Q4 2022 Ecolab Inc Earnings Call
Speaker 1: Greetings and welcome to the ECO Lab 4th quarter 2022 earnings release conference call.
Speaker 1: This time, our participants are in only mode.
Speaker 1: The question and answer session will follow the formal presentation.
Speaker 1: If anyone should acquire operator assistance during the conference, please press star zero from your telephone keypad.
Speaker 1: Now my pleasure to introduce your host, Andy Hedberg, Vice President and Investor Relations for ECO Lab.
Speaker 1: Mr. Hedberg, you may now begin.
Speaker 2: Thank you and hello everyone and welcome to Ecolab's fourth quarter conference call. With me today are Christoph Beck, Ecolab's Chairman and CEO , and Scott Kirkland, our CFO . A discussion of our results, along with our earnings release and slides referencing the quarter's results are available on Ecolab's website at Ecolab.com slash investor. Please take a moment to read the cautionary statements in these materials which state that this teleconference is a
Speaker 2: and the associated supplemental materials include estimates of future performance. These are forward-looking statements and actual results could differ material from those projected. Factors that could cause actual results to differ are described in the risk factors section in our most recent form 10K and in our poster materials. We also refer you to the supplemental diluted earnings per share information in the release.
Speaker 2: With that, I'd like to turn the call over to Christophe back for his comments. Thank you so much indeed and welcome to everyone. I would team deliver the strong force quarter and honestly, even slightly better than I would have predicted.
Speaker 2: The milder winter in Europe certainly helped, but most importantly, our team executed very well in a macro environment that was far from ideal. Organic sales grew 12%, with good momentum across all segments. Industrial grew 14%, institutional and specialty grew 11%.
Speaker 3: Headscan life sciences got back to growth, delivering 7% organic, and best elimination remained very strong, growing 10%.
Speaker 3: Volume's outside Europe remained stable year over year, while our total pricing continued to accelerate from 12% in the third quarter to 13% in the fourth quarter. All this contributed to a strong 14% adjusted fixed currency operating income growth, even as we experienced the...
Speaker 3: expected peak in delivered product cost inflation, which reached 43% over the last two years in the fourth quarter. This led to adjusted EPS getting very close to last year's 120-80PS while mitigating tensions of currency headwinds or 8% year-over-year headwind to adjusted EPS gross.
Speaker 3: Since the initial impact from the war in Europe , we have delivered consistent operating performance improvement quarter after quarter. And as mentioned during the last earnings call, this is the past we expected to stay on for the quarters to come.
Speaker 3: Mentoring 23 with a reasonable level of confidence.
Speaker 3: While we would have lost most of our 1.3 billion of earnings in 2022 to cost inflation, we have rebuilt almost all of it within the same year. This demonstrates the true earnings power of our value proposition and the strong momentum we have in margin rebuild.
Speaker 3: Most importantly, our shift to offense, which is where E. Colab is at its best, is also showing some very encouraging signs of progress.
Speaker 3: Our net-new business pipeline reached right at the end of last year as what we offer. Water, energy and labor savings while delivering the best and safest outcomes in the industries we serve around the world continues to grow in importance to our customers. And we expect this trend to continue to strengthen.
Speaker 3: On the other hand, I will view on the macro environment remains unchanged.
Speaker 3: We still expect inflation to remain high, well into the year. It just rates to move higher and have an increasing impact on demand in most markets and geopolitics in Europe , China and now in the Middle East to remain unpredictable.
Speaker 3: Nevertheless, we feel ready.
Speaker 3: In 23, we therefore expect to deliver double digit adjusted operating income growth and adjusted earnings growth that keeps accelerating toward our low double digit historical performance.
Speaker 3: This includes an approximate 7% your over your unfavorable earnings headwind from higher interest expense and effects in 2023.
Speaker 3: For the first quarter, we feel even more confident and are ready to resume quarterly guidance. We expect our strong supply momentum to continue and to deliver adjusted earnings per share to be in the range of 80-90 cents compared to 80 cents a year ago. This includes an approximate 15% year-over-year earnings headwind from higher interest expense and effects.
Speaker 3: And finally, well this is a period of caution. We have a positive outlook on where we're heading. Over the last two years, our expertise grew as we focused on supporting our team and on developing strong new innovation.
Speaker 3: Our retention rates remain high as we protected our customers from supply shortages.
Speaker 3: And we margin started to recover as we drove pricing in thoughtful ways while increasing customer value helping to drive a strong acceleration in operating income.
Speaker 3: We remain prepared for suffering marked for trends in Europe by accelerating the productivity improvements we had planned for future years.
Speaker 3: We are adjusting institutional to win in the new reality.
Speaker 3: and we begin into reposition healthcare for profitable growth as we promised.
Speaker 3: We will also keep investing in our major engines of high profitable growth like water that delivered 14% organic sales growth in the last quarter and life sciences that accelerate to 18% in Q4.
Speaker 3: Additionally, pure light, we started its expansion exactly as expected with new capacity coming online. Helping to drive a very strong acceleration in sales with operating income margins north of 30%.
Speaker 3: We remain good stewards of capital by continuing to invest in the business.
Speaker 3: increasing our dividend, reducing our leverage, and returning cash to shareholders as we've always done.
Speaker 3: And most importantly, with the best team, science and capabilities in the industry, we're ready to grow a share of a high-quality 150-to-billion market and our future has never looked brighter. I look forward to your questions.
Speaker 2: Thanks, Christophe. That concludes our former 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 22nd. If you're interested in attending or have any questions, please contact my office. Operator, would you please begin the question and answer period?
Speaker 1: Thank you. Well, now we can do a question and answer session.
Speaker 1: We ask you please leave yourself to one question and one brief follow a question for caller, so the others will have a chance to participate.
Speaker 1: If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue.
Speaker 1: You can press star 2 if you would like to remove your question from the queue.
Speaker 1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 1: Thank you and our first question is from the line of Tim Moroni with William Blair.
Speaker 4: Good afternoon, Kristoff Scott Nandy. Thanks for taking my questions.
Speaker 4: Good afternoon, Kristoff Scott Nandy. Thanks for taking my questions. Hello, Jim.
Speaker 4: So the first one, unsurprisingly, on gross margin. I mean, they were down year over year, but that contractions continued to narrow for a few quarters now. Based on what you're seeing in your pricing outlook and inflationary cost inputs, when would you expect gross margin to inflect into?
Speaker 4: positive expansion territory and the same question goes for OLY margin given some of the productivity gains that we're seeing.
Speaker 3: Thank you Jim. So let me start with what we've done in 2022 because margins cross margins and all I margins so where our number one focus for the few years and as I've mentioned in my remarks as well so we were facing headwinds that were equivalent to our net income so close to 1.3
Speaker 3: from there as we've done many times in our history as well. So if I look at our OI margin in Q4, they turned almost positive. They were slightly still down in the fourth quarter. So that's a good sign, obviously, of where we're trending.
Speaker 3: in a good place as well and we'll see what happens obviously with inflation. Q1 so should be a continuation of the OI growth which means that OI will keep improving as well in the first half so I think that it's going to turn positive in the first half.
Speaker 3: of 23 and gross margin will probably follow in the second half of the year. It's not going to happen on July 1st, but it's going to happen sometime in the second half.
Speaker 4: Got it, very clear. Thank you. Just as a brief follow up, you know, I saw an announcement recently, you're launching a consumer retail product line with Home Depot, I think. Can you just talk about what drove that decision to expand into this channel and what the margin profile looks like if it's materially different than your institutional margins?
Speaker 3: I would love to, Tim. So first, it's not a consumer brand. It's a brand that's aimed at pros, as the Home Depot also calls them. It's mostly cleaning contractors. That's the vast majority of the customers buying this range.
Speaker 3: which is an end market that we never really addressed in the past because we go through service and distribution as we've done so for a hundred years. So it was a white space basically for us. Again, focused on pros, not really on consumers. We have the best partner ever. We stay home.
Speaker 5: that's whatever with both cargo securities. This is your first question. Very good morning everybody. I wanted to ask about the new cost program. How should we think about the cadence on that flowing through? And more importantly, are those savings meant to be permanent?
Speaker 5: Or will those costs come back if volumes get better? Thanks.
Speaker 3: Thank you, Seth. Maybe just a few comments from me and the Nalpat Cicero to Scott who will give you a little bit more details on that. And like first and foremost, if you say that for us productivity is an outcome of momentum. So sales, innovation, pricing, this is the best way of using these auto drives.
Speaker 3: to be more focused on two businesses that we need to address, institutional because the market has changed. We're in a good place but market has evolved and we need to evolve here and healthcare because we need to bring that business back to profitable growth since it's been a challenge so for many many years. But I'd like to pass it to Scott to give you some more color on that.
Speaker 5: Yeah, thanks, Christophe. Thanks for the question, Seth. So just getting to your question about the pacing of the program, and when I talk about the program, I'm talking about the combined $175 million savings program, which includes the announced program we talked about in Q3, as well as the expansion that Christophe talked about, which includes healthcare and institutional focus.
Speaker 5: So the pacing of that 175, I would expect about 3.75% of it in 2023 and then the remainder in 2024.
Speaker 6: Okay, and it sounds like those changes are meant to be permanent, so if volume comes back you wouldn't expect those costs to come back then.
Speaker 5: Exactly, and it's Christophe talked about an institutional and health care. This is stuff that we're doing on those specific businesses, targeted those businesses, and then on Europe it's really accelerating what we had been thinking about for quarters and years to come, and so yes, we will expect to retain those savings.
Speaker 6: Right, okay, thank you. And then just a quick follow up on the PURLA. I mean, can you just...
Speaker 6: Are the capacity additions?
Speaker 6: done there at this point. I'm just trying to understand what the run rate of that business really looks like today. Thank you.
Speaker 3: Yeah, maybe take that question Seth. For the most part it's done, but it's a continuing story. We will be maxed as I've mentioned as well, so in the previous calls, a couple of years down the road again, which is out of a good problem because it's a business that's growing really fast. It's going to be dark.
Speaker 3: So the trajectory that we've seen in Q4 is kind of a good indication of what we expect for the future or the near term future.
Speaker 1: Thank you.
Speaker 1: The next question is from the line of John Roberts with Credit Suisse. Please just use your question.
Speaker 5: Did the surcharge come down in Europe with the drop in energy prices and do you have any plans to roll the surcharge into the base price at some point here to get back to a simple pricing structure?
Speaker 3: Hi John . So two parts, a few questions. So first the search arch has not come down since we started it on April 1st. So generally, generally, so far, so good, no change here. And the second part of your question, yes.
Speaker 3: We are progressively emerging as much as we can after search odds into traditional structural pricing. It's not going to be 100% game. Every region is in a different place. You mentioned Europe , every customer is in a different place as well.
Speaker 3: But generally, we're trying to get everything in traditional pricing, so going forward. And then on the Pro-SooClean program with Home Depot, will those be identical products to what you distribute through Cisco and others? And will the EGLE lab sales people service?
Speaker 3: customers who buy through Home Depot? So two parts in your question as well here. So the first part, those are different products than what we distribute or through distribution like Cisco. They're really made for smaller...
Speaker 3: cleaning contractors, those are not concentrated products, those are ready to use products for the most part, so they're different but really so adapted so for their needs at the right price point as well, so no real competition with anyone else out there.
Speaker 3: so might be shifting towards a service program at some point, which is what we do with Cisco as well. They have their own line like Keystone that we do for them, a non-service, and when customers become bigger, we start to service them. So it's really finding ways to approach every part of the market out there.
Speaker 7: Thank you.
Speaker 1: Any questions from the line of Josh Spector with UBS? Please receive your questions.
Speaker 1: Yeah, thanks for taking my question. I'm curious if you could talk about your volume expectations in first quarter and you mentioned your prepared remarks, you were surprised in some of the performance in the quarter. I wasn't sure if that was volume or something else you were talking about.
Speaker 3: Yes, hi Josh. So not surprised. It was in Europe where we were expecting a world situation like everybody else. Actually, so the milder winter has been less negative news generally so for Europe .
Speaker 3: And we take it. And I'm not taking it to the bank for 23. We know that in the months to come, the geopolitical situation on the eastern front in Europe could change quite dramatically, but I'm not going to make any prediction. In here, we'll take it. And we'll take it.
Speaker 3: trajectory as it is right now. But generally, so for the whole company, what you've seen in Q4 with volumes so fairly stable, excluding Europe , is what I'm expecting more or less in 23 years. Well, I think the environment is going to soften generally with interest rates are going up in the US.
Speaker 3: And in Europe , that's the whole intent of rising interest rates, obviously. But the shift that we've made to Athens a few months back, as I've mentioned, so is driving some very positive results in terms of new business, which I think should mitigate the further...
Speaker 3: softening of the demand out there. So what we've seen in Q4, I think is a good indication of what we could see in 23.
Speaker 1: Thanks. And just to follow up on the cost reduction, specifically institutional, I guess when you're adjusting to the current environment, I mean is that restaurants and take out or something different? And what does that mean in terms of your longer term volume recovery potential? Ind praticant you know, you've been a great lead user.
Speaker 3: Great question. So institutional is in a good place. As a business, we love that business. That's where we came from. It's a highly profitable business. We have great position. And I think it's going to be a great business for the future as well. So here's the situation. So I would say it's our north of 19, which is good.
Speaker 3: It's translating to the dining traffic, so people sitting in a restaurant, down 30% versus 2019. That's a fact that we all need to live with. It's not the demand reduction that we are seeing in our own business, but it has gone down. So we have the same amount of work. It's really about saving a lot of money from gas, tast esoteric and Keshere and getting regular power.
Speaker 3: because we have a similar amount of customers out there for a demand that is slightly lower. So we need to adjust for that. So what we're doing is doing two things on one hand. And we started that over the past 12, 18 months. It's not totally new. We're just accelerating that program right now. On one hand.
Speaker 3: focused on.
Speaker 1: Thank you. Any questions from the line of Mana of Potnac with Parklee's? Please receive your questions.
Speaker 8: Thank you. Good afternoon. Christophe, maybe if you could just help us with your price increase and also the raw material increase as I'm sure you need to train three and the 13% and the fourth quarter is obviously very strong like how it's.
Speaker 8: sustainable and sticky is that versus whatever you're expecting for the Auto Decay roller pocket faster roller speed
Speaker 3: Hi, my name. Well, two parts, a few questions. So first, the delivered product goes to inflation outlook and then pricing, which obviously are both on driving our margins. Starting with the market that we can't influence, obviously, but the way we look at it.
Speaker 3: from our perspective in 2023, it will keep going up but at a lower rate than what we've seen in 2022. So it's not that our delivered product cost is going to get cheaper, it's going to increase less fast than what it did in 2022.
Speaker 3: So that's the first part and obviously things can move one way or the other depending on what's happening in the world But that's the middle of the road that we've taken inflation staying high as a rate for longer Well into 2023 as I've mentioned as well so during the past call now the pricing Peace
Speaker 3: further as we've always done as a company and we'll keep doing going forward in order to recover and expand our margins. Weight will net out, we will see, but that's how we're estimating basically our sequential progressive earnings improvement quarter after quarter in 2-23.
Speaker 8: Okay, that's helpful. And then you talked about offense about the times in the call. Just the cost reductions that you're making, which category, if I were doing the head count reductions, then I get the questions more tied to, are you beefing up your sales force?
Speaker 3: how to fast the curve maybe. So when we talk about the beefing up our sales force and at all created equal, we have the high growth businesses like a life science, a pure light, a high tech. Those ones are clearly being fueled and we add
Speaker 3: people, we add investments for those ones because we know it's driving so high-profitable growth. And we have on the other side of the spectrum, other ones where we need to do some work, has care being one of the examples because it's a billion dollar business that's not making much money as we know. So we'll have to work on costs.
Speaker 3: Number one priority that we have as an organization, so for 23, it's about new business. Manav, you're familiar with that and we had some very good results in Q4. It's about innovation, the Home Depot that we talked about is a good example as well and fueling the IGRALs businesses as I just mentioned.
Speaker 3: are those programs as mentioned, but in a real surgical way, this is not going to be our main priority in 23.
Speaker 7: Thank you.
Speaker 9: The next question.
Speaker 10: Next question comes to the line of Mike Harrison with the C-Port Research Partners. Please excuse your questions.
Speaker 11: Good afternoon.
Speaker 11: Would have been a minute. Chris off.
Speaker 11: I was wondering if you could give a little bit more color on how you're thinking about the earnings cadence in 2023. You talk about getting to an EPS, low double digit growth rate later in the year, but if I look at your guidance for Q1, the top end of that range is already kind of a 9 to 10%.
Speaker 11: growth rate. So maybe just help us understand how you expect the year to play out and maybe what are some of the key drivers that could lead you to be maybe toward the higher end or lower end of that outlook.
Speaker 3: So if you brought to you question, but generally no change versus what we said, what I said during the third quarter call, and now in our release and in my remarks as well in the fourth quarter, that the way we look at the outlook.
Speaker 3: the full year yet. It will come at some point, obviously, here, but it's two-part. So for Q1 and for the full year. Now, as I've mentioned, we expect continued sequential improvement, as you've seen as well in Q22, by the way.
Speaker 3: Q3 was a nice improvement versus Q2, Q4 was a nice improvement versus Q3, and Q1 is going to add in the same direction of being a further improvement as well, and that's what we're providing so with the range. That's going to continue in the...
Speaker 3: to an operating income growth that's going to be in the double digit range, which will drive so operating income margin, turning positive sometime in the first half and the gross margin sometime as well in the second half. That leads to an EPS improvement quarter of the quarter.
Speaker 3: When do we get to the low double digit traditional E-colab performance? I said during the last call it's going to happen. Sometimes during the second half with everything I know today, everything I see today, I think that's probably going to happen in the fourth quarter.
Speaker 11: All right, and then a quick question on the water business, particularly the downstream portion, was just hoping to understand the the additive's impact that you called out in the prior year. Were those sales kind of one time in nature and I guess is that the...
Speaker 11: main reason that volumes aren't looking better in that downstream business as we're seeing some improvement in refinery utilization rates.
Speaker 3: That's exactly right. You gave the answer. Here it's one time in nature, it's depending on where the crew is coming from as well, so sometimes they need additives and sometimes they don't need. That's not under our control, that's our customers' control, whether they need additives or not depending on where they bond.
Speaker 3: water is in a very good place downstream being this special case in additive as you've mentioned with the one-timers.
Speaker 10: Our next question comes from the line of David Begleiter with Deutsche Bank.
Speaker 5: Thank you, Christoph. Just on your cost inflation in 23, is it primarily wage inflation and for rise this year? Are you expecting rise to be actually down?
Speaker 3: Here we are, if you guys. No, we don't. Hi Dave. We expect, as mentioned before, that our costs are going to keep going up as they did in 22. The rate is going to be lower than what we've seen. The rate of increase is going to be lower than what we've seen in 2022.
Speaker 3: But our delivered product cost is going to keep rising in 2023. The wage part is a minimal part of it. It's going to contribute to an increase in cost that's always the case every single year obviously. So that's not exactly material, but that's going to go up as well and all parts of the outlook to that decision.
Speaker 3: to go in all details. And the truth is that most of them keep going up. Some are more extreme than others. The cost is in Europe so we are not 90 percent. For instance lately so those are things that we need to deal with and everything else is between...
Speaker 3: zero, slightly negative, but nothing much negative, 200% plus, like the cost that I mentioned before, so being close to the 100% here. So not an exact answer to your question, but there will be a halt, so with the thousands of customers of our commodities that we're buying out there.
Speaker 10: Next question. Come from the line of Jeff Stacakis with JP Morgan. Please just give your questions.
Speaker 5: Thanks very much. Historically, Eekle Lab has raised prices.
Speaker 10: about a percent or a percent and a half per year in that its rate of inflation in costs has been pretty low.
Speaker 10: But, you know, over time there's much less commodity production in China and domestic producers of chlorine and caustic soda.
Speaker 10: are operating their businesses differently.
Speaker 10: So as a base case, are your expectations that...
Speaker 10: Annual price increases for ECO lab are no longer in the one to one and a half range, but maybe now are more two to three, and your customers understand that if that's true.
Speaker 3: It's a great question, Jeff. The short answer is...
Speaker 3: We can deliver more pricing than what we've done in the past. We've learned that over the past few years and our teams have built as well, so new capability during that time because we had to and we wanted to do it in a way that was
Speaker 3: thoughtful and smart with our customers as well. And the fact that our retention rate remains almost unchanged during that remarkable time is a good indication. We've gained customers during that time and we keep gaining customers. The big difference beyond the capability that we are improving within our team, Jeff is the fact that
Speaker 3: We've become much, much better at documenting the value, the savings that we are providing our customers with our service. How much we can deliver for them in the years to come as well. We've become much better at that. We can document it. We can...
Speaker 3: Share it with customers. We can make sure that we align on those numbers as well And we have a discussion ultimately on what our share of that savings That we have delivered for our customers. It's been at the core of the way we've been selling for hundred years We've never brought it
Speaker 3: to such a high level than for 18 months and that's going to help us get more pricing in the future. What's going to be the exact range, Jeff? I don't know yet, but it's going to be higher than where we were before.
Speaker 10: then maybe quickly for Scott. Are your inventory, it looks to me like your inventory is maybe a hundred and fifty million too high. What will working capital be as a source of cash in?
Speaker 10: 2023.
Speaker 5: Yeah, Jeff, thanks for the question. We certainly have seen throughout the year working capital increase in both because of inventories as well as just because of the sales growth with this very high pricing. And again, we expect higher pricing next year relative to history as Christoph and you had talked about. And so the inventory was again very specific decision.
Speaker 5: in DOH levels down. And so certainly I wouldn't expect the same level from inventory in 2023 as we had in 2022, but at the same time we are gonna continue with having very high sales growth, and so you will have some natural drag there.
Speaker 7: Thank you.
Speaker 12: Our next question to the line of Christopher Parkinson was Mizzouko. Please excuse your question. Thank you so much. Chris, you hit on a little bit on the volume trends and the water segments. I was wondering if you could just pass down a little, you know, go down a little bit more between just the trends and light, heavy, and mining and how you see those, you know, evolving throughout the year. Thank you.
Speaker 3: So, you know, it seems like your question is focused on the industrial fragments here. Good. So generally, industrial is in a good place, not because the market is booming and we know that interest.
Speaker 3: in new end markets and so on as we've done as well in the past. Industrial is in a very solid place, in a very good trajectory in terms of margins as well, so it's doing that balancing act of making sure that we can drive pricing.
Speaker 3: getting the right margins driven by value as I mentioned to Jeff as well before while we drive the new business with this shift to offense Which I like a lot because it's ultimately where our teams want to focus the time It's where we are best at and what we love most doing so generally industry is gonna keep
Speaker 3: being in a good place and some quarters will be a little bit lower in volumes and some will be a little bit higher but generally in a very good place.
Speaker 12: Just a quick follow up on pest elimination. It seems like your market share gains, I mean obviously coming out of COVID is a bit difficult but it seems like your market share gains are beginning to reaccelerate. Can you confirm that and talk about how your innovation in that segment is going to further drive and whether or not you're interested in the...
Speaker 3: Thank you. It's a great business. It's been a great business for a long time. I'm a fan of that business going forward. I can't comment on the M&A side obviously. But generally it's a business that has done very well during the COVID time.
Speaker 3: delivered in the fourth quarter as well. And I expect them to continue to do so. When I think in terms of innovation here, they're starting to provide disinfection services for their customers as well, which I think is going to be a very promising proposition. It's a good complement to what our teams are doing so right now as well.
Speaker 10: on the line of ICHI Sabajara with RBC Capital Markets. Please receive your questions.
Speaker 8: Thanks for taking my question. I was just wanted to build on further on the first water EPS guidance and follow up on a prior question. That range seems pretty wide. What are the key factors which takes you to the top or the bottom end of the range? Is it more volume, raw material or below the line items? No.
Speaker 3: It's a good question. So for Q1, the range we provided is reasonably consistent with what we've done in the past when we were providing guidance as well. The inflation component of the delivered product cost is a timing that we cannot...
Speaker 3: view on how it's going to end, but in a month a lot of things can happen. Last year I was pretty confident in the first quarter and the world started. At the end of February we had one month to go and we had to deal with that. It's those external factors that are driving ultimately, so the range that we're providing for the first quarter as for every quarter.
Speaker 3: Thanks. It's a great business, as mentioned before. We've been in that business for 400 years. Today, we've been successful. We have great positions. We are very close partner to most of the restaurant and hotel companies around the world.
Speaker 3: So I'm very bullish about the future of that business. Dad being said, as mentioned before, we need to adjust as well because the market has evolved from dining in a restaurant versus taking out from a restaurant as well. We need to adjust.
Speaker 3: We've done that in the past. We need to do it today. That's going to take some time, but we're going to get in a stronger place as well after that. And in terms of innovation, I think the most important for institutional is the overall program of E. Colab Science Certified.
Speaker 3: because it's one way of bringing all the solutions that we have all the innovations that we have for our customers and to really sort of drive food penetration, it's good for us, it's good for the customer, it's good for the guest ultimately because that's the way that they are the most protected.
Speaker 3: from whatever that can happen and at the same time making sure that I have a good experience being in that hotel, that restaurant or that retail store as well. So if I had to pick one, that would be the most important one.
Speaker 10: Next question, come from the line of John McNelty with BMO Capital Markets. Please just do with your questions.
Speaker 2: Yeah, thanks for taking my question. So on the healthcare and life sciences business, when I look at the third quarter, you know, you kind of made some, some comments at the time, like this is not acceptable. And literally one quarter later, the segment had earnings that were, that were double. I guess how much of that would you attribute to
Speaker 2: the pure light capacity getting unlocked versus some of the changes that you're trying to enact with the Salesforce, the team, the cost-cutting, you know, those types of initiatives. Because it's such a dramatic move, I guess I'm trying to understand it a little better as to how what drove kind of that big improvement.
Speaker 3: So two things, John . In very different stories, obviously, so in that segment. Life science has been in a good place for a long time. They were just laughing against very high numbers during the years prior.
Speaker 3: As well, so it was more for a year on year comp than anything else. And life sciences mentioned before, so he's back. So to 18% growth, he's driving very good earnings as well. As they did prior, during that comp was an issue and back ultimately, so to their traditional trajectory.
Speaker 3: produce until Q4, which limited the growth by definition because we couldn't produce the products that we could sell ultimately. That has created a bump. Obviously, so in Q4, it's not in our organic numbers by definition since it's an acquisition and it's the first year.
Speaker 3: can change as of Q1. And then you have health care. Totally different story. I like the fact that they're turning slightly to positive growth. The fact that they have made some money, but I'm not getting overly excited with that. It's one quarter and it's not.
Speaker 3: We've announced here.
Speaker 3: part of it that will help obviously the cost structure, but at the same time we know that we need to improve our offering. We need to make sure we focus on the programs that make most sense as well for our customers and for us. So it's still a long road ahead, but we will get to the right place as I've committed to that.
Speaker 2: about it, got it. And then thinking about the industrial segment in China, you had the lockdowns in but you had the virus kind of ripped through the country and you know, that business of yours doesn't tend to be overly economically sensitive but it is sensitive as plants have to close. I guess how much of a pressure was that in the fourth quarter?
Speaker 3: And how should we think about how that may snap back? You know, first, China represents 4% of our global business. So it's hard to be a material like Europe would be in our results.
Speaker 3: We have a good position in China. Our industrial business is a very strong business. What we do is something that customers and government likes a lot as well. It's about clean water, safe foods, preventing infection. It's obviously very important so far.
Speaker 3: And we'll see how Q1 is exactly happening. There's the new year that's happening during the quarter with the shutdown and reopening. That's going to be a bit of a messy quarter in China and Q1. But ultimately, I think we're going to get back to a good place once this kind of volatile period is behind us.
Speaker 3: because what we do matters and our team is really strong as well over there.
Speaker 10: The next questions come from the line of Shlomo Rosenbaum with Steve Hall. Please just deal with your questions.
Speaker 4: Is that a month for a little resident down? What tax wear are you sending for 2023?
Speaker 5: Hi, Sloan, you talked about the tax, right? I'll give you back to Scott who is much better than me to talk about that. Yeah, I will cover off on that. Thanks for the question. I expect the rate for 2023 to be slightly higher than this year. Just do geographic mix, but right around, call it 19%.
Speaker 4: Okay. And how do we think about free cash on 23 in light of the restructuring items related to the expanded cost savings program?
Speaker 5: Yeah, you should think about the free cash flow in 2023, much like we did this year in terms of our historical conversion. Certainly from a pacing perspective, Q1 will always be lighter, but I would expect the free cash flow to be right in that mid-90s conversion on net income.
Speaker 7: Thank you.
Speaker 10: A new question from the line of Rose Marie Morbelli. For Belly Funds, please receive your questions.
Speaker 13: Thank you. Good afternoon everyone. Bonjour Christophe. Bonjour.
Speaker 13: So we are talking about, first of all congratulations on a great quarter and a great year. But we talked about the challenging economic environment currently and you are beginning to see it. Now what you see if you compare it...
Speaker 13: to what you sow prior to the last recession. Are those signs indicating a recession or just a slowdown from where you've been?
Speaker 3: It's hard to tell. I don't have a clear opinion on whether they're going to be hard landing, soft landing, recession, nor recession. We're seeing some softening in the demands of individual customers, so a like for like, same-store sales.
Speaker 3: we've seen in the past and the shift to offense, which is the typical equal of way of responding to it, is going to be the best tool we have to mitigate against that.
Speaker 13: Can you tell whether it is real demand slowdown or whether it is actually this talking?
Speaker 3: It's probably a combination of both. Especially in industrial segment for hotels and restaurants that don't have much inventories, distributors. So could be the case. Everyone is becoming a bit more cautious. So that has an influence.
Speaker 3: and I feel good with our shift to offensive approach because getting new business, driving penetration, getting innovation on the market, well, it's what we good at.
Speaker 3: or shift to office approach because getting your business, driving penetration, getting innovation on the market, well, it's what we good at. Thank you.
Speaker 10: The next questions from the line of Kevin McCarthy with Vertical Research Partners. Please just use your questions.
Speaker 1: Good afternoon. How would you apportion the 175 million of targeted productivity savings between the institutional and health care segments?
Speaker 3: So let me give you just a few comments and then I'll pass it as well so to Scott but as you've seen half of the overall programs are easy in Europe that's what we've communicated.
Speaker 3: Well, under way on this one, I like the progress that the team is making over there and the balance of the overall program is mostly institutional with healthcare, getting its fair share. But maybe any more comments got? Yeah, no, not a lot to add there, Kristoff. Exactly that. Certainly the year program will impact.
Speaker 5: other businesses as well, but certainly institutional will have the largest portion of the overall 175 million.
Speaker 14: Okay, and then secondly if I may for Scott, if we go back a quarter or so my recollection is that you anticipated higher pension expense in 2023. Is that still the case and if it is how large my dad had win B?
Speaker 5: Yeah, we do expect some modest headwinds, but we're talking in the sort of five to six penny range, so not overly significant.
Speaker 7: Thank you.
Speaker 10: The next questions coming from one of Steve Bern with Bank of America. Please use your questions.
Speaker 7: Jason.
Speaker 15: Yes, thank you.
Speaker 11: If you had to estimate what your raw material costs are to purchase today.
Speaker 14: versus of this 10,000 products versus what their average costs would have been in the fourth quarter.
Speaker 11: What would you estimate that sequential change to be? Now that's just purchasing the cost of the products. What would you also estimate the average number of say months that a raw material is purchased versus when it flows through a cost of goods?
Speaker 3: So we don't buy any spot price or product that's spot price to begin with. So it's usually contractual, there are some exceptions but it's not material. To it generally it should be less than a 5% range.
Speaker 5: I'm sorry, I didn't follow that. You mean what is the less than a 5% range yet? I'm trying to assess whether there has been a sequential change in your raw material costs.
Speaker 3: during which I want to make sure so I'm sending questions. So Jeff says, allow the last quarter to where we are today.
Speaker 3: between Q4 and Q3.
Speaker 5: Overall, and where we are today.
Speaker 3: Are you seeing anything in recent weeks that is in your view? Got it. So you mean today? So in Q1, the trends as mentioned before, they keep going up just to be very clear. So in the third quarter, so I would total cost as mentioned, so we're up 30%.
Speaker 3: They were up in Q4, a little bit less than that and in Q1, they will be up a little bit less than what we had in Q4 but still up.
Speaker 3: Did I answer your question like that?
Speaker 5: Well, I see it that the year over your trend, you know, you're starting to lap higher costs and thus that maybe as part of that.
Speaker 11: that decrease, but you know there's two things here you know our raw material costs actually starting to deflate are you seeing any cost deflation and then how long does it take before that flows through cost of goods because I'm sure there's some of
Speaker 11: Some of your outlook is just the lag that it takes for the ros to flow through cogs.
Speaker 3: So, to the lag question, it takes a quarter or two to get through the system. Generally not every product is created equal in here, but I want to be very clear that the increase that we see in Q1 is a net.
Speaker 3: increase, which means that the cost of our delivered product cost is clearly going up as well in Q1 versus what we saw in Q4 in dollar terms as well. So the cost of what we buy keeps going up I'll be at the lower rate of increase than what we saw in the past three quarters
Speaker 5: Okay. And then maybe just one on a potential end market opportunity for you. A lot of industrial companies are getting sued because the products they're selling contain some PFAS and it's not because they're making stuff out of PFAS. It's in the wall.
Speaker 3: in the science of water, in mastering water, in managing water. So PFAS is an opportunity that we've been looking at for quite a while. The demand hasn't been as clear as we would wish so far. So it's...
Speaker 3: something that's going to come at some point which will be most probably something interesting for us like Microplastic By the way as well so the technology the science we have it Will be ready when the market is ready to use those solutions
Speaker 10: Our next question is from the line of Vincent Andrews with Morgan's family. Please excuse me.
Speaker 4: Thank you. I just have one question left here. In your downstream segment, you talked about particular strengths in the quarter in petrochemicals. And I was just wondering if you could bridge that with the fact that in most cases, particularly in the US and Europe , the petrochemical assets were running at very low operating rates.
Speaker 3: Yeah, we've shifted what we do for petrochemicals towards water management, energy footprint reduction, cost reduction, which I think the team did exactly the smart move. Our customers are looking for solutions to reduce.
Speaker 3: Thanks very much, guys. You're welcome, incident.
Speaker 10: The next question is from the line of Scott Schneeberger with Oppenheimer. Please visit your questions.
Thanks very much, you have to know. Following up on an earlier question on the cost savings program, you guys shared on institutional versus healthcare breakouts. I'm just curious, you know, it was originally in Europe , but when you announced in third quarter, now it's spanned to other regions. So, first of all, the question is curious of...
It is mostly global 9 US. How involved is the US with regard to these cost savings plans? And then also Scott, I guess specifically for you on this topic, you're going from 80 million savings to 175 more than a double with this incremental announcement, yet the cost incurred to an act.
only go up by about half as much as what it originally cost for the enactment. So just curious how you're able to basically get more leverage off this second iteration. Thanks.
So two thoughts, a few questions. I'll have maybe Scott to answer the cause versus savings first, and then I'll build on your questions so US and the US. Scott first. Yeah, the split of the savings as you pointed out. Certainly the first program, and this is very consistent in what we've experienced in the story with programs where the cost implement these programs.
to why, as mentioned before, so headscarom is a business that I've committed to bring to the right place at the right time as well. And that's the first step in that direction and what we've announced is mostly in the US. Same for institutional, this shift from dining in to take out is a shift that has happened most.
getting pricing, right, innovation and productivity as well, while the programs is helping us do surgical work where we truly need it in a short period of time.
Great, thanks. And a quick follow-up. You've addressed working capital a bit and free cash flow and thanks for that. Just curious on CapEx levels this year versus the past and what a normalized level percent of revenue perhaps is a good way to think about that and going one step farther, where the free cash flow might be utilized this year.
2023 to get to that sort of close to the middle of that historical range of five to six percent. And then as they talk about capital allocation, certainly we completed our $500 million program, share a buyback program this year and continued and now we'll be on our 31st year of increasing dividends. And between the two of those.
returned 100% of our free cash flows to shareholders of over a billion dollars in 2022. Going forward, I would expect to continue the dividends increase, but continue our consistent principles, which is first investing in the business, which includes...
M&A as well as increasing our dividends as I mentioned and then with excess cash looking at share buybacks
Next, gentlemen. At the time we've reached the end of our question and answer session, and I'll turn the floor back over to...
Thank you. At the time we've reached the end of our question and answer session and I'll turn the floor back over to Mr. Headberg for closing remarks.
Thank you. That wraps up our fourth quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time at Participation. I hope everyone has a great rest of your day.
This will conclude today's conference. May this connect your lines at this time. Thank you for your participation.