costs, while also continuing to invest in a world-class sales force, with upgraded training and tools for effective selling, and increased head count to expand service to our customers. In summary, we can draw three essential conclusions from our 2009 performance. One, we made the right decisions in the three prior years to create a competitive cost structure, a nimble, decisive organization, and to implement business systems that prepared us for the economic turmoil of the last two years. Two, we have a resilient business, in an industry with strong demand drivers that will accelerate in the years ahead. And three, our new equity partners and capital structure give us the financial flexibility to build this business, and contribute in ever increasing ways to a cleaner and healthier future. I would like to turn it over to Norm for some additional financial detail.

Thanks, Ed. I would like to remind you that a reconciliation of EBITDA to net cash provided by operating activities can be found on our Form 10-K reports for the fiscal year ended December 31, 2009, which can be accessed from our website. On an as reported basis, net sales for the fiscal year ended December 31, 2009, were $3.1 billion as compared to $3.3 billion in the prior year. After adjusting for currency, divestitures, and consumer product sales under our agreements with Unilever, our net sales were basically flat, as compared to the prior year, decreasing by 0.2%. Ed provided a summary of the overall trends impacting our sales for the year, but now let me provide some highlights of the performance of our regional businesses.

As noted, we will soon be moving to three regions, but our 2009 results are still reported based on the five operating units. In Europe, Middle East and Africa, we generated a slight increase in net sales, despite struggling economies across Europe. Sales volume increased from customer acquisition and a favorable sales mix, but demand declines on our current customer base and the pressure on floor care equipment due to constrained capital spending, more than offset those sales increases. Pricing positively contributed to the sales growth. With the economic stress in western Europe continuing, we are accelerating customer acquisition efforts, and continuing to work with our current customers to provide enhanced value propositions, in order to maintain our momentum in this critical market.

Latin America continued on its strong growth trajectory with a 6.1% increase in net sales over 2008. Recession driven volume decreases in some existing customers, were more than offset by new customer acquisition and pricing. We expect Latin America to continue it's growth pattern, as new customers come online, and new business models give us access to a broader customer set. In Asia Pacific, net sales increased by 1.6% as Australia stabilized, and India delivered exceptional growth. Volume increases in India, were partially offset by a decline in the lodging sector in most markets across Asia. We expect our growth to improve, as our business in China expands along with the country's economy.

In North America, we offset recessionary pressures of 1.2% over the prior year. We have returned our food and beverage business to growth. And in our institutional business, we are improving our position through innovations and improvements in how we reach and serve customers, in the government and education, building service contractor and retail sectors. In Japan, our net sales decreased by 10 -- 10.6%. Half of the sales decline was a result of our own decision to exit certain under-performing businesses, in both direct and indirect channels. The other half was driven by a general decline in demand, particularly in the food service business. Demographic shifts in Japan, along with the migration of some manufacturing to the mainland of Asia will continue to pressure our business in the entire industry. We have also installed strong new leadership, and built a new streamlined structure to enable our team to better respond to market conditions.

Now looking at the overall financial performance. Based on set sales as reported, our gross profit percentage improved by 120 basis points versus the prior year. Excluding the impact of sales agency fee income in both years our gross profit improved by 140 basis points in 2009, versus the prior year. The 140 basis point improvement was largely the result of increased prices, and a favorably reduction of certain raw material costs, including phosphorus materials, caustic soda, and chelates. We further improved gross margins by rationalizing the number of product offerings, and eliminating low margin products. In addition, we implemented internal processes to more effectively monitor customer profitability, and continued our focus on global sourcing initiatives.

As reported, and excluding sales agency fee income, SG&A expenses as a percentage of net sales were 32% in 2009, as compared to 32.5% in 2008. This includes period costs associated with our restructuring program of $31 million in 2009, as compared to $42.2 million in 2008. After adjusting for these period costs, SG&A expenses were 31% of net sales in 2009, as compared to 31.3% in 2008. This favorable decline is mainly due to cost savings under our restructuring program, and our aggressive expense control management in response to the current economic conditions. Again, we emphasize that we achieved these savings, while maintaining and providing our customer-facing capabilities.

Restructuring expenses in 2009 were $32.9 million, compared to $57.3 million in 2008. Costs incurred in 2009 were largely driven by involuntary termination costs associated with our European and North American business segments. EBITDA in 2009 was $312 million compared to $278 million in the prior year. Net of a negative foreign currency impact of $21.5 million, EBITDA increased by $55.7 million. This was primarily due to increased gross profits arising from price increases, and reduction in certain raw material costs, and decreases in our operating expenses.

The Company reported net income of $7.9 million in 2009, compared to a net loss of $11.8 million in the prior year. Excluding the negative impact of foreign currency exchange of $11 million, our net income increased by $30.6 million. This increase was primarily due to increased EBITDA. Diversey Holdings reported a net loss of $48.6 million in 2009, as compared to a net loss of $59.5 million in the prior year. As previously mentioned, the main differences between the results of Diversey Holdings and Diversey are interest expense, financing costs, and the provisions for income taxes. Capital expenditure in 2009 was $94.3 million, compared to $121 million in 2008.

I would now like to turn to liquidity and capital resources. This year we successfully completed the recapitalization of our Company through the debt and equity investment transactions that closed on November 24, 2009. The terms for our new debt provide us with more liquidity, and position us well for growth and stability. Our new senior secured credit facility includes, a $450 million term loan, a CAD52 million term loan, and a EUR333 million term loan, and a $250 million revolving credit facility. As of December 31, 2009, Diversey Inc. had total indebtedness of approximately $1.4 billion, consisting of $400 million of senior notes, $981 million of borrowings under our senior secured credit facility, and $27.7 million in other short-term borrowings.

We held cash and cash equivalents of $249 million, as compared to $108 million at December 31, 2008. This increase was primarily due to cash generated from operations, including a decrease in working capital, and proceeds from the issuance of long-term debt .in connection with the refinancing transaction. This cash generation was partially offset by capital expenditures of $94.3 million, and dividend payments of $132 million to Diversey Holding. Of this amount, $43.4 million was used to fund the semiannual interest payments on Diversey Holding senior discount notes, and $88.5 million was used in connection with the refinancing transaction.

As previously mentioned the company's cash flow was enhanced this year by a reduction of working capital. This decrease reflects the improved management of our cash resources which was particularly challenging, given the global economic environment. In response to the ongoing economic pressures, we will continue to aggressively manage our collection programs, and expect to benefit from the implementation of the inventory rationalization projects. In addition, in December 2009, we transferred $27.4 million into irrevocable trusts for the settlement of certain obligations associated with the restructuring program. The majority of this program will be used in 2010 to settle these obligations. This cash is classified as restricted cash on our balance sheets.

Also during the year, we entered into a new EUR50 million European securitization facility, including the receivables of our subsidiaries in the UK, France and Spain. Usage under the European securitization at December 31, 2009 was $18.7 million, and our existing North American securitization facility was undrawn at the end of the year. Diversey Holdings consolidated debt balance at December 31, 2009 was $1.6 billion, which includes Diversey Holdings $250 million senior notes. As of December 31, 2009, the Company had total credit available of $245 million under our revolving credit facility. Of the total credit available at the end of the year, we could borrow the full amount and still be in compliance with our financial covenants.

That will wrap up and concludes our presentation. I would like to remind you we have a robust Investor section on our Company website at Diversey.com. We consider this website to be a key communication tool with the investment community, and we encourage you to periodically access the site. Documents related to the Diversey and the Diversey Holding senior notes, as well as both company's financial results can be found in the Investor section of our corporate website. A recording of this conference call will be available for replay for the next two weeks, in the Investor section of the Company website at Diversey.com. Please direct questions related to our financial results to Lori Marin. John Matthews is a contact for all nonfinancial information. Our contact information can be found in the Investor section of our corporate web site. We will now move to questions and answers.

Thank you.

(Operator instructions).

Your first question comes from the line of Reza Vahabzadeh at Barclays Capital.

Good morning.

Good morning.

So you talked about the 2009 sales trends which was helpful. How do you feel about sales, starting here if 2010 across your -- across your major region? Any color as far as sales trends by industry group or by region?

Well, I've had a chance over the last three months, actually, to get pretty much everywhere in the world. And I would say volume for us remains our most -- our most crucial watch factor over the course of the next year. We see some economies recovering. Some sectors improving. We are still -- the jury is out on southern Europe, in my opinion, until we see what happens in the summer, although we see, I would say, green shoots in parts of the world. Our objective at the moment, is to continue focus on improving compliance and the customers that we do have, selling more applications to the customers that already trust and respect us, and to continue to focus on new customer acquisition. I can't predict where the economies of the world are going to go. And we'll take control of the things we can control in the face of that situation.

Got it. And then is there -- is there any reason to think your market share trends remained the same, or changed at all during 2009? And what you would generally expect on that in 2010?

Yes, I think as you all know, this is a data poor industry. So having fast moving consumer goods level of certainty on market share is always a difficult discussion. Highly fragmented industry, about 80% of the industry not in the main global market leaders. We believe that we grew market share in 2009. We believe our primary competitor grew market share in 2009, and we believe there's significant growth for further growth in 2010, primarily from the fragmented remainder of the industry.

Okay. And then a question for Norm. You had an adjustment in the cash flow statement around payables and receivables, related to acquisition related Unilever. Any comments on what caused that? And I assume that's a one-time item?

Yes, just one sec. Sorry, just pulling up my pages here on this one. Yes, we do believe it's a one-time item, and --

So the 86 of the receivables, and the 30 of the payables, is that just a -- adjustment related to the transaction that occurred in the first quarter?

That is correct.

Okay. Got it. And then, where are we as far as system integration? Are we basically done on that?

Well, system integration is one of those ongoing things, unfortunately. I think we have made a lot of great progress in implementing systems that are really state-of-the-art in many respects across the business. But I would say that we face ongoing investment into our systems, as we go forward which all businesses do. And we are looking for an ongoing spend in that area in 2010 as well.

If I could add something, Norm, I would say on the application side of our systems, we have now completed the global rollout of our HRIS system. So we can now track employee conditions anywhere in the world on a live basis. We are also just about completed the rollout of our global profitability and reporting system. So we now have visibility to SKU, and customer level profitability data on a near global basis. And they both have provided factors in our improved gross margin success in the course of the last year, and SG&A improvement.

I would just add as a bit of color, that coming in from Unilever as I did, I have been really, really impressed with the sophistication of the systems that are currently in play in this business today.

And, I'm sorry, Ed, did you say the applications platform has been rolled out or it hasn't been?

The -- the HRIS or the global profitability and reporting system?

HRS.

HRS is complete.

Got it. Okay, and then any thoughts as far as cash restructuring outlays, in whatever form in 2010, and as well as CapEx in 2010?

First of all on CapEx in 2010, we would expect the level spend to be broadly in line with -- with what we incurred in 2009. So we don't see any material change from that, as we get into 2010. We've made some changes in the overall levels of investment that we have put in, and tried to be more diligent in trying to restrict capital spending, and that appears to be taking hold across the business. So, again, to restate, we expect the CapEx in 2010 to be broadly in line with 2009. We -- in terms of the restructuring, we have transferred cash into into these irrevocable trusts. And we cover -- this will cover most restructuring expenses in 2010. And like any good business, we will continue to look at opportunities to for restructuring as we go forward with, and we'll evaluate each program as it comes along, but the majority spend in the year will be covered by the irrevocable trusts.

Got it. Thank you.

Your next question comes from the line of Todd Harkrider at Goldman Sachs.

Congratulations on a good quarter.

Thanks.

Since commodity costs are probably favorable in the first quarter as well, should we expect nice bottom line improvement year-over-year again? And then, as I guess when it comes to the second half, do you have a sense where your commodity costs will be compared to the second half of 2009?

Yes, I think as you guys know from the tracking of the markets, this is the great question for 2010.

(Technical difficulties)

We -- the key variable for us is what happens in the broader market? What happens to the price of oil and the currencies in the global, the remainer of the year? We have a pretty good view towards first half. What we are seeing is a pretty -- a pretty balanced pluses and minuses across our commodity input. So if you think about ethylenes and propylenes which are a key feedstock for our business, they are up about 40% in the market place in the United States, over the course of the first part of this year, but about half that in the EU. So they have differential impacts on our business. Caustic is moving more aggressively in the US, than it is in Europe, and the rest of the world. Inorganics are favorable in our mind, relative to what we budgeted. Phos acids, I think are a further question mark, because they are so dependent on the trade in fertilizer through the year. So on balance, I would say we don't expect any negative surprises versus what we had planned in the year, for -- for commodity increases, and we built pricing to manage that into our plans.

Okay. And it looks like your cash balance is higher than it's been in a long time. With your restructuring plan coming to a close, will paying down debt still be a large focus this year?

The cash generation of the business is -- has been quite strong recently and part of that, of course, is as you mentioned the fact that restructuring is coming to an end. We are going to continue to evaluate what we do with increasing levels of liquidity going forward, but certainly paying down debt is a priority for us.

And then, can you talk about your more open distribution strategy in North America? Are you getting more competitive on pricing in hopes of picking up volume? Or is this just more enhancing your relationships with the distributors in other ways or can you talk about that a little bit more?

Yes, I'm happy to. We consider distribution a core part of our go-to-market, and a differentiator for the Company in the globe. We, as you all know, we have a mix of direct sales and distributor partnered sales. And we are in the process on a global basis, of enhancing our distribution system. In some markets, we have to build it, in other markets we're partnering to improve it. We have the luxury in the United States, of a long established (inaudible) distribution network. And we have taken the opportunity of the move to a single Diversey brand to simplify our portfolios in the United States. What we have learned in our research is our customers care about the application expertise and efficacy we can deliver, not so much about which brand name is on the package. And so -- and they care more about signature floor wax than they care whether we call it Johnson Diversey or Diversey, for example.

So we spent quite sometime with our distributors over the last few years working on ways of how we improve business. In my opinion, we were not the best distributor managers in the industry. There are other players in the United States that did a better job in past years. We wanted to learn from that, and we have now fully deployed a new go-to-market model in the US, all renewed contracts are delivered as of February, and we are in process now. And I would say, there's always some angst and changes in distribution infrastructure. But our strong partners are excited about the changes, and feel there's an opportunity to grow business with us, and their business in the market place. Part of this, of course, was enabling us to move more of our salespeople into the field to work with distributors and end users, to drive new business for both them and for us. And we are seeing very positive signs first, call it four months of delivery. We'll know more --

I appreciate it, and thanks. Good luck with the rest of 2010.

Great, thanks.

Your next question comes from the line of Annika Eiremo at Delaware Investment.

Hi, guys. My first question is just about the transition out of your Waxdale manufacturing facility. I know you said the lease is up in 2013, and you were hoping to move out of there before that?

Yeah, we -- we are clearly still in the process of determining the next steps. We obviously don't have significant pressure to move out of that facility in the very short term, which gives us the opportunity to make the smartest choices about our manufacturing footprint. So I would say, we'll have more information for you as the year progresses. At the current point, our real focus is on engineering studies to ensure that we have got the right footprint for long-term delivery of product flow that we need out of this Company, and the United States over the next couple of years.

And what percentage of your products are actually manufactured in that one?

I can't tell you -- from a corporate global perspective, it's a hard number. I mean, we -- we generally produce -- self-produce about 70% of our portfolio, and the rest is contract manufactured, It's really -- it's always a decision about who can do it best. And that facility, of course, is heavily dedicated towards floor care in the United States, and we believe we can do that best. So it's variable by portfolio is probably the easiest way to say it. But in the United States, that's our primary manufacturing facility.

Okay, thanks. And then, my last question was on working capital. Obviously it was a pretty big source of cash in 2009, and I was wondering if you had any comments regarding the outlook for working capital sources or uses in 2010?

We made significant progress in all the components of working capital in 2009. And we have very detailed programs to drive for further improvement, particularly on accounts receivable, and a variety of other areas. We have big regional differences at the moment, in terms of the overall performance of the business in working capital. And I'm not going to get into the individual regions where we have some issues, but we have dedicated teams that are working to drive additional improvement which will be both on, just better execution of the programs we have in place, and review of pricing structures that we have with customers. But also looking at, are there structuring changes we can make to further improve the working capital position. So we expect to have further improvements as we go through 2010.

Great. Thanks, and good luck.

Thank you.

Your next question comes from the line of Dwain Carryl at GoldenTree.

Thanks. Just want to confirm firstly, that the revolver is undrawn, you said?

That' accurate.

That's correct.

Second, is just a follow on to the raw material question. Do you hedge at all the raw material costs and/or FX?

We have -- we'll have forward cover in a variety of areas for a period of time. So for example, many of our raw materials, we are covered through the middle of this year. The programs are on For Ex are not extensive. But we do have prudent cover programs for major raw materials.

Can you kind of quantify -- like to the extent that raw materials move a certain percentage, are you kind of half hedged? Are you most of the way, like 90% hedged? Is there a way to quantify that, or not really?

I think probably the easiest thing is we're on wave five of the global strategic sourcing initiative. And with each wave, we learn more about how to manage raw materials. I think we started out with fairly long contracts in some cases, which then proved to be a negative as the markets came down, and our suppliers are learning at the same time. I think the trend is towards shorter duration contracts, for the pricing in those contracts. And then clearly when you combine that with the work in process and the raw impact that we have in our -- in our system, we've got a pretty good idea out over the next, call it three to six months, about what we are going to face. I think it will be hard to -- to go much beyond that with certainty, because the suppliers are also managing the materials pretty carefully over the current environment, through capacity reductions, and plants and, et cetera. I mean, there's just so much volatility over the last three years. It's much different world than I lived in for the first 28 years I was in this business.

Got you. So kind of hedged in basically three to six months out?

Yes, I think what you can assume for most players in this industry is, we have a pretty good idea of the next couple of quarters. And we have the ability to get pricing in place by the time we know there's something that has to be done beyond.

And on the FX side, nothing really?

No, we do have FX programs. We also operate netting programs within the business as well, where we have high levels of foreign currency trading. So we have netting programs to try to eliminate the foreign currency risk that we have faced there. But as you can -- if you refer to the 10-K, in note 13, you'll see that we do have contracts in place to try to deal with some of the risks, related to the settlement of receivables and payables within the business.

Good morning. It's Lori Marin, Corporate Treasurer. For our foreign exchange, what we do, is we have a policy that was approved by the Board of Directors. And on an annual basis we go out, and we look a full-year out and then we continue to do rolling hedges throughout. We work with our large Op Cos. We look at what their streams of different currency needs are. And we take those, and we make certain that for the near end, for the first three months, that we are covered at 75% to 90%. And then going out throughout the year, we are covered at least to 50%. And then we update that every quarter with information that we have from our operating companies.

We also will do a hedge every time we have a known exposure. So in other words, if a dividend is declared between our operating companies, and something that's going to be paid to another operating company, or back to the home office. We will go out and we will absolutely on that date that the dividend is declared, we will go out and we will capture the rate. So that we know exactly the amount of that dividend on the due date. We will do that also for any large contracts that we have. If we are doing a buy of something, and it's in a foreign currency, like for machine parts or something like that. We also will go out, and we will make certain that we hedge it again, to make certain that we are not at risk to having a price differential, than what we originally contemplated.

That's helpful. You said 75% to 90%, for how long of the year?

For the first three months. And then we roll out throughout the rest of the year somewhere between 75% and 50%. And as you get further out, we then continue to add more rolling, so it gets tighter. So in other words, every three months we are updating and putting on new hedges. That way we make certain that we are in compliance with what our outside auditors, E&Y would like, so that we have effective hedging.

Perfect. And I guess two more questions. One is, it seems like the story of the quarter is the volume declines, offset by price increases. You seem fairly confident in your ability to continue to roll price increases on to new customers. How do you view volume going forward in 2010?

I think this goes back to one of the first questions we talked. If I had a crystal ball, it would be a lot easier to give you an answer, and I don't. Volumes driven by the state of our industry. If RevPAR and occupancy and lodging improves, then clearly we see a very fast benefit. If food and beverage production volumes improve, we see a very fast benefit. If people start to feel comfortable about the economy, and change their habits back to eating out more frequently, we see a benefit.

So, our objective and what we saw during the course of 2009, is many of our core customers saw volume decline in their industries. You can see in the publicly reported data what happened in lodging, for example. And as I said, I see signs of green shoots. I was in Beijing and Shanghai several weeks back, and our lodging partners are starting to see some return of business travelers to the market place. I think the big question for me, is what do the Europeans do this summer? Do they feel comfortable about taking holidays, because clearly the businesses around the Med, that are dependent upon that, whether it's food and beverages or lodging and food service, will be largely dependent on how people feel about their economies.

I think our job is simply, as I said before to focus on compliance and the customers we have. One of the biggest volume opportunities we have today, is simply to get the customers where we have contracts, to have us in all the sites where we have the right to play. And we are doing -- now that we have the capability to know through this global pricing and profitability reporting system, what we've got, where, we have targeted that. We also see as well, a highly fragmented industry out there, where not everybody has with the wherewithal in this type of economy to survive, and execute as well as operations like Diversey, and that provides opportunity. But at the end we are a GDP plus business as an industry. And I think if GDP recovers, we will see volume come back.

Let me ask it just a slightly different way. I guess, are you budgeted for flat volumes, or are you budgeted for continued volume declines?

I think --

Internally.

What we budgeted for, and what is actually going to happen this year are always interesting questions. We -- we certainly plan for, and hope to see both volume and pricing contribute to top line this year.

Okay.

If we don't see the economies recover, we are also aggressively planning to ensure that we deliver our bottom line financial commitments.

And lastly, with the large increase in the cash number, you said that you -- one of the things you certainly would consider is prioritizing that pay down. Is there -- when you kind of look at your cap structure, is there particular areas that you would prioritize, over other parts of the cap structure? Thanks.

I don't think we are at a stage that we are prepared to make any kind of commitment, as to what we are going to do. We have a variety of things we are going to look at. We will continue to evaluate on the pick notes, whether we would consider something different, rather than accruing the interest, whether we would pay cash interest, but we have made no decisions in that respect. We want -- what we want to see, is how the business results continue to develop through the year. And then therefore, what is the level of cash that we've got available to us to enable us to evaluate what we want to do, in terms of paying down of debt. But in terms of specifics, as to what we are intending to do we have made no plans as of yet.

Thank you.

You're welcome.

Your next question is a follow-up question from the line of Reza Vahabzadeh at Barclays Capital.

Hello.

Yes, thanks. So when you look at your plan for the next year or two, are -- are acquisitions part of the game plan?

We have no specific acquisition plans. And we continue to look at opportunities as they come up, and we will evaluate each and every one on the basis of alternative plans that we could be making to grow the business in a more organic way. As -- there's no question, with the improved financial position of the Company, with the new equity structure that we've got, we can consider these things. But it is not a priority for us at the moment, nor do we have any specific plans to make any acquisitions.

Okay. And then for fourth quarter, was foreign currency a benefit to revenues or -- or EBITDA?

Yes.

Yes.

And I didn't -- I couldn't catch how much that was.

Is that what you meant? The -- we had a -- it's a bit of a mixed bag. I'm not going to really disclose the exact amount. We had -- what happened is, as Ed indicated, we had two fewer days net in 2009, versus 2008. In the quarter by itself, we actually had four fewer days. That's just how the mechanics of the calendar worked out, and the four fewer selling days were offset by favorable ForEX during the quarter. You could probably run the sums yourself, to figure out what that would be.

Okay, so two fewer selling days in 4Q 2009, but offset by

No, no, sorry, sorry. Four fewer days in -- in Q4.

Okay.

Two fewer net, for the entire year.

I see. Okay. And so for the fourth quarter, the -- the four fewer days were -- was offset by the FX?

That is correct.

Okay. And then as far as pricing is concerned, how much pricing did you benefit from in 2009?

We actually don't disclose specifics on pricing or volume growth, and haven't ever, actually.

Right.

What I can tell you is the work we have done over the last several years has enabled us to set a price increase target and deliver it, in each of the regions of the world. I would say when I came here in 2006, this was an impossibility because we had disconnects, between the region and the end customer. All the work we have done to streamline and simplify our operations in the regions, have enabled us to very quickly move from pricing taken to pricing delivered.

And so the other thing that's happened in the course of the last several years is, as we renewed contracts, we built pricing revenues into the contracts. So we won't be caught flat footed as we were in four and five, with the inability to take pricing as raw material moved. I feel comfortability to offset inflation, both in the capabilities of the team, and the capabilities of our systems to deliver that. So obviously 2008, 20099 was an unprecedented period for materials inflation and for our pricing. We have see that mitigated somewhat as we move into 2010, because clearly the inflation profile is different this year. It's lower than it was in the last two.

Right. Now, I --

Sorry just give a bit of directional information. That's right. We don't wish to disclose the effect of pricing. The improvement in gross margin was comprised of three elements though, which was we had a favorable mix improvement. We had benefit from our global sourcing initiatives, and the benefit of additional price. And price was a significant element of that overall improvement. That gives you directionally, what the -- what was driving the business.

I hear you. And then on that pricing, when do you lap prior year pricing, is that late in the fourth quarter? Or is that going to be early 1Q 2010.

It actually varies by business unit, and region.

Okay.

Because our pricing varies depending upon the sectors that you are talking about, and the location in the world. So I would say it's very difficult to say, when you lap what. But I would say in the first half, most of what we took last year was deployed. And by the second half of last year, pricing had pretty much rolled into the -- into the business. Does that make sense?

That's very helpful. Thank you.

At this time, there are no further questions.

Okay. I would like to thank you all on behalf of everyone here at Diversey and Diversey Holdings for attending the call, and for your continued support of our companies. As we mentioned in the -- in the end of last year, we will return to quarterly earnings calls. So you can anticipate the first quarter call not too far in the future. Thank you.

This concludes today's conference call. You may now disconnect.