Q4 2021 Ecolab Inc Earnings Call
Superior long term shareholder returns.
And now here's Christophe Beck with his comments.
Thank you so much Mike and good afternoon, everyone. The fourth quarter showed once again that the global environment remains very dynamic presenting new challenges that we've learned to turn into long term opportunities.
Topline momentum reached 10% or 9% organic in a constrained environment institutional and specialty grew 19% pest elimination, 10% and industrial remains strong growing 8% in the quarter and our new business and innovation pipelines remain really strong.
At the same time Colby came back during the fall, especially North America and in Europe .
As we all know inflation get pricing substantially and still top line gained momentum, including pricing, which accelerated to 4% as we exited the quarter.
This was required to compensate for significant incremental costs from supply constraints and much higher inflation pressure on our raw material and freight costs.
Discuss by close to 20% in the fourth quarter.
Really double the rate we saw in the third and you didn't close to a total of $1 per share unfavorable impact for the full year with almost half of that in Q4 alone.
So once again, our team demonstrated our commitment to protect our customers' operations at all time and in any condition to ensure food power water and healthcare supply are protected while we also keep enhancing our margins for the long run.
We now enter 2022 with confidence and well aware that the environment might change, but we will keep doing our very best to stay ahead we.
We expect the global economy to remain strong even if not as a perfect straight line.
Timing for the end of Covid impact remains hard to predict but we expect it to be mostly behind us by the middle of this year.
We also expect inflation to remain at the high level at least for the first half of the Europe , while we expect it to ease during the second half and we're getting ready for these two.
We will keep driving growth by fueling institutional recovery, which is going really well by generating strong new business by investing in our new growth engines like life Sciences data centers or microelectronics and by making sure. We remain one of the very best places to work for the most promising and diverse global talent.
We keep addressing inflation by further enhancing our productivity through digital automation as we've done over the past few years by leveraging high margin innovation and naturally by accelerating our value pricing.
For the full year 'twenty, two we expect raw materials and freight costs to further increase with inflation remaining high before it eases during the second half of the year, our full year pricing expectation for 'twenty. Two is expected to be in the 5% to 6% range, which combined with our steady productivity work is expected to get ahead of.
Inflation dollar in the first half and enhanced margins in the second half of the Europe and certainly beyond as the Ecolab model has proven many times.
All these actions should lead to a strong 22 with strong topline and adjusted earnings growth in the low teens for the full year and the first quarter with very healthy sales growth and a flattish EPS as pricing keeps building fast.
Finally as.
As we've done throughout the pandemic and again major market disruptions, we will remain focused on the future for us. It's all about delivering long term value to our customers and to our shareholders, while managing the short term.
Our mission of protecting people and the resources about digital life is as important as it's ever been our opportunity has never been larger as we changed the global market. That's today greater than 150 billion and growing fast. We therefore confident that we will look back on disparate and truly feel we did the right things the right way, perhaps protecting them.
Our teams and our customers when they needed us the most and by protecting our company in ways that made ecolab, even stronger and more relevant.
As the infection prevention company, helping customers protect the customers and their businesses with Ecolab science certified and as D. Sustainability company, helping our customers progress on their net zero June all of which leading to strong topline and consistent reliable double digit EPS growth and ultimately getting us back.
On our pre Covid and its trajectory.
Look forward to your questions.
Thanks, Chris that concludes our formal remarks as a final note before we begin Q&A, we plan to hold our annual tour of our Booth at the National Restaurant Association show in Chicago on Monday May 23, if you have any.
Any questions. Please contact my office.
Operator would you. Please begin the question and answer period.
Thank you.
I would now be conducting a question and answer session.
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Okay.
Thank you and our first question today is from the line of Tim Mulrooney with William Blair. Please proceed with your question.
Yes. Good morning, Thanks for taking my questions I just have two not surprisingly.
Raw materials. So the first one is now that the year is complete.
I was hoping we could get some numbers around raw material cost inflation can you tell us how much was raw material inflation in 2021, and then what is the expectation for raw material inflation in 'twenty two.
Built into your guidance.
Yeah, Great question. Thank you Jim.
So thats the core topic, obviously saw for all of us for us, it's raw materials and freight.
Note that we combine.
Well and if we look at 2021, it was roughly 10%.
Increase we saw in the.
In the past year.
Spike in AR in Q4.
As you've heard and read as well as up to 20% so 10% for the full year in 'twenty. One we expect to stay pretty high for the first half of 'twenty two at the same levels similar to what we've seen in Q4, and then to ease during the second half of the year, which leads to a roughly a 15 <unk>.
So 10% in 'twenty, one roughly 15% in 'twenty, two and since raw materials and freight represent a quarter of our assay is roughly our pricing plan is well aligned with that and should allow us during the first half so to get the head of.
The dollars that we get in terms of inflation and then improving the margin during the second half assuming that there were assumptions happened as planned.
Yeah. Okay, you kind of you kind of started to address my second question, but I'm going to ask it any way in case you have anything else.
Just following up on that assuming oil prices stay about where they are today would you expect all else equal to <unk>.
<unk> gross margin expansion after 'twenty two.
The reason I ask I mean, if we kind of step back and we we look at your gross margin. It was 44% we've seen it go from 44 down to 41 over the last few years and I am wondering if this is kind of a new normal this $41 42 ish percent or if you do expect to see normalization back to that.
Historical average of closer to 44% over time.
How you plan to get there.
Yes, absolutely.
Expect to get back over time to where we were pre.
Pre inflation start to a pre COVID-19 wherever he is to start.
Obviously, when you look back as well taking industrial for instance in the.
Past years look it.
Operating income performance the margin performance they had in 2020.
It was north of 20% and that was really as an outcome of all the work.
He did in pricing and raw material market.
That trended.
Towards lower level.
So very good performance in 2020.
A perfect example of what's going to happen in the future exactly when I don't know, Jim, but we expect improvement in the second half of 'twenty, two and definitely over time to get back to where we were and go beyond that.
As well.
That's helpful. Thank you.
Thank you Jim.
Our next question is from the line of Manav Patnaik with Barclays.
Thank you.
Chris I was just hoping.
Thinking a little bit more towards the longer term growth trajectory like X reopening the whole hygiene and sanitation team, which is supposed to be elevated and that's why you have the ecolab science certified maybe could you give us some numbers around what that looked like in 2020 one.
Will it be elevated pre pandemic now how do you guys think about that.
Yeah. Good question Manav.
Going to be higher than 2019.
Which means.
Covid, but it is going to be lower than doing COVID-19 .
For sure.
In 2021, Sanitizing sales were close to it.
<unk> increase versus 2019, and I think it is going to remain at that elevated level.
For the foreseeable future and especially with our Ecolab Science Science certified program, which is going really really well.
Customers.
Use higher level of hygiene going forward, especially because their guests and customers are expecting more of it as well some of the ease that we've seen in 'twenty one.
Also related to the fact that.
Restaurants, and hotel had limited limited staffing.
Well, so to do all the cleaning and standardization.
Which probably saw has.
Pressured a little bit the sanitizing sales, but still quite happy versus 2019 as mentioned saw close to double digit and expect it to continue on that trend in the years to come.
Got it appreciate that and you guys obviously done.
A relatively good job here and managing all the cost inflation I suspect.
A lot of your competitors might be struggling more and my question is does that.
Does that mean, you have a greater potential M&A pipeline.
Could be executing on are you not looking at it that way.
Well, we usually.
Focus in terms of M&A.
Good strong companies so we're not looking.
First and foremost at companies that are not doing that great, but I would not exclude that.
But youre right that we are in a very good position you've seen our pricing evolution. So exiting Q4.
We saw 4% and confident in 2022, so to get to five 6% as well that's demonstrating the value that we can create and if we do that.
Over time as we always do it.
In our company, it's to make sure that we can keep those customers and keep those customers for the long term as well, which is going to improve as well our competitive situation.
Got it. Thank you Christophe Thank you manav.
Our next questions are from the line of Chris Parkinson.
Okay, great. Thank you so much just as difficult as it is to discuss anything normalized. These days just how should investors be conceptualizing your true earnings power in terms of let's say the eventual raw material moderation.
Put together I'd say, continuing pricing momentum transportation logistics and labor just all in the context of let's say end markets rebounding in 'twenty two 'twenty three in market share games, you've already spoken about GM normality, but just how should we think about this in terms of earnings power for 'twenty three 'twenty four.
Are there any extra considerations I Didnt mentioned thank you.
Yes, Thanks for your question, Chris Yes.
Long term.
<unk>.
Quite confident that we're going to get back to the pre Covid earnings trajectory.
For a few reasons.
The first one institution is going to keep recovering and it's one of our highest margin businesses. So just from a business mix perspective, so things are going to improve.
Obviously as well than we have.
Industrial that's going to keep growing fast and thats, creating leverage as well in terms of absorption.
That we have and then you mentioned, obviously the price versus inflation.
We've demonstrated that over and over.
Over our history as a company that during those inflationary period, while we end up with a gross margin that's higher than where it was prior to.
That cycle as well then you add businesses like pure light, which are very high margin and growing very fast as well and last but not least all of the work that we've done in terms of digital productivity automation.
Of transactional work, that's going to help our SG&A improvement as well in the years to come. So you bring all that together those are all positive drivers for our margins improvements.
That's helpful and just as a quick follow up.
The last several earnings releases.
<unk>.
Difficult times with Covid, you've been mentioning and market share gains fairly consistently as we stand here today between the two.
22 can you just give us a quick update on the market share gains by segments, where you've been pleasantly surprised even putting a perhaps disappointed based on your perceived opportunities and just how you'd expect your new baseline to generate incremental earnings power over the next few years. Thank you.
Yes, so the question on <unk>.
On market share.
It was a good one it's a different by business.
But if you think about it as a growing 10% in the in the fourth quarter.
That's faster than the general economic environment, So just macro eats indicating that we're gaining shares in average, but if you take institutional for instance, and taking the Big example of.
Of restaurants in the U S in Q4.
Our business was 9% down 91% of 2019, when the traffic in dining rooms, which is the most important for us was down 33%.
Versus 2019, so that's obviously showing so how much market share.
We've gained.
In industrial.
Seven 8% growth that we have.
The combination of very different businesses.
Where you have paper, a 15 plus percent that's definitely a place where we gained a lot of share you take data centers as well, where we're growing extremely fast as well.
With the objective to be really solid.
The best player in that market.
Well long term life sciences, especially as well so we saw with pure light, where we're growing faster than most of our competitors out there always difficult to compare so you look at it macro Chris was the 10% faster than general economic growth that leads to.
Share increases and examples like the one I just mentioned so a good indications as well that our position is improving over time.
Thank you as always.
Thank you Chris.
Next questions come from the line of John Mcnulty with BMO capital markets.
Yes. Thanks for taking my question can you speak to how youre dealing with wage inflation. It seems like there's kind of two different angles to it one that it's Nick in your customers, where maybe you can be helpful and come up with incremental solutions for them, but but I would think given the number of feet on the street that you have as well, it's something you have to deal with internally.
Can you kind of speak to the pressure that youre going to face and how maybe you can offset that with revenue coming in.
By helping out your customers.
Yes, as you mentioned Jon.
So we look at it in both ways first how do we help our customers.
We do not only have.
Wage inflation issue, but they have a hard time to find people as we know in restaurants and in wholesale so less people more expensive.
So our solutions that are automating a lot of the cleanup work sanitation work that they need to do is helping our music estimators and that's one of the reasons.
Why are we growing nicely in those markets now back to our own.
Wages.
The way I look at it.
Isn't it reasonable way so for 'twenty two.
We're trying to stay competitive.
The rest of the market.
Our retention of our talent in the company has been.
Very strong over the last two years when many have been struggling as well thats, indicating that we're doing more right than not in terms of how we managing as well.
Wages and last but not least we always make sure that we focus on our key talent and those once we support them.
Very specifically and making sure that they stay happy and stay longer in our company and the last point just to get back to your question as well.
On productivity.
The whole digital work that we've done over the last many years is really paying off do you see it in our SG&A improvement that's improving.
In in Europe .
That's going to help mitigate as well the wage inflation that we will face as well, but net net a good story.
Got it got it.
That's helpful and then maybe just from a.
A little bit more color on the raw material side. It sounds like you think raw materials and freight are going to come off in the back half of the year. I guess can you can you give us a little bit more granularity or quantify how much you think or how much of a decline you kind of modeled in when you are looking for these low teens EPS growth.
For 2022.
The best way to look at it is basically that the first half should be very similar to what we've seen in the fourth quarter. So the 20% that we've talked about.
Is roughly what we expecting as well so for the first half of 'twenty two.
And we expect that the rate of growth for the second half of the year to be I don't know half of that but if you compare to a high base, obviously, so it's not going.
Positive in terms of dollars, it's just the rate of growth.
Is getting lower we know it's going to go down John at some point. The only question is when and the good news with Ecolab is at the moment that inflation eases and goes down.
Where we create.
<unk> margins.
Hence as we've demonstrated in industrial in 2020.
Got it so just to be clear the cost youre, assuming they don't go down in the back half of the year Youre, assuming that the trajectory slow is that am I understanding that right.
Exactly yes, John and I've mentioned so.
Early onset with Tim.
It is expecting so kind of 10% we had last year in rolls and.
And freight cost inflation, and we expect to go up to 15% so for the full year 'twenty two.
So that's the way we assume it right now got it thanks very much for the color.
Thank you Jim.
My next question is from the line of Vincent Andrews with Morgan Stanley .
Thank you.
Could you maybe just expand on the raws and trade a little bit just in terms of.
What the breakdown is in terms of the increase youre seeing in the fourth quarter and continuing into this year how much of it is incremental on the raw side versus the freight and logistics and Covid disruption and also maybe speak to if there is any change in the mix of raws that are giving you problems.
It is not giving us problems it was.
In 2021 Vince.
Vincent it's up.
Three quarter roughly of the inflation pressure was in industrial.
Thats evolving.
Well, because it's not always the same raw materials that are increasing across our businesses and in the various geographies as well at the same time. So in a way. This is a good thing so it's becoming more spread out across the businesses and geographies not just industrial especially.
North America, but freight is becoming the new drivers of our cost inflation as everybody knows out there. This is not specific to us.
As well so that's the new one that we need to deal with the very good news on this one is on one hand, we weren't organized on the law.
<unk> side, we have I don't know.
Former Amazon people as well, so leading our logistics hubs and we've engaged as well.
Over the last 12 months and even more in 'twenty, two and as well new logistics policies surcharges, making sure that we not only optima.
<unk> logistics, but get paid as well so any increase that we might have.
Okay.
Could you maybe just give us your outlook for this year in <unk>.
<unk> care and life Sciences.
You mean, Vincent our outlook in terms of what.
Just in terms of how you expect the business to perform as we move through the year.
Like that okay.
Well as we've shared generally.
Entering 'twenty two we saw.
In a very good position in terms of business momentum.
The 10% that we delivered in the fourth quarter is something that we expect that to kind of.
They quite steady over 22.
The mix between volume and pricing, obviously is going to evolve since began to move.
Pricing closer to five 6% as mentioned as well so kind of steadied good momentum.
Four.
The EPS growth as mentioned so we expect it to be in the in the low teens for the full year. The first half is going to be so more on the lowest side and the second half is going to be.
On the highest side up to 10.
It goes up the margin improvement.
Given by pricing going steadily up and inflation easing as I just mentioned before was John .
Okay. Thank you very much.
Thank you Vincent.
Our next question is from the line of John Roberts with UBS.
Yes.
Welcome Scott.
Congratulations Christophe when the Barron's 100 sustainability ranking.
Thank you John .
Are you still adding new sign ups for Ecolab science certified or you're just enjoying the benefits of everybody who signed up early on I don't know if theres fatigue out there as this goes on that.
Less interest in <unk>.
Signing up for new programs.
No we don't really see any.
Slowdown on that front, which is.
Good sign.
Even taken time interestingly enough so for many customers so to kind of get on board really understanding what it would mean for their own brand Mcdonald's has been a perfect example, as well we wanted to make sure that it was right for them. It was supporting that brand the right way that it was well perceived with their guests.
Well so they came fairly late in the Covey journey.
If I may say, so if anything it's more interest not less interest which is encouraging because to your point, John we thought that it would be mostly.
Covid related and now it's becoming more interesting so for.
Restaurants hotels offices.
To make sure that the places where they welcome people.
Safe and healthy.
Thank you.
Thank you John .
The next question is from the line of Ashish.
<unk> with RBC.
Thanks for taking my question I, just wanted to focus on water, which continues to show really strong momentum delivering another solid 8% growth in the fourth quarter, how should we think about that momentum going into 2002. Thanks.
Well im a bit passionate about water I've been leading the business so for quite a while lessors. So this is something that I believe we are uniquely positioned here.
Do keep growing for two reasons.
On one hand.
Three reasons on one hand.
Water scarcity becomes a bigger issue because we're not going to get more water on earth, but we're going to use more water as well going forward.
So that's the first 0.2nd you have always more companies committing to net zero carbon and water.
By 2050 getting half there so by 2030 or whatever the commitment that they have not only because it's good for water, but if you save water you see energy as well at the same time and always more companies are realizing that they can get well both benefits.
So less issues from a water perspective, and reducing the carbon footprint same time. So the only one who can really help companies get to the net zero, which is kind of a new trend, which is great for us and the last point I'd mentioned is that while we're probably the only company that can do it.
At the very high margin as well at the same time, because we bring so much science expertise in digital technology as well in there so bringing all three together water scarcity need for net zero and the fact that we can do it at high margin makes me really bullish about that business going forward.
That's very helpful color and maybe if I can just ask a quick follow up on the commercial pest.
Elimination business again.
Again, a small business, but has been a strong growth engine for you.
And particularly one of the large players in commercial pest control getting a client how do you think about the comp, particularly environment changing going forward and typically would you also consider potential M&A to expand your position in the commercial pest control. Thanks.
So maybe to your point.
Fairly small business. So it's almost $1 billion for us so it's quite significant it's extremely profitable and it's.
It's growing really fast it grew 10% during the fourth quarter and it's been growing during COVID-19 as well so just to show the resilience the strength of that business and the other thing I really like.
The past is that it's a perfect complement to everything else that we do.
A hospital when you think about infection prevention, while you need to eliminate pass.
Food and beverage plant you need to bring pest elimination as well to make sure that you do not create food safety issue at the same and I hope the same in our restaurants. So it's a perfect fit to our value proposition as a company and to your point in terms of M&A.
One of our competitors are getting into a big M&A now.
Means a lot of distractions for them accompany that we respect a lot by the way.
But when they're busy doing integration those are the best times for us intimately to gain share and in terms of us doing M&A.
The best elimination field, we don't comment in details, but we definitely open to consider as well as we have in the past we will in the future as well.
Businesses that are so valuable for us.
That's very helpful color. Thank you.
Thank you Ashish.
Our next question is from the line of Laurence Alexander with Jefferies.
Good morning, I guess two questions about sort of lag effects. The first is.
With all the volatility that.
We've seen the last couple of years and how ecolab has improved their portfolio.
Should your pace of share gains pick up.
Over the next couple of years.
Customers recalibrate and.
We are able to.
A more stable environment sort of reassess kind of your relative position versus peers.
And secondly from the sounds of it.
Factoring in the water and the productivity and the digitalization than some of the other initiatives you've mentioned.
Your topline.
Growth be faster than the last.
10, 15 year period.
And kind of the pace of productivity gains improved compared to the last decade or so.
Great question, So I see three big questions all related obviously here.
So I'll try to be as a <unk>.
<unk> as I can on that so first in terms of <unk>.
Sure.
As mentioned before the fact that we are growing fast.
In most of our businesses. So it's not just one business.
It's growing in all the other ones are going slow is a good indication.
That we are gaining share.
Once all the craziness of the world is behind Us.
To pay dividend as well because we're going to be.
Stronger position afterwards, so it's always been.
Focus for US we have these men trying to company in doubt go and sell something.
Which is pretty useful.
Unpredictable times, well, that's going to pay dividends for the future. So I feel good about that which leads me to your second question in terms of.
The topline momentum.
Yes, I firmly believe that.
The growth that we will see in the used to come is going to be ahead of the growth that we've seen pre COVID-19 .
If there's any such thing as well in terms of productivity.
With all the investments that we've made.
ERP technology in field technology in remote monitoring for our customers.
In AI.
All of that is not only pay dividend right now as you can see as well over the past few years, our SG&A productivity has improved but I believe he is going to improve even better in the future as well. So when you bring all three together I think it should lead to our.
Performance. That's ahead of what we've seen pre COVID-19 .
Thank you.
Thank you.
The next question is from the line of Scott Schneeberger with Oppenheimer.
Thanks, very much and I think I'll bring Scott on that first one.
Capex increased as a percent of revenue in 2021.
Probably pretty logical given the environment, but.
It's still below the 6% level in pre pandemic, where do you see capex in 2022.
And perhaps beyond and some major categories of spend going forward. Thanks.
Yes, Hi, Scott. Thanks for the question, Yes, It certainly was lower and as you know of our historical range, we've been around 6% of sales on Capex and during as sales have been lower relative to 19, Theres a big portion of our Capex, that's in merchandise and equipment with customers. So as the customer rebounds come back expect that capex to be similar to those historic.
<unk> trends around 6%.
Great. Thanks for that Scott and then Christophe.
High level or perhaps both of you.
<unk>.
It's been awhile since theres been discussion.
The efficiency initiative and kind of the overriding long term theme of cost savings.
And it's been it's been a.
Choice time period, but just curious.
How are you progressing on that how should we be looking at that as.
As we approach the end of 'twenty, two and 'twenty three.
Yes, let me make a quick comment on this one and I'll pass it back so to discuss the details here.
Efficiency initiatives that we've had over the past few years.
Progress really well and let's keep in mind that those initiatives were not pure cost savings initiatives. Those are all initiatives that we're leveraging all the investments that we have made in the past in ERP technology in digital technology, and all of that and as Ive mentioned before not only its delivery.
Great results, so far I think it's going to give even better.
Margin improvement as well going forward. So it's not something that we're going to stop doing but we're going to do that in a more organic waste are going forward.
Scott maybe a few comments on that sure. Thanks Christophe yes.
Christophe said.
We have progressed very well on it if we think about the two big programs.
We have programs going on all the time, but the two big program through 2020, and institutional Advancement program through the end of 2021, we were north of 90% complete from a savings and cost perspective on both of those and we'll have a little bit of a tail into 2022 and 2023 to wrap up those programs.
Excellent. Thank you both for that color.
Our next question comes from the line of Steve Byrne with Bank of America.
Yes. Thank you you've had pure light in a couple of months.
How do you view the.
Expectations about profitability from the.
Relative to what you previously.
Previously had in both the industrial business.
Let's share gains and on the life science anything that has changed your outlook on that.
No we're really happy with that acquisition as you mentioned, so we kind of two months in so we really at the beginning.
Our first objective was really to do no harm and making sure that they can keep growing.
As they have in the past and they are doing really well.
We're not working on any significant integration because it's not the synergy play or a cost synergy play.
It's purely a growth synergy.
That we see.
And the biggest challenge that we have which is an interesting challenge is that we need to keep building enough manufacturing capacity.
In order to keep growing which is a challenge that the whole industry is having we had which is good.
And we have two extensions and new plant in the U S and the extension.
In the UK that supposed to be coming in line.
Well in the first half of 'twenty, two and Thats going to give as well an inflection point.
The second half so so far really.
Happy with what we're seeing with <unk>.
And one quick follow up on that when do you.
Operating results out of that business to more than offset the <unk>.
Amortization expense or do you think you will.
<unk> your view and not include amortization in your and your adjusted earnings.
If you don't mind can you also comment on.
What is the average number of months between your purchases of raw materials and when it flows through Cogs.
So on the question on amortization.
We've been so.
Very clear on how we see so 22 to be neutral.
Is it related to the first question since our business is evolving as expected the neutral is going to happen as well in 'twenty two but it is important to keep in mind that the amortization is 26 cents.
In 'twenty two so it's.
It's relevant and it's all cash thats coming obviously.
The amortization is noncash.
Item as well as such so we're looking at what other companies are also doing.
In life Science.
Arena.
It's usually.
Definitely done what we've done in the past.
Im not indicating that we're going to change anything, but we're going to share with you. How much is the amortization. So at the same time, while you can know what is the true cash return of that business and so we want to know it as well.
Our next question comes from the line of Andrew Wittmann with Baird.
Great. Thanks for taking my question guys.
To start out with a I guess, a two part question on.
The revenue outlook.
Just wanted to clarify first part here first off in your prepared remarks, I think you said the pricing was going to be five to six for the year and I think in your Q&A, you mentioned that pricing goes to five or six I guess the question I wanted to clarify if it's going to be five or six for the year, presumably 4% for the fourth quarter. It would suggest that the exit rate in <unk> could be above.
6%, so could you just clarify.
The cadence throughout the year that gets you to the five to six and then.
Maybe for Scott could you talk about what.
FX could mean to your revenue.
Performance or growth here in 'twenty, two with current rates.
Where they are.
So Andy I will take the first one.
The effects of two Scott.
On pricing.
And so we are exiting so.
At four of the fourth quarter.
Moving towards.
Five for the first quarter and for the full year or so being between five and six so it's pretty steady.
Our current plan.
During all Reno in terms of inflation as mentioned before rolls in.
Freight inflation not dealt with exactly the same way, but relatively steady so.
These four and six during 'twenty, two which leads to this average of five to six ultimately.
And Scott on the effects.
Yes, certainly yes, as you might expect just given where rates are going in the U S. The expected increases during the year, we will have some drag.
As a result of FX it'd probably in that 10% range in 2022.
Okay, and then I guess I wanted to just ask kind of follow up here just regarding the special gains and charges.
That we expect here that you expect in 2022, you kind of mentioned that you're 90% done with the programs.
Pure light I guess, because it's not an integration cost synergy place shouldn't have too much there I don't think.
And then the other big bucket it looks like the COVID-19 costs in 'twenty one.
Notable but with Covid subsiding.
And just getting used to COVID-19 , it's kind of feels like the special gains and charges should be less in 'twenty two.
Am I thinking about that the right way Scott or are there other things that I should be considering in that.
As you talk about the big buckets, there will be ongoing special charges with pure late next year, but we did have the big impact from the purchase kind of include the inventory step up in 2021 as.
As it relates to 2022 as you think about as you mentioned COVID-19 .
It really had a couple of big buckets in it and it was pay protection was a large piece of that we also had the inventory reserve that we disclosed and pay protection as.
Can't predict how COVID-19 is going to react, but expect that variable pay protection to be less in 2022. We also had some medical costs and testing there'll be a little bit of a tail on that I expect but given our pace of COVID-19 , we expect that to be less in 2022 than it was in 2021.
Thank you very much have a good day.
Thank you Randy.
Our next questions come from the line of Rosemarie <unk> with Gabelli.
Good morning, everyone.
No.
Zero.
I was wondering if you could touch on Russia, and Ukraine, how much of an impact.
So if you go to law, which.
Once but nevertheless, I'll launch out of.
Those two regions for your business.
Yes.
I hope that that thing is going to happen.
So too many human lives so would be impacted.
For us, it's a reasonably small business it used to be a much bigger when we had upstream energy.
As you know.
Today it is.
<unk>.
It's less than half a percent so for the whole company.
For us it's not so much.
<unk> issue it could have an impact on energy cost.
That's an indirect impact and for US obviously is a people company, it's making sure that everyone from our team is in a good place. Unfortunately, we have some experience.
A few years back when premiere.
It wasn't a focus and we've managed that really well we have a good team even if it's a small town.
Rosemary no big business in fact, maybe on energy and we want to make sure that our team is doing well.
Okay. That's great. Thank you and so I was surprised by the double digit growth institutional considering that there is COVID-19 that not everyone is back on the road.
We still have masked.
Lot of people go into a hotel can you give us a little more detail as to why is that.
Well it's interesting.
Well it is.
Good business, which is really in leading physicians that helps.
We haven't lost customers, we have roughly the same number of units as well than we had pre COVID-19 they buying a similar number of solutions as well.
We have a lot of new business as well that we've acquired they've been extremely good.
The call will be times in new business generation.
Pricing has been good as well equal upsides certified has been good as well and customers need us more than ever during COVID-19 , so as they reopen.
Well, we keep growing and honestly at Rosemary.
We were expecting in Q4 to grow even faster except that omi chrome change the plans a little bit.
And it stalled at the Q3 level of growth.
That's going to come when hopefully COVID-19 is going to move behind us So I'm really confident in that business going forward.
Great Thanks, and if I may.
Our SG&A ratio was 32, 6% in 2017 or thereabout.
Obviously, you have made profit progress as it is down to 28% in 2020, and you talked about the factors that.
Going to impact this ratio how low do you think yes.
It's reasonable to think you can go as a ratio to sales.
It's a great question, well, it's not going to reach zero that I'm sure.
But it is going to be better than that.
Where we are today.
Keep in mind that we have a very large.
<unk> team.
They drive a lot for instance to go and visit our 3 million customers.
Round the World Digital technology is helping us.
Managing and serving customers.
Mostly as well that reduces the time that our teams need to travel that improves obviously, the SG&A productivity. They do a lot of press.
<unk> work preparation work so before they go and meet customers after they've met customers in order to make sure that head office knows the value. That's been created that's getting out to meet did as well as we speak so without automation in such a large team I think that we still have a lot of.
Not only to improve the productivity, but making sure that our team's rosemary.
<unk> on creating value for our customers instead of moving papers collecting data or driving on the road.
Okay. So we can expect.
We are going to be speaking, maybe another 200 basis points.
Great question I don't think it's going to be a straight line rosemarie, but it's going to improve every year and we've demonstrated that so the many past years and.
It's going to keep improving what <unk> seen in the policies, but you're going to see in the future.
Alright, great.
Yes.
Our next question is from the line of Jeff Zekauskas with Jpmorgan.
Thanks very much.
In your industrial business your margins were sequentially flat and you had good volume growth.
But your margins in institutional where you also had very good volume growth.
Were down I don't know 350 basis points.
Same thing in health care, you had weakness there why is there more margin stability in the.
The industrial business versus the other two isn't that raw materials are.
Going up less or your price pass through is more effective what accounts for the difference in margins between the segments on a sequential basis.
With the macro.
It's basically that the share of raw materials and freight costs versus the total P&L is very different.
Business by business.
So when you have inflation the impact on the P&L and the margins is very different business by business exactly the way.
You described it.
And then it's the.
The speed at which we can drive pricing.
Is different.
So business by business, sometimes you have.
Group purchasing organization, sometimes it's individual street accounts. This is different so those are the two main drivers Jeff. The first one is really what's the share of.
Rolls and freight for the P&L and second it's the speed at which we can increase prices, while keeping customers for the long term as well which is essential.
For us and the combination of both over time create.
Creates dose distortion that you just mentioned.
Okay.
Second question is.
In the institutional business in 2018, you used to make a $1 billion and now you make $5 66.
When do you get back to $1 billion.
And can you help us out with what your interest expenses for 2022 now that you've bought paralyzed.
Yes.
So two questions obviously, so leave it up to Scott for the for the interest.
Piece very different question.
In institutional.
Keep in mind, Jeff that we.
We've kept our team intentionally and thank God, we did that so when you look at restaurants and hotels today, where you need to do your own housekeeping into your bed yourself, because they don't have labor to do it.
Would be a dramatic place today, if we didn't keep our team in 2019 2020, sorry, when Covid started.
That was totally conscious we've said, we're going to maintain the whole team, even though the business.
Went down so quite a bit during COVID-19 that has a direct impact.
On our income in that business, so as the business gets back to the 2019 level.
Which we expect to happen so <unk> 22.
While over time Youre going to get to the same margins than we had before and on top of it you get productivity gains as well that are going to improve it. So I feel really good about the trajectory that we have any institution. So with that maybe Scott. If you can comment certainly first off Jeff answering your question on interest expense. So adjusted interest expense was.
North of $180 million in 2021.
And as you'll recall the three we had $2 9 billion of debt through the pure light transactions and so we will see it about $45 million higher call. It roughly $230 million of interest expense in 2022.
Thanks very much.
Our next question is from the line of Kevin Mccarthy with vertical research partners.
Good afternoon Christoph.
Interested to hear your updated thoughts on the subject of labor. If we think about the first half of 'twenty two.
You think that labor related challenges will be any better or worse or perhaps stable versus the back half of 'twenty one.
And Kevin when you say labor, our labor our customers' labor.
Yeah.
I was really referring to downstream among your customers, but if you have meaningful issues internally I'd like to hear about those as well.
Yes, Thank God, we don't have big issues internally.
We've had our share, but we've managed it really well you've probably heard that.
We have over 95% of our team has been vaccinated as.
As well in the U S. So it's over 18000 people that are protected that has helped us dramatically as well so to keep our team operating.
During that time, so we were in <unk>.
Isn't that really good place.
Internally.
That's been a bit different for our customers.
As we know.
Distribution centers had a hard time as well so to unload the trucks.
You have retail stores that going through the cleaning there.
Supposed to be doing it.
<unk> hotels as well because they are having such a hard time to find the right talent as well to do it so it's having an impact in logistics.
Sitting in impact in demand because our customers don't have to.
People to do the work.
As well, but it is improving every month.
So over time, it's going to improve but I think it's going to take.
Probably the whole 22 until our customers on a more stable place.
I see and then secondly, I wanted to come back to the subject of pricing.
As we indicated 5% for the first quarter on a glide path to 5% to 6% for the year.
So that would imply I think relatively modest incremental price contributions from here.
So I was tempted to ask you why not be more aggressive there.
How would you frame potential for upside to price I. Appreciate you have a value in use model, but are there.
Some combination of competitive considerations elasticity or contract terms that would preclude.
A greater contribution or might you revisit depending on.
<unk> cost trajectory.
Well, you've given a few answers as well at the same time.
But I'd.
I would say so first when you say two 5% in Q1, so it's going to happen during Q1 as you know.
So pricing is happening exactly so.
As quarters evolve as well so we crossed the 4% in Q4, we will cross the 5% in Q1, when exactly I don't know, so well see where it nets out so for the first quarter.
As an individual quarter, but for the full year, we feel reasonably confident that the five to six we will deliver right.
And that feels like the right amount of pricing in order to get our margins back to where they should be and to your point if inflation happens differently than what we've assumed as I described it in my opening remarks.
Well, we will adjust as we did as well so over the past few months, but what's absolutely critical the way we think about pricing is that we want to keep pricing for the long term.
Not a cyclical company and have no ambition to become a cyclical company, which means that when we get pricing from customers. It's based on the value that we create for them on the long run and when inflation moves behind us well it sticks as well and that has an impact on the speed at which.
We can get pricing.
We're a chemical company pure play while we would go much faster, but we would have to give it back at some point. This is not what we do so we go slower.
Lower impact on margin so for a while but ultimately.
It's paying off big dividends on our margins and the last point.
I will make is up Rosen freight for us is 25% of our sales.
So the inflation that you get the 10% I talked about so for 'twenty, one what is 25% of our sales so when you compare.
The 10% under 25% to the pricing.
Five to six you get to a reasonably good place.
Understood. Thank you so much.
You.
The next question is from Mike Harrison with Seaport Research partners.
Hi, good afternoon.
Hey, Mike Christy.
Christophe you've talked a little bit about innovation in the institutional business. It's been a while since we've had the restaurant show in Chicago for you to showcase some of your new products. So I'm looking forward to that.
In may, but maybe give us a little bit of a preview I guess are there some key products around.
Washing her hard service sanitizing or.
Food safety that Youre excited about launching here in 2022.
Well, we do as you know Mike at the same time, so it's not just about product for US it's about program. So.
You put all the products together.
But to name one in institutional.
<unk> really driven by Covid. So we brought on the market over the last 12 months a whole range.
A product that are killing COVID-19 within 15 seconds.
Was a remarkable achievement, especially when customers do not have the labor force as we discussed before so to do the work well if it can kill effectively very quickly.
Is not only good for guests, but it's good for customers as well at the same time. So this whole program.
<unk> is very interesting and youll see that the NRI at the same time.
You mentioned as well the Ecolab signed 35, which brings all the programs together in order to make sure that you get are protected and that's it's a good story in terms of how many units we get but you need to keep in mind that in order to be certified you need to use all of the product as well as the company.
Well, that's driving sales as well at the same time, which is good and if I fast forward.
In industrial.
A major new program is really the so called net zero water program.
Customers are looking to deliver on the commitments of getting zero water or net zero water usage over time, whatever the commitment is and we are uniquely positioned with our newer program to help them deliver that so you won't see that that alright, but thats going to be an interesting one in that.
You're going to see as well more on pure light.
Which is a head of innovation as well.
We will cover that more when we get together.
Alright, and then my other question is on the specialty business that has historically been a very consistent high single digit grower in 2021, a decline can you help us frame up the dynamics that youre seeing there and maybe give us a sense of where you see volume and pricing growth in specialty.
LT in 2022.
Yes.
Specialty growth in 'twenty one.
Mostly impacted by very hype.
Comparisons in 2020.
Because during COVID-19 .
Restaurants, and hotels were closed people, we're going to retailers.
And to a certain extent.
Take out or drive through.
From <unk>, so that has driven high growth during COVID-19 and when Covid. So evolved footnote, saying going away. Unfortunately was suddenly you compare it to a very high comparison.
But generally underlying those are two very strong businesses that going.
To keep doing well going forward as well and so that's been growing 8% in the fourth quarter just to name one.
Alright, Thank you very much thank.
Thank you.
Our next question is from the line of Kevin Mcveigh with credit Suisse.
Great. Thanks, so much Christophe could you give some thoughts on the downstream business. It seems like it's recovered a little bit in the quarter, but based on the recent.
Pricing actions in oil any thoughts as to that business as we move our way through 2022.
Okay.
It's a very interesting business downstream because I think so.
One thing we are doing today.
And even more tomorrow, some very different things than what we did in the past.
In the past in downstream was all about maximizing capacity utilization.
Improving the efficiency the productivity.
The assets.
That was the number one.
Focus it hasn't gone away.
Today, but the focus has shifted dramatically.
Towards.
Our sustainable operations.
And it's turning refineries.
<unk> operations that are using much less water.
Thinking about the refineries so beyond crude oil obviously that go through the second element is water and we're working with the super majors to help them so get to.
Zero ambitions.
As well and that's totally new.
That had no acceptance in the bulk for most customers and today. This is the number one.
And Thats, where we best App as well, we can differentiate ourselves and the good news is really that our new business is going really well in that business. So.
Very different going forward than what we've seen in the past with much much more.
As a company and we want to become as well in the future.
Very helpful and then just real quick.
What type of pulse.
Full servicing unit traffic.
So.
2022 that I know it was about 70% in 2019 levels in Q4, how are you thinking about that over the course of 2022.
Well, it's a it's a good and difficult question. So the industry is expecting to be back towards the end of the year in restaurants.
I hope, there's probably more.
You are after we are ahead of that curve as you mentioned.
We mentioned as well early on so I think so during the second half of this year.
We should be add slash quite a bit.
Thank you.
Thank you Mr. Monahan there are no further questions at this time I'd like to turn the floor back over to you for closing comments.
Thanks, Rob that wraps up our fourth quarter Conference call. This conference call and the associated discussion and slides will be available for replay on our website.
Thank you for your time and participation today and best wishes for the rest of the day.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.