Operator:

Greetings. Welcome to the Ecolab Second Quarter 2024 Earnings Release Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce your host, Andy Hedberg, Vice President Investor Relations. Thank you Mr., Hedberg, you may now begin.

Christophe Beck:

Thank you, Andy, and welcome to everyone on the call. I'm happy to share my perspective before we jump into Q&A. But in summary, with 35% adjusted earnings growth in Q2 and 25% to 29% earnings growth expected for the full year, I feel very good about where we are and even more where we going. Ecolab’s very strong business momentum continued in the second quarter. Our team delivered for our customers and delivered for our shareholders. Organic sales growth remained in its previously forecast 4% to 5% range, as growth in our institutions and specialty segment, normalized to a strong 7%, lapping last year's very strong 13%. Performance across the rest of our segments further improved. Our growth continues to be leveraged by exceptional organic operating income margin expansion. Margin increased by 360 basis points to 17%, which is a record second quarter margin for Ecolab, resulting in the very strong 35% growth in adjusted earnings per share. With continued top line momentum and operating margins expanding towards our 20% target. We remain firmly on our long-term 12 to 15 earnings growth trajectory. Looking at our segments, Institutional and Specialty continued to perform exceptionally well, delivering strong organic sales growth on top of last year's double-digit gains. Importantly, our business continues to significantly outperform softer restaurant food traffic trends, as our customers look to Ecolab's labor savings technologies to improve their operational performance. This growth was leveraged by continued robust operating income margin expansion with Institutional Specialties margin already exceeding 20%. Growth in our Industrial segment improved, despite continued volatile end market demand. Water sales growth accelerated to 4%, led by strong growth in downstream and double-digit growth in our global high tech business, which serves the rapidly expanding data center and microelectronic industries. As expected, sales in food and beverage were stable as good new business wins offset comparisons to last year's double-digit growth. Performance in paper improved also, a trend we can – we expect to continue, as new business wins helped us accelerate those end markets stabilized. Our Healthcare & Life Sciences segment also showed better performance. Life Sciences growth improved to 4%, as attractive share gains allowed us to outperform ongoing short-term soft industry trends. We continue to expect modest growth in our Life Sciences business during the second half of the year. Healthcare sales were down modestly, as we continue to exceed low margin business to improve our profitability. Our healthcare transformation is progressing very well. At a previously announced sale of our Global Surgical Solutions business to Medline is moving exactly as expected, subject to customary regulatory and closing conditions, we expect to close this transaction and very soon. As discussed when we announced the sale last quarter, once closed, the transaction will reduce our Healthcare & Life Sciences quarterly sales by about $100 million in quarterly operating income by about $15 million. Longer term, healthcare continues to sharpen its focus on and it's very healthy anchor instrument reprocessing business that combines consumables, personal service and digital solutions, while in other words, but typically Ecolab business, whether it is much more to be done, I'm proud of the progress we've made to create a sustainable, profitable healthcare business that will deliver even stronger value of our important hospital customers. Pest Elimination once again continued to execute exceptionally well. Organic sales grew 9% and organic operating income grew double digit, benefiting from our enterprise cross-selling strategy and innovative digital capabilities. As we continue our long-term growth journey, I'm excited to share details of our One Ecolab initiative, which will help fuel 5% to 7% long-term organic sales growth and continued to expand our operating margins towards 20% and beyond. We know what best-in-class performance looks like, the best restaurants, the best hotels for the best data centers. And we know how to deliver this by our customers, because of our experience serving millions of locations in more than 170 countries, across 40 industries. By leveraging more than 100,000 system connections and billions of proprietary data points on business outcomes, operational performance, and environmental impact, we can demonstrate how an entire network of customer sites can operate a best-in-class performance to deliver even more customer value. This will help us drive attractive growth by continuing to capture more share of our existing $55 billion cross-sell opportunity. At the same time, these new technologies will allow us to enhance the way we operate and serve our customers by realigning the function and worked on across hundreds of offices around the world into major global centers of excellence. The resulting total annualized savings of approximately $140 million are expected to be realized by 2027. Put simply One Ecolab will enable customers to reach best-in-class performance on all three fronts, business outcomes, operational performance and environmental impact by leveraging Ecolab's complete offering. Looking to the balance of 2024, the confidence we have in our performance continues to strengthen. As a result, we're increasing our outlook for full year 2024 adjusted EPS to the range of $6.50 to $6.70, up 25% to 29% versus last year. As previously discussed, this range includes an unfavorable impact in the second half of 2024 from sale of our global Surgical Solutions business. The unfavorable impact to 2024 adjusted EPS is now estimated to be $0.08 a share, which is a bit more than we had previously anticipated as we expect this transaction to close very soon. This is very good news, but it also has a bigger impact on the full year. FX on the other hand has also become more of a headwind and is now anticipated to be about $0.09 drag to full year EPS, and despite its incremental headwind to EPS, we still have increased our guidance range, which demonstrates the strong underlying momentum we have in the business. We expect to keep growing our organic sales at a similar rate as in the first half of the year, driving 2% to 3% value pricing and 1% to 2% volume growth. Attractive operating income margin expansion is expected to continue to second half 2024. The rate of exceptional expansion will moderate as benefits from lowered delivered product cost we continue to ease. Finally, we continue to anticipate quarterly adjusted diluted earnings per share growth to progressively normalize towards Ecolab's long-term 12% to 15% target as solid growth continues and impact from delivered product costs expected to normalize exiting 2024. As always, will remain good stewards of capital by continuing to invest in the business, increasing our dividend and returning cash to shareholders with great business momentum and cash flows. Our balance sheet is in a very strong position. This provides us with many options to allocate capital to growth opportunities that will generate continued strong returns for shareholders. Ecolab future has never looked brighter. Our leading customer value proposition where our technologies help customers improve the operating performance while reducing their water and energy use is increasingly relevant and continues to fuel our growth, pricing and margin expansion. We therefore, remain confident in delivering superior performance for our customers and shareholders in 2024 and beyond. So thank you for your continued support and investment in Ecolab. I look forward to your questions. Andy?

Operator:

Yes. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question is from the line of Tim Mulrooney with William Blair. Please proceed with your questions.

Christophe Beck:

Good afternoon, Tim.

Christophe Beck:

Thanks for the question. Tim, very pleased with the Institutional and Specialty segment. They're performing exceptionally well. As you've seen, as you know, so they're lapping against the 13% top line growth in Q2 of 2023. So the 7% for this year is really strong, especially in a market where food traffic is down 4%. So quite a remarkable performance. The margin that we had in Q2 were very clean for that segment. And as you know, it's a little bit seasonal, so by quarter, but generally, margins are going to remain north of 20%. And as we've said, for the full year, we should reach the 22% targeted OI margin for 2024 as segment keeps improving as well from there. So good top line, huge interest from customers, very clean. And from a margin perspective, so very strong, and it's going to keep improving as well in the next few quarters and years. So, very pleased with what IMS is doing. Innovation is also adding a lot as well as to the firepower of that business. As you know, our customers are trying to find solution to manage labor shortages, wage growth as well that they have. They need more automation, they need more systems, they need more digital technology. This is exactly what we're providing our customers. So, all-in-all, as I've shared with you many times before the pandemic, for me, institutional was kind of a steady good business for the future of Ecolab. Now, a few years later, I'm extremely bullish about that business because we're uniquely positioned to gain a lot of share at very high margin.

Ashish Sabadra:

Thanks taking my question. I just wanted to focus on the raw price dynamic. How should we think about the raw material tailwinds going into the back half of the year. And we've continued to see pretty robust gross margin expansion. How should we think about the SG&A operating leverage going forward? Thanks.

Scott Kirkland:

Yes, Ashish, thanks for the question. Just -- answering your first question, as we think about the DPC, as Christophe talked upfront, we saw the favorability in Q2, high single-digits. We're expecting that favorability to taper as we go into Q3, sort of, call it, low to mid-single-digits. And then by Q4, raws to get really stabilized as we think about them and going into next year, frankly, we're seeing a world where raws get back to sort of normal inflationary levels next year. Certainly, given the amount of raws, the thousands of raw materials that we buy, they move around differently in some cases, like caustic, you've seen favorability. But in other commodities, you're seeing them go the other direction, oil-based commodities in particular. And then as we think about the SG&A leverage, which your two-part question is -- as we talked about last quarter, we are making really smart growth-oriented investments, which is really driving the lion's share of the increase second quarter, the 6% year-over-year. And those investments are in frontline firepower, technology, digital technology, which is all helping long-term productivity. And we feel very good about that underlying productivity. So, in long-term, expect to get at least those historical levels of productivity going forward.

Ronan Kennedy:

Hi, good afternoon. This is Ronan Kennedy on for Manav. Thank you for taking my question. With the One Ecolab initiative, I understand the long-term guidance framework unveiled at September 23 Investor Day. I understand that contemplated SG&A productivity in addition to GM recovery. But to what extent did you consider this One Ecolab initiative and related benefits? Was it fully considered or is it incremental? And what impact -- what's the impact on the targets, the trajectory, the timeline for realization, if any?

Operator:

Our next question comes from the line of John Roberts of Mizuho Securities. Please proceed with your question.

Christophe Beck :

So, John, I'll let it to Scott to reply to that question. But generally, we've been so over the years, always evolving way we work, especially with all the technology capabilities that we have. So most of the investments share from all the technology to newer technology to that new way of working, which ultimately is going to help us grow faster and drive productivity, but bottom line, the good thing is that our team will keep strengthening as well in the meantime. So there will be no net negative for anyone in the organization. Is that Scott?

Operator:

Our next question comes from the line of Joshua Spector with UBS. Please proceed with your question.

Christophe Beck:

Thank you. I'll let Scott start and I'll build on that.

Christophe Beck:

Yes, I feel really good about the second half here, when you think about it, so 35% earnings growth in Q2, 14% to 20% expected in Q3, 12% to 18% for Q4 with the midpoint of 15%, as Scott said. So with no DPC help as well at that point, including as well the impact of the surgical sale and FX as well, while demonstrates the strong business momentum and margin upwards momentum that we have as well here. So very consistent, very steady, feel really good about where we're going here.

Chris Parkinson:

Great. Thank you so much. Chris, I'd like to dig in a little bit more on Institutional and Specialty, just given kind of all the macro dynamics and your relative outperformance. But can you break down, everything that's going on in quick service, including some of these perceived value ores and obviously the mechanics of food retail and then lodging in the institutional side of it, what's been driving the degree of material outperformance. And when we think about the second half into 2025, does your team see actually any further improvements there, or is it going to be primarily market share gains that's going to drive the narrative for the foreseeable future? Thank you.

Operator:

The next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your question.

Christophe Beck:

Thank you, John. Generally, I like the progression that industrial is having. So, if you take a little bit the broader picture, the last figures, industrial has done unbelievable work in terms of margin improvement. We've reached a record level as well. And the shift to offense a year ago that we started is starting to bear fruits as well in terms of top line momentum, which is exactly where we wanted to be, getting top line moving while keep improving as well the margins, and that's exactly what's happening. So, we've moved overall segments from 1% growth in the first quarter to 2% in the second quarter. Within that as well, our largest business, which is water is at 4%, which, by the way, has been impacted as well by mining. So, underlying water would be even stronger in the downstream is really strong in water as well. Global high-tech is doing extremely well as well at the same time. So, industrial shifting very nicely. When I think about F&B and paper, they're going to keep improving in the quarters to come. So, bottom-line, you will see industrial shift even further up with very strong margin of 16% today, which is 200 basis points better than where we were in 2019. So, I think that we've really managed that very, very well and the best is yet to come.

Jeff Zekauskas:

Thanks very much. In the first quarter, our year-over-year volume growth was 2%. In this quarter, your year-over-year volume growth is 1%. Is the reason for the deceleration, a deceleration in volume growth in the institutional business because of tougher comparisons? And secondly, do you have a target for your global industrial business. I know you want to get to a 20% margin, and that's the business that's maybe at, I don't know, 16.5%, something like that. Do you have a goal for that business?

Operator:

Our next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Christophe Beck:

So David, thank you. It's going to be progressive. There is no revolution that's to be expected here. A lot of ground work has been done over the past few quarters as well as we now also get into execution mode. All the investments are planned in our numbers as we will share. So no surprise to be expected. So from that initiative, it's really an initiative that's helping us get towards this 5% to 7% as quickly we can. And I feel really good because we know that the €55 billion cross-sell opportunity that we have out there. And again, as mentioned before, out of the top 35 customers, we have $3 billion is available there. Well, this easier top line that we can get at a higher margin because obviously, we're serving those customers already. So the cost to serve is much lower. So when you bring it all together, it's very it's very organic, natural. There's no revolution. It's what customers have been asking for years as well. What our teams are expecting as well that when they go and serve a customer while they get the full picture of what we're doing for that customer today. At the same time, they understand what could be the best-in-class performance, how much additional value they could generate, what are the programs that they could sell to them as well and then developing an execution plan for the customer to get there and ultimately to get paid for it through the value pricing that we've been developing over the past few years. So bottom line, very organic, no incremental cost that we haven't included in our numbers as well in here. So I feel really good about where we're going with One Ecolab here.

Pavel Molchanov:

Thanks for taking the question. We haven't seen any M&A of late, even on a kind of bite-sized or tuck-in scale. I'm curious how you're currently evaluating the acquisition pipeline?

Operator:

Thank you. Our next question is from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Christophe Beck:

Not really. We, obviously, look at our portfolio on a regular basis. And really, you think the way on who would be the best owner for that business. That's been true for a very, very long time. And the surgical business was an obvious candidate, because it is a product business, it's not service business where we can apply the Ecolab model, where you have service, technology, chemistry and data that come together. Surgical was purely drapes, great drapes, obviously, but those are products. That's a business that fits very well in a Medline portfolio, much less in our own company. So that's one of the reasons why we've sold this business. At the same time, we want to make sure that our healthcare business can build from a smaller scale, a much healthier business for the future and really focused on instrument processing, which is a typical Ecolab business. Beyond that, there's no obvious business out there that that doesn't fit the portfolio doesn't have the right performance. I like a lot the broad-based nature of the performance of the business across businesses and across markets. So, in short, no obvious candidate out there to do something similar.

Shlomo Rosenbaum:

Hi, thank you. I just wanted to ask Scott to maybe dig a little bit deeper just on that volume question that was brought up before. I understand the mathematical implications of institutional growth slowing, but -- because of the comps, how should we think of that in the second half of the year? If you look at it, you -- on a total company volume, you grew 1% on a negative 1% last quarter. If you had 0% or flat volume in 3Q, does it make it tougher in order to generate the volume growth for the second half of the year? So, just trying to get to how we should think of the volume growth going forward? And then if you don't mind, I just want to ask a housekeeping question, we saw a spike up sequentially in interest expense about $7 million, but the debt level was relatively the same. I don't know if there were some inter-quarter borrowing or is there something else that's included in that line? If you could just clarify that, so we can straighten that out for our model?

Christophe Beck:

And maybe building on that, my commitments to you has been so to get to this 5% to 7% as quickly as we can. 4% to 5% this year, as I've said, not every quarter is going to be created equal, mostly because of year-on-year comparison. So, 4% to 5% this year towards 5% to 7% doesn't seem to be like something crazy especially with the momentum that we're showing, and industrial also getting better, as mentioned, past remaining very strong. Institutional being in a very strong position as well. And when I see all the investments that we're making as well out of the margins improvements that we have with more feet on the street, with more capacities in growth businesses like global high tech, with more capabilities in digital and innovation around the world as well, I feel good with the trajectory that we're having moving from this 4% to 5% to 5% to 7% is going to happen so very naturally.

Steve Byrne:

Yes. Thank you. I'd like to hear your view on two potentially meaningful longer-term opportunities in water. The first one being this initiative you talked about last year where you're going to be going after these -- I don't know, what is 150 companies that consume 20% of global freshwater, is that an initiative that still has a meaningful potential for you. And then the other one is with PFAS being classified as hazardous, that means every company that manages or uses it, will have to report it in 2025 under TRI, is that an initiative you are following?

Operator:

Our next question is from the line of Kevin McCarthy with Vertical Research. Please proceed with your question.

Christophe Beck:

Thank you, Kevin. It was in September or October last year that I said we will get there, so within a few years. And for sure, less than five. Well, we're almost a year later. So it's kind of the same and a year closure. To that, if anything, I feel more confident that we're going to get there. We're going to get there in time. There is no direct correlation between the One Ecolab savings and that margin, as Scott was saying before, we're talking about smaller numbers. This $140 million in the grand scheme of things. One Ecolab is mostly a growth initiative which will help, obviously, on the SG&A, but most importantly, will drive the margin, gross margin even higher, which will lead us to an OI improvement. So I stick to where we were within the next few years, and we see the PCs coming very well together. Gross margin is already close to 44%, which was the high watermark. For our company, we keep improving from there. Our SG&A is 200 basis points below where it was pre-pandemic as well in 2019 and will keep accelerating as well. Well, you bring all three together nice top line acceleration, gross margin further improvements and productivity improvements as well will mathematically lead to the 20% fairly soon.

Patrick Cunningham:

Hi. Thanks for taking my question. On the Pest Elimination business, the sales growth continues to be very strong, but the margin expansion is a bit more muted than the other segments. How should we think about the cadence of growth investments into that business and the timing on when we start to see some meaningful sales leverage and just a follow-up there is, what sort of long-term margin target do you have for that business?

Operator:

Our next question is from the line of Andy Wittmann with Robert W. Baird. Please proceed with your question.

Christophe Beck:

So the main difference, Andy, is that the prior ones where by individual business. It was to really improve the delivery and the performance of Institutional. From a growth perspective, you've seen the results. That's why it's working so well today. It's the only reason. Obviously, we talked about innovation as well here, but the way we've organized ourselves, the way we've leveraged technology, well has been leading to these great performance that we have in Institution and Specialty today. You look at Europe, it was also technology, but it was much more back-office technology. It was much more ERP, Andy. And when you look today, well, Europe came from 0% margin to 13%, 14% today. So a very solid good business that we have there. 1 Ecolab is connecting all the businesses together in order so for our customers to see 1 Ecolab and for us to help them understand by leveraging all Ecolab can do, what's the value, what’s the savings that me as a customer can expect if all my units were at the best performance level of all my locations, how much would that be? It's a different dimension because this one, Andy, is connecting businesses together the previous ones whereby individual businesses that all led to very good returns at the same time.

Mike Harrison:

Hi, good afternoon. You noted the high-tech business within the Water segment is growing double-digits. Christophe, is there any way to be a little bit more specific? Is that a teens growth rate or more like 20% or 30% or even higher? And can you talk about the penetration rate with data centers? Or any other context around the opportunity that you're seeing around data centers over the next few years for your Water business? Thank you.

Operator:

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

A – Christophe Beck:

It's an interesting question, Vincent. There is one that I could share with you. When I think about F&B, as we speak, so we are bringing our food and beverage, cleaning sanitation business together with our water F&B business. And don't get me wrong. It's not that suddenly we'll have at the frontline people doing both water and cleaning and sanitation. They go hand in hand, but they are complementary, like you would be in a hospital, you have several physicians that are serving you as a patient. We believe in expertise. We don't believe in generalist. But that business, which will include our cleaning and sanitation and water together, well, is one of our biggest business, one of our best franchisees as well in the world. And I believe that's going to drive a lot of further value for our customers and for us and our shareholders, obviously here. But you can think as well about institutional. When you are a restaurant chain, so with thousands of restaurants in the country or around the world, knowing what's potential of performance improvement in dollar terms that I can get if all my restaurants were performing at the best performing one. Well, that's huge insight. What's even more important. So with us is that we can deliver that performance because we've delivered it for the best-performing unit as well at the same time. And the fact that we shared then afterwards the upside for the customer what that drives mostly value price, which is not the least price, which is mostly seen in other businesses. I mean, in other companies. For us, value price, and that's why we call it that way. It's our share in the improvement that we are delivering to our customers, which is why it never goes down by the way and we keep going up as we move forward as well at the same time. So, a very good story for all businesses. Food and beverage is an obvious one and institutional another one as well. So ultimately, this is bringing our strategy of circle the customer, circle the globe in ways that are much more hard wired than the way we did it in the past where we can share the knowledge of Ecolab anywhere around the world across all businesses and industries. Well, that's a critical reason why I believe that in the quarters and years to come, we will keep delivering day in and day out and get towards our targeted performance of the 5% to 7% or 20% OI margin and 12% to 15% 0earnings per share growth as our next step of performance. And again, that's not going to be the last step. This is our next level of performance that we're all working hard to deliver as quickly as we can.

Andy Hedberg:

Thank you. That wraps up our second quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thanks for your time and participation, hope everyone has a great rest of your day.

Operator:

Greetings, and welcome to the Ecolab First Quarter 2024 Earnings Release Conference Call. [Operator Instructions] As a reminder this conference is being recorded. At this time it's now my pleasure to introduce your host, Andy Hedberg, Vice President and Investor Relations for Ecolab. Mr. Hedberg, you may now begin your presentation.

Christophe Beck:

Thank you so much, Andy, and welcome to everyone on the call. We're really pleased to report that Ecolab is off to a strong start. In 2024 with first quarter organic sales growth of 5% and organic operating income margin expansion of 400 basis points, driving adjusted earnings per share up 52%. We remain firmly on our long-term 12% to 15% earnings growth trajectory with our exceptional growth in the first quarter being the result of strong execution on fundamentals and the additional benefit of lower delivered product costs.

Operator:

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

Operator:

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

Christophe Beck:

Thank you, Ashish. I'll pass that question to Scott, who will be best positioned to answer.

Operator:

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

Christophe Beck:

Thank you, Manav, good to hear you. A few things here. So maybe starting with the macro. I would say, kind of unchanged. There's a lot of puts and takes, obviously, in all the 40 end markets that we serve. But -- what we've seen in '23 is what we're seeing in '24 overall. So feel good about the general macro, at least with everything we know now.

Operator:

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

Christophe Beck:

Not much. There were 4 points on my plan, John, and I shared with you, you saw each step that we made when I could, obviously, so do so. The first 1 was to really adjust the cost structure. We did that. The second was to create that bifurcation for infection prevention and surgical, which happened very well in the latter part of last year and now so the pending sale of our Surgical Solutions business to Medline, that step 3.

Joshua Spector:

I wanted to ask a couple of related things around institutional and specialty. So first, congrats, really strong performance in the quarter. I think we know the optics of pricing coming down. But if we say pricing in the segment was anywhere near the ballpark in the total company, it looks like volumes were up high single digits. And it's a pretty meaningful step-up on year-over-year and multiyear stack.

Christophe Beck:

Thank you, Josh, especially for nice comments. So the team has done an unbelievable work in the last quarter, like in the many prior to that as well. So back to your question on institutional and specialty. This business has been now for quite a while on a great path. As I've shared with you, very openly, the pandemic has been game changing for this business, and I mean that in a very positive way.

Christopher Parkinson:

On the global Pest Elimination business, you're offering a little bit more detail, and we've been hearing about the business for a while. But can you just offer a little bit more color on how you're thinking about that business strategically? Is this simply just, "hey, it's a great institutional service-driven pricing as business?" Is this more of a roll-up, should be emphasizing, I think, the old terminology was enterprise selling across your institutional clients? Just if you could offer a little bit more insights on how we should be modeling that and your thought process that would be very helpful?

John McNulty:

So just wanted a little bit more clarity on the Life Sciences business. I know it's struggled a bit, but it does seem like it's finally starting to pick up a little bit of momentum. Can you flesh that out for us in terms of what you're seeing and maybe how that pipeline is filling out as we kind of look to the back half of this year?

Operator:

Our next question is from the line of David Begleiter with Deutsche Bank.

Christophe Beck:

Maybe so to your first question. So where, as I've shared with many of you, so we look at our businesses in 4 key categories. The fuel the growth, the protect the growth, transform the growth and fix. Those are the 4 big broad categories where we put our businesses and our markets and invest accordingly to make sure that we do a very smart capital allocation based on projected returns.

Operator:

Our next question is from the line of Pavel Molchanov with Raymond James.

Christophe Beck:

Pavel, we've been on that topic for a very long time, but we don't want to be part of the marketing fray or political fray of PFAS, we are by far, the leader in water globally. And we've been in the business of mastering water purity for a very long time, like almost 100 years, as you know. So PFAS purification is one of the many things that we do and can do in water.

Laurence Alexander:

I have a question around sort of your growth investments and the targeted returns. I think Ecolab usually has a metric for almost everything that we can think about. So do you have a sense for what your historical kind of hit rate is for those types of investments? Or -- and I guess what I'm getting at is, as you move more into sort of the data marketing to customers, is the hit rate getting better or worse compared to your expectations for how kind of your investments in staff and training and marketing are playing out?

Operator:

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

Christophe Beck:

I guess that's the end of your question, Jeff.

Christophe Beck:

Very good. I will be too mature. I was not missing something, obviously here. So a lot on volume. You're right. So we're still 2% for the company. That's the way we report it. So that's not a surprise. That's why I'm saying the 1% to 2%. So for the year, I feel really good in getting that, again, that every quarter is created the same. We have some year-on-year comparison, we need to manage with. But the 1% to 2% feel good, and I'm talking '24 year. And individually here, institutional you're right. It's directionally, it's kind of half price, hub volume, doing really well, as I've shared as well, so previously as well in some of the question.

Steve Byrne:

Kind of a follow-up on the pest control business. Do you have an estimate of what fraction of your customers within industrial and institutional are customers within pest control? And what could that fraction get to, is that the primary driver for that business? Or would you say expanding the platform and getting into other products like fumigation and so forth is the growth driver?

Operator:

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

Christophe Beck:

Okay. Thank you. I'm going to pass that question to Scott. But before I get there, so you've heard in my open basically how we look at it. So we're not disclosing too much detailed business information. So underneath what we publish. That's the case, obviously, for a business within health care. So the $15 million headwind per quarter once we close is kind of a good direction, but more to that, Scott.

Operator:

Our next question is from the line of Patrick Cunningham with Citibank.

Christophe Beck:

So 2 questions in here. So on Europe, I like a lot what this business has done. It just takes a big picture, 10 years ago, it's a market where we used to make no money. And today, it's a business that's close to the average of the company today. So has done a remarkable work, has grown very nicely last year, is growing as well in the first quarter in a very difficult environment, and margins have kept expanding, very significantly in Europe as well at the same time.

Operator:

Our next question is from the line of Andy Wittmann with Baird.

Christophe Beck:

Yes. Thank you, Andy. It's been a long journey, and it's going to be a continued long journey. At the end of the day, we call it our one Ecolab growth program. It's to provide our customers with a transparent view of all the businesses that are serving them and all the opportunities that they have, if they were to work even more with them.

Operator:

Next question is from the line of Mike Harrison with Seaport Research.

Christophe Beck:

Mike, 10 years ago, I was not exactly in love with our mining business because it was focused on segments of the past, coal, primary metals, all those things where the world is not exactly going towards to longer term. And we made the conscious decision back then to shift everything towards much less cyclical, much more growth focus and much higher margin as well at the same time. And we've made a total transformation of that business over the last 10 years and what was 80-20 yesterday is closer to 20-80 today, which is why I like where we are and even more where we're going with mining.

Vincent Andrews:

Christophe, if I could go back to the investment spending, I'd love just to get your thought process on how you sort of came up with the amount to spend. And I guess I'm just asking, did you set a bar or hurdle somewhere. Are you trying to achieve a certain outcome either in terms of your near-term earnings or your medium-term volume growth? And I guess, why wasn't the number higher or lower? What things did you say no to versus what things that you absolutely have to do?

Andy Hedberg:

Thank you. That wraps up our first quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation, and hope everyone has a great rest of your day.

Operator:

Greetings, and welcome to the Ecolab Fourth Quarter 2023 Earnings Release Conference Call. This time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. At this time, it is now my pleasure to introduce your host, Andy Hedberg, Vice President of Investor Relations. Thank you, Mr. Hedberg. You may now begin.

Christophe Beck:

Thank you so much, Andy, and welcome to everyone on the call. The very strong performance in the fourth quarter capped off a phenomenal year for our company. With the fourth quarter, organic sales growth of 6% and adjusted earnings per share up 22%. I'm so proud of this team, because this strong performance underscores the collective hard work and dedication of our entire Ecolab team, and reflects our sustained focus over the last few years on driving long-term growth the right way. Despite the unpredictability of macroeconomic conditions, our team drove further value-based pricing while maintaining our strong business momentum. Volumes in the fourth quarter continued to improve with the positive growth, reflecting new business wins that more than offset soft macro demand. Our success is anchored in the value we create for customers by improving their operating performance while also reducing the water and energy consumption. In 2024, our focus remains on continuing to fuel our strong and consistent long-term double-digit earnings per share growth. The highlights for the fourth quarter was the continued and rapid expansion of our gross margin, which increased by 330 basis points and our organic operating income margin, which increased 200 basis points to 16%. This growth was led by a 390 basis point increase in the Institutional & Specialty segment margin, as we continue to quickly narrow the gap to this segment's historical 21% operating income margin. The Institutional & Specialty team continues to execute well, driving further value pricing and volume growth that accelerated to the mid single-digit range, reflecting the strong new business wins. The Industrial segment operating income margin increased 220 basis points with notable expansion in each of our Water, Food & Beverage and Paper businesses. And other segment's operating income margin was up 160 basis points driven by strong Pest Elimination performance once again. As expected the Healthcare and Life Sciences segment operating income margin eased versus last year. Healthcare's profitability continued to improve, which is good, reflecting the benefits of separating our North America operations into two focused businesses as mentioned infection prevention and surgical. Healthcare's income growth was more than offset by comparison to the very strong performance of Life Sciences last year in continued market pressures. Most importantly, operating income dollars for this segment have grown, sequentially throughout 2023 from the actions we have taken to improve performance, and we expect this growth to continue over the course of 2024. From a sales perspective, our Life Sciences business drove slightly positive growth in 2023, despite the market being down double-digits. And while we continue to expect this market to remain soft for the next few quarters, our ongoing investments in new capabilities and new capacity enabling us to gain market share in this very attractive long-term high-growth and high-margin market. Our overall performance highlights the strength of the Ecolab model, as we continue to execute on pricing and driving new business all backed by delivering leading customer value. Additionally, we've seen some benefits from moderately lower delivered product costs. This costs are still up 35% compared to 2019 levels, but declined by mid-single digits relative to last year's fourth quarter a bit more than we had anticipated. We continue to take a prudent stance on the trajectory of delivered product costs. Therefore, our outlook for 2024 assumes that, these costs will remain favorable in the first half of the year, and stable in the second half of the year. Although, we are very pleased with the margin expansion, we have delivered so far. Our focus remains on fully recapturing our historical 44% gross margin to reach our 20% OI margin target. Our value-based pricing model and delivered product costs that are now coming down, a further strengthened our conviction in achieving this target over the next few years. Our underlying productivity also remains strong, as we continue to leverage our leading digital capabilities. As expected SG&A expenses, remained relatively stable compared to the third quarter. And consistent with previous years, we anticipate a few percentage point sequential increase in SG&A dollars in Q1, but expect to drive further improvements in our SG&A ratio as the year progresses. We expect 2024 to be another strong year for Ecolab, building on our long-term 12% to 15% earnings growth trajectory that is amplified by shorter-term benefits from lower delivered product costs. For the year, we expect adjusted earnings per share to grow in the 17% to 25% range, which assumes soft, but stable microeconomic demand and lower delivered product costs in the first half of the year, as global inflation eases. With this, we expect to maintain our business momentum as we drive further pricing, volume growth, and continued robust operating income margin expansion. Looking at the first quarter, the benefit from lower delivered product costs is expected to peak with costs down high single digits in the quarter, resulting in adjusted earnings per share increasing 44% to 56% versus last year. Beyond the first quarter, quarterly adjusted diluted earnings per share growth is expected to progressively normalize towards the upper end of Ecolab's long-term 12% to 15% target, as favorability from lower delivered product costs eases. As always, we will also remain good stewards of capital by continuing to invest in the business, increasing our dividend, and returning cash to shareholders. Most importantly, with the best team science and capabilities in the industry, we will continue to grow our share of the stable and high-quality $152 billion market we serve. I believe Ecolab's long-term parameters are stronger than ever and I'm confident in our outlook for continued strong performance, as we work to deliver superior shareholder returns. So thank you for your continued support and investment in Ecolab. I look forward to your questions.

Operator:

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from Tim Mulrooney with William Blair. Please proceed with your question.

Christophe Beck:

Good afternoon, Tim.

Christophe Beck:

Love that question, Tim. Thank you. Well, two parts of your question obviously here. So let me give you a little bit a picture of the broader company and then specifically to Europe, which had a lot of good stuff to offer as well at the same time. So as the world is slowing or has been slowing over the past few quarters, especially outside the US, especially in Europe, as you mentioned as well. Well, I'm really glad that we shifted to offense as we shared with you a few quarters back because it's really working. As you've seen so in the fourth quarter our volume growth went up one percentage point in Q4. And to your question, if you exclude Europe, our volume growth would be 3% up so quite a bit. So now our job is absolutely to maintain that choosing speed in 2024. As we rebuild margins obviously, the right way, which means in Ecolab speak in a way that benefits customers by reducing the total operating cost. But to your point on Europe, specifically. Yes, it's been a drag on growth in overall company plus 1% excluding Euro plus 3%. Europe has had an exceptional year in 2023. We reached almost 14% operating income margin, which was our objective when we started the whole transformation in Europe. So good evolution in a very difficult market, where we prioritized really making sure we get the right margins, the right businesses, the right customers investing in the right places. So slight volume decline, very good pricing and really focused on the right businesses with the right productivity. So good year in Europe, difficult from a volume perspective but good for the overall company in Q4 and especially so the 3% ex Europe is a very good news for us.

Ashish Sabadra:

Thanks for taking my question. Just as we think about fiscal year 2024, how should we think about the volume growth as well as pricing normalizing in 2024? And congrats on the solid quarter. Thanks.

Operator:

Our next question is from the line of Seth Weber with Wells Fargo. Please proceed with your question.

Christophe Beck:

Yes, a few elements to unpack here. So, the 5% in Q4 was all new pricing realized in 2023, there was no carryover anymore from the previous years. In the fourth quarter, which was a remarkable accomplishment. So, the 5% in an environment with delivered product costs. So, tends to ease, Obviously, the fact that we can still get incremental pricing from our customers because we deliver even more value to them in terms of total operating cost reduction, for me it's a very good sign. And as I've shared with you I don't know exactly where pricing is going to end up on a longer term basis. We used to be one plus pre-inflationary cycle if I may say. And what I've shared with you is to say I'm fairly confident that we will be north of 2% as I called it so the two-plus for the future. We'll see where we end up. I feel good about the two-plus. That's going to be true for 2024, while we keep volume growing as well at the same time. So, let's see where we will end up.

Josh Spector:

Yes, hi. Good afternoon. So, I wanted to ask about the cadence of earnings through the year. So, first congrats on a strong guide for the first quarter. But I guess if you look at the typical run rate, you're up about 30% -- $0.30 in the second order, another $0.30 in the second half. I guess if we run that math through, we're closer to something in $7 in EPS for this year versus your guide in the low $6s. So, just curious if you can kind of run through. Are there things through the year that add to costs or things we should be aware of that would deter you from that path? Or any comments you have around that? Thanks.

Operator:

Our next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your question.

Christophe Beck:

So we haven't said higher. What we said is that we reached a peak mid of last year so 2023 and it kept easing. So, in the third quarter, in the fourth quarter, and will be the case as well in the first quarter of 2024. What we're saying is that it's going to keep easing in the second quarter until the second half where we expect it now to be rather stable versus last year. We know and you know how hard it is to predict, obviously, sort of delivered product cost or inflation, as we've seen this morning as well so was the inflationary print. It was hard to predict when it went up, obviously, how much and how quickly, it's hard to predict how much and how fast it's going to go down. So for now with what we see, with what we know keeping in mind that we buy 10,000 products in our portfolio. So it's very diverse, which is a good thing in a way as well. Some will go up, some will go down. But generally, so it's easing for the first half stable in the second half, and we will see what truly happens. But it's important to keep in mind what Scott just said before, we keep our eyes laser-focused on really driving this 12% to 15% earnings per share growth with everything we can control and really to get as close to the 15% as we can and DPC comes on top of it, which means the bump in the first half and in the second half so to be closer to the upper end of that range. How do we do that? Well, it's the old fashioned way that we've been practicing for a long time now with new business, with value pricing with productivity, and with innovation. That's the way we think about it, and that we hope you will see that way too.

Jeff Zekauskas :

Thanks very much. It's a two-part question. Have volumes in the institutional business accelerated? And if so why? Or is it just that the comparisons are easier year-over-year in the fourth quarter than they were in the third? And secondly in terms of pricing, how will your price initiatives work? Are you already raising prices in the first quarter here at the beginning of the year? Or will they come later? Will they sort of make their way smoothly quarter-by-quarter through the year? Or will things bump up, I don't know in May or June? That's the base case.

Operator:

Next question is from the line of Manav Patnaik with Barclays. Please proceed with your question.

Christophe Beck:

Yeah, hi, Manav. So it's a little bit like with our kids, they're not always doing great at the same time that's a bit the same with our businesses. It doesn't mean that we love them less. But if we look at all our businesses and markets out there over 90% of them had double-digit operating income growth, so a pretty remarkable bias towards good performance for all our businesses. And so I like the overall portfolio that we have. We're also approaching investments and resources as a company. That's been true for many years in four different buckets. The one that we want to fuel those are the ones with the highest growth potential, the ones with the highest margin potential as well, you have the one that we want to protect. Those are the ones that are doing well, no big change. You have the ones that we need to transform. And those are the ones that, obviously, have potential but are not exactly there yet. And then you have the ones that you need to fix. Healthcare being one of the perfect example of that. Paper would either be on the transform side, because it's north of 16% margin that we have in that business not great volume growth right now but very good margin and we'll end up in a good place as well as we keep transforming that business. So that's the way we think about it. We're not investing so everyone the same way. It's really by category along the four that I just mentioned as well. So overall I like the portfolio we have, but we always, kind of, critical for every business, every market to make sure that we have the best owner's mindset and making sure that we do what's right for shareholders.

David Begleiter:

Thank you. Christophe, again just on the delivered product costs, could you unpack the dynamics as to the high single digit increase in Q1? Is that primarily a function of the caustic price decrease last year we saw for I think every month of the year? And then going forward, is your flattening out a function of just caustic being up as the year progresses? Thank you.

Scott Kirkland:

Yeah, happy to David. Thank you. Yeah, as Christophe referenced earlier, our DPC is still up and again just to clarify 35% versus our pre-inflationary period. And as you referenced we -- it peaked in the middle of last year, right? And then we started to see some modest benefit in Q3 some additional single-digit benefit in Q4 and are expecting then that benefit really to peak in Q1 up high single digits. So as we said, and then some modest benefit likely in Q2, as then we see costs stabilizing for the second half. And with the 10,000 raw materials very difficult to sort of isolate individual buckets. Obviously, you have some raw materials like caustic, where we've seen some easing, but you've also seen other products raw materials like propylene or resins, where we've seen those costs going up as well. And so with the big basket of materials hard to isolate any one of those.

Operator:

Our next question is from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Christophe Beck:

Good question, but a difficult one to answer for me, obviously, Pavel as you know. But the way, I always answer that question is, basically what you've seen in the past from Ecolab is what you're going to see in the future. We have an extremely strong balance sheet, now our leverage levels are closer to our longer-term average of these two times, as well. So we're in a very good position to go after opportunities that we believe are strategically relevant for us. And obviously, that we can buy at the right price, as we've done very successfully so in the past. So yes, the market becomes even more interesting right now which is good. We have a rich pipeline as we've always had and we will keep focusing on our three key priorities, but as I've always shared first is water, second is Life Science, third, is digital and AI technology mostly focused on North America and in Europe.

John Roberts:

Thank you, and congrats on making the Just 100 list again. In Healthcare, some companies have been talking about de-stocking continuing. Are you seeing de-stocking in Healthcare? And are you seeing equal benefits between your surgical and infection prevention business now that you've got the separation?

Operator:

The next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Christophe Beck:

We're in a fairly good place actually in Asia, especially China. For us we separate our Asia Pacific, and where we have a few markets in China, which is one of the mega markets. As you maybe remember, North America, Western Europe and Greater China to be our three mega markets, where we focus 80% of our retention, where 80% of the opportunity lies as well. And I like quite a bit how we're working in China, not an easy environment as we all know, but growth has been good in China, especially in Institutional. We have a great team, a great business and we have very good margins as well in China. That was not the case 10 years ago but that's clearly the case today. So we have a very good business, a great team, very well positioned with what customers in China wants, when we think food safety, infection prevention and water that's exactly what they're looking for as well. So pleased with the evolution of China, and that's true with the rest of Asia Pacific as well but every country is a bit in a different place but in aggregate a pretty good story.

Shlomo Rosenbaum:

Hi. Thank you very much. Christophe, you made tremendous strides in the margin over the last little bit and the pricing has been very successful and it looks like volumes have turned positive. So there's a lot of positivity there. I was wondering if you could bridge us from where you are today to where -- you mentioned getting to that 20% margins. And can you walk us through that bridge, how much would be pricing? How much would you think about in volumes? Is there a certain cadence that we should be thinking about over the next several years? Just give us your thoughts on how investors should be thinking about it how you're thinking about it?

Scott Kirkland:

Yes, thanks Shlomo. Great question. Yes, as we've talked about -- and we talked about at Investor Day, really very focused on getting to that 20% OI margin and I think we have a very clear path over the next few years. And it's largely by getting back to those 2019, sort of, pre-pandemic gross margins right, which are still down relative to 2019. If you look at overall OI margin, so we finished the year at 14%, so about six points from that 20% OI margin. And by recovering those 2019 gross margins, which is really split pretty evenly between the value-based pricing, what we do for our customers, driving that value-based pricing, and then the other half of that being volume and mix sort of combined there, okay? As we showed during 2023, our OI margins were up 140 basis points. And we're expecting about another 200 basis points in 2024. So, we think that's great evidence for what we can do and that path to get to that 20% OI margin. And then additionally in there aside from the gross margin, we'll expect to continue to deliver some SG&A leverage at least equal to what we've done historically.

Operator:

Thank you. The next question is from the line of Steve Byrne with Bank of America. Please proceed with your question.

Christophe Beck:

Yes, those are two platform innovations as we call them Ecolab Science Certified. So, it's keeping -- progressing very nicely with a few big customers as well jumping on that journey, McDonald's being the latest big one obviously out there. So, we like how Ecolab Science Certified is not only providing benefits to our customers by protecting their guests by providing a safe and clean and welcoming environment, but also safe foods at the right cost with the total operating cost manage as well as we can. So, Ecolab Science Certified is an overall promise by our customers, which encompasses all our services as well. So, it's a penetration play which is good for us, driving good results for our customers. Ecolab Water for Climate is a bit the same in a very different set up, obviously, because it's helping our customers get to their ambition of the net zero. Some customers are much further down the road and some are very early on that journey. So, to give you some highlights without going too much in detail since we don't share our customers' details publicly. We have a dozen of flagship customers, as we call them, who have committed to getting to net zero. One has been very public that's Microsoft, and progressing very well on that journey as well. It's really helping them get to net zero, but in a way that makes financial sense for them and for us by driving a lot of innovation and services in their own operations, in order to deliver their objective. So, two growth platforms, driving penetration, improving impact from our customers, which helps us ultimately drive growth and value pricing.

Kevin McCarthy:

Yes. Thank you and good afternoon. Christophe, back at your Investor Day in September last fall, I think it was. You talked a little bit about cross-selling initiatives. And I was wondering if you could provide an update on those efforts. In other words, if I look at the volume improvement from the first half of 2023 to the back half basically going negative to positive. Do you think that those cross-selling efforts have borne fruit? Or is that on the come in 2024?

Operator:

Thank you. Our next question comes from Patrick Cunningham with Citi. Please proceed with your question.

Christophe Beck:

So a few different questions here, Patrick, so all related to the same topic obviously. So, new business generation is our number one focus in the company where sales organization says that heart our mantra in the company for the 47,000 people is we're all in sales just to describe how we think about it as well. So it's really a teamwork. And new business generation, our pipelines are at record levels right now really like how much we have gained. Obviously we now we need to install all that in the next few months, next few quarters. That's always true and it's different by businesses. It goes faster in Institutional, which is why you see as well a very good growth in Institutional. They have a great new business generation. They can install pretty quickly as well, good for the customers, good for us and leading to great results because margins are so good, obviously, in that business. So to your question on how much is cross-selling versus totally new. The best way to think about it in our company is generally two-third is cross-selling, which is really selling to customers that other businesses already have and one-third is brand new and that's an average number. It's not obviously always the same across businesses and geographies, but that's a good way to think about it and to keep in mind that we are primarily focused on cross-selling, which is the best way and easiest way to sell and the cheapest way driving the highest margins.

Mike Harrison:

Hi. Good afternoon. I wanted to ask another question around the Institutional business, but I wanted to dig in more on the specialty side of that business. You just had within specialty probably the best year of growth in a decade or more. Can you talk about what is driving the improvement on both the QSR and the food retail side? And then you also -- it also looks like you acquired this Chemlink business back in May. Can you talk about what Chemlink is bringing into the portfolio within that specialty business?

Operator:

Thank you. Our next question is from the line of Scott Schneeberger with Oppenheimer & Company. Please proceed with your question.

Christophe Beck:

Yeah. Thank you, Scott. So let me have the other Scott answer part of that question and I'll make a few comments.

Christophe Beck:

Well said, Scott. In general, we want to get transformation done the old-fashioned organic way. It's only in exceptional opportunities that we go the restructuring way. When it helps us move quicker, which means making the business more competitive to gain share and improve our margins in order to return more to shareholders. And to Scott's point you look at what we've done in Europe has been an unbelievable journey. The fact that that business has been doing so well in 2023, reaching the highest level of margin, as well in some of the toughest of times, as well is speaking very well on how we're doing that. Think about Institutional, we had to adjust to a new reality business is in the best place it's ever been. And then Healthcare, early on that journey much smaller business obviously, but we will get to the right place as well over time. And the restructuring investment, helped us in all three cases to move much faster and to get returns quicker as well into the P&L. So when I look back, I like what's been done and especially been done as well. So, in budget, and in time, as we had promised as well. So overall, good stuff for the company our customers and our shareholders.

Vincent Andrews:

Thank you. Wondering if there's been some change in your procurement strategy, whether it's been changing in some of your large suppliers or changing the terms or duration of the contracts that you have? I'm just really trying to bridge. 4Q came in a bit better than expected but 1H is obviously, a lot better than what we were talking about three months ago. So I'm just trying to understand if something has meaningfully changed in what you're doing or if it is just conservatism? Or what drives us from there to here particularly because – it sounds like a lot of folks think the back half raw guide is conservative. I would probably echo that. So just trying to understand what might change over the next quarter or two that could allow that second half to come in better than what you're guiding to right now?

Operator:

Thank you. At this time we have reached the end of the question-and-answer session. I'll now hand the floor back to Mr. Hedberg for closing remarks.

Operator:

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.

Operator:

Greetings. Welcome to Ecolab’s Third Quarter 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations for Ecolab. Thank you, Mr. Hedberg. You may begin.

Christophe Beck:

Thank you so much, Andy, and welcome to everyone on the call. “Building on our momentum with strong and reliable growth.” That’s the headline for Ecolab third quarter. Thanks to exceptional execution by our team, Ecolab delivered a very strong quarter as our momentum continued with 7% organic sales growth, which was actually exactly as expected and 18% growth in adjusted earnings per share, reaching the high end of our expected range. Against unpredictable macro conditions, we drove continued strong pricing, new business, accelerated volume trends and continued robust margin expansion. Our focus remains on offense, which we are best at, continuing to fuel strong and consistent double-digit earnings per share growth. We maintained strong organic sales growth with pricing increasing by 7%. This increase reflects both, the value-based pricing we put in place last year and the new pricing we’ve implemented this year, reflecting the enhanced value we offer to our customers. Our volume trends continue to strengthen as well, which is great news, with new business helping to accelerate volumes despite softening in global end market demand. Organic operating income margin continued its impressive expansion, up 160 basis points compared to last year, reaching 15.5%. This notable progress reinforces our path towards achieving our long-term margin goal of 20%. In the third quarter, our adjusted gross margin expanded 360 basis points to 41.3%. This strong expansion is a result of our value-based pricing strategy, improved volume trends and a slight decline in delivered product costs. While global energy prices remain dynamic, we’re confident in our value-based pricing strategy and is absolutely necessary, our capability to implement energy surcharges. We continue to take a prudent stance on the trajectory of delivered product costs as costs remain up nearly 40% compared to pre-inflation levels. Assuming the current high energy price environment persists and our costs ease only slightly in 2024, we continue to expect very strong gross margin expansion in the quarters ahead. This will help us make progress in achieving our historical 44% gross margin and our 20% OI margin target over the next few years. Underlying productivity also remains strong as we continue to leverage our leading digital capabilities. As expected, SG&A expense was relatively stable versus second quarter levels. The year-over-year comparison reflects the rebuild of incentive-based compensation, a result of our strong sales and earnings growth and the strategic investments in our growth engines. We also expect SG&A dollars in Q4 to remain very consistent with second and third quarter levels. Our performance further strengthened across our businesses. The highlight was Institutional & Specialty. We grew organic sales double digits and organic operating income, 28%. Organic OI margin was up 260 basis points to 19.3%, approaching its historical 20% level. Our Industrial segment also performed well, especially comparing to an extremely strong Q3 last year, led by attractive growth in Food & Beverage and in Water as our unique ability to bring end-to-end water and hygiene technologies to customers continues to drive strong share gains in this segment. Operating income growth is the best in the third quarter, reflecting the incentive-based compensation rebuild as mentioned in the last call. And importantly, we expect this segment’s operating income to return to double-digit growth in Q4. Our Healthcare bifurcation strategy is progressing well. Strong pricing and new business had to improve underlying sales growth and operating income. The business also benefited from larger than normal surgical sales, which is not expected to recur. While we are pleased with our progress, delivering sustainable and profitable growth remains a focus for me and for our team. Life Sciences growth also improved to mid-single digits despite continued short-term pressure for everyone in this market as our team continued to win share. While we expect the market to remain under pressure for the next few quarters, our ongoing investments in additional new product capacity and keen capabilities will allow us to capitalize on attractive long-term high-growth, high-margin opportunities. In summary, in the third quarter, we delivered as expected with strong sales and solid earnings growth. Now looking ahead, we expect our strong performance to continue in the fourth quarter with adjusted earnings per share increasing 17% to 24% versus last year, which is above the mid-teens growth we had guided to during our second quarter call and will bring the full year EPS north of 2019’s EPS. This performance is expected to be driven by new pricing, volume growth and robust gross margin expansion expected to be up 250 to 300 basis points versus last year. As we shared with you at our Investor Day in September, we see continued strong momentum in ‘24. Even as global uncertainty remains with softening macro demand, we continue to expect mid-teens or better growth in adjusted earnings per share in 2024. As always, we’ll remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing leverage and returning cash to shareholders. Most importantly, with the best team, science and capabilities in the industry, we will continue to grow our share of the stable and high-quality $152 billion market we serve. I believe that Ecolab’s long-term fundamentals are stronger than ever, and I am confident in our outlook for continued strong performance as we work to deliver superior shareholder returns. So, thank you for your continued support and your investment in Ecolab. I look forward to your questions.

Operator:

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

Christophe Beck:

Thank you, Tim. I have no doubt in my mind that we will get there. We have a great team running a great business and a great trajectory. And as mentioned many times, Tim, the P&L of I&S will end up in a better place post the cycle versus previous years like 2019. Just for perspective, o in Q4, as mentioned during Investor Day as well, our OI dollar will already be back to the 2019 level. So I really expect to cross that 20%, 21% line in the next few years while we drive new business innovation, price, the advantage of the new organization as well with the focus on sales and service and leverage as well digital technology, as we’ve done over the past few years. So, of all the opportunities we have in front of us, all the challenges that we might be facing, I think Institutional is going to be probably one of the best promises that we have ahead of us.

Seth Weber:

You mentioned a few times in the slides in the release and your comments just about new business wins. I’m just -- can you talk to the selling environment, your sort of traction with new wins and how we should think about new ads going forward? Thank you.

Operator:

Our next question comes from the line of Josh Spector with UBS.

Christophe Beck:

Volume is the most important driver, obviously, for us. And Q3 happened pretty much as expected. We can talk about rounding, obviously here, but we were in positive territory, which is good. And if we exclude Europe, which is the most difficult place in terms of volume, we are at plus 1% already. And I feel confident that in Q4, we will have a 1% volume growth overall also for the company. So when I look at the trajectory that we’re having on volume, especially with all the pricing that we’ve done over the past few years and in a market that’s not exactly booming right now, I feel really good with what we’re doing, where we’re heading. And to your point, for ‘24, while it’s the best way we can close the year with good volume momentum in order to start ‘24 in whatever environment we’re going to find with a company that’s having good sales momentum, which is our number one priority as a company right now.

Mike Harrison:

Congratulations on a nice quarter here. Just in terms of the Healthcare and Life Sciences business, I’m curious, if we saw any of the benefits from some of the changes that you’re making on the Healthcare side of that business already in Q3, or are those actions still to come? And then, just curious on the onetime 6% sales benefit, did that also help margins come in higher or was that kind of an average incremental margin contribution?

Operator:

Our next question is from the line of David Begleiter with Deutsche Bank.

Christophe Beck:

So, DPC or delivered product cost was roughly 3% down versus last year. A little bit better than what we had expected. It’s always a very broad mixed bag, as you know. So we have 10,000 raw materials that we buy. So they didn’t all go in the same direction, obviously. So some easing on the market. At the same time, our supply chain team speak, procurement team did also some remarkable work as well with our partner suppliers. So both together led to this 3% easing versus last year. Keeping in mind that our costs are still 40% higher than where they used to be pre-inflation. That’s important to keep in mind. I expect kind of the same type of costs for Q4, so kind of a similar easing versus the prior year. And I expect basically those costs to stay similar in the quarters to come, which will mean the slight easing versus ‘23 when we talk about ‘24. I’m not banking on big improvements in the quarters to come. And if they come, well, we will all benefit from them.

Jeff Zekauskas:

Ecolab buys its raw materials sometimes monthly, sometimes quarterly, sometimes annually. So, raw materials have moved down through the course of the year, but it may be that the timing of your contractual agreements has slowed the benefits for Ecolab. Can you talk about how you purchase your raw materials in terms of the way raw materials are repriced? That is, should we expect different incremental changes on a six-month basis or a three-month basis or an annual basis?

Operator:

Our next question is from the line of John McNulty with BMO Capital Markets.

Christophe Beck:

Thank you, John. Well, Industrial is in a very good place, actually. But I’d like to ask Scott maybe to give some perspective on margins evolution.

Christophe Beck:

Yes. As mentioned early on, John, I like a lot the performance of Industrial for the past few years, and that’s going to be even more true in the years to come. If you strip out that incentive-based compensation, so the OI growth would be in the upper teens, which is what you’re going to see in the fourth quarter as well. So, it was kind of a one-quarter story underlying our performance very strong.

Manav Patnaik:

Just two-parter, Christophe. So in the pricing, firstly, I think in terms of what you already have in place, if you rolled through, I think you get mid-single-digit pricing next year. But just curious on how you feel like you could keep pushing the pricing dynamic? And then, just a quick follow-up was the new sales pipeline that you’re really confident on, like how big is that the perspective? Like how much of a volume headwind can that offset?

Operator:

The next question is from the line of Shlomo Rosenbaum with Stifel.

Christophe Beck:

Yes. So to give you a simple answer, so the ones that are on the soft side, Paper, you mentioned it and Europe is the second one. So those are the two. Everything else is trending in either positive direction or improved direction, if they were on the negative side. I’m especially pleased with the I&S, Institutional & Specialty improvements and Water is going to keep improving as well. So those two key businesses are going to be good in the quarters to come, at least with what we’re seeing as well right now. So, we have passed elimination as well, which is always a bit of a different volume play, as we know. That’s doing exceptionally well. We know that competition has a lot to do with themselves. By the way, it’s providing us an opening for us to gain share as well. And our team is doing an excellent job in pest elimination, where we see growth, really steady, strong and margins as well at the same time keeping improving. So overall, our business in a very healthy place with a few places where we need to work on, as mentioned, Europe and Paper. But to the point of Europe, I’d like to mention as well that margin improvement has been great. So volume challenged in Europe, as we know, but okay, not great. And when I think about our operating income it almost doubled in Europe in the third quarter. So the team has done some really good work.

Andy Wittmann:

I guess maybe, Scott, probably for you, when I was just looking at the adjustments to the results, I noticed that there was $26 million of restructuring and the total exclusions were $0.13 for the quarter. You talked about last quarter expectation of 5. And actually, the guidance for fourth quarter is pretax around $30 million by my calculations or $0.09. I guess, could you just talk about what the restructuring actions were in the quarter and the quarter ahead? Maybe which segments, geographies? And are these -- is it another restructuring program that you’ve taken in the past forming here, or can you just maybe talk about some of the operational effects of what you’ve achieved and are trying to achieve?

Christophe Beck:

Let me add a few comments. So you totally support what Scott just said. Obviously, I’m really happy that most of the combined programs are coming to a close by the end of this year, which was the plan, so delivered as expected as well. At the same time, we know that digital technology, artificial intelligence will open some new productivity opportunities for us in the future. There’s nothing clear in our plans right now, but we will keep looking at that. And if there is an opportunity to improve significantly our productivity through technology in the quarters and years to come, we will certainly capture them and discuss that with you.

Steve Byrne:

Christophe, I’d like to hear your view or maybe ranking among your four key product areas

Operator:

Our next question is from the line of Patrick Cunningham with Citi.

Christophe Beck:

Yes. So, Patrick, on Life Science, we’ve seen improvement, which is good in the third quarter, in a market that’s generally down. And I see that as a short-term impact in the industry, it’s an industry, pharma, biotech, that is very promising for the future, a few challenging times for a few quarters. We see how many more quarters that’s going to last for the industry out there, but I’m very bullish with where the industry as a whole is going in the years to come. Now, when it comes to our own performance, well, the fact that we have positive growth is also a sign of the new business that we’re generating, the share that we’re gaining as well versus our competition. And it’s in that time that Ecolab usually focuses the most in investing for the future. And as I’ve shared during Investor Day, well, we’re investing in capacity making sure that we will have enough production capacity, for the years to come to deliver our growth and not just in one location, but in several locations in Asia, in Europe and in North America. And at the same time, it’s also building capabilities. It’s building our team. It’s building expertise. It’s building science and R&D as well at the same time. And if the market is a bit different short term than what we had expected a year or two ago, our investment plan hasn’t changed because for me the future totally unchanged. It’s just a short-term impact that the market is having on everyone’s performance.

Kevin McCarthy:

Christophe, I’d welcome your updated thoughts on the Healthcare business. I guess, in terms of operations, would you expect that business to grow on par with your corporate average next year or better or worse? And then, on the strategic side, I think you’ve now separated infection prevention from Surgical. And maybe you can kind of talk through what you’re seeing in terms of incremental benefits from that in the early days as it relates to customer touches and productivity and the like?

Operator:

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

Christophe Beck:

Thank you, Vincent. I’m going to pass this one to Scott.

Operator:

Our next question is from the line of Rosemarie Morbelli of Gabelli Funds.

Christophe Beck:

Thank you, Rosemarie. This is a core element of focus between us and our hospitality customers. It was initially driven by shortage, obviously, of labor that they didn’t have to do all that work, which is still a challenge for that industry. At the same time, well, they like the fact that less labor meant as well less cost while pricing went up, that drove good margins for institutional customers, which ultimately is a good thing for the industry, and when the industry is doing well, it’s a good thing for us as well at the same time. That being said, quality standards need to get back to where they used to be. It’s exactly playing into what we’re doing which is having products that are delivering better quality, better standards, better cleanliness with less labor. So it’s 2-in-1 -- 3-in-1, it’s automated dish machine, laundry, floor cleaning, whatever those solutions might be as well so for the industry. So we’ve reoriented really over the last two years, all our innovation towards increasing even more the automation level for our customers in order to drive better cleanliness while using less labor and keeping the margins that they used to have. So at the end of the day, if Institutional industry hadn’t changed for a long time like 100 years, I think that the past few years, it’s an industry that has made a step change in terms of leveraging technology more than ever. Well, this is exactly what we’re doing. For me, it’s going to help bring our partnership between us and our customers to a whole new level, helping them perform better and for us leveraging all the innovations that we have to offer. So, at the end of the day, a good news, and cleanliness is going to improve as well in the hotels that you’re going to visit.

Scott Schneeberger:

Christophe, could you give us an update? It’s been, I think, nearly five years since data centers and animal health became big areas of focus of the company. Could you speak to growth rates at both and how meaningful they’ve become within their subsegments of Industrial? Thanks.

Operator:

The next question is from the line of Josh Spector with UBS.

Scott Kirkland:

Yes. Josh, I’ll handle the two follow-ups. The first one on the debt and where we sit today, have strong liquidity, as you saw on the free cash flows for the third quarter and the expectation for the full year and we ended third quarter with around about $1 billion of cash. And so where we sit today, my expectation would be we pay down both maturities due in December and January combined is a little over $1 billion. So expectation there. Again, long-term focus on capital allocation remains the same. But obviously, in the short term, we’re very committed to deleveraging. And on a good path to do that where at the end of the third quarter leverage ratio was at about 2.5% and feel very good by end of next year to get back down to our historical sort of 2 times range. Getting back to your SG&A question. As we talked about, and Christophe talked about in the open that the Q3 dollar was what we expected -- expect similar levels in Q4, as you talked about, but year-over-year, really largely driven by this incentive compensation. And then, as well, if you look at Q3 had a tougher comp -- low incentive compensation last year, but that underlying productivity remains really strong. Just for perspective on that, SG&A, as Christophe talked about, we will continue to grow this business, but we’re needing less people. And actually, in the third quarter, our headcount year-over-year was down on SG&A 2% and so our sales per head was up about 7%. So showing that good productivity. And I would expect -- it’s early to sort of talk about 2024, but we’ll expect to continue to drive great productivity next year, leveraging the technology that we continue to deploy and really increasing the time that our sales teams spend on creating customer value.

Operator:

Thank you. Mr. Hedberg, there are no further questions at this time. I’d like to turn the floor back over to you for closing remarks.

Operator:

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference, and you may now disconnect your lines, and have a wonderful day.

Operator:

Greetings and welcome to the Ecolab Second Quarter 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Director of Investor Relations. Andy, you may now begin.

Christophe Beck:

Thank you, Andy, and welcome to everyone. In Q2, our team delivered another very good quarter, building on continued strong momentum and once again making further improvements compared to the last quarter. Strong execution as well as easing inflationary pressure helped us get to the upper end of our expected Q2 earnings growth range. In an environment that remains unpredictable, our shift to offense continues to gain traction and our confidence in delivering midterm performance that’s ahead of historical average trends clearly keeps getting stronger. Organic sales growth remained strong at 9%, driven by the steady recovery of Institutional & Specialty with 13% organic growth. Pest Elimination and Industrial follow, delivering 11% and 9% organic growth, respectively. Despite softening global end market demand, overall volume trends remain steady. In other good news, volume excluding Europe improved from flat in Q1 to 1% growth in Q2. So, volume trends are improving further, too. Adjusted earnings per share grew 13%, led by strong organic operating income growth that accelerated from 19% in the first quarter to 21% in the second. Although year-on-year comparisons are getting harder, pricing remained strong at 10% as further new pricing continued to grow. Delivered product costs were 5% higher than last year, but is sequentially a bit more than expected, which is further good news. We kept working on strengthening our performance, including targeted actions in Institutional, Life Sciences and Healthcare. Institutional had another remarkable quarter as it continued its very strong recovery, focused on new business and penetration, drove share gains in units served, solutions sold and sales delivered. Growth, value pricing and productivity drove strong margin improvements, which we expect to continue in the second half. Additionally, innovation in labor automation positions Institutional as the ultimate leader in the market undergoing a foundational transformation, driven by evolving consumer habits and increased use of digital technology, all good news for us. Our highly attractive Life Sciences businesses was not immune to the short-term market pressure, which led to flattish sales. However, this is much better than competition. And Life Sciences growth potential remains extremely strong. Even if the short-term market transition takes a few quarters to get back to strong growth, we’re staying on offense. We’re taking this as an opportunity to gain share with major customers and to further invest in capacity and capabilities in biopharma and undisrupted pure water, even if it results in short-term operating income decline. As promised, we’re also continuing our rapid transformation in Healthcare. In the first quarter, we announced a restructuring program to rightsize our cost structure. This is progressing well. Now, over the next few months, we will also be creating two separate, yet focused businesses from our North American Healthcare business, Surgical and Infection Prevention. Surgical, which provides protective drapes for surgeons, patients and equipment in operating rooms, will become a stand-alone business. Infection Prevention on the other hand, which provides environmental hygiene to reduce hospital-acquired infections, will leverage the critical mass of our North American Institutional field sales and service organization to expand customer reach and significantly improve productivity. This is just a further step on our journey to transform Healthcare into a profitable business that serves hospital exceptionally well. While we continue to focus on margin improvement, which improved 130 basis points in Q2, we also accelerated our shift to offense. Our 1,100 corporate account managers achieved a record new business pipeline by leveraging enterprise opportunities to drive penetration and by focusing on new business prospects to expand our reach. Our more than 25,000 field sales associates sharpened their focus on exceptional service and deploying new business, which resulted in promising share gains. Our 1,200 scientists remain focused on breakthrough innovations, which enabled customers to achieve better outcomes at a lower total cost through reduced use of natural resources. We’re also ramping up our investments in digital technology. With Ecolab 3D, one of the largest IoT cloud in the industry and our 1,000 digital experts, we’re uniquely positioned to further empower our field and customers to deliver best-in-class performance to unleash unique customer value, improved field productivity and deliver an exceptional customer experience. You’ll have the opportunity to experience some of this firsthand at our Investor Day in September. In summary, we delivered the second quarter exactly the way we wanted, with strong top- and bottom-line momentum despite the challenging environment. Looking ahead, we anticipate delivered product costs to remain high, but to ease progressively and for global demand to soften further. Although none of this is new, the good news is that we are well positioned to win in this environment as our momentum keeps picking up. In the second half of the year, we expect volume growth to continue improving and gross margins to expand 150 to 200 basis points versus last year. During the last few years, our expertise grew as we maintained our team and rolled out new innovative solutions. Our retention rates remain high as we protected customers from supply shortages. Our margins continue to recover, and our organic operating income accelerated as we drove pricing in thoughtful ways, while increasing customer value. With this, we expect adjusted earnings growth in the third quarter to improve further and to reach 12% to 19% with continued strong momentum as we exit the year. Finally, we’ll remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing our leverage and returning cash to shareholders, as we’ve always done. Most importantly, with the best team, science and capabilities in the industry, we will continue to grow our share of the high-quality $152 billion market we serve. In other words, our future has never looked brighter. I look forward to your questions.

Operator:

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

Christophe Beck:

Thank you, Tim. Great question, because Institutional is our largest single business, as you know, in the Company, and they had a remarkable quarter in Q2, which followed a very good quarter in Q1 as well. So, I’ve been very impressed with how the team delivered once again. So, you mentioned it’s up 13% sales growth, 40% operating income growth. So, the team executed perfectly well. And what’s important is that our new model, which we announced a few years back now with focused sales and service organizations, one really focused on driving gains and the other one, servicing customers extremely well, while this new organization is working really, really well. That was the right move that we made a few years back. So, we’re gaining share with new business. This business has a new business pipeline, which has reached record highs over the past few months, and they’ve done an excellent job at executing this new business. Pricing has been very good as well, which has been driven by the total value delivered that they’re delivering for customers that need it. So, more than ever, if I look at the unit share as well in the market with the number of units that went down, we’re quite stable versus 2019, which is remarkable. Penetration is up as well, with programs like Ecolab Science Certified that’s driving the usage of much more solutions than in the past as well in that business. And one other point, I mentioned it so many times. So since 2019, the foot traffic in full-service restaurants, dine-in traffic is down a third. Our sales in that same segment in the U.S. is up 12%, so a massive share of gain that we’ve delivered here. So, we expect this momentum to continue in the quarters to come. And I even think that the OI dollars that we had in Q4 2019, well could be pretty close -- closely delivered in Q4 this year as well, which means that we would be, in dollar terms, very close to where we were in 2019. And well, it’s only upside from here. So, institutions did really well. It’s driven by fundamentals of new business, of pricing, of productivity, of customer service, and I like a lot where we are and even more where we’re going.

Ashish Sabadra:

So, pretty solid gross margin expansion in the quarter, and thanks for providing color on the gross margin expansion for the back half of the year as well. I was wondering if it’s possible to quantify what the delivered product cost was in the quarter. And there was obviously a comment on the delivered product cost to ease, but I was wondering if you could help quantify how we should think about those delivered product costs in the back half. Thanks.

Scott Kirkland:

Yes. Hi Ashish, thanks for the question. Yes, as you said, gross margins improved nicely. It was up modestly in Q1, 20 basis points, but really saw great expansion year-over-year in Q2, up 130 basis points. As Christophe said, continue to drive new pricing as well as maintaining the pricing that we’d already achieved and had hit that peak in pricing in Q1, but continue to drive new pricing and then seeing that DPC inflation easing a bit. So, as you said with that, is that easing inflation on DPC as well as the new pricing is what is going to help drive continued margin expansions in that 150 to 200 basis points year-over-year. So, we expect DPC to continue to be up year-on-year, just at a smaller rate as we see in the second half of the year. So, as we said, up 9% in Q1, 5% in Q2 and probably low-single-digits in the second half.

Seth Weber:

I wanted to go back to the strength in the institutional margin for a minute. Just, have you -- can you provide us kind of where you’re at on the cost-saving program? I’m just trying to gauge how much of the margin expansion is a function of price versus volume versus the actual -- the cost initiatives that you guys have kind of started to talk to, but not clear where you’re at in that process? Thanks.

Scott Kirkland:

Yes, happy to do that. Yes, as Christophe said, institutional margins are doing very well. It’s really a combination of everything. As we talked about earlier this year as part of the expanded program, that expanded program had a total run rate savings of about $195 million. And we expect to realize the vast majority of that, let’s call it, 80-plus percent of it by the end of this year. We’re progressing on track for that, about that pace through the end of Q2, and that represents for the full program as well as the institutional, the I&S business.

John Roberts:

Thank you. Nice quarter. Can you give us a rough split of the Healthcare business between Surgical and Infection in North America? And why is Surgical so much smaller in Europe?

Operator:

Our next question comes from the line of Josh Spector with UBS.

Christophe Beck:

Yes, Josh. It’s year-on-year, so the improvement that we will see so in Q3 and in Q4. And in Q2, I was pleased to see that excluding Europe, our volumes went from flat to plus 1% year-on-year once again. And it’s all driven by the way we are driving the business. Because the end markets, honestly, so everywhere around the world have a tendency, so to soften, it’s not true everywhere. But for the most part, the softening quarter-after-quarter, hopefully, that’s going to change as well over time. We’re not counting on that. Just to be clear, our assumption is really that the end market trends will continue to soften in the next few quarters. How are we driving growth? It’s the old-fashioned way, by driving fundamentals. It starts with new business. This is a practice that we have perfected over years/decades, as we call it, a grow-to-win pipeline, which is our new business pipeline, is at an all-time high right now. And we need to deliver it, obviously, by executing it, so customer by customer. In some businesses, it’s quicker, like in Institutional, or it takes a bit more time in Industrial, since it’s heavy equipment that we need to install. But new business is really good. Penetration as well of new solutions within existing customers is a priority so for us because it’s the lower cost to execute, because we go to those customers anyway. This is improving as well. Innovation is also in a very good place. Our innovation pipeline is also at an all-time high. So, it’s an execution question as well. So to get that done, especially in what we call the mega markets in North America, Western Europe and in China, while we follow closely after in the other markets around the world. So, those are the big reasons. And it’s also driven by our new growth businesses, like data centers growing over 20%. Microelectronics, close to that as well. And our water business. That’s doing really well at the same time. So, it’s really focusing on the fundamentals, what we can control, because we can’t control what’s happening in the market.

David Begleiter:

Christophe, you are investing in the business. Any way to quantify how much more you’re investing this year than last year on either an absolute or a relative basis? Thank you.

Scott Kirkland:

Yes. David, what I’d say is, I wouldn’t give you a specific number here. I would say we’ve continued to invest in the business not significantly different than we have in the past. As we’ve said through the last few years, we’ve continued to invest in the business, adding capacity, maintaining the team, investing in the team. So proportionately, it’s not that the big driver of what you’re seeing from the OI margin expansion, any change in that investment.

Operator:

Our next question is from the line of Jeff Zekauskas with JPMorgan.

Christophe Beck:

Great question. Thank you, Jeff. So three questions here for Scott, I guess.

Christophe Beck:

So, that’s on SG&A. Maybe so an additional comment here. We’ve had that question so many times, Jeff, on have you reached the bottom in terms of SG&A ratio? The short answer is no, because of what Scott just said. All the digital technology that we’ve been implementing, plus all works to come will improve the performance of our organization. So for this year, expect our SG&A dollars are to remain kind of stable quarter-after-quarter, keeping in mind that our headcount at the same time is slightly down as well, which is driving that productivity, not because we spend less time with customers. We spend more time, but we automate most of the transactional work, if I may say. Your second question was on delivered product cost. It is easing a bit faster that we had expected, but it’s important to keep in mind, it’s still 40% up versus two years ago, pre-inflation. So obviously, that trend is a positive trend for us, and I’ll take that, obviously, to improve margins as well. But most of the work is on pricing and new pricing, which is going really well. And your last question on the summer. We are in 172 countries. So, it’s not impacting in material ways the business, the way we look at it. So, no influence of that, at least no significant one.

Christopher Parkinson:

Just on the Institutional side, you have some very helpful commentary by region. I was just hoping to dive down a little bit more on the volume trends in the various geographies, obviously, specifically North America. And just what ultimately is underscoring the confidence in kind of market share gains, just given all of the volume volatility on the post-COVID era. Just any color on that, and just trying to extrapolate, where the real opportunity is heading into ‘24 and ‘25?

Operator:

The next question comes from the line of Manav Patnaik with Barclays.

Christophe Beck:

Good question on Healthcare. So, we will stay serving hospitals with what we do as a company, so protecting what’s vital, reducing hospital-acquired infection remains a point of focus. The fact that our Healthcare business has not been growing and has not making money so for quite a very long time is something that I have committed to change. And I made that commitment pretty clearly a year ago. So, what we’re doing is a very thoughtful plan. We’re quarter-after-quarter, I want to make moves that are driving us to a place where it’s a business that’s growing nicely. It’s not going to be high growth, but that we get good profitability. The first move was really in Q1, to do this cost restructuring in North America and in Europe, so to get the right cost base. And that’s evolving pretty nicely. We’re on plan delivering on that front. And I wanted to make a second step, which we announced a week ago to the organization and wanted to share with you as well in the release and on that call, where we want to have those two businesses, Surgical, which is really focused on drapes protecting surgeons’ equipment and patient’s, which is very different than our Infection Prevention business, which is much more traditional Ecolab business of hygiene and disinfection, infection prevention. Well, those two businesses, we want to have them separate. They’re more focused. They’re serving two different parts as well in the hospital. And most importantly, our Infection Prevention business, which is the one with the lowest profitability, cannot afford the cost structure that we have today. On the other hand, leveraging the huge sales force that we have in Institutional in North America, well, they get immediately a much broader reach on the market because institutionally serving hospitals on the food service and hospitality side today already and at the same time, get a huge boost in terms of cost productivity. So, improving Infection Prevention business performance, kind of almost overnight, it’s going to take, obviously, so a few months to get there, but it’s kind of a sure thing. It’s in our hands, while the Surgical business, which is doing quite well and with good margins, is going to remain a focused business. So, we have those two businesses in a better place, and that’s the next step that we want to execute towards our ambition to have a good Healthcare business ultimately.

Shlomo Rosenbaum:

I actually want to piggyback on Manav’s question. Is the Infection Protection business going to be kind of folded into Institutional? If you’re going to be leveraging their sales and service organization, what is going to be kind of standalone on its own? And by separating these businesses, does it also make it easier, if you can’t get them to the place you want to be to kind of sell them off in bite-sized pieces?

Operator:

Our next question is from the line of Andy Wittmann with Robert W. Baird.

Christophe Beck:

Thank you, Andy. So, Life Sciences is a great business. It’s been a great business, since we started in 2017, when we rolled the various pieces together. And the future is even better, because -- while it’s going to be the golden age of pharma, and biopharma is going to be the new way of producing drugs and vaccines going forward as it’s been demonstrated with COVID over the past few years. So, a great business that has delivered very well with a very good future. Purolite is a new element to that business, which adds drug filtration to it as well as new capabilities to filtrate any other liquid, especially saltwater in other industries, as we’ve mentioned. So the industry is a bit under pressure today. I feel pretty good with our flattish growth because if I compare it to competition, which are great companies, by the way, well, their growth is way down. So being flattish, I feel pretty good about that. It’s driven by what you mentioned. It’s kind of still the outcome of the past few years with COVID, COVID-related production inventories as well. And in an industry that is basically getting ready for the future. It’s not going to last long. It’s going to last a few quarters. So, we’re not going to see a major pickup in Q3, but I think it’s going to happen over the next few quarters. But if anything, when I look back, so a year ago, how I was looking at Life Science, how am I looking at the market and the business today where I feel really good and even better with where we’re going, which is why we’ve decided to stay on offense. Even if the market is pressured for a while, it’s not going to last forever. So, for me, making sure that we can get more new customers, that we can build capabilities, which means expertise, people on the street, people in R&D, innovation, and at the same time, some building capacity as well to produce for the future, well, it’s the best time to do it. That has an impact on the operating income margin. That’s okay, because we know that that business is kind of north of 30% on a long-term run rate basis, it’s worth doing it. So, a few quarters a bit pressured, but we’re going to get to a better place, and that business is more promising than it’s ever been. So, I feel good about Life Sciences.

Patrick Cunningham:

So, we’re starting to see some deceleration on pricing. What can we expect from normalized pricing going forward? And specifically on the water business, you’ve highlighted the unique competitive position and customer sustainability objectives. Do you think that will translate into higher pricing power relative to historical pricing?

Operator:

The next question is from the line of Laurence Alexander with Jefferies.

Christophe Beck:

We’ll see where we end up in ‘24. If I’m looking at currently, I’m pleased with the fact that we’re better than the market. The fact that we’re improving ex-Europe, as well in Q2 and that we are in positive territory is a very good sign. I like the evolution that we’re having in Europe as well. We have a great team doing very good work over there. So, Europe is going to improve as well. So, over time, new business is very strong, as mentioned earlier. So it’s really focusing on what we can control, new business, penetration, innovation, enterprise selling. Those are the old fashioned good ways of driving volume. We’ve been successful so far. As mentioned, the last two years, we focused primarily our attention on pricing and margin. We shifted our attention primarily on volume a quarter or two ago, and it’s working. And usually, those trends take a few quarters to take hold in our organization. But when we have good momentum, it remains as well. So, I feel positive about where we’re going for the second half, so for sure. And I see no reason why it shouldn’t be good for ‘24 as well.

Kevin McCarthy:

Perhaps a two-part question on the price-cost spread. Christophe, on the price side, would you call out any particular areas where you’re seeing the most positive sequential momentum on price realizations and perhaps other areas where it’s more of a struggle and starting to flatten out sequentially? And on the cost side, really a similar approach or question in that, are there particular areas you would call out, where your costs are dropping fast on a sequential basis and other areas where you have stubborn increases?

Scott Kirkland:

Yes. Hi. Thanks, Kevin. Yes, as we talk -- as Christophe said, there’s the carry-in pricing, the pricing we executed last year, which we said had peaked at the 13% in Q1, but continue to drive that new pricing. And really, the pricing across the board, as I think about it by segment, very strong pricing across I&S, Industrial, Healthcare, Life Sciences and our other segments, which is mostly passed this as you’re aware. But really strong pricing, both that we had in that the carry-in, the structural price we did last year as well as the new pricing that will continue to accelerate this year. As I think about to your other question, from a cost perspective, DPC, Industrial took the lion’s share of the cost increases over this inflationary environment over the last couple of years. So that’s where we’re going to see the biggest impact as that DPC costs have started to ease, which we talked about in Q2, which was 5% relative to the 9% last year. So as that continues to ease, we’ll likely see the biggest benefit in Industrial, just given that they took the lion’s share of the increase over the last two years.

Operator:

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

Christophe Beck:

So, a few questions in here. So, to unpack, Steve, first, on the equipment question, just would like to remind you is on 95% of our sales are recurring. So it’s not equipment by definition. This is in chemistry or lease programs or digital subscriptions or sales that you get recurringly on a monthly, on a weekly basis. So the equipment components is really, really small. At the same time, since you have equipment in those customer location, well, it increases the stickiness as well of our business with our customers. Not obvious to change. So from us to someone else, especially, since equipment is not going to be at the same level of technology, need to say the least. But this is not the way we’re driving our business with our customers. We want them to stay with us, not because it’s hard to change the equipment, but because they get the best service, the best customer experience, and most importantly, that their total cost of operation is going down because they reduce their usage of natural resources, carbon and water and at the same time, as well as the labor. So, that’s the way we drive our business, 95% recurring, less than 5% equipment. And to your last question about the competitive situation, our competition is busy right now, but we take them very seriously as we’ve always taken them. And the fact that our new business generation is doing really well is a good indication that we’re kind of winning that war.

Vincent Andrews:

I’m just wondering if you can give us a little more specifics on the volume by segment. I mean, I see what you said for the total company on an ex-Europe basis, but can you tell us anything in particular about the key segments?

Operator:

The next question comes from the line of Scott Schneeberger with Oppenheimer & Company.

Christophe Beck:

I guess, Scott, you start?

Christophe Beck:

Then the second part of your question, I believe, difference on our F&B business, one of our largest businesses. I’m really pleased with the work that the team has done in this business, they’ve been able to work well on both growth and margin recovery. They’ve been impacted, obviously, by the inflationary costs and delivered product cost, but managed well to manage new business and the margin performance. Second, it’s a positive industry. So it’s serving consumer goods industries. You’re familiar with most of them. They’ve done quite well over the last few years, and they’re still doing well today. So, it’s a good place to be as an industry. And the third point I’ll make is that it’s one of those industries that’s very interested in what we do. It’s about food safety, which is essential for them. It’s non-negotiable, obviously, for their brands and our customers do very well with it. And at the same time, they are the most advanced companies in terms of commitment on carbon footprint, on water usage, on waste management at a lower total cost, which is exactly what we do for them. So, they are very interested in what we do. And the last point I’ll make is we have this unique position of bringing water management and food safety in one offering, which no company today can offer. We’re uniquely positioned to offer that to our customers. And we perfect that model all the time, and I like a lot where we’re heading because that’s exactly what those customers are looking for, which are the reasons why this business is doing so well.

John Roberts:

North American Healthcare Infection Protection is going to use the commercial organization from Institutional. Do you have any other examples within Ecolab, of sort of cross-segment collaboration like that? And will that result in any intersegment financial reporting?

Operator:

Mr. Hedberg, there are no further questions at this time, I’d like to turn the floor back to you for closing remarks.

Operator:

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may now disconnect your lines at this time. Thank you.

Operator:

Greetings and welcome to the Ecolab First Quarter 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations for Ecolab. Thank you, Mr. Hedberg. You may begin.

Christophe Beck:

Thank you so much, Andy and welcome to everyone. Look, our team delivered another strong quarter, once again, even slightly better than I would have predicted. Top line was very strong. Volume trends remained stable. Margins expanded. Operating income growth got even stronger and adjusted EPS growth kept improving as we promised. All as promised, as we continued to face some real headwinds in foreign exchange and interest. Most importantly, our shift to offense showed some real encouraging signs of progress. Organic sales improved from 12% in the fourth quarter to 13% in the first, with strong performance across all segments. Our net new business pipeline once again reached new records in the first quarter as what we have to offer, water, energy and labor savings while delivering the best and safest outcome in the industries we serve continues to grow in importance for our customers. We also maintained very strong pricing at 13%, which we believe will be the peak as we will begin to lap against last year’s strong acceleration. Our approach to pricing and it’s important to state that is responsible and respectful allowing our customers to absorb long-term increases in a progressive manner. This is backed by true eROI value, the Ecolab way as we help them reduce the overall operating cost, usage of natural resources and their environmental impact. Delivered product cost continued to increase versus last year, but the rate of inflation began to ease. This, along with strong pricing execution, allowed us to drive modest gross margin expansion a bit earlier than expected. That being said, our margin recovery journey has only just begun. Despite our expectation that inflation remains stubbornly high, we remain fully committed to recovering our margin over time, done the right way, when that builds further customer loyalty as we continue to deliver more value. The repositioning of our institutional business, which is a big priority for us, is progressing well as demonstrated by strong sales growth and margin leverage within that segment. Healthcare & Life Sciences organic sales growth strengthened, while operating income remains under pressure near-term at least as we continue to invest in growth and transformation. They are two very different businesses and stories within that segment. In Healthcare, we continue to take actions to improve profitability. Whereas in Life Sciences, we are making further investments as we add capacity and capabilities in Purolite to capitalize on very attractive and profitable long-term growth opportunities. While we continued investing in our long-term capabilities and in digital technology, we also continue to make solid progress in SG&A productivity. The combination of improved gross margins and better operational productivity led to strong organic operating income growth of 19%, up from 10% in the fourth quarter last year. Our adjusted earnings per share growth improved to 7%, which includes a 13% headwind from FX and interest. In summary, we started the year exactly the way we wanted with strong top and bottom line momentum despite a challenging environment. Looking ahead, we anticipate inflation to remain high for the foreseeable future, interest rates to have a strong impact on global demand and continued geopolitical tensions. Although none of this is new, the good news is that we are very well positioned to win in this environment. Over the last 3 years, our expertise grew as we focused on supporting our team and developing innovative solutions. Our customer retention rates remain high as we protected them from supply shortages. Our margin started to recover and our organic operating income accelerated as we drove pricing in thoughtful ways while increasing customer value. And now as macro trends are softening, we will continue to accelerate our shift to offense by accelerating the business, by executing extremely well and by driving productivity improvements and continuing to invest in our major growth engines to drive profitable growth. This will ensure we deliver stronger sequential earnings performance exactly as we’ve indicated during our previous calls. With this, we expect adjusted earnings growth in the second quarter to be in the plus 5% to plus 14% range and to end the year as expected, with adjusted earnings growth in the fourth quarter that reaches low double-digits. And finally, we will remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing our leverage and returning cash to shareholders as we’ve always done. And most importantly, with the best team, science and capabilities in the industry, we were prepared to grow our share of this high-quality $152 billion growth market. I believe our future has never looked brighter. I look forward to your questions.

Operator:

Thank you. [Operator Instructions] Our first question comes from Tim Mulrooney with William Blair. Please proceed with your question.

Christophe Beck:

Hi, Tim.

Christophe Beck:

Thank you, Tim. I’m very pleased with the progress that we’ve made, and we know that’s an outcome of what the team has done the past 2 years. It’s been a long journey. We wanted obviously to reach the point where we could turn the corner and then rebuild and expand on our gross margins and operating income margins as well. So quite pleased, as you said, with what we’ve delivered. In Q1, operating income went up 19%, as I said just before, which led to a 50 basis points improvement as well as the OI margin, which is the first trigger for me. And the second is this gross margin of 20 basis points. It came a bit earlier than we had expected. We thought it would happen during the second half of the year because, ultimately, pricing got stronger than what we thought initially, which is a good news. Volume was better than feared, especially because of what happened in Europe. It did not happen because of the higher temperature as well. And the delivered product cost inflation that didn’t go down, but went less up than what we saw in the fourth quarter of the past year. So when we bring it all together, gross margins are turned the corner at that point, which is all good news. Gross margin turning good, OI, operating income margin turning good as well, but we are just at the beginning of that journey because our mission is really start to get back to a high watermark as we call it, and then to keep expanding from there. So we’ll keep improving quarter-after-quarter as we’ve promised and committed as well. But that will also depend on the rate of the delivered product cost inflation, which is hard to know exactly how it’s going to be. It’s been up 9% in the first quarter. We had delivered product cost inflation of 27%, same in ‘22. So 19% is obviously lower than 27%, but it’s still going up. And I don’t see it turn negative anytime soon. So for 2023, I think we will be facing continuous DPC inflation. So with that, well, we will keep working on pricing. We will keep working on volume. We will keep working on productivity in order as committed to make sure that our earnings improve quarter-after-quarter until we get to our traditional low double-digit operating income or earnings per share growth in the fourth quarter.

Ashish Sabadra:

Thanks for taking my questions. I wanted to focus on the SG&A leverage that we saw in the quarter, pretty strong leverage there. I was wondering if you could talk about the productivity initiatives that you have – and the cost takeout initiatives, but also how the digital innovations are driving better SG&A leverage? Thanks.

Operator:

Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed with your questions.

Christophe Beck:

I’d love to, Seth. Thank you. So pricing, the team has done a remarkable job over the last 18 months, making really sure that the pricing we were delivering was really so backed by value that we’re creating so for customers as well because we will never go down in pricing. It’s been true for the last 20 years. That’s not going to change in the years to come. This is the Ecolab way of creating value for customers and capturing part of it, which translates into pricing for our business. So when I think about the pricing we had last year, we had roughly sort of 10% of price, so in ‘22. As mentioned, half of it will be carried over in ‘23, which is unchanged. The 13% that we have in Q1, you’re right, you understood well. So it’s going to be the peak for ‘23. We will keep having strong pricing in the quarters to come, but the rate of increase will ease as we lap obviously so year-over-year. And now to your point, under energy surcharge, we’ve been working with our customers over the past 12 months to merge as much as we could of the surcharge into structural pricing, a bit different in every industry that we serve. But for the most part, the transfer from energy surcharge to structural pricing is going quite well. It’s not all the way there, but I like the progress that we’ve made so far.

John Roberts:

Thank you. Nice quarter. Do you need to shrink the sales of the European healthcare business in order to turn around earnings?

Operator:

Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.

Christophe Beck:

Yes. Thank you, Josh. So on the volume, as mentioned, we’ve been slightly negative. It was kind of the same trends as what we saw in the fourth quarter. So honestly, better than peer, if I may say, because Europe was less bad than we sold. So from an environment perspective, honestly, I like a lot, how Europe has been delivering. In the first quarter, sales were good. Margins were extremely good, and I think that they’re going to have a very good year in Europe in ‘23. So that’s the good news. If I look at overall volume for the company, if you exclude Europe, as mentioned just before, so we’re slightly positive, which is a good news as well. And the third point, which is most important is the shift to offense that we’ve initiated a few months back, while we wanted to really make sure that pricing was done the right way in order to enter ‘23 very well positioned to improve our margins. Well, that was taking a lot of time for our sales team that they were not focusing on generating even more new business. That being said, new business in ‘22 was stronger than in ‘21. So it’s not that it was not good. It was good actually, but I’d like to have much more. Now we’ve made that shift – it’s what our teams like to do. It’s where we are best at, ultimately, I like a lot when I see the new business that’s been generated. We had a record high in Q1, which is a very good news. We need to execute that properly as well. So we will be biting a slowdown of the global economy. I don’t know whether that’s exactly going to go, obviously, but it’s not going to accelerate that I’m pretty sure about. So we will have to drive volume the old-fashioned way with new business with innovation, investing behind our growth engines as well. So it’s going to improve quarter after quarter. And I think that, that’s the journey that we are on, and you will see that in the quarters to come, especially in the second half of the year.

Mike Harrison:

Hi, good morning. Sorry, good afternoon, I guess. Christophe, I know you are reluctant to put numbers around the full year outlook. The wording compared to 3 months ago is pretty much unchanged. But can you talk about how confident you are in that outlook today versus 3 months ago? What are some components that have changed for the better? And maybe what are some areas that you’re more concerned about?

Operator:

Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

Christophe Beck:

Help me understand, Manav, I really wanted sense. So when you say data initiative, what is it exactly like, Manav.

Christophe Beck:

Okay. Got it. Thank you. That’s helpful. So two questions here. First, on new business. We’ve never disclosed the exact numbers on your business pipeline and growth. So I’m not going to start now. But we haven’t changed our definitions. So it’s really so comparable. So in Q1 was quite a bit better than what we had in the past few quarters and even compared to Q4 as well. So the fact that new business is accelerating year-on-year is a good news, obviously. So for the new business generation. Then once we have sold that new business, we need to install it, as you know. So we don’t sell for the most part software, so people need to install our technology and make sure that the chemistry is working and that the processes are working as they should and all that. That usually takes a few months or a few quarters to implement nothing new. That’s always been true, and that’s going to be true this year. So very good new business pipeline. Major refocus of our team on new business. If you want to think about it in the past 2 years, our team was 80% focused on pricing and 20% on new business. Now it’s the other way around. It’s 80% on new business and 20% on finishing the price and keeping pricing for the future as well. So that’s going to have an impact, obviously, on our volume, which we will have to net, obviously, with the market evolution. But I feel confident for now that we will master that quite well. Now the second part of your questions are very different on digital. We’re still focusing on three major pillars. That hasn’t changed. The first one is really so to generate value for our customers. The way we’ve done it in the past with 3D TRASAR is going really well. Ecolab 3D, which is the Ecolab Cloud, one of the largest in the industry, by the way, since we’re connecting tens of thousands of plants on the cloud is giving us a very unique view, Manav, on what’s the best performance that we can reach within a company, what site that’s having the best performance and how to lead to that performance and then expand it across that customer. We can do it within industry, across the industries. And that we’re really focusing on with our team. And just for perspective, we have over 1,000 people in digital today. So we have quite a bit of firepower for that. The second pillar is really to focus on field automation, as mentioned before, and you see it in the SG&A productivity as well. This is not squeezing our teams, it is really sort of providing them with the tools that they can really focus on creating value for our customers and that we can automate all the transactional work. We’re early on that journey, but it’s progressing well. You can see it in the numbers. And the last component is really the customer experience really making sure that they can have a real-time data-driven type of experience, e-commerce is something that has expanded very well over the last 12 to 18 months but it’s also what we call our digital industrial bulk has been an interesting project as well. We ultimately saw all our distribution to industrial customers is connected to the cloud and can be done not only in real time where customers know when the products are going to come, but we can also increase the safety level of the delivery because it makes sure that what’s being delivered is being delivered exactly in the right tank, and that’s been a great plus, not only for our customers but for our team because safety still got better. So sorry for the long answer on that, but good progress on the digital front as well, and we’re still on our journey here.

Chris Parkinson:

Great. Thank you so much. Just in your supplemental, when you break down the water business, it’s pretty clear that you’re still enthusiastic about the pricing gains as well as new business wins. But Christophe, just given what – understanding you don’t have a crystal ball, but just given what you’re seeing right here right now and what you’re hearing from the customers of these various substrates, can you just comment on what your expectations are for the evolution of those for the balance of the year? And then perhaps comment on – it seems like this business has been under-earning along with Institutional. And just how long you think it will take to get back to its, let’s say, full potential at trend line? Thank you so much.

Operator:

Our next question comes from the line of Jeff Zekauskas with JPMorgan. Pleas proceed with your question.

Christophe Beck:

Thank you, Jeff. So let me take pricing, and then I’ll give the floor to Scott who need to work a little bit here as well during that call in SG&A. On pricing, you’re right. We’ve always increased prices overall in our history, 20 years plus, it’s not going to change in ‘23 and in the years to come. So there will be a combination of a few things that are going to happen. As mentioned before, 10% was the pricing we had last year. Half of that will be carryover that math since we’re not going to give it back in 2023. And we will build on that some incremental pricing. So you do the math, obviously, and then there is the lap year-over-year. Then there is the last question or part of the question, which is what’s going to be the run rates are going forward. We were 1% to 1.5% in average, in the last 10 years as a company. Depending on where inflation is going to be in ‘24, I don’t know how it’s going to be, but it’s going to be north of 2%. I’m almost sure about that. Jeff, I think that our incremental pricing will be higher than what we had in the past before this inflationary cycle. So if you combine both the carryover and the new pricing, you can see more or less where we’re going to be and for the years to come. I think that the company has developed a very strong muscle in pricing, not because we’re jamming pricing to customers. As mentioned before, we’ve taken our time to do it really well, really respectfully and backed by value with our customers, and we’re going to continue to do that in the future. It’s going to be good for customers. It’s going to be good for us, and it’s going to be good for shareholders, especially as inflation will be easing since our margins will improve as well at the same time. So that’s the general picture on pricing. Now for SG&A. So Scott, you might want to make a few comments.

Operator:

Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Christophe Beck:

So David, I like the progress we’re making in Institutional. You’ve seen the numbers, 14% growth in Institutional & Specialty and 16% on the operating income, which is good. But this is the beginning of the journey. As I’ve mentioned a few times over past calls, the industry behavior has changed quite a bit. If I take the example of restaurants, which unfortunately are the same numbers as the ones that I’ve mentioned during the past few calls, the dining in traffic, which means people going in the restaurant and sitting at the table is down 30% versus 2019. And we were all hoping that, that would improve quarter after quarter. Well, the ugly truth is that it’s not. And people have gotten used to order online, to do some pickup or being delivered as well the food, and that’s amazingly sticky interestingly enough. So it’s been good for our customers, and I’m really pleased for them because at the end of the day, well, they are selling the same or more at a lower service cost because they have less people staying in the dining room, very good deal for restaurant operators. And I think this is a very good thing for them as well. We had to change obviously. So for us, when I think about it versus 2019, so if you take in restaurants, this minus 30% of foot traffic in their dining room, well, our sales in comparison in North America are up 12% in 2023, so the first quarter. So we’ve gained market share. Our teams have managed to really sort of drive share, drive pricing, drive innovation to make sure that we could get ahead of the curve. But the baseline has changed quite a bit. A bit similar in hotels as well because we’re all experiencing that. Our room prices are higher, good things for the industry, obviously. But the services provided have gone down. This is helping their margins. This means less natural demand for what we’re doing. And our teams is and will be offering more services in order to drive penetration of all we do for the lodging customers we have around the world in order to make sure that we keep growing in an industry that has changed a bit what they are offering for their guests. And for perspective, the rooms sold off versus 2019 in North America up 8% and our housekeeping business is up 18%, for instance, as well. So, showing as well that we are gaining share, but a lot needs to be done in an industry that has changed because guest demand has changed as well. I like what the team is doing, so offering Ecolab Science Certified, which means offering the whole Ecolab offering to customers in order to make sure that their guests are safe and satisfied in a way that’s reducing cost as well. We need to reduce our own costs as well at the same time, which is why we’ve announced this restructuring program in Institutional that is done for the most part as well, and it’s going to pay off in the quarters to come. So we’re early in that journey. But I like what the team is doing in repositioning itself for a new industry, which I believe is going to be better after that whole phase than it was even before.

John McNulty:

Yes. Thanks for taking my question. And my question is on the global Healthcare & Life Sciences businesses. The margins in the third quarter were in the single digits. They spiked back up to mid-teens. And then again, this quarter, they are back down into the single digits. So can you help us to understand what’s driving the big volatility that we’ve seen there over the past few quarters in what I would assume is normally a pretty stable business. And then I guess to one of the points you brought up earlier, you indicated that you’re looking to strengthen the core of the specific healthcare side of Healthcare & Life Sciences. I guess can you flesh that out a little bit? Does that include potentially M&A? Or is it really just internal self-help? I guess how should we think about that.

Operator:

Our next question comes from Shlomo Rosenbaum with Stifel. Please proceed with your question.

Christophe Beck:

Good afternoon.

Christophe Beck:

Yes. Thank you, Shlomo. So it’s a change that we’ve initiated in 2021, if I remember right. So it’s been quite a while ago. It’s something that we have been preparing very carefully. It’s a large business. It’s a successful business in an industry that is changing and that will be changing in the future. So it’s combining repositioning towards what our customers truly need while making sure that we’re improving the performance our overall business. And that’s why we’re doing that in a very careful, thoughtful manner. I might be taking a bit more time than some would wish. But I want to make absolutely sure that Institutional after that cycle is in a better place than it was pre-COVID or pre cycle. This is my objective number one. And as mentioned before, when you look at the numbers I mentioned on restaurant with traffic in dining down 30% and our own sales up to 12% versus 2019. So precycle as well, same on hotels, as mentioned before as well, is showing that we’re gaining share. At the same time, our margins are improving as well, so in that business. So the fact of splitting sales and service has reached or is reaching because we’re still on that path, our two objectives. The first one is to gain share, as mentioned before, so we did. And second is to reduce our cost because we have a service organization that is really organized in order to have the best performance in serving and servicing our customers. And when you look at the cost structure that we have in Institutional, it’s improving as well. So, we get both. Gain share in our end markets and at the same time, reduction of our cost structure that leads to better performance for the business. So, work in progress, but I like where we are going here.

Andrew Wittmann:

Great. Thanks for taking my question. I guess Christophe, I had a question about the gross margin. You talked about you are targeting getting back to the prior gross margins and eventually even exceeding that. I guess with – the business mix has changed over the recent years, certainly, in the waning days of your energy ownership, it was weighing on margins. Purolite goes the opposite way. That’s a very high margin – gross margin business. So, I guess I don’t know what the target gross margin to get back to the prior levels is, and I was hoping you could kind of clarify what that gross margin is that would be equivalent on today’s mix of business to kind of where it was pre-inflation or pre-COVID, if you understand what I am asking here?

Operator:

Our next question comes from the line of Ryan Connors with Northcoast Research Partners. Please proceed with your question.

Christophe Beck:

Great question. Thank you, Ryan. Yes. It’s not our biggest business, obviously. But it’s quite a fascinating journey because we all see obviously, those products when we get to the stores of Home Depot. I hope Ryan that you participated as well, so to our new venture here. It’s been a great story over the last few months. It’s early. We started in January. Home Depot had their market manager conference a month ago with 5,000 people, the number one innovation was our rollout of the Ecolab products that we do exclusively for them. So, it’s a big deal for the Home Depot. And it’s an interesting deal for us. We take it extremely seriously. We have a great team after it. We are doing it very thoughtfully. We are trying to learn as much as we can with the consumers, what the pros since it’s the main focus of that whole business are looking for as well, so far, so good. Every week, we track the progress, and it’s been a remarkable progress week-after-week without disclosing numbers that need to be Home Depot’s numbers, obviously here. I like where we are going. It’s not going to move the needle for the company in ‘23. But down the road, I think it’s going to be a nice growth engine for the company.

Laurence Alexander:

Good afternoon. Just a follow-up on your discussion around sort of the pricing environment, particularly in a more inflationary environment. As you have done experiments around the world, do you get a sense that your ability to take share and your pricing initiatives have kind of a linear relationship, or is there kind of a non-linear kind of breakpoint where if you push too hard, the share gains really deflate very quickly. Just can you give a sense for how you see the customer psychology playing out based on what you have seen over the last couple of years?

Operator:

Our next question comes from the line of Kevin McCarthy with Vertical Research. Please proceed with your question.

Christophe Beck:

No, in general, it’s been a very good story. It’s not going to be every quarter the same because in Life Science, obviously, where half is our Purolite business. We are building new foundations. We are expanding the capacity, as you mentioned before, we are investing as well in the team that requires time to do it very thoughtfully. But when I look at the capacity build, we are exactly on schedule. It’s going really well. We are learning while we are doing it. But for the most part, it’s going well. When I look at the whole new business generation, good progress being made here as well at the same time and driving it towards customers, so it takes time for us to do it really, really well. We had as well that shift, obviously, so from pricing to new business, which impacted as well. Life sciences, good on margin and it’s a shift that’s required in order to get more volume going forward. But the stores are aligning very nicely in this overall life science business. I like a lot where we are going. Long-term, it’s not going to be every quarter the same as mentioned a little bit early on, but the trajectory, very good, very promising, and we are going to do that really well.

Steve Byrne:

Yes. Thank you. So, what would do you attribute the primary driver of the new business wins in water? And I say that not beyond – not discarding the effort that your sales force is putting in. But is this new customers, or is this expanded treatment for existing customers, is there something particularly driving it such as increased regulatory or legal scrutiny on your customers?

Operator:

Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Christophe Beck:

So, a few elements, Vincent, here. So, labor is not in delivered product costs for us. So, that’s outside those numbers that we have always been talking about and that I have been talking about as well, but just maybe a comment on labor and wages. I feel really good with how we have been able to manage that. The fact that we have had very high retention of our team has helped us as well to keep our labor cost within a good framework ultimately and driven by the digital automation. As mentioned before, we managed to drive the productivity that you have seen as well in our numbers. So, on the labor side and wages, I feel really good. When we talk about the delivered product cost, which is ultimately raw materials, freight/logistics and technology, dispensing equipment and all of that that we are bringing to our customers as well, that’s what we mean. We delivered product costs and that you see in our numbers that represent roughly a third of our sales. Overall, I wish you were right, Vincent, that it would turn negative. It will not in ‘23. The question is only, so how much is it going to ease. As mentioned a little bit earlier on the call, we had an overall increase of delivered product costs of 27% in 2022. We had a further increase of 9% in the first quarter of this year. So, better than the increases we have seen in the past, but still an increase. And I hope that in the next two quarters, this rate of increase will ease, but we do not expect that it’s going to cross the zero line to become negative in the quarters to come. And well, when it comes and if it comes earlier, Vincent, will take it. But this is not what we are seeing right now.

Scott Schneeberger:

Thanks very much. Good afternoon. Christophe, I think let’s go to the pest category, one segment, two questions. The momentum has been really, really strong there. We have seen margin expansion. Some of the reference in the releases is about innovation and competitive advantages. I was hoping you can elaborate on that a little bit. And the second part of the question is, it was cited unfavorable mix was one of the headwinds in the segment? I am just curious if you could share a little bit about what that means. Thank you.

Operator:

And Mr. Hedberg, there are no further questions at this time. And now I would like to turn the floor back over to you for closing comments.

Operator:

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

Operator:

Greetings, and welcome to the Ecolab's Fourth Quarter 202 Earnings Release Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. It's now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations for Ecolab. Mr. Hedberg, you may now begin.

Christophe Beck:

Thank you so much, Andy, and welcome to everyone. Our team delivered a strong fourth quarter, and honestly, even slightly better than I would have predicted. The milder winter in Europe certainly helped, but most importantly, our team executed very well in a macro environment that was far from ideal. Organic sales grew 12%, with good momentum across all segments. Industrial grew 14%, Institutional & Specialty grew 11%, Healthcare & Life Sciences got back to growth, delivering 7% organic, and Pest Elimination remains very strong, growing 10%. Volumes outside Europe remained stable year-over-year, while our total pricing continued to accelerate from 12% in the third quarter to 13% in the fourth quarter. All this contributed to a strong 14% adjusted fixed currency operating income growth even as we experienced the expected peak in delivered product cost inflation, which reached 43% over the last two years in the fourth quarter. This led to adjusted EPS getting very close to last year's $1.28 EPS, while mitigating $0.10 of currency headwinds or 8 percentage year-over-year headwind to adjusted EPS growth. Since the initial impact from the war in Europe, we have delivered consistent operating performance improvement quarter after quarter. And as mentioned during the last earnings call, this is the path we expected to stay on for the quarters to come. We're entering '23 with a reasonable level of confidence. While we would have lost most of our $1.3 billion of earnings in 2022 to cost inflation, we have rebuilt almost all of it within the same year. This demonstrates the true earnings power of our value proposition and the strong momentum we have in margin rebuild. Most importantly, our shift to offense, which is where Ecolab is at its best, is also showing some very encouraging signs of progress. Our net new business pipeline reached record high at the end of last year as what we offer. Water, energy and labor savings while delivering the best and safest outcomes in the industries we serve around the world continues to grow in importance to our customers. And we expect this trend to continue to strengthen. On the other hand, our view on the macro environment remains unchanged. We still expect inflation to remain high well into the year, interest rates to move higher and have an increasing impact on demand in most markets, and geopolitics in Europe, China and now in the Middle East to remain unpredictable. Nevertheless, we feel ready. In '23, we, therefore, expect to deliver double-digit adjusted operating income growth and adjusted earnings growth that keeps accelerating towards our low double-digit historical performance. This includes an approximate 7% year-over-year unfavorable earnings headwind from higher interest expense and FX in 2023. For the first quarter, we feel even more confident and are ready to resume quarterly guidance. We expect our strong top line momentum to continue and to deliver adjusted earnings per share to be in the range of $0.82 to $0.90 compared to $0.82 a year ago. This includes an approximate 15% year-over-year earnings headwind from higher interest expense and FX. And finally, while this is a period of caution, we have a positive outlook on where we're headed. Over the last two years, our expertise grew as we focused on supporting our team and on developing strong new innovation. Our retention rates remain high as we protected our customers from supply shortages. Our margin started to recover as we drove pricing in thoughtful ways, while increasing customer value, helping to drive a strong acceleration in operating income. We remain prepared for softening market trends in Europe by accelerating the productivity improvements we had planned for future years. We are adjusting Institutional to winning the new reality, and we're beginning to reposition Healthcare for profitable growth. as we promised. We will also keep investing in our major engines of high profitable growth like water that delivered 14% organic sales growth in the last quarter, and Life Sciences that accelerated to 18% in Q4. Additionally, Pure Lite, we started its expansion exactly as expected with new capacity coming online, helping to drive a very strong acceleration in sales, with operating income margins north of 30%. We remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing our leverage and returning cash to shareholders as we've always done. And most importantly, with the best team, science and capabilities in the industry, we're ready to grow our share of high-quality $152 billion market, and our future has never looked brighter. I look forward to your questions.

Operator:

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

Christophe Beck:

Thank you, Tim. So let me start with what we've done in 2022 because margins, gross margins and OI margins were our number one focus for the full year. And as I've mentioned in my remarks as well, so we were facing headwinds that were equivalent to our net income, so close to $1.3 billion. And we've been able to rebuild most of it within the same year, so which is really showing the earnings power that we have as a model and as a company. So I'm confident that we will rebuild our margins to where they were, and we will expand from there as we've done many times in our history as well. So if I look at our OI margin in Q4, they turned almost positive. They were slightly still down in the fourth quarter. So that's a good sign, obviously, of where we're trending. Our OI growth, organic, was up 10% as well. So if we look at the trajectory, we're in a fairly good place. So if I look at '23, we have some good momentum. Pricing keeps accelerating. Productivity is in a good place as well, and we'll see what happens, obviously, so with inflation. Q1 should be a continuation of the OI growth, which means that OI will keep improving as well in the first half. So I think that it's going to turn positive in the first half of '23. And gross margin will probably follow in the second half of the year. It's not going to happen on July 1, but it's going to happen sometime in the second half.

Christophe Beck:

I would love to, Tim. So first, it's not a consumer brand. It's a brand that's aimed at pros as their Home Depot also calls them. It's mostly cleaning contractors. That's the vast majority of the customers buying this range, which is an end market that we never really addressed in the past because we go through service and distribution as we've done so for 100 years. So it was a white space, basically for us, again, focused on pros, not really on consumers. We have the best partner ever with the Home Depot to do that as well. So we'll see how big it's going to churn, but we're quite bullish about what that could deliver in the years to come.

Operator:

Next question comes from the line of Seth Weber with Wells Fargo Securities.

Christophe Beck:

Thank you, Seth. Maybe just a few comments from me and then I'll pass it to Scott, who will give you a little bit more details on that. I'd like, first and foremost, to say that, for us, productivity is an outcome of momentum. So sales, innovation, pricing, this is the best way, obviously, to drive productivity, as we've done over the past few years, and we'll continue to do it as well in the future. Now to the programs, it's really so to focus on individual businesses or markets, as we've disclosed, our Europe program. So during the last quarter, and now to be more focused on two businesses that we need to address, Institutional because the market has changed. We're in a good place, but market has evolved, and we need to evolve here, and Healthcare because we need to bring that business back to profitable growth since it's been a challenge, so for many, many years. But I'd like to pass it to Scott to give you some more color on that.

Seth Weber:

Okay. And is it -- it sounds like those changes are meant to be permanent. So not volume -- if volume comes back, you wouldn't expect those costs to come back then?

Seth Weber:

Right. Okay. Thank you. And then just a quick follow-up on the Purely. I mean, can you just are the capacity additions done there at this point? And I'm just trying to understand like what the run rate of that business really looks like today? Thank you.

Seth Weber:

Thank you.

John Roberts:

Thank you. Did the surcharge come down in Europe with the drop in energy prices? And do you have any plans to merge the roll the surcharge, I guess, into the base price at some point here to get back to a simple pricing structure?

John Roberts:

And then on the Pro So Clean program with Home Depot, will those be identical products to what you distribute through Cisco and others? And will the Ecolab salespeople service customers who buy through Home Depot?

John Roberts:

Thank you.

Joshua Spector:

Yes, hi. Thanks for taking my question. I'm curious if you could talk about your volume expectations in the first quarter. And you mentioned in your prepared remarks, you were surprised some of the performance in the quarter. I wasn't sure if that was volume or something else you were talking about?

Joshua Spector:

Thanks. And just a follow-up on the cost reductions, and specifically institutional. I guess when adjusting to the current environment, I mean is that restaurants and takeout or something different? And what does that mean in terms of volume recovery potential?

Operator:

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

Christophe Beck:

Well, two parts of your questions. So first, the delivered product cost inflation outlook, and then pricing, which obviously both are driving our margins. Starting with the market that we can't influence, obviously, but the way we look at it from our perspective in 2023, it will keep going up, but at a lower rate than what we've seen in 2022. So it's not that our delivered product cost is going to get cheaper, it's going to increase less fast than what it did in 2022. So that's the first part. And obviously, things can move one way or the other depending on what's happening in the world. But that's the middle of the road that we've taken. Inflation staying high as a rate for longer well into 2023, as I've mentioned as well during the past call. Now on the pricing piece, we remain focused on pricing. We will have carryover in '23 coming so from '22. We expect half of it, so to be strictly carry over into '23. And we will keep pricing further as we've always done as a company, and we'll keep doing going forward in order to recover and expand our margins. Wait will net out, we will see, but that's how we're estimating basically our sequential progressive earnings improvement quarter after quarter into '23.

Christophe Beck:

So when we talk about the beefing up our sales force, they're not all created equal. We have the high-growth businesses like Life Science, Purelite Hightech, those ones are clearly being fueled, and we add people, we add investments for those ones because we know it's driving so high profitable growth. And we have, on the other side of the spectrum, other ones where we need to do some work. Healthcare being one of the examples because it's $1 billion business, that's not making much money as we know. So we'll have to work on cost efficiencies, including in our sales structure as well, but all done with a long-term view of building profitable growth business. So when we talk about cheap to offense, this is, by far, the number one priority that we have as an organization for '23. It's about new business, Manav. You're familiar with that, and we had some very good results in Q4. It's about innovation. The Home Depot that we talked about is a good example as well and fueling the high-growth businesses, as I just mentioned. So it's what we're really good at. It's what the organization loves doing. And while we do that, we'll stick as well, so new to pricing because we need to get our margins back to where they used to be and expand further, and third, we will address those programs, as mentioned. But in a real surgical way, this is not going to be our main priority in '23.

Michael Harrison:

Hi, good afternoon. Christophe, I was wondering if you could give a little bit more color on how you're thinking about the earnings cadence in 2023? You talk about getting to an EPS low double-digit growth rate later in the year. But if I look at your guidance for Q1, the top end of that range is already kind of a 9% to 10% growth rate. So maybe just help us understand how you expect the year to play out. And maybe what are some of the key drivers that could lead you to be maybe towards the higher end or lower end of that outlook?

Michael Harrison:

All right. And then a quick question on the Water business, particularly the downstream portion. I was just hoping to understand the additives impact that you called out in the prior year. Were those sales kind of onetime in nature? And I guess is that the main reason that volumes aren't looking better in that downstream business as we're seeing some improvement in refinery utilization rates?

Operator:

Our next question comes from the line of David Begleiter with Deutsche Bank.

Christophe Beck:

No, we don't. Dave, we expect, as mentioned before, that our costs are going to keep going up as they did in '22, the rate is going to be lower what we've seen -- the rate of increase is going to be lower than what we've seen in 2022, but our delivered product cost is going to keep rising in 2023. The wage part is a minimal part of it. It's going to contribute to an increase in cost. That's always the case every single year, obviously. So that's not exactly material, but that's going to go up as well and all parts of the outlook that I described before.

Christophe Beck:

We buy 10,000 different raw materials. So that's going to be hard for me, David, to go in all details. But the truth is that most of them keep going up, some are more extreme than others. The caustic in Europe, went up 90%, for instance, lately. So those are things that we need to deal with. And everything else is between 0, slightly negative, but nothing much negative, 200% plus like the caustic take that I mentioned before, so being close to the 100% here. So not an exact answer to your question, but it will be hard with the thousands of customers -- of our commodities that we're buying out there.

Jeffrey Zekauskas:

Thanks very much. Historically, Ecolab has raised prices about 1% or 1.5% per year in that its rate of inflation and costs has been pretty low. But over time, there's much less commodity production in China, and domestic producers of chlorine and caustic soda are operating their businesses differently. So as a base case, are your expectations that annual price increases for Ecolab are no longer in the 1% to 1.5% range, but maybe now we're more 2% to 3%? And your customers understand that, if that's true?

Jeffrey Zekauskas:

And maybe quickly for Scott, are you -- it looks to me like your inventories are maybe $150 million too high. What will working capital be as a source of cash in 2023?

Operator:

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

Christophe Beck:

So it seems like your question is focused on the Industrial segment here?

Christophe Beck:

Good. So generally, industrial is in a good place, not because the market is booming, and we know that interest rates are going to soften the demand. So that's our base case of saying our general demand like-for-like same-store sales is going to go down. So we will need to drive our own growth through new business innovation, in new end markets and so on, as we've done as well in the past. Industrial is in a very solid place, in a very good trajectory in terms of margins as well. So it's doing that balancing act of making sure that we can drive pricing, getting the right margins driven by value, as I mentioned to Jeff as well before, while we drive the new business with the shift offense, which I like a lot because it's ultimately where our teams want to focus the time. It's where we are best at and what we love most doing. So generally, industrial is going to keep being in a good place and some quarters will be a little bit lower in volumes and some will be a little bit higher, but generally in a very good place.

Christophe Beck:

It's a great business. It's been a great business for a long time, and I'm a fan of that business going forward. I can't comment on the M&A side, obviously. But generally, it's a business that has done very well during the COVID times and has done very well in the years after that as well, a very nimble business, very strong leadership team, unique market positions as well, and we see that in the 10% growth that they've delivered in the fourth quarter as well. And I expect them to continue to do so. When I think in terms of innovation here, they're starting to provide disinfection services for their customers as well, which, I think, is going to be a very promising proposition. It's a good complement to what our teams are doing so right now as well. So strong business, with strong margin, with the highest return on invested capital because there's almost no capital involved, obviously, in that business, then driven by good innovation for the future. So great story that's going to keep staying great.

Ashish Sabadra:

Thanks for taking my question. I was just wanted to drill down further on the first quarter EPS guidance and follow up on a prior question that range seems pretty wide. What are the key factors which takes you to the top or the bottom end of the range? Is it more volume, raw material or below-the-line items?

Ashish Sabadra :

That's very helpful color. And then good to see that strong momentum in the business as well. Maybe just a quick question on the National Restaurant Association. I was just wondering, from a preview perspective, can you provide any color on new innovations that we can potentially expect at that event? Thanks.

Operator:

Our next question comes from the line of John McNulty with BMO Capital Markets. Proceed to your question.

Christophe Beck :

So, two things, John, and very different stories, obviously, so in that segment. Life Science has been in a good place for a long time. They were just lapping against very high numbers during the years prior as well. So, it was more of a year-on-year comp than anything else. And Life Science, as mentioned before, is back to our 18% growth, driving very good earnings as well as they did prior during that comp was an issue and back ultimately to their traditional trajectory. So, life science in a very good place, which you see fully in Q4, and you couldn't see fully in Q3. Second, Purolite, as mentioned many times, so we were capped in terms of how much we could produce until Q4, which limited the growth by definition because we couldn't produce the products that we could sell ultimately. That has created a bump, obviously, in Q4. It's not in our organic numbers by definition, since it's an acquisition, and it's the first year. It's going to change as of Q1. And then you have Healthcare, totally different story. I like the fact that they're turning slightly to positive growth. The fact that they have made some money, but I'm not getting overly excited with that. It's one quarter, and it's not a dramatic change in that business. On the other hand, I like a lot the efforts that are being made by that team to really drive it back to the performance that it should be from a growth and, most importantly, from a margin perspective. The program we've announced is part of it that will help, obviously, the cost structure. But at the same time, we know that we need to improve our offering. We need to make sure we focus on the programs that make most sense as well for our customers and for us. So, it's still a long road ahead, but we will get to the right place as I've committed to that.

Christophe Beck :

First, China represents 4% of our global business. So, it's hard to be material like Europe would be in our results. We have a good position in China. Our Industrial business is a very strong business. What we do is something that customers and government likes a lot as well. It's about clean water, safe food, preventing infection. It's obviously very important for all of them as well out there. We've had a decent performance in '22 in China, in Q4 as well. So, it’s positive growth. It was kind of in the mid-single range in China during the fourth quarter. And we’ll see how Q1 is exactly happening. There’s the new year that’s happening during the quarter with the shutdown and reopening. That’s going to be a bit of a messy quarter in China in Q1, but ultimately, I think we’re going to get back to a good place once this kind of a volatile period is behind us because what we do matters and our team is really strong as well over there.

Adam Parrington:

This is Adam on for from of Rosenbaum. What tax are you seeing for 2023?

Scott Kirkland:

Yes, I will cover off on that. Thanks for the question. I expect the rate for 2023 to be slightly higher than this year just due to sort of geographic mix, but right around, call it, 19%.

Scott Kirkland :

Yes. You should think about the free cash flow in 2023 much like we did this year in terms of our historical conversion. Certainly, from a pacing perspective, Q1 will always be lighter, but I would expect the free cash flow for 2023 to be right in that mid-90s conversion on net income.

Rosemarie Morbelli:

Thank you. Good afternoon everyone. One on top -- so we are talking about -- first of all, congratulations on a great quarter and a great year. But we talked about the challenging economic environment currently, and you are beginning to see it. Now what you see if you compare it to what you saw prior to the last recession, are those signs indicating a recession or just a slowdown from where you stand?

Rosemarie Morbelli :

Can you tell whether it is -- will demand slow down or whether it is actually destocking?

Operator:

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

Christophe Beck :

So, let me give you just a few comments, and then I'll pass it as well to Scott. But as you've seen, half of the overall program is in Europe. That's what we've communicated. Well underway on this one. I like the progress that the team is making over there. And the balance of the overall program is mostly Institutional, with Healthcare getting its fair share. But maybe any more comments, Scott?

Kevin McCarthy :

Okay. And then secondly, if I may, for Scott, if we go back a quarter or so, my recollection is that you anticipated higher pension expense in 2023. Is that still the case? And if it is, how large might that headwind be?

Operator:

The next question is coming from the line of Steve Byrne with Bank of America. Proceed to your question.

Christophe Beck :

So, we don't buy any spot price or product at spot price to begin with. So, it's usually contractual. There are some exceptions, but it's not material so it's up, generally, it should be less than a 5% range.

Christophe Beck :

During which -- I want to make sure I understand your question.

Christophe Beck :

Between Q4 and Q3. So overall...

Christophe Beck :

Okay. Got it. You mean today in Q1. The trends, as mentioned before, they keep going up. So just to be very clear. So, in the third quarter, our total costs, as mentioned, were up 30%. They were up in Q4, a little bit less than that. And in Q1, they will be up a little bit less than what we had in Q4, but still up. Did I answer your question like that?

Christophe Beck :

So, to the lag question, it takes a quarter or two to get through the system generally. Not every product is created equal in here, but I want to be very clear that the increase that we see in Q1 is a net increase, which means that the cost of our delivered product cost is clearly going up as well in Q1 versus what we saw in Q4 in dollar terms as well. So, the cost of what we buy keeps going up, albeit at a lower rate of increase than what we saw in the past few quarters.

Christophe Beck :

Yes. We're probably the most advanced company in the science of water, in mastering water, in managing water. So PFAS is an opportunity that we've been looking at for quite a while. The demand hasn't been as clear as we would wish so far. So, it's something that's going to come at some point, which will be most probably something interesting for us, like microplastic by the way, as well. So, the technology, the science, we have it, we'll be ready when the market is ready to use those solutions.

Vincent Andrews:

Thanks. I just have one question left here. In your Downstream segment, you talked about particular strength in the quarter in petrochemicals. And I was just wondering if you could bridge that with the fact that in most cases, particularly in the U.S. and Europe, the petrochemical assets were running at very low operating rates.

Vincent Andrews:

Okay. Thanks very much Chris.

Scott Schneeberger:

Thank you so much. Good afternoon. Following up on an earlier question on the cost savings program you guys shared on Institutional versus Healthcare breakout, I'm just curious, it was originally in Europe, but when you announced in the third quarter and now let's spend to other regions. So, first part of the question, just curious, is this mostly global non-U.S.? How involved is the U.S. with regard to these cost savings plans? And then also, Scott, I guess, specifically for you on this topic, you're going from $80 million savings to $175 million, more than a double with this incremental announcement, yet the costs incurred to enact only go up by about half as much as what it originally cost for the enactment. So just curious how you're able to basically get more leverage off the second iteration? Thanks.

Scott Kirkland :

Yes. The split of the savings, as you pointed out, certainly, the first program, and this is very consistent with what we've experienced historically with programs where the cost to implement these programs is higher in Europe and then less so in the U.S., just due to the nature of the environment.

Scott Schneeberger :

Great. Thanks. And a quick follow-up. You've addressed working capital a bit and free cash flow, just curious on CapEx levels this year versus the past and what a normalized level revenue perhaps is a good way to think about that? And going one step further, where the free cash flow might be utilized this year? Thanks.

Operator:

At this time, we've reached the end of our question-and-answer session, and I'll turn the floor back over to Mr. Hedberg for closing remarks.

Operator:

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Greetings. Welcome to the Ecolab's Third Quarter 2022 Earnings Release Conference Call. At this time, all participants will be in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations. Mr. Hedberg, you may now begin.

Christophe Beck:

Thank you, Andy, and welcome to everyone. In Q3, our team delivered another strong quarter, with steady double-digit organic sales growth of 13% and total pricing that accelerated from 9% in the second quarter to 12% in the third. Industrial grew 16% organic, with 15% pricing, and Institutional & Specialty grew 12% organic, with 10% pricing as market stabilized. The Other segment, led by Pest Elimination, continued on its strong trajectory with 13% organic and 7% pricing, and Healthcare and Life Sciences with year-over-year comparisons finally stabilizing, and with Life Sciences clearly leading. Most importantly, accelerating pricing exceeded continued substantial delivered product cost inflation, with the net benefit expanding significantly since the end of the second quarter, which helped further ease year-over-year gross margin pressure. This, along with increased productivity gains, led to renewed positive growth in fixed currency operating income with nice gains in the Industrial, Institutional and Other segments. All in all, a clear and further step on our journey to fully recover our margins and get back to strong and steady earnings growth. With this clear commitment to continuously improve earnings performance, quarter-after-quarter, we have been preparing for an environment where inflation will remain high for longer and interest rates will impact demand. This is especially true in Europe, where the war and the energy crisis are impacting demand and global energy costs. In my view, this is just the beginning, with inflation in Europe at 11% as of yesterday, and natural gas price is 60% higher than a year ago, which is the equivalent to $180 per barrel of oil today with future pointing towards $230 by the end of this year. More importantly, we're taking early action, as we take a realistic view of what's ahead and we continue to expect earnings growth to progressively improve, but at a moderate pace than previously anticipated coming out of Q2. Over the past three years, Europe has become a very strong, successful and critical market for Ecolab, with steady growth, profit margin improvement and the right team to strengthen our market leadership positions. We’re therefore entering this European winter with confidence, confidence is not built on hope, but the momentum, actions and exceptional execution led by a great team. We're in a unique situation to accelerate our performance improvements as we've launched a new initiative that will lead to $80 million of annual savings when fully implemented, helping to partly mitigate the negative impact towards short term and improve longer-term performance. This, along with accelerating pricing, new business and productivity gains, is expected to deliver a strong acceleration in operating income growth. The sequentially improving operating performance is expected to be offset by unfavorable impact from currency translation and interest expense, resulting in fourth quarter adjusted diluted earnings per share approaching last year's $1.28. Now more broadly, and with pricing and productivity work showing strong continued momentum and now fully in execution mode, we've clearly shifted our primary focus to offense. We've accelerated new business generation to gain more share. We’ve sharpened our attention on customer value creation to improve their total operating costs and importantly, protect our pricing in the long run. We've increased our investments in select breakthrough innovation to help customers save more water, energy and cost when they need it the most, especially in Europe. And we're prepared to accelerate Purolite growth with new capacity coming on line as we speak. This will help us unlock our large order backlog and expand proprietary technologies across high-growth, high-margin end markets in life sciences, nuclear power, microelectronics, and lithium extraction for EV batteries. Being back on offense, while staying on price execution and productivity is good for Ecolab. This is where we are at our best and what we love doing most. Looking ahead, we do not expect the global environment to improve anytime soon, but it's in times like these that our growth model demonstrates its strongest resilience, and our customers need us the most. We will, therefore, remain laser-focused on exceptional execution to enter next year in a position of strength, with strong double-digit organic sales growth, total pricing getting further ahead of inflation and productivity work mitigating the impact of the energy crisis and the war in Europe. We're now in a position to deliver earnings growth that progressively aligns with our strong historical double-digit growth performance. And this, for me personally, remains my core objective. We have all it takes to win, short term and long term. Our $152 billion total available markets keep getting bigger, with customers increasingly needing our solution to reduce their total operating cost and water and energy usage. Our pricing and productivity work provides us with a firm runway to recapture our historical OI margin and drive towards our long-term 20% OI margin objective, helping to drive significant earnings power as inflation eventually eases and our value delivered keeps rise. And our leadership team, now together with Darrell Brown, as Chief Operating Officer and my trusted partner, has never been stronger. This is why I'm more confident than ever about our future and our ability to deliver superior long-term performance for our customers and our shareholders. I look forward to your questions.

Operator:

[Operator Instructions] And our first question is from the line of Manav Patnaik with Barclays.

Christophe Beck:

Good question, Manav. Thank you. It's mostly Europe, but it's also the macro view. And that's our assumption, which might be overly realistic. If I may say that inflation is going to stay high in 2023, that the dollar will remain strong as well, interest rates might impact demand as well at some point. But most importantly to your point, that Europe is going to have a tough winter. So, we've been improving our performance quarter-after-quarter from Q2 to Q3, expecting the same as well for Q4, and leading towards the double-digit historical growth that we've had in the past as well sometime in 2023, that we can have really an improvement that's steady quarter-after-quarter, mostly driven by steady growth, which has been so really strong over the past few quarters and will remain as such and pricing, that's going to keep to strengthen as well over the quarters to come as inflation hopefully, stabilizes and goes down at some point.

Tim Mulrooney:

I know there's concerns about softening Europe and FX headwinds. But based on our math, it still seems like the number 1 determinant for EPS growth is still around gross margins. So, my question is, assuming no more significant spikes in raw materials and based on what you expect for pricing, when would you expect gross margins to begin to expand year-over-year? Is that most likely sometime in the second half of 2023? Any directional guidance would be helpful.

Operator:

Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank.

Christophe Beck:

Thanks, David. Healthcare, I think, has reached the low point in Q3. And now, we could see the trends coming back up where surgeries are starting to get back to normal levels. We could feel that over the past couple of months. Inventories as well of COVID-related products are kind of melting, which is good as well. And most importantly, so pricing moved from 3% in the second quarter to 6% as well in the third quarter, and we keep improving as well in the quarter to come. So, I think we're turning the corner with the lowest quarter in the third quarter in healthcare. But let me be clear, as I've always been, I don't like the performance of that business. That's been true for quite a while as well. But I'm absolutely committed to resolve it over the quarters to come and '23 is going to be a transformational year for healthcare in many ways.

Christophe Beck:

You're talking about healthcare or...

Christophe Beck:

It's a good question, David. So, we're taking probably an overly realistic view, but it's basically saying that the high delivered product cost that we have today will remain for 2023, which is why when we can improve our gross margins and operating margins as well, which, by the way, have turned positive as well, in the third quarter, it's already a remarkable achievement, if other things that inflation is going to ease and go down during 2023, while our margin leverage will improve dramatically as it always does. But I'm not counting on that for now.

Seth Weber:

I guess, I was hoping to drill down a little bit more on the institutional business. Whether you've seen any kind of -- whether you saw any deterioration kind of through the quarter, just in response to the high price increases, whether that's starting to have any impact on customer demand? I guess, I'm just trying to understand what's happening more specifically in the institutional business, and then just any specific color on Europe institutional that you could share?

Seth Weber:

That's helpful. Thank you. And then maybe just a quick follow-up on the Purolite capacity adds. Can you just frame for us the pace of that and just the order of magnitude that you're looking at on Purolite capacity additions for this year and next year? Thanks.

Operator:

The next question is from the line of John Roberts from Credit Suisse.

Christophe Beck:

We're not expecting much softening, John. So in the fourth quarter, we were expecting that in Europe, things would be better, which would ultimately help us get even better in terms of volume. That's not going to happen. I might be overly realistic in Europe. But I think that the war in Europe, the impact as well on energy cost on all European economies as well over there is going to have a major impact. I hope I'm wrong, but that's going to be the bull's eye of the volume challenge. But overall, we're going to keep steady double-digit growth as a company and volume will remain quite stable as well versus what we've seen in Q3.

Christophe Beck:

Let me give that question to Scott.

Operator:

The next question comes from the line of Josh Spector with UBS.

Christophe Beck:

Hi Josh, it's worked really well. Actually, we didn't know how it would be working when we started with the energy surcharge on April 1st. We have never done that as a company, so let alone on a global basis, all businesses all at the same time. It worked out really well. Some of the learnings for us, some customers who preferred having it directly in a structural pricing because it was easier for them to handle that. So, from a system perspective as well, and others chose the energy surcharge as a viable part as well to it. But it's covered very nicely, so dollar for dollar, what we were expecting. And most importantly, it's a tool that we can use as well. So going forward, with whatever could happen, like natural gas in Europe, it's been highly variable. As you've seen, it's on the lower side right now, still 60% higher than a year ago. It could double very easily over the next few months. Having such a tool that we can engage very rapidly is going to be a huge advantage for us and our teams.

Christophe Beck:

So, the short answer here, Josh, is looking at the operating income, so in Q3, it's turned positive for the first time since the war started in Europe, which is a good sign. It's going to keep improving nicely as well in the fourth quarter and going forward in '23. Then you get the FX impact, which is something I mentioned as well in the previous quarter that impacted us down for the third quarter. That's the core of the story.

Christopher Parkinson:

Hey Christophe, could you just circle back to just two quick comments on global healthcare and then Purolite. On healthcare, can you just give a little quick update on the U.S. side for elective surgeries and what that means for your outlook for 2023? And on the Life Sciences side, do you feel that the growth expansion opportunity of Purolite is well understood? And are margins in that business still where you are anticipating, or should we anticipate startup cost? Just any additional framework you could help us out there would be really appreciated.

Operator:

Our next question comes from the line of John McNulty with BMO Capital Markets.

Christophe Beck:

Yes. Thank you, John. It was roughly the same type of pressure in Q3 versus Q2, which is 30% year-over-year. And since we had 10% last year, it's a 40% delivered product cost increase over two years. So if you want to count, the overall inflation, which is quite a bit to say the least. To your question on the basket, it's a bit evolving with oil price, so easing a bit. Natural gas went up during the quarter and eased a bit towards the end of the quarter. And then, you have cost tick in food and beverage and institutional that's going up in a big way as well at the same time. But overall, kind of the same in Q3 versus what we saw in Q2. And that's why I'm quite proud of what the team has delivered over the last five quarters. So Q2 last year, when inflation started to go up, well, the team has overcome over $1 billion of incremental cost with pricing that's going to stick for the future, which is good short term, but it's especially good for the long term because we will be protecting that pricing going forward.

Christophe Beck:

It will happen during ‘23, during the second half. So most probably what's most important for me is making sure that pricing gets way ahead of delivered product costs, and we've done that quarter after quarter. Second is making sure that our operating income keeps growing. It's been growing in the third quarter, which is a good sign. It will be growing even more in the fourth quarter, and it's going to keep growing as well in the quarters to come, in 2023. Then you have the impact on FX and interest, obviously, that's mitigating that. We'll see how it all plays out in 2023. But as long as I have business momentum strong, that I have pricing getting way ahead of delivered product cost and that we have productivity in a positive direction as it is today as well, while it's going to lead to operating income growth that's ultimately going to lead to EPS growth as well sometimes in the second half of next year.

Jeff Zekauskas:

On slide 12 of your deck, you say that your delivered product cost inflation was 30%, but your SG&A is only up, I don't know, 14%, and product and equipment cost of goods sold is up a little bit faster than that. Can you reconcile those numbers? How do we go from 30% to 14%?

Jeff Zekauskas:

In looking at different chemical companies, like if you look at the petrochemical companies, I think that utilization rates for those companies maybe have gone from the mid-80s to the low-70s. And if you look across many industrial areas, what you're seeing is a tremendous liquidation of inventories. So, I'm surprised that your industrial business isn't feeling any of that for the fourth quarter because I would think your customers would be operating at much lower levels of utilization and water treatment chemicals should be a function of utilization? Is there some other factor going on?

Operator:

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

Christophe Beck:

Ashish, it's very early. We usually never talk about next year before the publication of our results of the fourth quarter in February, but I chose intentionally to share with you early enough what we’re seeing, and things are going to evolve, obviously, in the next 3, 4 months until we get back together. But it's really trying to share with you what we're seeing, what we're assuming. And our assumptions are really inflation stays more or the same level for the whole next year, that the dollar remains strong as well for most of the year as well in 2023. Same with the interest rate and with Europe getting tougher as well, so in the months to come. How it's going to play out exactly? I don't know yet. And I don't think that anyone knows. But when I know that we're going to maintain our strong momentum, top line volume and pricing. So together, that we will keep expanding pricing as well as we've done in quarter after quarter over the quarter five as well, and that we're going to get some upside from the European program that I've announced as well. Well, I can feel reasonably confident that quarter-after-quarter, we're going to improve as we've done Q2 to Q3, it's going to be Q3 to Q4, and we're going to keep going that path as well in 2023, heading towards this double digit that I mentioned, so in the second half -- sometime in the second half of '23.

Shlomo Rosenbaum:

Hey Christophe, the volume growth is 1% across the Company, which is I would consider that a little bit low for coming -- still comping off of COVID comps, and still potential for some opening. I was wondering if you could break out the volume growth along the different segments? And how much of that had to do with the inventory stuff going on in healthcare that you have to go through? And maybe just give us a little bit of color on that. And then, I'll have a follow-up.

Shlomo Rosenbaum:

And then the next one maybe is for Scott. Just some of the below-the-line items and how to expect -- or what to expect, I'm sorry. Should we expect any other income kind of after 3Q more of a normalized pension income, which you've been getting somewhere around $19 million for the last three quarters. Is that fair? Or does something change with the change in the stock markets? And then you had a $10 million sequential increase in interest expense. Do you feel like -- from where you are right now, this is a relatively -- it should be relatively close to this, oare you assuming that the interest expense is going to continue to step up a lot?

Operator:

Next question is from the line of Mike Harrison with Seaport Research Partners.

Christophe Beck:

Yes. Mike, industrial has been a great story for many, many years. And when we say industrial, it's mostly driven by water, which is becoming something that's even more essential for our customers. So going forward, because of water scarcity, but most importantly because water drives energy consumption which drives cost and which drives as well to the carbon footprint. When I look across the various segments in Industrial, think about it, water is up 14%. F&B is up 40%, downstream is up 22%, and paper is up 19%. So, it's very healthy, very steady, very strong that we have in that whole group. And it's driven by, okay, market that likes what we're doing, which is ultimately driving new business. It's a business that's very strong at innovation. It's a business that's strong in digital technology as well. And that's why pricing is so good as well with pricing that's been up 15% in the third quarter, and we had 12% in the second. And we know that that business, when you look at the margins as well hear have improved dramatically from the second to the third or the margin pressure I should rather say, 340 basis points in the second quarter, down only 130 in the third quarter as well. And we know when industrial gets in the right momentum in terms of pricing and inflation eases, we know that great things happen, both on a margin and earnings perspective as well. So, yes, as mentioned before, to Jeff, some softening that we're feeling in some of the industries, petrochem being one of them for the reasons mentioned as well early on, which we mitigate with new business, with penetration and innovation. So, so far so good, business let’s see what happens in the months and quarters to come.

Christophe Beck:

So, it's all in Europe, as you said, I've been leading that region, years back, leading to turn around over there, so very familiar with that story. And I'm really proud with what the team has done. You maybe remember or not that 10 years ago we had a large business over there that was not growing and that was not making money. Other than that, it was a great place to be. Well when I look at today, well over the last 5, 10 years our growth has been 4% from a CAGR perspective. Our OI has grown double digit over that time as well. And we've moved from close to nothing in terms of profitability to north of 10% in 2021, as well. So a great story that we've had in Europe. I want to make absolutely sure that we not only mitigate the short-term, but most importantly what we are doing is helping us for the long term that Europe can stay on that successful journey. So to your question on where we are going to work the most, it's going to start with supply, security. This is a big deal for our customers. So streamlining our network, making sure that we can have the best cost of delivered product in Europe. So it's going to be the first priority. The second one will be our structural cost as well in our SG&A leveraging as well, so digital automation. Third will be in regional G&A as well leveraging all the work that we have done with the backbone SAP infrastructure over the past few years as well. So, it's really kind of doing things we would have done no matter what for the long-term, but really accelerating these activities in order to get even more on the short term. We would have done it in a more organic fashion in the years to come. And I've decided to do that in the months to come, which is generating so this stream program as we've announced. [Operator Instructions]

Dan Rizzo:

It's Dan Rizzo on for Laurence. Just piggybacking on what was just said about the cost reduction program. I was wondering if there are other variable costs that you could temporarily take out if things were to get significantly worse in Europe? If there's something you can do there?

Dan Rizzo:

And then, if we think about the North America or the Rest of the World, so things are pretty okay right now, but assuming that as everybody is expecting that there is some sort of recession in the second half of next year. Are you targeting or setting up cost programs that could be implemented there? Obviously, it seems like a much more efficient and better margin region or elsewhere, but I was wondering if there's things there you're looking at if things get markedly worse here in the U.S.?

Operator:

The next question is from the line of Andy Wittmann with Robert W. Baird.

Christophe Beck:

Yes, let me be very clear. Pricing is going to strengthen, especially in the next quarter. In Q4, we're going to keep working on pricing as well in 2023. I'm going to get too much ahead of my skis here. But it's really making sure that we get the right pricing in order to rebuild our margins fully. This is the objective for the team. But as we run a commercial organization, it's kind of leading them towards what's the primary focus. The last five quarters, it's been driving price, and they've gotten over $1 billion over the last five quarters, while driving new business. So primary focused pricing, secondary focus new business. And now, we've shifted that in the third quarter, with clearly is going for offense for all the reasons that we've discussed on that call, being in Europe, the risk in the U.S. or elsewhere as well around the world to really go for new business, to really go for penetration, to really go for innovation, while we keep strengthening the pricing, and that's why I'm saying it's going to be higher in Q4 than it's been in the third quarter as well. And at the same time, making sure that we can maintain most of this pricing as well in the long run because we provide incremental customer value as well over the quarters to come, as we've always done in our history.

Christophe Beck:

So far, it's been very good. Our customer retention hasn't changed versus pre-pricing times. But customers are always price-sensitive, and that's why we're taking time to do it really well. We can't compare obviously to a commodity company, a chemical company that's going up and down with the market. As you know, at Ecolab when we go up, we don't go down. The energy surcharge is the only variable that we'll have to manage the right way going forward. But the vast majority of our pricing is structural pricing. And we do that with customers in ways that is good for them, that we create value, which means we reduce the total operating cost that ultimately it's a good deal for them, it's a good deal for us as well, and that we can keep it going forward. But that's real work. And that's why we haven't lost customers more than we used to, pre-pricing or pre-inflation as well, and that we do it very carefully because we want to keep our customers for the long run.

Eric Petrie:

Could you talk a little bit more about your climate intelligence offering? What kind of technology does Siemens bring to the table? How do you split value and gain share with those industrial customers towards that net zero goal?

Eric Petrie:

And then, circling back to the Purolite expansion, how much EBITDA uplift do you expect on an annualized basis? Is it $30 million to $35 million? Is that in the ballpark?

Operator:

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

Christophe Beck:

Great question, Kevin. The best is in North America. We have the strongest team. It's one market as well, two countries, the way we define it with the U.S. and Canada. Europe is the toughest, because it's always been the toughest, complexity, a region that’s used to negotiate price as well. But with whom we have very good relationship because ultimately, our value is to help our customers reduce their total cost as well at the same time. And then, you have the rest of the world in between, with probably China being the toughest place.

Christophe Beck:

So, starting with the last part. From a supply perspective, so we feel good about it. We practiced our resilience planning quite a while. Now from a cost perspective, of diesel or other, the fact that we have that surcharge allows us to react fairly quickly, which is very different, obviously, than structural price, which is an agreement for the long term, together with our customers. Now, in terms of structural price versus energy surcharge, as I've shared earlier, it's roughly two-thirds structural, one-third energy surcharge, but knowing as well that the structural part is growing as well, which is good. We want to make sure that as much of the pricing so it can be structured for the long term, backed by true value that we're creating for our customers as well. And it's not the perfect line between structural and energy surcharge because some customers aren't equipped to deal with an energy surcharge and the thing. So let's have that directly in my structural price, which we've accommodated for as well at the same time. But two-thirds, one third is a good proxy.

Rosemarie Morbelli:

When we look at institutional did quite well, travel has been strong, which I am assuming also translates into hotels, restaurants, cruises, Disney, et cetera. Are you seeing some kind of a decline recently due to inflation or you haven't seen any change yet?

Rosemarie Morbelli:

Okay. That is helpful. Thanks. And I was wondering, you mentioned lithium as one area using your products. Can you give us a better feel for what from Ecolab is the lithium industry using and then where because it is mostly in Asia Pacific and not yet in the U. S. or Europe?

Rosemarie Morbelli:

I am a little confused. I'm not aware of any mine in California. There is a project going on in the Salton Sea, but with no lithium coming out of it. So which mine are you referring to?

Operator:

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

Christophe Beck:

It’s a combination of that, obviously, cross-selling, in other words. So, customers we have, they don't we bring into our customers and the other way around as well so for them. But at the same time, it's developing some joint solutions that are adding value for customers because they manage power in a plant, electricity in a plant, something we don't do, but we manage water in a plant. So from end to end, and both are related as well. So continuing our applications is not only good for both of us, Siemens and Ecolab, but is most importantly, so good for our customers.

Christophe Beck:

No, because this is not an expertise that they have. They're not planning to have expertise in water management, in chemistry, in service that we're providing. And we don't have the ambition either to become an electricity power expert as well for our industrial customers. So, we're in a very healthy place where we work together for the good of our customers with no risk between the two companies.