Ecolab Inc (ECL) — Q4 2021 Earnings Call Transcript

Greetings, and welcome to the Ecolab Fourth Quarter 2021 Earnings Release Conference Call. As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce Mike Monahan, Senior Vice President, External Relations. Mr. Monahan, you may now begin. Thank you. Hello, everyone, and welcome to Ecolab's Fourth Quarter Conference Call. With me today are Christophe Beck, Ecolab's CEO and Scott Kirkland, our new CFO. A discussion of our results, along with our earnings release and the slides referencing the quarter's results are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplemental materials include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. Starting with a brief overview, the strong fourth quarter sales were driven by accelerated pricing, business wins and product innovation with double-digit gains in our institutional and specialty and other segments as well as continued strong growth in the Industrial segment. These were partially offset by negative COVID-related effects on business activity and an unprecedented estimated 20% increase in year-on-year delivered product cost and supply constraints in the quarter. We closed out a challenging year in 2021 in which we invested in key business drivers and aggressively drove pricing, innovation and productivity. We also successfully managed through substantial supply constraints and cost increases to deliver the strong full year earnings increase. Looking ahead, recent programs, including Ecolab Science Certified and Net Zero have further differentiated Ecolab's value proposition and enable us to create better customer outcomes and reduced environmental impact, all while simultaneously reducing their costs. Our new business wins and innovation pipelines are at record levels and new market focus areas are well positioned to drive growth and our leading digital capabilities continue to add competitive advantage. We expect to leverage these drivers to once again drive strong sales volume and pricing gains and along with productivity and cost reduction actions more than offset the higher cost to yield another year of double-digit earnings growth. Our strong business momentum, along with our enhanced value proposition and favorable macro trends position us well to leverage the post-COVID environment and deliver further 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. Our top line momentum reached 10% or 9% organic in a constrained environment. Institutional & Specialty grew 19%, Pest Elimination 10% and Industrial remained strong, growing 8% in the quarter, and our new business and innovation pipelines remain really strong. At the same time, COVID came back during the fall, especially in North America and Europe. As we all know, inflation kept rising substantially and still, top line gain 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, discussed by close to 20% in the fourth quarter, nearly double the rate we saw in the third. And then 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 times 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 expect the global economy to remain strong even if not as a perfect straight line. The exact 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 a high level, at least for the first half of the year, while we expect it to ease during the second half, and we're getting ready for this, too. We will keep driving growth by fueling the 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'll 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 '22, 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 '22 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 year and certainly beyond as the Ecolab model has proven many times. All these actions should lead to a strong '22 with strong top line and adjusted earnings growth in the low teens for the full year and a first quarter with very healthy sales growth and a flattish EPS as pricing keeps building fast. Finally, as we've done throughout the pandemic and against 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 resources better is as important as it's ever been. Our opportunity has never been larger as we chase a global market that's today greater than $150 billion and growing fast. We have confidence that we will look back on this period and truly feel we did the right things the right way by protecting 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 their customers and their businesses with Ecolab Science Certified and as the sustainability company, helping our customers progress on the Net Zero journey, all of which should lead to strong top line and consistent, reliable double-digit EPS growth and ultimately getting us back on our pre-COVID earnings trajectory. I look forward to your questions.

Thanks, Christoph. 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 questions, please contact my office. Operator, would you please begin the question-and-answer period?

Yes. I just have two, not surprisingly on 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 '22 that's built into your guide?

Yes. Great question. Thank you, Tim. So that's the core topic, obviously, for all of us. For us, it's raw materials and freight, as you know, that we combine as well. And if we look at 2021, it was roughly a 10% increase we saw in the past year. We spiked in Q4, as you've heard and read as well to 20%. So 10% for the full year in '21, we expect to stay pretty high for the first half of '22 at the same level, similar to what we've seen in Q4 and then to ease during the second half of the year, which leads to a roughly sort of 15% or 10% in '21, roughly 15% in '22. And since raw materials and freight represent about 25% of our sales, our pricing plan is well aligned with that and should allow us during the first half to get ahead of the dollars we get in terms of inflation and then improving the margin during the second half, assuming that the assumptions happen as planned.

Yes. Okay. You kind of started to address my second question, but I'm going to ask it anyway in case you have anything else. So just following up on that, assuming oil prices stay about where they are today, would you expect all else equal to see gross margin expansion after '22? The reason I ask, I mean, if we kind of step back and 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'm wondering if this is kind of the 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? And how you plan to get there?

Yes, we absolutely expect to get back over time to where we were pre-inflation start or pre-COVID wherever is the start, obviously. When you look back as well, taking industrial, for instance, in the past years, look at operating income performance, the margin performance they had in 2020, which was north of 20%. And that was really as an outcome of all the work they did in pricing and the raw material market that trended towards lower levels. So very good performance in 2020. That's a perfect example of what's going to happen in the future. Exactly when, I don't know, Tim, but we expect improvement in the second half of '22 and definitely over time to get back to where we were and go beyond that as well.

Christophe, I was hoping you could share your thoughts on the long-term growth trajectory beyond reopening, particularly regarding the elevated focus on hygiene and sanitization, like the Ecolab Science Certified initiative. Could you provide some figures on how that performed in 2021? Will we see an elevation compared to pre-pandemic levels, and what are your thoughts on that?

Yes. Good question, Manav. It's going to be higher than 2019, which means pre-COVID, but it's going to be lower than during COVID for sure. In 2021, sanitizing sales were close to a double-digit increase versus 2019. And I think it's going to remain at that elevated level for the foreseeable future, especially with our Ecolab Science Certified program, which is going really, really well. Customers will use a higher level of hygiene going forward, especially because their guests and customers expect more of it as well. Some of the ease that we've seen in '21 was also related to the fact that our restaurants and hotel had limited staffing to do all the cleaning and sanitization, which probably has pressured a little bit, the sanitizing sales but still quite happy versus 2019, as mentioned, close to double digit and expect it to continue on that trend in the years to come.

I understand. Thank you for that. It seems you have managed cost inflation quite well, and I believe many of your competitors may be facing more challenges. My question is whether this situation indicates a larger potential for mergers and acquisitions that you could pursue, or if you are not viewing it in that way.

Well, we usually focus in terms of M&A, Manav, on very 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 you're right that we are in a very good position. You've seen our pricing evolution, so exiting Q4 with 4% and confident in 2022, so to get to 5%, 6% as well. That's demonstrating the value that we can create. And if we do that over time as we always do it, Manav, 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.

Great. 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 with, I'd say, continuing pricing momentum, transportation, logistics and labor? Just all in the context of, let's say, end markets rebounding in '22 and '23 and market share gains. You've already spoken about GM normality, but just how should we think about this in terms of earnings power for '23, '24? And are there any extra considerations I didn't mention?

Yes. Thanks for your question, Chris. Yes, long-term, I feel quite confident that we're going to get back to this pre-COVID earnings trajectory for a few reasons. Here, the first one, institutional 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. Then we have industrial that's going to keep growing fast, and that's creating leverage as well in terms of absorption that we have. And you mentioned, obviously, the price versus inflation, we've demonstrated that over and over our history as a company that during those inflationary periods, 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 Purolite, which are very high margin and growing very fast as well. And last but not least, all 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 margin improvement.

That's helpful. And just as a quick follow-up, the last several earnings releases even through the difficult times of COVID, you've been mentioning market share gains fairly consistently. As we stand here today at the beginning of 2022, can you just give us a quick update on the market share gains by segments where you've been pleasantly surprised even 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?

Yes. The question about market share is always relevant and varies by business. In the fourth quarter, we saw a 10% growth, which is faster than the overall economic growth. This suggests we are gaining market share overall. Looking specifically at the institutional sector, for example, our business was down 9% compared to 2019, while restaurant traffic was down 33% compared to that same year. This clearly indicates that we have gained market share. In the Industrial segment, our 7% to 8% growth includes diverse businesses, such as the paper sector, which saw over 15% growth and where we have gained significant market share. Additionally, we are experiencing rapid growth in data centers, and our goal is to become the top player in that market in the long term. Life Sciences is also an area where we are growing faster than most competitors, especially with Purolite. While comparisons can be challenging, looking at the macro level, Chris, the 10% growth exceeding general economic growth suggests solid market share increases. The examples I've mentioned demonstrate that our position is improving over time.

Can you speak to how it seems like there’s two different angles to it. One, that it's nicking your customers where maybe you can be helpful and come up with incremental solutions for them. 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 you're going to face and how maybe you can offset that with revenue coming in by helping out your customers?

Yes, as you mentioned, we approach this issue from two perspectives. First, we are focused on assisting our customers who are facing wage inflation challenges and difficulty in recruiting, particularly in industries like restaurants and hotels. With fewer workers becoming more costly, our solutions that automate cleaning and sanitation processes are proving beneficial, which is contributing to our growth in those markets. Regarding our own wages, we aim to remain competitive within the market for 2022. Our talent retention has been robust over the past two years, a time when many companies struggled, which suggests we are managing wages effectively. Moreover, we prioritize our key talent, ensuring they feel supported and satisfied to stay with us longer. On the topic of productivity, our ongoing digital initiatives over the years are delivering results, evident in the year-over-year improvement in SG&A, which will help us offset the wage inflation we anticipate. Overall, it’s a positive narrative.

Understood. That's helpful information. Could you provide a bit more detail on the raw material aspect? It seems you believe that raw materials and freight costs will decrease in the latter half of the year. Can you elaborate on this or specify the extent of the decline you have factored in when you project 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 see in the fourth quarter. So the 20% that we've talked about is roughly what we're expecting as well. So for the first half of '22. 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 you compare it to a high base, obviously. So it's not going positive in terms of dollars. It's just that 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 that the moment that inflation eases and goes down, that's where we create the best margin enhancement as we've demonstrated in Industrial in 2020.

Got it. So just to be clear, the costs you're assuming they don't go down in the back half of the year, you're assuming the trajectory slows. Am I understanding that right?

Exactly, yes, John. As mentioned earlier with Tim, we are expecting about a 10% increase in raw and freight cost inflation, and we anticipate it will rise to 15% for the full year in 2022. That's our current assumption.

Could you maybe just expand on the raws and freight a little bit just in terms of what the breakdown is in terms of the increase you were 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's any change in the mix of raws that are giving you problems.

It's not giving us problems. It was in 2021, Vincent, three quarters roughly of the inflation pressure was in Industrial. That's evolving as well because it's not always the same raw materials that are increasing across our businesses and in 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 driver 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're well organized on the logistics side. We have a lot of former Amazon people as well as leading our logistics, that helps. And we've engaged as well over the last 12 months and even more in '22 as well new logistics policies, surcharges making sure that we not only optimize our logistics but get paid as well for any increase that we might have.

Okay. And could you maybe just give us your outlook for this year in health 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, we're entering '22 in a very good position in terms of business momentum. The 10% that we've delivered in the fourth quarter is something that we expect to stay quite steady over '22 the mix between volume and pricing. Obviously, it's going to evolve since we're going to move pricing closer to 5%, 6% as mentioned as well. So kind of a steady, good momentum. And for the EPS growth, as mentioned, we expect it to be in the low teens for the full year. The first half is going to be more on the lower side and the second half is going to be on the higher side of the 10 because of the margin improvement driven by pricing going steadily up and inflation easing, as I just mentioned before with John.

Welcome, Scott. And congratulations, Christophe, on the Barron's 100 sustainability ranking.

Thank you, John.

Are you still adding new sign-ups for Ecolab Science Certified, or are you just enjoying the benefits of everybody who signed up early on? I don't know if there's fatigue out there as this goes on, that there's less interest in signing up for new programs?

No, we don't really see any slowdown on that front, which is a good sign. It's even taken time, interestingly enough, for many customers 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. Wanted to make sure that it was right for them, it was supporting their brand the right way that it was well perceived with their guests as well. So they came fairly late in the COVID 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 are safe and healthy.

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 '22?

I'm very passionate about water and have been leading this business for quite some time, Ashish. I believe we are in a unique position to continue growing for several reasons. Firstly, water scarcity is becoming a more pressing issue as we won't get more water on Earth, yet our consumption will increase. Secondly, more companies are committing to achieving net-zero carbon and water by 2050, with interim goals by 2030. This commitment is driven not only by environmental considerations but also because saving water often leads to energy savings. Many companies are recognizing the dual benefits of addressing water issues while also reducing their carbon footprint. We are the only company that can truly assist businesses in reaching net-zero, which is an emerging trend that bodes well for us. Lastly, we likely stand out as the only company capable of delivering these solutions at a high margin, thanks to our extensive scientific expertise and digital technology. When you consider water scarcity, the need for net-zero initiatives, and our ability to do it profitably, it gives me great confidence in the future of this business.

That's very helpful information. If I could just ask a quick follow-up regarding the commercial pest elimination business. It's a small segment but has been a strong growth driver for you. With one of the major players in commercial pest control being acquired, how do you view the changing competitive landscape moving forward? Additionally, are you considering potential mergers and acquisitions to strengthen your position in commercial pest control?

So maybe to your point of a fairly small business, it's almost a billion for us. So it's quite significant. It's extremely profitable, and it's growing really fast; it grew 10% during the fourth quarter and it's been growing during COVID as well. So just to show the resilience, the strength of that business. And the other thing I really like about pest is that it's a perfect complement to everything else that we do. In a hospital when you think about infection prevention, you need to eliminate pests. In a food and beverage plant, you need to bring pest elimination as well, so to make sure that you do not create food safety issues, the same in a hotel, the same in 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, a company that we respect a lot, by the way. But when they're busy doing integration, those are the best times for us ultimately to gain share. And in terms of us doing M&A in the pest elimination field, we don't comment in details, but we are definitely open to consider as well as we have in the past; we will in the future as well in businesses that are so valuable for us.

I have two questions regarding the lag effects. First, considering the volatility we've experienced over the past couple of years and how Ecolab has enhanced their portfolio, do you expect your share gains to accelerate in the coming years as customers adjust and begin to reassess your position relative to competitors in a more stable environment? Second, when you take into account the factors like water, productivity, digitalization, and other initiatives you’ve mentioned, should we anticipate your top-line growth to be faster than what we’ve seen in the last 10 to 15 years? Additionally, can you expect improvements in your pace of productivity gains compared to the last decade?

Great question. So I see three big questions, all related obviously, here. So I'll try to be as extensive as I can on that. So first, in terms of share, as mentioned before, the fact that we're growing fast in most of our businesses, so it's not just one business that's growing and all the other ones are going slow, is a good indication that we're gaining share. And obviously, once the whole craziness of the world is behind us that's going to pay dividends as well because we're going to be in an even stronger position afterwards. So it's always been the focus for us. We have this mantra in the company, in doubt go and sell something, which is pretty useful in those 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 top line momentum. Yes, I firmly believe that the growth that we will see in the years to come is going to be ahead of the growth that we see in pre-COVID, if there is any such thing as well. And in terms of productivity, with all the investments that we've made in ERP technology, field technology, in remote monitoring for our customers, in AI, all that is, not only paying dividends right now as you can see as well over the past few years our SG&A productivity has improved, but I believe it's going to improve even better in the future as well. When you bring all three together, I think it should lead to a performance that's ahead of what we've seen pre-COVID.

I think I'll bring Scott in on the first one. CapEx increased as a percent of revenue in 2021, probably pretty logical given the environment. But it's still below the 6% levels prepandemic. Where do you see CapEx in 2022 and perhaps beyond in some major categories of spend going forward?

Thank you for the question, Scott. Yes, it was indeed lower. Historically, we've maintained around 6% of sales in capital expenditures. As sales have decreased compared to 2019, a significant part of our capital expenditures has gone toward merchandising equipment for customers. As customer activity returns, we anticipate that capital expenditures will align with those historical trends of approximately 6%.

Great. And then, Christophe, just a high level or perhaps both of you. It's been a while since there's been discussion of the efficiency initiatives and kind of the overriding long-term theme of cost savings. And it's been a tumultuous time period, but just curious, how are you progressing on that? How should we be looking at that as we approach the end of '22 and '23?

Yes. Let me make a quick comment on this one, and I'll pass it back to Scott, who has the details here. The efficiency initiatives that we've had over the past few years have progressed really well. And let's keep in mind that those initiatives were not pure cost savings initiatives. Those were initiatives that leverage all the investments that we had made in the past in ERP technology, in digital technology and all that. And as I've mentioned before, not only it's delivered 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 way going forward. But with that, Scott maybe a few comments on that.

Sure. Thanks, Christoph. Yes. As Christoph said, we progressed very well on it. If we think about the two big programs and we have programs going on all the time with the two big programs, the 2020 and the 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.

You've had Purolite now a couple of months, how do you view the expectations about profitability from that business relative to what you previously had in both industrial business wallet share gains and on the Life Sciences, anything that has changed your outlook on that?

No. We're really happy with that acquisition. As you mentioned, we're kind of two months in. So we're really at the beginning. Our first objective was really to do no harm and make sure that they can keep growing as they have in the past, and they're doing really well. We're not working on any significant integration because it's not a 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 all industry is having, we had, which is good. And we have two extensions, a new plant in the U.S. and the extension in the U.K. that's supposed to be coming in line as well in the first half of '22, and that's going to give as well an inflection point for the second half. So, so far, really happy with what we're seeing with Purolite.

I want quick follow-up on that one. Do you expect operating results out of that business to more than offset the amortization expense? Or do you think you will change your view and not include amortization in your adjusted earnings? And 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 very clear on how we see '22 to be neutral. Obviously related to the first question since business is evolving as expected the neutral is going to happen as well in '22. But it's important to keep in mind that the amortization is $0.26 in '22. So it's relevant and it's all cash that's coming, obviously, since the amortization is a non-cash item as well as such. So we're looking at what other companies are also doing in the Life Science arena, and it's usually handled definitely differently than what we've done in the past. I'm 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, well, you can know what's the true cash return of that business since we want to know it as well.

Great. I guess I just wanted to start out with a, I guess, a two-part question on the revenue outlook. I think I just wanted to clarify the first part here. Christophe, in your prepared remarks, I think you said that pricing was going to be 5% to 6% for the year. And I think in your Q&A, you mentioned that pricing will ramp to 5% or 6%. I guess the question I wanted to clarify is, if it's going to be 5% or 6% for the year, presumably 4% for the fourth quarter, it would suggest that the exit rate in 4Q could be above 6%. So could you just clarify the cadence throughout the year that gets you to the 5% to 6%. And then maybe for Scott, could you talk about what FX could mean to your revenue performance or growth here in '22 with current rates where they are?

Andy, I'll take the first one, and I'll give the FX to Scott. On pricing, as mentioned, so we're exiting at 4% of the fourth quarter, moving towards 5% for the first quarter and for the full year, so being between 5% and 6%. So it's pretty steady, and that's our current plan, considering all we know in terms of inflation. As mentioned before, raw materials and freight inflation are not dealt with exactly the same way, but it's relatively steady. So between these 4% and 6% during '22 which leads to this average of 5% to 6% ultimately. And Scott, on the FX?

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's probably in that $0.10 range in 2022.

Okay. And then I guess I wanted to just ask kind of a 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, Purolite, I guess, because it's not an integration cost synergy play, shouldn't have too much there I don't think. And then the other big bucket, it looks like the COVID costs in '21 were notable. But with COVID subsiding and just life getting used to COVID, it kind of feels like the special gains and charges should be less in 2022. Am I thinking about that the right way, Scott? Or are there other things that I should be considering in that?

Yes. As we discuss the major categories, there will be ongoing special charges related to Purolite next year, but we experienced significant impacts from purchase accounting, including the inventory step-up in 2021. Regarding 2022, as you mentioned COVID, there were a few significant factors. Pay protection was a substantial component of that. We also had an inventory reserve that we disclosed. While we can't predict how COVID will evolve, we anticipate that variable pay protection will decrease in 2022. Additionally, we incurred some medical costs related to testing, which I expect will linger a bit, but overall, given the trajectory of COVID, we foresee those costs being lower in 2022 compared to 2021.

I was wondering if you could touch on Russia and Ukraine, how much of an impact, let's say, that we go to war, which we probably won't. But nevertheless, how large are those two regions for your business?

Yes. Well, I hope that nothing is going to happen, obviously. So too many human lives would be impacted. For us, it's a reasonably small business. It used to be much bigger when we had Upstream Energy, as you know. And today, it's less than 0.5% for the whole company. So for us, it's not so much a business issue. It could have an impact on energy cost, but that's an indirect impact. And for us, obviously, as a people company, it's making sure that everyone from our team is in a good place. Unfortunately, we had some experience a few years back when Crimea was in focus and we've managed that really well. We have a good team, even if it's a small one. So Rosemary, no big business impact, maybe on energy, and we want to make sure that our team is doing well.

Okay. That is great. And so I was surprised by the double-digit growth in institutional, considering that there is COVID that not everyone is back on the road. We still have masks and not a lot of people are going to hotels. Can you give us a little more detail as to why that performance was impressive?

Well, it's a good business, which is really in leading positions; that helps. We haven't lost customers. We have roughly the same number of units as we had pre-COVID. They're buying a similar number of solutions as well. We have a lot of new business that we've acquired. They've been extremely good during the COVID times in new business generation, pricing has been good as well. Ecolab Science Certified has been good as well. And customers have needed us more than ever during COVID. So as they reopen, we keep growing, and honestly, Rosemary, we were expecting in Q4 to grow even faster except that Omicron changed the plans a little bit, and it stalled at the Q3 level of growth. But that's going to come when hopefully, COVID is going to move behind us. So I'm really confident in that business going forward.

Great. And if I may. Your SG&A ratio was some 32.6% in 2017 or thereabout. And obviously, you have made progress as it is down to 28% in 2020, and you talked about the factors that are going to impact this ratio. How low do you think is 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's going to be better than where we are today. Keep in mind that we have a very large sales team. They drive a lot, for instance, to go and visit our 3 million customers around the world. Digital technology is helping us managing and serving customers remotely as well. That reduces the time that our teams need to travel, that improves, obviously, the SG&A productivity. They do a lot of prep work, preparation work before they go and meet customers or after they've met customers in order to make sure that head office knows the value that's been created. That's getting automated as well as we speak. So with automation and such a large team, I think that we still have a lot of potential not only to improve the productivity but making sure that our teams, Rosemarie, are focused on creating value for our customers instead of moving papers, collecting data or driving on the road.

Okay. So we can expect maybe another 200 basis points.

It's a 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 for many past years and it's going to keep improving. What you've seen in the past is what you're going to see in the future.

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 Healthcare. You had weakness there. Why is there more margin stability in the Industrial business versus the other two? Is it 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?

Well, the macro is basically that the share of raw materials and freight cost 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 speed at which we can drive pricing is different as well, so business by business. Sometimes you have group purchasing organizations. 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 raws 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 creates those distortions that you just mentioned.

Okay. Second question is, in the Institutional business in 2018, you used to make $1 billion, and now you make $566 million. When do you get back to $1 billion? And can you help us out with what your interest expense is for 2022 now that you've bought Purolite?

Yes, I have two questions. I'll let Scott address the interest aspect. It's a very different issue. In our Institutional sector, we have intentionally maintained our team, and I believe that was a wise decision. When you consider the current state of restaurants and hotels, where housekeeping must often be done by guests due to labor shortages, our situation would be drastically different today had we not retained our team since the onset of COVID in 2020. This was a deliberate choice—we decided to keep our entire team even though our business suffered significantly during the pandemic. This decision directly affects our income from that sector. As we anticipate a return to 2019 levels of business, which we expect to see, I believe that over time we will achieve the same profit margins as before. Additionally, we are likely to see productivity gains that will further enhance those margins. I feel optimistic about the growth prospects we have in the Institutional sector. Scott, would you like to add any comments?

Jeff, answering your question on the interest expense. So adjusted interest expense was just north of $180 million in 2021. And as you recall, we had $2.9 billion of debt through the Purolite transactions. And so we'll see it about $45 million higher, call it, roughly $230 million of interest expense in 2022.

Christophe, I'd be interested to hear your updated thoughts on the subject of labor. If we think about the first half of '22, do you think that labor-related challenges will be any better or worse or perhaps stable versus the back half of '21?

And Kevin, when you say labor, you mean our labor or our customers' labor or both?

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, fortunately, we don't have major internal issues. While we've faced some challenges, we've managed them effectively. As you might know, over 95% of our U.S. team is vaccinated, which includes more than 18,000 individuals. This has significantly helped us maintain operations during challenging times. Internally, we are in a fairly good position, but our customers are experiencing different challenges. Distribution centers are struggling to unload trucks, and retail stores are unable to perform necessary cleaning tasks. Hotels are also facing difficulties due to a shortage of the right talent. This situation is affecting logistics and demand, as our customers lack the workforce to manage their operations. However, conditions are improving gradually each month. Over time, we expect further improvements, but it may take until the end of 2022 for our customers to reach a more stable state.

I see. And then secondly, I wanted to come back to the subject of pricing. I think you indicated 5% for the first quarter on a glide path to 5% to 6% for the year. And so that would imply, I think, relatively modest incremental price contributions from here. And so I was tempted to ask you, why not be more aggressive there? Or 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 the cost trajectory?

You've provided several insights already. To clarify, regarding the 5% increase in Q1, it will occur within that quarter. As we progress through the quarters, we surpassed 4% in Q4 and are expected to exceed 5% in Q1. I can't specify the exact timing, but we will evaluate the first quarter individually. However, we are fairly confident about achieving the annual goal of 5% to 6%. This pricing adjustment is necessary to restore our margins to acceptable levels. If inflation deviates from our expectations, as mentioned earlier, we will adapt as we have in recent months. It is crucial for us to maintain a long-term pricing strategy; we do not aim to operate cyclically. Our pricing reflects the long-term value we provide to customers, and once we move past inflation, that pricing stabilizes. The rate at which we can adjust pricing is influenced by this stability. If we were exclusively a chemical company, we could implement price changes more rapidly, but we would eventually need to retract them. Our approach is slower, which temporarily affects our margins, but ultimately yields significant benefits. Additionally, raw materials and freight costs account for 25% of our sales. Therefore, the 10% inflation I mentioned for '21 applies only to that portion of our sales. When you consider this in relation to our anticipated pricing increase of 5% to 6%, it leads to a solid outcome.

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 warewashing or hard service sanitizing or food safety that you're excited about launching here in 2022?

We indeed have some exciting developments. At our core, we focus not just on products but also on programs that integrate all our offerings effectively. For instance, in the Institutional sector, particularly fueled by COVID, we introduced a variety of products that can eliminate the virus in just 15 seconds. This is a significant milestone, especially considering the labor shortages we've previously discussed. An efficient cleaning solution benefits not only the guests but also the customers. This entire initiative will be showcased at the NRA. Additionally, we have the Ecolab Science Certified program that consolidates all our initiatives to ensure guest safety. It's important to remember that to achieve certification, all of our products must be utilized, which is contributing to our sales growth. Looking ahead in the Industrial sector, we have launched the Net Zero water program, addressing clients' goals for reducing water usage over time. While this won’t be highlighted at the NRA, it’s a noteworthy initiative. At the NRA, we will also be presenting advancements in Purolite, and we will provide more details on that during our time together.

All right. And then my other question is on the Specialty business. That has historically been a very consistent high single-digit grower. In 2021, it declined. Can you help us frame up the dynamics that you're seeing there? And maybe give us a sense of where you see volume and pricing growth in Specialty in 2022?

The Specialty growth in 2021 was largely affected by high comparisons from 2020, as the closure of restaurants and hotels during COVID led customers to retail and drive-through options at quick service restaurants. This created significant growth during COVID, and as we transitioned from that period, the comparison to such high growth became challenging. However, both of these businesses remain strong and are expected to perform well in the future. Notably, quick service restaurants experienced an 8% growth in the fourth quarter.

Christophe, I wonder, could you give some thoughts on the Downstream business? It seems like it recovered a little bit in the quarter. But based on the recent pricing actions in oil, any thoughts as to say, that business as we move our way through 2022?

It's a very interesting business, Downstream, because things are evolving. We're doing today and even more tomorrow, some very different things than what we did in the past. In the past, Downstream was all about maximizing capacity utilization, improving the efficiency, the productivity of the assets. That was the #1 focus. It hasn't gone away today, but the focus has shifted dramatically towards sustainable operations, and it's turning refineries into operations that are using much less water. When you think about the refinery, so beyond crude oil, obviously, that goes through the second other element, its water. And we're working with the supermajors to help them to get to their net zero ambitions as well. And that's totally new. That had no acceptance in the past for most customers. And today, this is the #1 pick and that's where we're best at as well. We can differentiate ourselves. And the good news is really that our new business is going really well in that business. So a very different one going forward than what we've seen in the past, which matches much more who we are as a company and who we want to become as well in the future.

Very helpful. And then just real quick on what type of full service in unit traffic could we assume in the 2022 guide? I know it was about 70% of 2019 levels in Q4. How are you thinking about that over the course of 2022?

Well, it's a good and difficult question. So the industry is expecting to be back towards the end of the year in restaurants and in hotels, probably more the year after. We are ahead of that curve as you mentioned, as we mentioned as well early on. So I think that during the second half of this year, we should be ahead/quite a bit.

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.