Ecolab Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 20 speakers on the call.

Operator

As a reminder, this conference is being recorded. It is now my pleasure at this time to introduce your host, Andy Hedberg, Vice President, Investor Relations.

Operator

Mr. Mr. Hedberg, you may now begin.

Speaker 1

Thank you, and hello, everyone, and welcome to Ecolab's 3rd quarter conference call. With me today are Christophe Beck, Ecolab's Chairman and CEO and Scott Kirkland, our CFO. A discussion of our results along with our earnings release and the slides referencing the quarter results are available on Ecolab's website atecolab.com/investor.

Speaker 2

Please take a moment to

Speaker 1

read the cautionary statements in these materials, which state that this teleconference and the associated supplemental materials include estimates of future performance. These are forward looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10 ks and in our posted materials. We also refer you to supplemental diluted earnings per share information in the release. With that, I'd like to turn the call over to Christophe Beck for his comments.

Speaker 3

Thank you so much, Andy, and welcome to everyone on the call. And let me start by thanking our incredible team for their hard work and seamless execution this quarter again. It's because of our team's endless dedication to our customers and commitment to our goals that I have the pleasure of sharing another excellent quarter. Delivering broad based performance across our businesses, end markets and geographies. Our company has never been as healthy as it is today, and I'm proud to lead such a talented team with such a great future.

Speaker 3

Moving to the specifics of our performance. Our Q3 was highlighted by strengthening volume growth, continued strong value pricing and robust operating income margin expansion. These all combined to deliver 19% growth in adjusted earnings. With this strong momentum, we are increasing once again the midpoint of our full year earnings guidance range. As expected, organic sales grew 4% with very healthy growth across our businesses.

Speaker 3

Importantly, volume growth improved to 2%, driven by strong business wins and breakthrough innovation. The Ecolab team also delivered solid value pricing at the same time in our targeted 2% to 3% range in a quarter where carryover pricing is at 0 and new pricing for 2025 is not in yet. In a world that remains hard to predict, our solutions are more essential than ever to our customers. Backed by our reliable supply and global expertise, our unique technologies are recognized to dramatically enhance productivity while significantly reducing water and energy usage. This solid top line growth had to further increase our gross margin 220 basis points to 43.5%.

Speaker 3

Our SG and A productivity also improved consistent with our long term trends. In 2017, our SG and A ratio was over 29% and today it's around 27%. This year we expect it will further improve from 28% in the first half to 26% in the second half even after growth investments in frontline firepower, digital technologies and service capabilities. And on a side note, 3rd quarter SG and A also benefited from FX, which we expect will reverse next quarter. With this, we anticipate 4th quarter's SG and A ratio to be flattish versus last year's Q4, while long term trends will keep improving 20 to 30 basis points per year.

Speaker 3

Overall, our operating income grew 22 percent. NOI margin expanded by 260 basis points to 17.9%, which is very close to a record 3rd quarter margin for Icolo. For the full year 2024, we expect an OI margin of around 16.5%, 50 basis points better than our early commitment and 2 60 basis points better than last year. With our strong margin expansion momentum, my confidence in consistently delivering 12% to 15% long term EPS growth has only strengthened. This will position Ecolab to reach our 20% operating income margin target over the next 3 years.

Speaker 3

Now I'd like to transition our attention from Q3 to what our teams are focused on to fuel long term growth and margin expansion. Our growth engines in clean tech, high-tech and biotech are showing strength and momentum, even if each are at a different stage of development. In the clintech area, institutional and specialty as well as pest elimination are both delivering strong performance, growing 7% 8% respectively with operating income margins north of 20%. Global High-tech, which includes data center cooling and water for microelectronics, is growing at strong double digits. And in Biotech, our Life Sciences business remains ahead of the curve in what we believe will be a huge long term growth opportunity.

Speaker 3

Our innovation pipeline also continues to build as we shift our focus from renovation to breakthrough innovation. With nearly $1,500,000,000 our 2024 pipeline is at record levels and laser focused on the biggest opportunities across our cleantech, high-tech and biotech platforms. Finally, our OneEcolab growth initiative, which seeks to leverage our digital technologies to deliver best in class business outcomes, operational performance and environmental impact at every customer location around the world is progressing very well. Over the next few years, Wannicollab looks to more quickly unlock our current $55,000,000,000 penetration opportunity. Our early focus on our largest and fastest growing 35 customers is showing promising results with significant total value delivered for our customers and a great growth opportunity for Ecola.

Speaker 3

With strong long term business momentum, record free cash flow and the proceeds from the sale of the surgical drapes business, our balance sheet is in a very healthy position. This provides us with many options to allocate capital to organic and inorganic growth opportunities. On organic growth, we are well positioned to scale unique customer solutions like our AI dish machine program for QSR and circular water systems for data centers and microelectronic manufacturers. On the acquisition front, we're now in a unique position to enhance our focus on the core fields of water, digital and life sciences to generate strong returns for shareholder. In closing, I say this every quarter and I say it again today, Ecopad's future has never looked brighter.

Speaker 3

Our leading customer value proposition where our technologies had customers improve their operating performance while reducing their water and energy usage is increasingly relevant, especially in unpredictable times and continues to fuel our growth and margin expansion. Simply put, we remain very well positioned to consistently drive 12% to 15% growth in adjusted diluted earnings per share in 2025 and in the years to come. So thanks again for your continued support and naturally your investment in our company. I look forward to your questions.

Speaker 1

Thanks, Christophe. That concludes our formal remarks. Operator, would you please begin the question and answer period.

Operator

Thank you. We'll now be conducting a question and answer session. Thank you. And our first question is from the line of Tim Mulrooney with William Blair.

Speaker 2

Please proceed

Operator

with your question.

Speaker 4

Hi, Christophe. Good afternoon.

Speaker 3

Good afternoon, Tim.

Speaker 4

So I wanted to talk about volumes a little bit. We saw them accelerating here in the Q3. It was great to see. It was slightly above our expectations. I'm curious how you're thinking about that trajectory as we move into the Q4.

Speaker 4

And maybe you could talk about some of the moving pieces here, whether it's institutional, what's happening there volume wise or any other business that maybe having an outsized impact on that trajectory in volumes? Thank you.

Speaker 3

Thank you, Tim. Yes, I'm very pleased with the 2% growth that we delivered in volume after the 1% in the previous quarter and especially when it comes with a continuous build in value pricing. It's been quite a long time that we've managed to keep volume strong while building pricing, while retaining customers all at the same time, which was quite remarkable what the team has been able to execute for quite a while and especially in the Q3. It's been because our team has been really focused the last few years at selling value for our customers that's generated obviously record levels of new business and innovation sales. But to your question on how broad based it is, that's the best part of it.

Speaker 3

Because if I look at all our businesses, most are accelerating in terms of volume, which is good. And I'm especially pleased with institutional and specialty that are growing and gaining share in a market that's going down. And it's the same in industrial as well, where most of our businesses are improving as well, their volume grows. Also in most markets that are either soft or going down. But if we look at the markets or the geographies, the regions, whatever we want to call them, in our company, what's pretty remarkable is that we've delivered 4% organic growth when Europe was flat, which means that the rest of the world outside Europe was obviously north of 4%, which is demonstrating how nicely we're growing outside of Europe, which is a difficult place, obviously, so to operate.

Speaker 3

But on the other hand, really like the margins that we have over there, but the growth is going to be our priority going forward.

Operator

Thank you. The next question is from the line of Manav Patnaik with Barclays. Please proceed with your question.

Speaker 5

Hi, good afternoon. This is Ronan Kennedy on for Manav. Thank you for taking my question. May I please ask Christophe, as DPC deflation tailwinds fade and inflation normalizes, how do the drivers of margin expansion and the pace of it evolve? So if not mistaken, there would be GM leverage with 2% to 3% price over 1% to 2% inflation.

Speaker 5

But to what extent is that margin expansion dependent on volume growth and mix shift, whether it be to high growth, high margin businesses or to digital?

Speaker 3

Yes, great question, Ronen. So as you said, so we expect delivered product costs to get back to normal inflationary trajectory, kind of aligned with inflation as well kind of low single digit growth. We expect that churn by the way to happen in the Q4, as we've mentioned, as well early on. So the Q4 will be the inflection point, where we've seen so kind of a slight tailwind in Q3, turning point in Q4 and then back to historical level in 2025. That's the way we've been used deliver as well in the past, and I feel really good about that.

Speaker 3

Because the way we're going to deliver is ultimately by staying focused on volume growth, keeping value pricing as well humming as it has so far as well. At the same time, we will keep working on SG and A productivity, improving 20 to 30 basis points as well on an annual basis, while we keep investing as well in the business as well at the same time. And ultimately, so you end up with these 12% to 15% earnings per share growth, which we expect very clearly to deliver in 2025 and the years beyond as well, which will lead us ultimately to the 20% oil margin that we've committed to. And I expect to get there over the next 3 years. So feel really good about the trajectory that we have even with DPC delivered product costs getting back to its normal inflationary trends.

Speaker 5

Thank you. Appreciate it.

Operator

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

Speaker 2

Yes. Hi, good morning. I wanted to ask specifically on institutional margins. I mean, you continue to do quite well there. However, when I look at margins relative to the past, there's been a lot more seasonality.

Speaker 2

So margins typically have been higher in the second half versus second quarter and the first half. It kind of stabilized. So I was wondering if you could unpack some of the moving parts there between maybe some of the reinvestments, product costs, etcetera. And as you look forward, is this now a more stable margin profile for that segment with some of the changes you've made in Europe? Or do you expect that normal seasonality to kind of return?

Speaker 3

Thank you, Josh. I'll give that question to Scott, and I'll add a few comments, if needed after that.

Speaker 6

Yes, absolutely. Thanks, Josh. As you noted, the margin performance in Institutional Specialties has been exceptional. Q3, their OI margin was up 3 80 basis points versus last year. You talked about seasonality.

Speaker 6

Certainly, sales tend to be higher in the summer there. Sequentially, we saw a very modest decline Q2 to Q3, like 20 basis points. But that's really, to your point, we're investing in that business as we are elsewhere, making field investments there. And so that's really what drove that just sequential decline Q2 to Q3, but very happy with the margin expansion there, performing well. As Christophe said, in markets that are not helping.

Speaker 6

But given what we do, the labor savings are more important to our customers and quarters move around, as you said. So I would expect OI margins for institutional, especially on a full year basis, around about 22%, so right around our long term target. Thank you,

Operator

Scott. Thank you. Our next question is from the line of John Roberts with Mizuho Securities. Please proceed with your question.

Speaker 6

Thank you. There are currently outbreaks at a major deli meat provider and a major QSR. When something like this happens, do you pivot the sales force to leverage that as a teaching moment for your customers and drive more penetration?

Speaker 3

It's an interesting question. And it's always sad that it happens usually with a huge impact on human lives. And I feel really sorry for all what happened and every time happens as well when all things are happening on the market. And we really step back and look at it's never been happening to one of our customers, just first. That's important to remember.

Speaker 3

And when it happens to some of those companies, we reach out and we offer our services and almost every time after a while they come to us and we work together in order to bring them to the right place. But most importantly, we talk about that to our new customers that haven't gone through those outbreaks, our current customers as well, what we've learned from it. So we never leverage that as a sales opportunity. We leverage that as a learning opportunity to use Uterm, as wheelchair and almost every single time, those companies come and join us to do the right thing the right way and ultimately start to protect guests, patients, consumers, which is part of our mission as a

Speaker 7

company. Thank you.

Operator

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

Speaker 8

Yes, good afternoon. I was hoping you could speak to the growth that you're seeing in the electronics and data center area and how you see that playing out over the next 12 months to 24 months? And is it largely coming from existing data centers that are now converting over to and seeing the value kind of that your solutions bring or is it new data centers coming online? How should we be thinking about that?

Speaker 3

Thank you, John. It's a very interesting set of end markets. So we call it global high-tech, but it's really 2 complementary, but differentiated end markets, microelectronics, obviously the production of microprocessors and data centers. They're related but different. And to your question, is it existing or new ones?

Speaker 3

It's both. We try to focus as much as we can to the new ones because we can embed our technology in the whole design of the data center or of the microelectronic production site called a fab usually, but we work on both actually. Maybe just for perspective as well, when I think about AI in the next 5 years, so 2025 to 2,030, When you think about it, AI uses 4% of the power that's generated electricity in the U. S. Today.

Speaker 3

It's expected to use 10% to 15% by 2,030. At the same time, AI globally will require as much water to cool those data centers than the drinking needs of the whole of India in the next 5 years. So we thought that we were heading for a water scarce world. Well, with AI, it's just gotten way more acute. So the fact that we're talking to those high-tech companies, they're very familiar with that challenge.

Speaker 3

And in the microprocessing world, so in the fabs, we help them produce those microprocessors in ways that we use and recycle water at every step of the production process, which is really complicated to do in the past, while they were generating wastewater that they had to either dump or try to treat before they dumped it, never to reuse it. Well, all the new technologies that we are deploying with our customers, we use these and recycle water, so within the fab. And for the data centers, technologies are evolving. Up to now, most of the data centers were cooled because you were cooling the room where the computer was in and tomorrow it will be so cooling the chip that's within the computer and it's called a direct to chip cooling. And in both cases we have some very good offering and innovation to help them do that job as well in ways that are reducing water usage in dramatic ways.

Speaker 3

When they reduce water usage, they reduce power usage as well at the same time. They improve the uptime as well and they reduce their cost, which is a very Ecolab like type of model. So we've created dedicated teams, both for data centers and for microelectronics in very dedicated markets because that's not happening everywhere around the world as we know and really like what we're building, what we've built, the performance of that business and I expect it to become a major driver for us in the years to come.

Speaker 8

Great. Thanks very much for the call.

Speaker 3

Thank you.

Operator

The next question is from the line of Jason Haas with Wells Fargo. Please proceed with your question.

Speaker 7

Hey, good afternoon. Thanks for taking my question. I'm curious if you could comment on the deceleration in the water segment. I recognize it's relatively slight, but was curious if that was entirely driven by mining or if there are any other factors and if there is some softness in mining, just talk about when you would expect you could see some improvement there? Thanks.

Speaker 3

Thank you, Jason. You gave the answer actually. So water is very stable growth as we had in Q2 was impacted by mining, which is the smallest business by the way, which has a tendency to be more lumpy, not cyclical, but lumpy. It's in remote places. You send all those products as well in long distance as well.

Speaker 3

So it's not every quarter is created equal. And that's the only reason. So for the water trend, otherwise businesses are doing really well and they're trending up as well at the same time, which is a good thing.

Speaker 7

Great. Thank you.

Operator

The next question is from the line of Patrick Cunningham with Citi. Please proceed with your question.

Speaker 9

Hi, good afternoon. Hi, Patrick. So I know it's early days, but could you hi. Could you discuss how the One Ecolab initiative is progressing in terms of commercial buy in, value pricing and some of the modest cost efficiencies you laid out in the prior call? And then you mentioned the early focus on the largest 35 customers.

Speaker 9

So what's been the feedback from those customers?

Speaker 3

So let me give the first part of the question to Scott and then I'll talk a little bit more about the so called 35 top customers.

Speaker 6

Yes. As we talked about last quarter, we've really just launched the program. And as you said, it's very much focused on growth, really getting after or accelerating to our 5% to 7% targeted sales growth, focusing on our biggest customers, leveraging the teams that we have, but very focused on growth. The savings are pretty incidental to the program, frankly. But like the way it's going, getting to this best in class performance, the best restaurant, best hotel, data centers within our network and really transforming the way we work, working with these largest customers to get after and it really accelerates that $55,000,000,000 opportunity, cross sell opportunity that we have.

Speaker 3

So to build a little bit on that. So it's a combination of 3 things. As I've shared early on, on previous calls as well here. So it's to be exactly what Scott has been talking about, really so penetrating a much bigger share of the $55,000,000,000 that we have as a penetration opportunity within all customers. And it's the total opportunity for the top 35 is €5,000,000,000 and half of it we don't have.

Speaker 3

So that's a penetration opportunity that we have. But second, it's to help our team as well figure out what's the path in order to deliver that penetration opportunity while delivering sort of value for our customers. And 3rd, it's to drive the productivity, which is 3rd priority, but we'll take it. We know that technology helps us improve our productivity, which helps us invest while keeping improving productivity as well at the same time. So one comment, so for the top 35, which is a combination of our largest 20 customers plus our emerging 15.

Speaker 3

So those are the ones with the potential to become one of the top twentythirty 5 in the future. The reception from our customers has been very positive because the way we sell is evolving. In the past, we've been selling so much more annually, incrementally, what are the new things I can do for you. Tomorrow, we're selling very differently. And it's saying, well, if one customer has a lot of facilities, locations, units, restaurants, Well, we can help them understand if all your units were performing at the best performing unit, what would be the potential.

Speaker 3

And that's the new way of selling, of saying, well, you can get that much savings in your operation in all three elements. 1st, your business outcome, it can be food safety in a restaurant example. The second is the operational performance. And third is the environmental impact. You add all 3, you get to a dollar impact.

Speaker 3

You translate that in the total value delivered and we develop a plan in order to deliver that that's driving growth for us, performance for our customers. And our customers have been very pleased with that approach. And to be honest, it was customers that were asking us to approach them that way. So it made obviously the sale to those customers much easier. Early on the journey, but very promising so far.

Speaker 9

Great. Thank you so much.

Operator

Our next question is from the line of Chris Parkinson with Wolfe Research. Please proceed with your question.

Speaker 10

Great. Good afternoon. Christophe, you continue to put a pretty good results in pest elimination. Just the margin was just a touch bit lighter than we are anticipating. Can you just hit on any color?

Speaker 10

I think that's a pretty asset light business. So is there a headcount investment there? Is there innovation in terms of your digital efforts? Just any color how we should think about the growth rate relative to the margin progress,

Speaker 3

even if you just want

Speaker 10

to hit on it longer term, would be incredibly helpful. Thank you.

Speaker 3

Yes, you said it, Chris. It's a remarkable business. So high single digit organic growth, high margin, insane return on invested capital because there's almost no capital that's being invested in that business. So this is a combination of high margin, low capital, so drive huge returns as well at the same time. When we compare ourselves, so with other companies, large companies out there, and there's only 4, so it's pretty easy, that are large.

Speaker 3

And then you have a zillion of smaller ones that represent the lion's share of the market, by the way as well, where we are the best performing business in the world as well. So when we look at that combination, best performing business in the world, great performance versus all our businesses as well that we have. Well, it's pretty easy to come to the conclusion that we should invest more behind that business and see exactly what we're doing, what we've been doing as well over the past few quarters and that's impacting the margin short term, but for good results, obviously long term. And to your question where do we invest, it's basically in 3 areas. The first one, it's in innovation.

Speaker 3

You've heard about our pest intelligence business, which is ultimately connecting the 1,000,000 of devices that we have around the world in order to simplify the work that our teams need to do in a big conference center. While you might have 500 devices over there, you need 8 hours to get it done. While with Pest Intelligence, you need 20 minutes to get the same job done and you have a better result as well in terms of activity in those locations. So better for us, better for the customer and better for the shareholder because it's a great added value business as such. The second is to invest in our team, it's sales firepower to sell more better to more customers around the world.

Speaker 3

And the third one, it's to invest in a smaller bolt on acquisitions, all focused on commercial. Sometimes some residential is coming with it, but this is absolutely not our focus. We are commercial B2B business here. That's where we want to be in the future. So all in all, a great business that I believe has much more potential for the future.

Speaker 3

That's why we're investing behind it as well. And that has some impact on the margin short term, but for great return long term. Great color. Thank you.

Speaker 1

Thank you, Chris.

Operator

Our next question is from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.

Speaker 11

Hi. Thank you for taking my questions. Christophe, the margin is definitely doing better than expected and looks like you put a framework in terms of time wise into where to get when to get the 20% you said the next 3 years. I was wondering a little bit more shifting onto the revenue side of things in terms of growth. With declining raw material costs that tailwind kind of now going to be behind you, should we expect you to be leaning more into pricing?

Speaker 11

Should we expect that volume is going to get better with the investment in the resources? I'm just trying to map to what will be maybe 4% to 5% growth this year to getting to the 5% to 7%, which is your targeted range?

Speaker 3

Well, ultimately, I want to get to that targeted range, obviously. That's going to take some time to get there. That's the beauty of our business. It's very very consistent, very long term, good momentum. And it's going to be

Speaker 5

a combination of

Speaker 7

volume and pricing.

Speaker 5

I think the 2%

Operator

to 3% on

Speaker 3

pricing range that I've been talking about and that we've been delivering as well in 2024 seems to be the sweet spot. We didn't know exactly where it would be in the past pre COVID was 1% to 1.5% and we see that T2T3% seems to be the sweet spot going forward and the balance is on the volume side. Interestingly enough, when I look at all our sales of all our businesses, we're close to 60% of our portfolio today is already within the range that we committed to at Investor Day, so a year and a half ago when we were together. So the majority of our business are already humming in the right direction. And when I look at the opportunity we have out of the penetration, the €55,000,000,000 that I talked about just before as well, our new growth engine in water circularity, in high-tech, in pest elimination, in life sciences, the whole breakthrough innovation portfolio that's coming online as well.

Speaker 3

And last but not least, the monetization of our digital offering as well at the same time makes me feel good about our progression towards that committed range of the 5% to 7%. But what's important is when I committed to 12% to 15%, we don't need the 5% to 7% to get there. That's why for next year, even if we keep progressing nicely, so quarter over quarter towards that range, we'll be delivering the 12% to 15% as well at the same time because value pricing is driving obviously 100% margin. The volume is going to help and we keep driving productivity as Scott has mentioned as well. So with the Waneta Labs initiative, we're expected to have 20 to 30 basis points SG and A improvement longer term, while we keep investing 20 to 30 basis points as well in the 3 big categories that I mentioned as well on earlier calls.

Speaker 3

So generally nice progression towards the range that we want to accomplish. Thank you.

Operator

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

Speaker 12

Thank you. Christophe, staying on value pricing, how should we think about for next year in terms of being closer to 2% or closer to 3%? What are the key drivers for the lower upper end of that band?

Speaker 3

It's going to be between 23%, David, and we always round that number to make your life a bit easier. So sometimes it falls on the 2, sometimes it falls on the 3. But you've seen this year, it's gone pretty well. We had 2% in Q3 because as mentioned in my open, as well you have no carryover left in the Q3 and you don't have the new pricing for the coming year in there either as well. So it's kind of the lowest pricing quarter that's always the case.

Speaker 3

It's not a new thing. But I feel good with this 2% to 3%, as mentioned, feels like the sweet spot. We're going to try, obviously, so to get as high as we can on that range. But for now, since we just have a few quarters under our belt of that, I want to make sure that I stay within that range, feel really good about that. And the closer we can be on the upper side, the better we'll be.

Speaker 3

The very good news is that, as I've mentioned many times, we drive that value pricing based on the TVD. So the total value delivered, that we deliver for our customers, the savings in their operation, in business outcome, operational performance and environmental impact. And that TVD number is way higher than the pricing that we are delivering, which is demonstrating that net net, it's a very good deal for our customers and it's obviously a very good deal for us. So I feel really good about staying, getting in that range and having it very stable for the longer run.

Speaker 12

Thank you.

Operator

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

Speaker 2

Thanks for taking the question. You had a divestiture this year, but I'm not sure that you've acquired anything since 2023. What are your latest thoughts on the M and A front?

Speaker 3

So we don't comment too much on M and A, obviously. So it's a lumpy proposition by design. Obviously, we can't plan too much in advance. But let me share some perspective on that. So we have a great track record of M and A.

Speaker 3

If I look at the 10 issues behind us, we did roughly 100 transactions, smaller, bigger ones. So we have a lot of experience on how to do that really, really well with a very high success rate. The second point is, as mentioned in my open, we are in a great place from a balance sheet perspective, very low leverage, great cash flow, so a very strong, very healthy balance sheet. And the third point is our M and A pipeline that we've been nurturing for years continuously is very strong and very focused on the 3 big areas I've mentioned all the time. The first one being in water technology, but high technology, not basic technology.

Speaker 3

2nd, it's digital and high-tech. And 3rd, is in life science. So those are the 3 big areas. So I feel good with what we've done in the past, the position that we're in in terms of firepower. And third, in terms of opportunities that we have.

Speaker 3

So I can't comment much on what's going to happen, but we're best positioned ultimately to capture whatever would make sense for shareholders and for the company.

Speaker 2

Appreciate it.

Speaker 7

Thank you, Bhavan.

Operator

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

Speaker 13

Thanks very much. Year on year, was volume growth in industrial close to 0 and volume growth in institutional and specialty close to 4? And in terms of your 20% longer term margin target in 3 years. Would you reach that if you were at the bottom of your 5% to 7% sales range? Or do you need to be at the top or it doesn't matter, you'll get there anyway?

Speaker 3

I feel really good about getting there for the reasons that I've mentioned as well earlier. We don't need to be at 7%. 7% is obviously easier than 5%. 5% is in a very good place to be to get to this 20%. But if we were to continue on the track we now, so this 4% to 5%, which is not my objective, obviously.

Speaker 3

So we want to keep accelerating our top line as well, but the environment plays a role as well around us. We would get to this 20% over the next 3 years. If you do the math with the 12% to 15% by year for the next 3 years, you get very close to that. You add a few other things as well like the One E Collab initiative and you get there. So pretty mechanically, we all know other next few years are going to be from an external world perspective.

Speaker 3

We're going to react to that as we've done in the past as well. But I feel really good, Jeff, about delivering that in the next 3 years, as mentioned earlier.

Speaker 13

And then the volume growth question?

Speaker 3

The volume growth question, as mentioned, so, to get within this 2% to 3% is obviously or 1% to 2%, sorry, and 2% to 3% on the value pricing is the base case to get to the 20%. Anything that comes on top of that will help us get there quicker.

Speaker 13

I'm sorry, I meant for the quarter was industrial close to 0 and institutional close to 4 in the quarter?

Speaker 3

Year on year, Jeff, just to understand that well. Yes, we had IMS in Q3. So I'm looking at the table here is a bit north of 3% and industrial is a bit north of 1% in Q3.

Operator

Okay, great. Thank you so much.

Speaker 3

You're welcome, Jeff.

Operator

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

Speaker 14

Good afternoon. It's Dan Rizzo on for Laurence. Thank you for taking my question. I was just wondering if you've ever really talked about how much cannibalization new technologies does of some existing products, if at all? And if you ever really talked about the vitality index for you guys?

Speaker 3

Thanks. So the vitality index, the way we calculate it, it's so the sales of new products introduced within the last 5 years, that's our definition. That's the one that we've been using so over a very long time. It's around 30% plus, and it's growing with our increased focus on breakthrough innovation. So really pleased with that.

Speaker 3

And the cannibalization, we don't really disclose that number, but it's a very high, especially on the innovation side. And most importantly, all new products and offering coming on the market are incremental at margins. And this is the number one objective that we have.

Speaker 14

If it's 30% growing, is there a target you guys have for over the next 5 years or 3 years, given what you've laid out before with your sales growth target?

Speaker 3

Can you ask again? I'm not trying to answer that question, all right?

Speaker 14

Sorry. Vitality Index is at 30% but growing. Given your sales growth targets, what is is there a target for Vitality Index? Do you expect it to get up to north of 40% or higher? Or is that I mean, I just how should we think about the growth from here?

Speaker 3

It's going to be north of 30%. We haven't committed to a number out there. So for me, the quality of innovation is more important than just a number as well here because it's this big shift that we've made. The 30% in the past was mostly renovation of existing products and offering that we provided to our customer. Now almost half of that innovation pipeline, which is at record level, is what we call breakthrough innovation.

Speaker 3

That's an end to end solution for a data center, as I shared before, for a microelectronics manufacturer, for a brewer or for a restaurant making sure that their performance reaches the best in class level of performance as well. So the impact of our innovation is shifting way more in terms of driving performance for our customers and driving our top line and most importantly, our margin as well at the same time. So the 30% is going to go up, but most importantly, the quality of the innovation pipeline is going to be much better.

Speaker 14

Thank you very much.

Operator

Our next question is from the line of Ashish Sabadra with RBC Capital Markets. Please proceed with your question.

Speaker 15

Thanks for taking my question. I was just wondering how should we think about the benefits of the growth investments in frontline digital technology and service capabilities as we approach fiscal year 2025 in terms of like the pricing tailwinds or volume growth, but also operating efficiencies or any incremental color? Thanks.

Speaker 3

So the best way to think about it, Ashish, is that it's fueling, obviously, our acceleration towards the 5% to 7%, helping us get, obviously, to the 20% OI margin over the next 3 years, as mentioned. And it's 3 components. 1 is the sales by a power, more people on the street, more efficient at doing it as well. 2nd, it's digital technologies. And 3rd, it's service capabilities like the 1 Ecolab initiative that you heard as well as from Scott a little bit early on as well.

Speaker 3

But what's important is

Speaker 8

we

Speaker 3

make those investments while driving a net productivity improvement as well at the same time. That's why I shared with you a little bit the numbers here. We think about in the years to come 20 to 30 basis points of our sales in growth investment in the years to come and still getting 20 to 30 basis points of SG and A productivity improvement while we do that. So the improvement is a net of the investments that we're making. So you get good to applying evolution and at the same time an EPS in line.

Speaker 3

So with the 12% to 15% leading us to the 20% over the next 3 years.

Speaker 15

That's great color. Thank you. Thanks, Christian.

Speaker 3

Thank you, Ansh.

Operator

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

Speaker 16

Yes. Good afternoon. Christophe, I was wondering if you might hit the reset button for us as it relates to Healthcare and Life Sciences. So now that you've closed the GSS divestiture, how would you characterize organic sales growth prospects and margin uplift prospects for 2025 and beyond?

Speaker 3

So, 2 different businesses, Healthcare and Life Sciences, as you said, so with the reset, we're going to separate that as well. So, in 2025 and beyond, that you have more clarity as well, so about those 2 businesses, especially Life Sciences. Honestly, Healthcare is becoming a pretty small business after the divestiture. It's very close to the institutional team as well since they're leveraging the same sales force, especially in the United States. And I'm very pleased with the evolution that we're having here.

Speaker 3

So it's a smaller business where we want to improve the profitability of that business and build a new proposition around instrument reprocessing as I've shared with you as the next step on the healthcare journey. We did the first step was driving cost to the right place. 2nd is bifurcation of surgical and infection prevention. 3rd, the sale of surgical drapes. And 4th is to rebuild or to build the instrument reprocessing business for the future.

Speaker 3

We have a nice base to start with in Europe on that and that's going to be the base that we're going to build on in the years to come. But still it's going to be a smaller business, more quality business And I expect that business to grow low single to mid single digits in the years to come, but really driving margin. The second, which is much more important, is Life Sciences. And we've made that bet since 2016, 2017. It's a great business in a great end market.

Speaker 3

I believe that it's going to be a booming business in the next 5 to 10 years. The industry is in a transition phase right now after the complicated years of COVID. We've been growing slightly. My ambition was to grow double digit. Well, we've been low single in that business, while most of the competition was down, by the way.

Speaker 3

So it doesn't make me feel good, but certainly better than the trends that we've seen in other companies in this business as well. But when I look at what we're doing, how we're building that business, as I've said, so we close to $1,000,000,000 today. I expect that business in the next 5 to 10 years to be a few 1,000,000,000 at margins that should be in the 30 range, if not more than 30 as well. We're building towards that. I like a lot of progress that we're making.

Speaker 3

The speed at which we're going to get there, well, is also a bit depending on the market. But generally, this is an investment I like. And the more I look at it, the more I understand. So the opportunity out there, the more I like it. And I think that we're all going to love that business down the road.

Speaker 16

Thank you very much.

Operator

Our next question is from the line of Andres Kostanos with Berenberg. Please proceed with your question.

Speaker 17

Hi. Actually following up on Healthcare. You just consolidated a business that was making 20% margin and you are expanding margins quarter on quarter despite that. So can you help us understand that what has gone well and what is turning around within Healthcare?

Speaker 3

So the margin you were talking about was a combination of Healthcare and Life science as mentioned before. So it's a combination of 2 very different businesses. 1 is serving hospitals and the other one is serving obviously the pharma industry and biotech, which is pharma as well. So obviously, We'll have so if I look at today, so post the sale of surgical drapes, our healthcare business is kind of a breakeven type of business. We knew that, so no big surprise.

Speaker 3

But it's a very Ecolab institutional like type of business. So we know how to get to a better place. It requires work, time and some investment to get to the right place. And this is a playbook that we're familiar with. I like where we're going and we're going to get to the right place.

Speaker 3

But again, it's less than 5% of the company. So it's a very small business over there, but we really want to have this one being smaller, but much more quality focused than what we had in the past. On the life science side, we're investing now as we've been investing in many businesses that we've built in the past. So we're conscious on how we're investing in capacity and capability, in team, in expertise, in technology as well. So to make sure that we can compete with the 2 or 3 other big ones on the market as well, but truly aiming at the type of margin that's closer to 30, if not more than that down the road as well.

Speaker 3

So very differentiated roadmaps, both for healthcare and for life science. Life science really focused as building a multibillion dollar business in the years to come and healthcare really focusing on building a highly quality business, which will remain relatively small in the years to come.

Speaker 5

Thank

Operator

you. Our next question is from the line of Mike Harrison with Seaport Research. Please proceed with your question.

Speaker 18

Hi, good afternoon.

Speaker 6

Hi, Mike.

Speaker 18

Christophe, I'm curious about the recent hurricanes and whether you saw any impact on your institutional or specialty businesses. Can you quantify any drag that you saw in Q3? And would you expect that to worsen in Q4 or be similar?

Speaker 3

Well, I don't know what's going to come in Q4, Mike, obviously. So I can't talk about events that haven't happened yet. But we've gotten very good at that. I'm always heartened obviously with the human impact of those situations on our teams. And more broadly, we had plant in Asheville as well.

Speaker 3

You've heard them in the news as well. But our supply chain team has become such a world class team that's so resilient, so well organized in addressing whatever can happen in the environment of the market out there that ultimately we haven't seen anything in the Q3 from a business perspective. There's a human impact obviously, but not on the business side. We've become so much better from a resilience perspective that I feel quite good with whatever can happen out there, assuming it's something that's in a normal range, obviously. And even those more extreme situations around the world, I've been really pleased with the way we could deal with them.

Speaker 3

When you think about it, 92% of our sales are produced locally. In a place like in China, it's 99%, for instance, as well. And that whole evolution of producing locally for local markets not only has been better from a performance perspective, but it has risen as well, our resilience levels in dramatic ways. I'm so pleased with our supply chain team. Didn't used to be a huge competitive advantage in the past.

Speaker 3

Today and tomorrow, supply chain is a huge competitive advantage that we have as a company and our customers recognize that every single day, especially in extreme times because we're always there for them. We never let them down.

Operator

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

Speaker 4

Thank you. Christoph, can I ask you, if you think about your market share gains, whether it's new business wins or increased share of wallet, maybe compared to the beginning of the year or this time last year, however you think is more sensible, How would you characterize them in terms of their pace of acceleration? And are you doing better more with wallet share gains or with new business wins? Or is it about the same?

Speaker 3

Well, it goes a bit together. When we have a share of wallet, that's an increased market share as well because we're taking it from competition by definition. But we try as well to get to new incremental type of offering. The example I was giving before on data centers and microelectronics, water reuse and recycle, well, those are applications that customers do not have today. So that's an incremental sale.

Speaker 3

That's not a share gain because they were not buying from someone else, which is where we focus a big part of our attention. But the €55,000,000,000 I mentioned before, which is the focus of 1 Ecollab, well, it's wallet share, obviously, because those are sales that are being generated by competition so far. I like a lot the progression that we have, the fact that our top line is healthy, our volume is improving as well. In many markets where demand is not exactly accelerating, if anything, it's staying kind of stable out there. So for me, our share gains are improving over time.

Speaker 3

And if I look as well at our new business generation, very healthy as well. That's a good indication for what's to come down the road. And as mentioned before, our innovation pipeline, which helps us sell as well to customers is stronger than it's ever been as well at the same time. Good indications for the future as well. So good evolution from a share gain perspective the last 12 to 18 months and good indication for the quarters to come as well with those leading indicators of new business and innovation.

Speaker 10

One is not materially stronger than

Speaker 7

the other in terms of lead indicator?

Speaker 3

The new business is the closest, obviously. But you get new business thanks to innovation as well at the same time. So we don't measure them so separately like that. There is some double count. If you just you can't add both of them and to say that's the whole pipeline that we have down the road.

Speaker 3

But the fact that both are at record levels is a very good indication that we can maintain our sales momentum and accelerated as I was sharing before.

Speaker 7

Thank you very much.

Operator

Our next question comes from the line of Charles Neiver with Piper Sandler. Please proceed with your question.

Speaker 2

Thanks for taking my question. Just a couple of quick things. One, in terms of the fact that oil pricing has dropped quite a bit lately and may continue to drop a little bit more. And I know that's not sort of an effect on a raw material standpoint, but when people are looking for savings and the savings that you can offer them on the energy side, does that drop will that drop affect your ability to raise pricing further than it might have otherwise gone, meaning at higher oil prices, the value you save them is bigger, so therefore price hikes would be bigger. So is this sort of a little bit of a problem in terms of how far you can raise pricing?

Speaker 2

And secondly, can you talk specifically about Europe? We know it's slow. We know the economy is slow. But is there anything specific? Is it Asian imports?

Speaker 2

Is there anything that's happening in Europe that is specifically sort of hindering your ability to grow at any at a better pace? And will it change or can it change in your obviously in your favor? So

Speaker 3

two different questions, obviously here. So, Charles, the first on pricing. Well, the best indication is what happened the last 12 to 18 months, where raw material costs were a tailwind for us. And we still, it delivered some very strong value pricing, because we are delivering so much total value delivered, this TV day, as mentioned before, so to our customers. Ultimately for them, well, it's TBD minus price if it's a net positive.

Speaker 3

So for the customer, usually it works well. And that's what we've demonstrated over the last 2 years. So we've demonstrated that even in an environment where delivered product cost is a tailwind, we can generate value pricing as well at the same time. Well, when it becomes a headwind, as we expect it to be sometime in Q4 and certainly, in 2025. Well, the whole discussion of value pricing is even more important, obviously, here.

Speaker 3

So I feel reasonably good, at delivering the value pricing, in the next few quarters and years to come because we've been able to deliver very strong value pricing in a easier environment from a DPC perspective. Well, in a more difficult one in the future, it should not make it harder, but it should make it slightly easier. Saying pricing is never something easy. So I want to be careful how I'm saying that as well at the same time. But generally, so that's why I feel really good about 2025, because we have saw good volume growth, we have steady value pricing, DPC is probably going to become as a headwind.

Speaker 3

We have good productivity, but the combination of all four together puts us in a very good place to deliver this 12% to 15% in 2025 no matter what, which is something that we've practiced over the last few years. So we know how to manage that and we'll keep managing it while going forward.

Operator

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

Speaker 19

Thanks very much. Christophe, all the way back to the first question, it was a discussion about how volumes had picked up a little bit. And you mentioned you were really proud of how you continue to get pricing and retention had been quite strong. I just kind of want to ask this as a look back question, but about 2 years ago was when you really started increasing pricing, inflationary environment. And curious, did you see anything really unique or dynamic with retention over the last couple of years, which I imagine is improving now?

Speaker 19

But just get a little perspective is what I'm looking for over those 2 years on retention and anything currently on the competitive environment that may influence that as well? Thank you.

Speaker 3

The retention rate, is close to 95%, it's been true for a very long time as a company, hasn't changed in the last few years, which have been kind of extreme years since 2020 as we know. There was COVID and there was the hyperinflation driving the higher pricing as well. We stayed at the same or very similar retention level. So which is why I feel really good about our approach that's been demonstrated over years now in the most extreme of the situation. Our focus on total value delivered, making absolutely sure that our customers get more savings in their own operations by delivering better outcomes, better performance and better impact, ultimately is more than what we asked from a pricing perspective.

Speaker 3

So net net, very good thing for them and ultimately a very good thing. So for us as a company and you as shareholders obviously here. So retention very stable, volume strengthening, pricing strengthening as well at the same time. So kind of a very good balance of all drivers here. So at the end of the day, I feel really good with the momentum that we have as a company.

Speaker 3

As mentioned to Tim at the beginning, very broad based across businesses, across geographies with Europe being the tougher place. It's always going to be the case. I've been living there so for half of my life as well. And we know how to win in Europe as well at the same time, which is driving ultimately. So margin improvement, driving productivity and delivering.

Speaker 3

So this 12 to 15 EPS growth feel really good about where we're heading for 2025 and for the years ahead and ultimately get to this 20% OI margin. That's the next step. But my focus is already some beyond the 20% and making sure that we can grow beyond that for the benefit of all our shareholders. So that would be in summary, how I would look at it.

Speaker 1

Thank you. That wraps up our Q3 conference call. This conference call and the associated discussion slides will be available for replay on our website. Site. Thank you for your time and participation.

Speaker 1

Hope everyone has a great rest of the day.

Operator

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

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Earnings Conference Call
Ecolab Q3 2024
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