Ecolab Q4 2023 Earnings Call Transcript

Presentation

[Operator]

Greetings, and welcome to the Ecolab Fourth Quarter 2023 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.

[Andrew Hedberg, Vice President - Investor Relations at Ecolab]

Thank you. And hello everyone, and welcome to Ecolab's fourth 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's results are available on Ecolab's website at ecolab.com/investor Please take a moment to read the cautionary statement 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 Factor section in our most recent form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release.

With that, I'd like to turn the call over to Christophe Beck for his comments.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

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 their 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 highlight 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 and specialty segment margin. As we continue to quickly narrow the gap to this segment's historical 21% operating income margin. The institutional and specialty team continues to execute well, driving further value based pricing and volume growth that accelerated to the mid single digit range, reflecting their strong new business wins.

The industrial segment operating income margin increased 220 basis points, with notable expansion in each of our water, food and beverage and paper businesses. And other segments, 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 and 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 are 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 drive new business, all backed by delivering leading customer value. Additionally, we've seen some benefits from moderately lower delivered product costs. This cost 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, have 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 remain 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 fundamentals 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.

[Andrew Hedberg, Vice President - Investor Relations at Ecolab]

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

Questions and Answers

[Operator]

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

[Tim Mulrooney, Analyst at William Blair]

Hey Christophe, good afternoon.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Good afternoon, Tim.

[Tim Mulrooney, Analyst at William Blair]

If I'm recalling correctly, you guys talked about Europe as kind of being a drag on growth in 2023. Can you talk about how volumes trended in Europe in the fourth quarter and what volumes for the business overall look like if you were to exclude Europe? Thank you.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Love that question Tim, thank you. Well, two parts to your question obviously, here. So let me give you a little bit 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 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 cruising speed in 2024 as we rebuild margins, obviously the right way, which means in Ecolab speak, in a way that benefits customers by reducing their total operating cost.

But to your point on Europe specifically, yes, it's been a drag on growth since overall company plus one, excluding Europe plus three, 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.

[Operator]

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

[Ashish Sabadra, Analyst at RBC Capital Markets]

Thanks for taking my question. Just as we think about [Indecipherable] '24, how should we think about the volume growth as well as pricing normalizing in '24? And congrats on the solid quarter. Thanks.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Thank you Ashish. Good question as well. So in that environment, as described before, so with Tim, I really expect that to stay on our long term average Ecolab growth trajectory. With what I would say is a 2% plus pricing, as I've shared with you as well and positive volume growth as we've had in the fourth quarter as well. But bottom line, our long-term growth target remain unchanged. Even in difficult environments, it's going to be a little bit lower than that range for 2024, where we prioritize, obviously, getting the right value pricing, while keeping driving growth as we did in Q4, and that will help us deliver a very good year in '24.

[Operator]

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

[Seth Weber, Analyst at Wells Fargo & Company]

Hi guys, good morning. Maybe just -- if I could just clarify, Christophe, that last comment. Are you -- is pricing 2% in 2024? Is that what you said? And then my bigger question is, I was trying to disaggregate the five points of pricing that you got in the fourth quarter how much of that is new versus carryover, which I guess, is ultimately kind of the same question, but I just want to make sure I understood your answer to the prior question about pricing for 2024.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Yeah a few elements to unpack here. So the 5% in Q4 was all new pricing realized in '23, there was no carryover anymore from the previous years. in the fourth quarter, which was a remarkable accomplishment. So the 5% in an environment were delivered product costs 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 two, 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 '24, while we keep volume growing as well at the same time. So let's see where we will end up.

[Operator]

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

[Josh Spector, Analyst at UBS Group]

Yeah, 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 quarter, 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.

[Scott Kirkland, Chief Financial Officer at Ecolab]

Hi Josh, this is Scott. I'll cover this one. Thanks for the question. Yeah, as Christophe said in his opening, we're expecting this a bigger benefit of DPC in the first half and bigger in the first quarter. But if you look at sort of separating out DPC, would expect throughout the year that underlying EPS delivery to be at the high end of our long-term targeted range. So it's really this expected benefit in the first quarter, little bit in the second quarter as well, but really looking at DPC in the second half being pretty stable.

[Operator]

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

[John McNulty, Analyst at BMO Capital Markets]

Yeah, good afternoon. Thanks for taking my questions. So on the delivered product costs, I guess, are you expecting to see either raw materials or some other part of those costs pushing noticeably higher as we go through the year or is there some kind of a, I don't know, speed bump or I guess, reverse speed bump, some best fit that you're seeing in 1Q? Because I guess, I don't want to understand why you would necessarily be seeing delivered product costs pushing higher throughout the year.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

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 can 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 set 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 fashion 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.

[Operator]

Our next question is from the line of Jeff Zekauskas with J.P. Morgan. Please proceed with your question.

[Jeff Zekauskas, Analyst at J.P. Morgan]

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.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Hi Jeff, good to hear you. So two questions, obviously, here for the price of one. So the volume in institutional is clearly up. It's not a year-on-year comparison question. especially when the market is down as well at the same time are really showing that this business, institutional is in a great shape, with great momentum, driving volume, driving share, getting price, driving margin really like where institutional is heading. So the short answer is yes, volume in institutional keep accelerating.

The second part of your question on pricing, they are the exceptional times like in the past few years, and they are the more normal times. I would say, like now, which basically the discussions with customers for the most part, they're not all created equal, obviously, are happening in the fourth and the first quarter of the year. So fourth quarter and as we speak now. So it's usually something that's evolving progressively during the year with no big bumps. It's something which is pretty organic, keeping in mind that the pricing is always based on the value we create for customers, which is why we were able to deliver $3 billion in the last few years and kept it and keep building it. It's because ultimately for customers, it's a good deal. The net-net in the operations, while it's positive, including our pricing as well time. So from a timing perspective, Jeff, happening in Q4, Q1, and it's being delivered in the quarters during the year.

[Operator]

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

[Manav Patnaik, Analyst at Barclays]

Thank you. Christophe, it looks like a lot of things are aligning well here starting the year, and you've touched a lot of them. I just wanted to touch base on how you thought about your portfolio. There have been a few pieces like HealthCare and even paper that have been dragged to top line growth. And just curious on how you think about your portfolio composition today and if anything might be in the works there?

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

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 sort of 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.

[Operator]

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

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you. Christophe, again, just on the deliver [Phonetic] product costs, could you unpack the dynamics as to the high [Indecipherable] 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 you're flattening out a function of just caustic being up as the year progresses? Thank you.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Thank you, David. I'm looking at Scott and he'd love to answer that question. So I'm happy to.

[Scott Kirkland, Chief Financial Officer at Ecolab]

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.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

But what's important to keep in mind here is really where we focus our attention. It's really driving the business in order to get on the upper end of this 12% to 15% earnings growth. And what's happening on the DPC front, we see that all incremental benefit which is exactly what we've shared for Q1 in pretty detailed terms as well. We'll get some more in Q2. And we expect flat from DPC tailwind perspective in the second half. But let's see what truly happens. Your best guess will be my guess, too.

[Operator]

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

[Pavel Molchanov, Analyst at Raymond James]

Thanks for taking the question. In this uncertain macro environment, including the inflationary pressures you alluded to earlier, can you talk about what you're seeing on the M&A front as far as valuations in any particular geographies that perhaps look more enticing than others?

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

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 2 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, 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.

[Operator]

Next question is coming from the line of John Roberts with Mizuho. Please proceed with your question.

[John Roberts, Analyst at Mizuho]

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

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Hey John, thank you for your comment on the just list. We're never going after awards, obviously, but we're always honored and humbled when we get those awards that's basically describing the way we run our business the right way as much as we can, obviously. So the question on healthcare. I've committed quite a while ago so to fix that business, with the team. I like the progress that we're making. We went through a few phases, as I shared very openly with you, and we'll keep doing so in the future. So we worked on the cost structure early on, then we worked on the bifurcation of the two surgical and infection prevention businesses by leveraging as well the critical mass of institutional -- early on that journey because that happened, obviously, in the fall of last year. Healthcare is growing overall, which is something I like because that's early signs of success. Our margins are increasing quite significantly from a low level, as we know, but that's the second good sign as well of progress and the teams working really well with the institutional team. So I think that we found the right model for now. Again, the work is not finished. We've committed to get to double-digit type of margin in that business. And we will get there a few more phases. I expect it as well to happen, and I will keep you posted on our plans and our progress as transparently as I can.

[Operator]

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

[Laurence Alexander, Analyst at Jefferies Financial Group]

Good afternoon. can you give a bit more granularity on the trends you're seeing in Asia, particularly the strong volumes in China. Can you break out kind of where you're seeing that? And are you seeing sequential acceleration or is it just a comp issue?

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

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 attention 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.

[Operator]

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

[Shlomo Rosenbaum, Analyst at Stifel Nicolaus]

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?

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

I'll give it to Scott first, and then I'll make a few comments.

[Scott Kirkland, Chief Financial Officer at Ecolab]

Yeah, thanks Shlomo. Hey, great question. Yeah, 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 6 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 '23, 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.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

So bottom line, Shlomo, with all the elements that Scott just mentioned, I feel even better what I said and shared with you at the Investor Day in 2023. I was saying we will get to this 20% OI margin, so within the next few years, and it's not going to take us five years to get there. So our confidence level has just risen with the delivery of the last few quarters.

[Operator]

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

[Rob Hoffman, Analyst at Bank of America]

Hi, Rob Hoffman [Phonetic] on for Steve Byrne. And my question was, if you guys could share any update on the water for climate and science certified initiatives?

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Yeah, those are two platform innovations as we call them Ecolab Science certified so is 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 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 details, since we don't share 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, patient and services in their own operations in order to deliver their objectives. So two growth platforms driving penetration, improving impact from our customers, which helps us ultimately drive growth and value pricing.

[Operator]

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

[Kevin McCarthy, Analyst at Vertical Research Partners]

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 '23 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?

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

There's no doubt that it's proving right. It's been true for a very long time, by the way. I'd like just to indicate what we've built with pest elimination, for instance, which is 90% circle the globe type of business, which is ultimately all our businesses from institutional, healthcare and industrial bringing our team from pest elimination in order to offer the world-class service to all those different segments, while we've managed to build $1 billion business with great margins and highest returns by doing so. So that's something that we have proven for a very long time in our company. It's also keeping in mind that half of the $152 billion market we have out there, is an opportunity of penetration. Ultimately, customers we already have that should be or could be buying everything from what Ecolab does. And the two main drivers for it is what I just shared before with Ecolab Science Certified and Ecolab Water for Climate that ultimately drives bigger gains for our customers by driving the overall end-to-end proposition that we have in the company.

And last point I'll make is that we have further focused as well our execution work towards our Top 35 customers in the company to make absolutely sure that we were not only providing them with all the resources of the company, but that we could capture as well as much of the opportunity that those customers can offer to us, which is a number that counts in the billions.

[Operator]

Thank you. The next question comes from the line of Patrick Cunningham with Citi. Please proceed with your question.

[Patrick Cunningham, Analyst at Smith Barney Citigroup]

Hi, good afternoon. I have kind of a specific follow up on the last question. So you've had the solid share gains in institutional, with volumes up maybe mid single digits, where end markets are stable to slightly down. How much of this was a share of wallet versus new customers? And are there any sort of representative products or technologies which have driven a lot of the share gain this year? And then how should we think about new business wins for institutional and specialty into 2024?

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

So a few different questions here. Patrick are all related to the same topic, obviously. So new business generation is our number one focus in the company. We are sales organization, sales at heart. Our mantra in the company for the 47,000 people is we're all in sales, just to describe so 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 know 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 the 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.

[Operator]

Thank you. The next question comes from Mike Harrison with Seaport Research Partners. Please proceed with your question.

[Mike Harrison, Analyst at Seaport Research Partners]

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?

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Okay. So a few questions in there. So Mike, you're right, the specialty, which is QSR as a quick serve restaurants and food retail, had a great year in '23. It's been true for pretty long time, by the way. So great businesses based in the same place in North Carolina, as you probably know as well the -- the key reasons why those businesses are going so well. On one hand, especially QSR is an industry that's doing well at all times, especially in more difficult times because people have a tendency to trade down. And when they move from full service restaurants to quick serve, obviously we can capture them in a good way, at high margin as well at the same time. That's a little bit the beauty of our portfolio since we serve all the various segments. So serving an industry that is very successful. It's the first element.

The second one is it's an industry that, by definition, is very standardized as we know, across the country or across the world. When you think about our promise, well, it's probably the industry where it resonates the most because what we're helping our customers achieve is to understand what's the best-performing unit in their enterprise and to help them get all the units from the enterprise at the level of performance of the best-performing one in terms of cost, in terms of quality of delivery and in terms of environmental impact as well. So the combination of a very strong business that's been built over decades with an industry that is especially successful right now, '23 was a great year for that industry and a value proposition that resonates exactly with them because their objective is to reach the best-in-class performance across the universe as well, those are three key reasons why this business is doing well. And I believe in the future of that business as well going forward.

[Operator]

Thank you. Our next question is from the line of Scott Schneeberger with Oppenheimer & Company Pleased to see with your question.

[Scott Schneeberger, Analyst at Oppenheimer & Company]

Thanks very much. Sort a little bit -- this is regarding the cost savings program. It's now been a full-year in place and very sizable. Scott touched a bit earlier on some of the key focus areas, geographies and segments, and that was very helpful. But just curious, is this on track as far as timing wise, is it something that maybe you've had the opportunity where you haven't had to be as aggressive because you've had a really nice growth 2023. Just curious how close to on plan timing-wise and size-wise, this is? And any incremental thoughts you'd like to share? Thanks.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

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

[Scott Kirkland, Chief Financial Officer at Ecolab]

Thanks Scott. No, we are exactly where we expected to be. If we think about the combined program, which is really what we have left. We had some older restructuring programs, which are complete, the institutional advancement 2020 or complete through the end of the year. The combined program, we delivered through the end of 2023, 75% of those expected savings cumulatively through the end of the year and expect to realize the lion's share of that through 2024. And as you know, when we initially launched this at the end of 2022. It was initially focused on Europe and early in '23. We expanded it to institutional and health care. And if you think about the performance of those businesses, Christophe talked about Europe, talked about the great margins there, the great growth, and you've seen the great OI in institutional specialty, up over 40% in the quarter and as well as the healthcare continuing to get better. And so we're on track with those, and those program is having a significant impact.

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

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 '23, 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. This 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 that you 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.

[Operator]

Thank you. Our next question is from the line of Vincent Andrews with Morgan Stanley. Please just hear us your question.

[Vincent Andrews, Analyst at Morgan Stanley]

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, you know, 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?

[Christophe Beck, Chairman and Chief Executive Officer at Ecolab]

Well, a few points in your question here. So when I think about our procurement team, we have an unbelievable team around the world. We have a new Chief Procurement Officer, who joined us a year ago from a world-class organization that been very respected in the procurement world. And yes, he has brought new capabilities, new tools, new approaches, new ways as well of managing relationships with suppliers. So yes, quite a bit of a transformation. And I think we're really reaching world-class levels that new leadership and that new team that we have on procurement. So I really like what I see on the procurement side. So there's one team that can leverage as much as we can in terms of capturing the benefits of the easing of DPC inflation. Well, that's the right team. So when we talk about what you've heard from Scott a little bit early on, our cost -- EPC costs are still 35% up versus what they used to be pre-inflation. Well, I see it as a huge opportunity, obviously, for our company and for our shareholders because most of it will recoup at some point. The timing is not in our hands, our team is trying to get it as quickly as we can. So we will get it. And at the same time, I want to make absolutely sure that we get our value pricing done the right way. As you know, our margins are not at the high watermark, the 44% where it used to be, we will get back to these 44% because, yes, DPC is going to get back closed where it used to be. When? I don't know, it might take a few years to get there. But on the price side with our customers, we want to do it exactly the right way. That's a net benefit for our customers as well. They get more pricing, but when you think about the value we create for them, well it far outweighs the pricing that they're paying for us, which is one of the key reasons why our margins are improving so nicely and why are we keeping our customers and building even new relationship as we move forward. So overall, a good story for our customers, our company and our shareholders.

[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.

[Andrew Hedberg, Vice President - Investor Relations at Ecolab]

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

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Andrew Hedberg, Vice President - Investor Relations
• Christophe Beck, Chairman and Chief Executive Officer
• Scott Kirkland, Chief Financial Officer

Analysts

• Tim Mulrooney, William Blair
• Ashish Sabadra, RBC Capital Markets
• Seth Weber, Wells Fargo & Company
• Josh Spector, UBS Group AG
• John McNulty, BMO Capital Markets
• Jeff Zekauskas, J.P. Morgan
• Manav Patnaik, Barclays PLC
• David Begleiter, Deutsche Bank Aktiengesellschaft
• Pavel Molchanov, Raymond James
• John Roberts, Mizuho
• Laurence Alexander, Jefferies Financial Group Inc.
• Shlomo Rosenbaum, Stifel Nicolaus
• Rob Hoffman, Bank of America Co.
• Kevin McCarthy, Vertical Research Partners
• Patrick Cunningham, Smith Barney Citigroup
• Mike Harrison, Seaport Research Partners
• Scott Schneeberger, Oppenheimer & Company
• Vincent Andrews, Morgan Stanley