Greetings, and welcome to the Ecolab Fourth Quarter 2021 Earnings Release Conference Call. [Operator Instructions] 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 Christoph 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 in 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 high 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 time and in any condition to ensure food, power, water and healthcare supply are protected while we also keep enhancing our margins for the long run.

We now enter 2022 with confidence and well aware that the environment might change, but we will keep doing our very best to stay ahead. We 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 1 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 the resources better to life 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 leading 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?.

[Operator Instructions] Our first question today is from the line of Tim Mulrooney with William Blair..

Yes. I just have two, not surprisingly on raw materials. So the first 1 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 10% of the 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 1/4 of our sales roughly, our pricing plan is well aligned with that and should allow us during the first half to get the heads of the dollars that 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 level as such. 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..

Our next question is from the line of Manav Patnaik, Barclays..

Christophe, I was just hoping -- just thinking a little bit more towards the longer-term growth trajectory like ex reopening. The whole hygiene and sanitization theme, which is supposed to be elevated, and that's why you have the Ecolab Science Certified.

Maybe could you give us some numbers around what that looked like in 2021? And will it be elevated pre-pandemic now or how do you guys think about 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 the double-digit increase versus 2019.

And I think it's going to remain at that elevated level for the foreseeable future and especially with our Ecolab Science Certified program, which is going really, really well. Customers will use higher level of hygiene going forward, especially because their guests and customers are expecting more of it as well.

Some of the ease that we've seen in '21 was also related to the fact that our restaurants and hotel had limited staffing as well 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..

Got it. Appreciate that. And you guys have obviously done a relatively good job here in managing all the cost inflation. I suspect a lot of your competitors might be struggling more.

And my question is more, does that -- does that mean you have a greater potential M&A pipeline that you could be executing on or are you not looking at it 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..

Our next question is from the line of Chris Parkinson with Mizuho..

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 1 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 period, well, 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. So the question on market share is always a good one, different by business. But if you think about it's a growing 10% in the fourth quarter, that's faster than the general economic environment. So just macro, it's indicating that we're gaining shares in average.

But if you take institutional, for instance, and taking the big example of restaurants in the U.S, in Q4, our business was 9% down or 91% of 2019, when the traffic in dining rooms, which is the most important for us was down 33% versus 2019. So that's obviously showing so how much market share we've gained.

In Industrial, the 7%, 8% growth that we have -- well, it's a combination of very different businesses, where you have paper, 15-plus percent that’s definitely a place where we gain a lot of share, you take data centers as well where we're growing extremely fast as well with the objective to be really the best player in that market as well long term.

Life Sciences especially as well, so with Purolite where we're growing faster than most of our competitors out there, always difficult to compare.

So you look at it macro, Chris, with the 10% faster than general economic growth that leads to good share increases and examples like the 1 I just mentioned, are good indications as well that our position is improving over time..

Next question come from the line of John McNulty with BMO Capital Markets..

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, John. So we look at it in both ways. First, how do we help our customers who do not only have wage inflation issue, but I have a hard time to find people, as we know, so in restaurants and in hotels. So less people more expensive.

So our solutions that are automating a lot of the cleaning work, sanitation work that they need to do is helping, obviously, customers, and that's 1 of the reasons why we're growing nicely in those markets. Now back to our own wages. The way I look at it is in a reasonable way. So for '22, we're trying to stay competitive with the rest of the market.

Our retention of our talent in the company has been very strong over the last 2 years when many have been struggling as well. That's indicating that we're doing more right than not in terms of how we're managing as well wages.

And last but not least, we always make sure that we focus on our key talent and those ones we support the very specifically and making sure that they stay happy and stay longer in our company. And the last point, just to get back to your question is what -- on productivity.

The whole digital work that we've done over the last many years is really paying off. You see it in our SG&A improvement that's improving year in and year out, that's going to help mitigate as well the wage inflation that we will face as well. But net-net, a good story..

Got it. Got it. No, that's helpful. And then maybe just from -- a little bit more color on the raw material side. It sounds like you think raw materials and freight are going to come off in the back half of the year.

I guess can you give us a little bit more granularity or quantify how much you think it -- or how much of a decline you kind of modeled in when you're looking for these low teens EPS growth for 2022?..

The best way to look at it is basically that the first half should be very similar to what we 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 to a high base, obviously. So it's not going positive in terms of dollars. It's just that 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 cost 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. And as mentioned on early answer with Tim, it's expecting -- so kind of 10% we had last year rose and freight cost inflation, and we expect to go up to 15% for the full year in '22. So that's the way we assume it right now..

Our next question is from the line of Vincent Andrews with Morgan Stanley..

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, 3 quarter 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 drivers of our cost inflation as everybody knows out there. This is not specific to us as well. So that's the new 1 that we need to deal with.

The very good news on this 1 is, on 1 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, so 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 kind of 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..

Our next question is from the line of John Roberts with UBS..

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, so 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 the welcome people are safe and healthy..

The next question is from the line of Ashish Sabadra with RBC..

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?.

Well, I'm a bit passionate about water I've been leading the business for quite a while, Ashish. So this is something that I believe we are uniquely positioned here to keep growing for 2 reasons, on 1 hand -- well, 3 reasons.

On 1 hand, water scarcity becomes a bigger issue because we're not going to get more water on earth, but we're going to use more water as well going forward. So that's the first point.

Second, you have always more companies committing to net-zero carbon and water by 2050, getting half there, so by 2030 or whatever the commitment that they have, not only because it's good for water, but if you save water, you save energy as well at the same time.

And always more companies are realizing that they can get -- well, both benefits, getting less issues from a water perspective and reducing the carbon footprint same time. So the only 1 who can really help companies get to the net-zero, which is kind of a new trend, which is great for us.

And the last point I'd mention that well, we're probably the only company that can do it at a very high margin as well at the same time because we bring so much science expertise and digital technology as well in there.

So bringing all 3 together, water scarcity, need for net-zero and the fact that we can do it at high margin makes me really bullish about that business going forward..

That's very helpful color. And maybe if I can just ask a quick follow-up on the commercial pest elimination business. Again, a small business, but has been a strong growth engine for you.

And with 1 -- particularly 1 of the large players in commercial pest control getting acquired, how do you think about the competitive environment changing going forward? And separately, would you also consider potential M&As to expand your position in the 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 with 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 pest.

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 issue, 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, well 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 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..

Next question is from the line of Laurence Alexander with Jefferies..

I guess 2 questions about sort of lag effects.

The first is with all the volatility that you -- that we've seen in the last couple of years and how Ecolab has improved their portfolio, should your pace of share gains pick up over the next couple of years as customers recalibrate and sort of are able to -- in a more stable environment, sort of reassess kind of your relative position versus peers? And secondly, from the sales of it, if you factor in the water and the productivity and the digitalization and some of the other initiatives you've mentioned, should your top line growth be faster than in the last say, 10, 15-year period? And can the pace of productivity gains improve compared to the last decade or so?.

Great question. So I see 3 big questions, all related obviously, here. So I'll try to be as extent 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 1 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 dividend 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 dividend 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, in field technology, in remote monitoring for our customers, in AI, all that is, not only pay dividend right now as you can see as well over the past few years our SG&A productivity has improved, but I believe it's going to improve even better in the future as well.

When you bring all 3 together, I think it should lead to a performance that's ahead of what we've seen pre-COVID..

Next question is from the line of Scott Schneeberger with Oppenheimer..

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?.

Scott, thanks for the question. Yes, it certainly was lower. And as you know, of our historical range, we've been around 6% of sales on CapEx. And during -- as sales have been lower relative to '19, there's a big portion of our CapEx that's in merchandising equipment with customers.

So as the customer rebounds come back, expect that CapEx to be similar to those historical trends around 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 we're leveraging 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, so 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 2 big programs and we have programs going on all the time with the 2 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..

Our next question comes from the line of Steve Byrne with Bank of America..

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 2 months in. So we're really at the beginning. Our first objective was really to do no harm and making sure that they can keep growing as they have in the past, and they'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 2 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 noncash item as well as such. So we're looking at what other companies are also doing in Life Science arena, and it's usually handled definitely 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..

Our next question comes from the line of Andrew Wittmann with Baird..

Great. I guess I just wanted to start out with a, I guess, a 2-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, is 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, rolls and freight inflation are not dealt with exactly the same way, but 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 ‘22.

Am I thinking about that the right way, Scott? Or are there other things that I should be considering in that?.

Yes. As you talk about the big buckets, there will be ongoing special charges with Purolite next year, but we did have the big impact from the purchase accounting including the inventory step up in 2021. As it relates to 2022, as you think about -- as you mentioned COVID, the COVID really had a couple of big buckets in it.

And it was pay protection that was a large piece of that. We also had the inventory reserve that we disclosed. And the pay protection, can't predict how COVID's going to react, but expect that variable pay protection to be less in 2022. We also had some medical costs in testings.

There will be a little bit of a tail on that I expect, but given our pace of COVID, we expect that to be less in 2022 than it was in 2021..

Our next question comes from the line of use Rosemarie Morbelli with Gabelli..

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 2 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 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 mask and not a lot of people are going to a hotel.

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 well than we had pre-COVID. They're buying a similar number of solutions as well. We have a lot of new business as well that we've acquired.

They've been extremely good 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, while 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 0, 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 works 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 -- I mean, reasonably speaking, 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 the 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..

Next question is from the line of Jeff Zekauskas with JPMorgan..

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, what 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 2 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 distortion 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. So 2 questions, obviously. So I'll leave it up to Scott for the interest piece, a very different question, obviously. In Institutional, keep in mind, Jeff, that we've kept our team intentionally. And thank God, we did that.

So when you look at restaurants and hotels today where you need to do your own housekeeping and do your bed yourself because they don't have labor to do it, we would be in a dramatic place today if we didn't keep our team in 2020 when COVID started. So that was totally conscious.

We said we're going to maintain the whole team, even though the business went down so quite a bit during COVID. That has a direct impact on our income in that business. So as the business gets back to the 2019 level, which we expect to happen. So this year in '22, well, over time, you're going to get to the same margins than we had before.

And on top of it, you get productivity gains as well that are going to improve it. So I feel really good about the trajectory that we have in Institutional. So with that, maybe, Scott, if you can comment --.

Jeff, answering your question on the interest expense. So adjusted interest expense was just north of $180 million in 2021. And as you recall, the -- 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..

The next question is from the line of Kevin McCarthy with Vertical Research Partners..

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. Thank God, we don't have big issues internally. We've had our share, but we've managed it really well. You've probably heard that we have -- over 95% of our team has been vaccinated as well in the U.S. So it's over 18,000 people that are projected, that has helped us dramatically as well to keep our team operating during that time.

So we were in a reasonably good place internally that's been a bit different for our customers as we know. Distribution centers had a hard time as well to unload the trucks. You have retail stores that can't do the cleaning as they're supposed to be doing it.

The same in hotels as well because they're having such a hard time to find the right talent as well to do it. So it's having an impact in logistics, and it's having an impact in demand because our customers don't have the people to do the work as well. But it's improving every month. So over time, it's going to improve.

But I think it's going to take probably the whole '22 until our customers are in a more stable place..

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?.

Well, you've given a few answers as well at the same time. But I'd say -- so first, when you say the 5% in Q1, so it's going to happen during Q1, as you know, so pricing is happening exactly. So as quarters evolve as well. So we crossed the 4% in Q4. We will cross the 5% in Q1.

When exactly? I don't know, so we'll see what it nets out for the first quarter as an individual quarter. But for the full year, we feel reasonably confident that the 5% to 6%, we will deliver it. And that feels like the right amount of pricing in order to get our margins back to where they should be.

And to your point, if inflation happens differently than what we've assumed, as I described it in my opening remarks, well, we will adjust as we did, as well over the past few months. But what's absolutely critical, the way we think about pricing is that we want to keep pricing for the long term.

We're not a cyclical company and have no ambition to become a cyclical company, which means that when we get pricing from customers, it's based on the value that we create for them on the long run. And when inflation moves behind us, well, it sticks as well. And that has an impact on the speed at which we can get pricing.

If we were a chemical company, pure play, well, we would go much faster, but we would have to give it back at some point. This is not what we do. So we go slower, it's having a lower impact on margin for a while. But ultimately, it's paying off big dividend on our margins. And the last point I'll make is raws and freight for us is 25% of our sales.

So the inflation that you get, the 10% I talked about for '21, well it's on 25% of our sales. So when you compare the 10% on the 25% to the pricing of 5% to 6%, you get to a reasonably good place..

Next question is from Mike Harrison with Seaport Research Partners..

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?.

Well, we do. As you know, Mike, at the same time, so it's not just about product for us, it's about programs. So where you put all the products together. But to name one in Institutional, especially driven by COVID, so we brought in the market over the last 12 months a whole range of products that are killing COVID within 15 seconds.

It was a remarkable achievement, especially when customers do not have the labor force as we discussed before. So to do the work, well, if it can clean effectively, very quickly, this is not only good for guests, but it's good for customers as well at the same time. So this whole program is very interesting, and you'll see it at the NRA.

At the same time, I've mention as well the Ecolab Science Certified, which brings all the programs together in order to make sure that your guests are protected. And that's -- it's a good story in terms of how many units we're getting, but you need to keep in mind that in order to be certified, you need to use all the products as well of the company.

Well, that's driving sales as well at the same time, which is good. And if I fast forward in Industrial, a major new program is really the so-called Net Zero water program where customers are looking to deliver on their commitments of getting zero water or net zero water usage over time, whatever the commitment is.

And we're uniquely positioned with our Net Zero program to help them deliver that. So you won't see that at the NRA. But that's going to be an interesting one. And at the NRA, you're going to as well more in Purolite, which is ahead of an innovation as well, and we will cover that more when we get 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?.

Yes. The Specialty growth in '21 was mostly impacted by very high comparisons in 2020 because during COVID, well, since restaurants and hotels were closed, people were going to retailers and to a certain extent for the takeout or drive-through from QSR.

So that's driven high growth during COVID and when COVID evolved, I'm not saying going away, unfortunately, was suddenly when you compare to a very high comparison. But generally, underlying, those are 2 very strong businesses that are going to keep doing well going forward as well. And QSR has been growing 8% in the fourth quarter, just to name one..

Our next question is from the line of Kevin McVeigh with Crédit Suisse..

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 go through the second other element, its water.

And we're working with the super majors 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 to 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..

Mr. Monahan, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments..

Thanks, Rob. That wraps up our fourth quarter conference call. This conference call and the associated discussion and slides will be available for replay on our website. Thank you for your time and participation today, and best wishes for the rest of the day..

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day..