Ecolab Q3 2024 Earnings Call Transcript

Presentation

[Operator]

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

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

Thank you, and hello, everyone, and welcome to Ecolab's third 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 at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplemental materials include estimates of future performance.

These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release.

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. 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.

Moving to the specifics of our performance. Our third quarter 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% and with very healthy growth across our businesses. 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 zero 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 helped to further increase our gross margin 220 basis points to 43.5%. Our SG&A productivity also improved consistent with our long-term trends. In 2017, our SG&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, third quarter SG&A also benefited from FX, which we expect will reverse next quarter. With this, we anticipate fourth quarter's SG&A ratio to be flattish versus last year's fourth quarter, while long-term trends will keep improving 20 to 30 basis points per year.

Overall, our operating income grew 22%. NOI margin expanded by 260 basis points to 17.9%, which is very close to a record third quarter margin for Ecolab. For the full year 2024, we expect NOI margin of around 16.5%, 50 basis points better than our early commitment and 260 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 three years. 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 the different stage of development. In the clean tech area, institutional and specialty as well as pest elimination are both delivering strong performance, growing 7% and 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. Our innovation pipeline also continues to build as we shift our focus from renovation to breakthrough innovation. With nearly $1.5 billion, our 2024 pipeline is at record levels and laser-focused on the biggest opportunities across our clean tech, high tech and biotech platforms.

Finally, our One Ecolab growth initiative, which seeks to leverage our digital technologies to deliver best-in-class business outcomes, operational performance and environmental impact that every customer location around the world is progressing very well. Over the next few years, One Ecolab looks to more quickly unlock our current $55 billion penetration opportunity. Our early focus on our largest and fastest-growing certified customers is showing promising results with significant total value delivered for our customers and a great growth opportunity for Ecolab. 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 shareholders.

In closing, I said this every quarter, and I'll say it again today. Ecolab's future has never looked brighter. Our leading customer value proposition where our technologies help customers improve their operating performance while reducing the 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.

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

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

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Thank you. And our first question is from the line of Tim Mulrooney with William Blair. Please proceed with your question.

[Timothy Mulrooney, Analyst at William Blair]

Hi, Christophe. Good afternoon.

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

Good afternoon, Tim.

[Timothy Mulrooney, Analyst at William Blair]

So I wanted to talk about volumes a little bit. We saw them accelerating here in the third quarter. It was great to see was slightly above our expectations. I'm curious how you're thinking about that trajectory as we move into the fourth quarter? And maybe you could talk about some of the moving pieces here, whether it's institutional, what's happening in their volume-wise or any other business that may be having an outsized impact on that trajectory in volumes? Thank you.

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

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 the continuous build in value pricing. It's been quite a long time that we've managed to keep volumes 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 third quarter. It's been because our team have 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 because if I look at all our businesses, most are accelerating in terms of volume, which is good. And I mean, 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. The volume growth 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 that'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, to operate. 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.

[Ronan Kennedy, Analyst at Barclays]

Hi good afternoon. This is Ron 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 evolves. So if not mistaken, there would be GM leverage with -- 2% to 3% price over 1% to 2% inflation. But to what extent is that margin expansion depending on volume growth and mix shift, whether it be to high-growth, high-margin businesses or to digital?

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

Yeah. Great question, Ron. As you said, we expect delivered product costs to get back to normal inflationary trajectory kind of aligned with inflation as well, kind of a low single-digit growth. We expect that trend by the way to happen in the fourth quarter, as we've mentioned as well early on. So the fourth quarter will be the inflection point where we've seen some kind of a slight tailwind in Q3, turning point in Q4 and then back to historic level in 2025. That's the way we've been used to deliver as well in the past, and I feel really good about that 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&A productivity, improving 20 to 30 basis 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 this 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% OI margin that we've committed to and I expect to get there over the next three years. So I feel really good about the trajectory that we have even with DPC delivered product costs getting back to its normal inflationary trends.

[Ronan Kennedy, Analyst at Barclays]

Thank you. Appreciate it.

[Operator]

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

[Joshua Spector, Analyst at UBS Group]

Yeah, 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. 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, etc. And as you look forward, is this now a more stable margin profile for that segment with some of the changes you made in Europe? Or do you expect that normal seasonality to kind of return?

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

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

[Scott Kirkland, Chief Financial Officer at Ecolab]

Yeah, absolutely. Thanks, Josh. As you noted, the margin performance in Institutional Specialty has been exceptional. Q3, their OI margin was up 380 basis points versus last year. You talked to the seasonality. Certainly, sales tend to be higher in the summer there. Sequentially, we saw a very modest decline in 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 Christoph said, in markets that are not helping. But given what we do, the labor savings are more important to ever 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.

[Operator]

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

[John Roberts, Analyst at Mizuho Securities]

Thank you. There are currently outbreaks at a major daily meat [Phonetic] provider in 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?

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

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 so sorry for all what happened. And every time happens as well when all things are happening on the market. And we really stepped back and look at -- it's never been happening to one of our customers just first. That's important to remember. And when it happens to some of those companies, we'll 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 [Indecipherable] as well as here and almost every single time those companies come and join us to do the right thing, the right way and ultimately, to protect guests, patients, consumers which is part of our mission as a company.

[John Roberts, Analyst at Mizuho Securities]

Thank you.

[Operator]

Our next question comes 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. 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 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?

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

Thank you, John. It's a very interesting set of end market. So we call it global high tech, but it's really too 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? 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 five years, so 2025 to 2030, when you think about it, AI uses 4% of the power that's generated electricity in the U.S. today. It's expected to use 10% to 15% by 2030. 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 five 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. And in the microprocessing world saw in the past [Phonetic], 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 the dump it, never to reuse it. Well, all the new technologies that we are deploying with our customers, we use this and recycled 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 direct to chip cooling. And in both cases, we have some very good offering and innovations to help them do that job as well in ways that they're reducing water usage in dramatic ways.

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 we like what we're building, what we have built, the performance of that business and I expect it to become a major driver for us in the years to come.

[John McNulty, Analyst at BMO Capital Markets]

Great. Thanks very much for the call.

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

Thank you.

[Operator]

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

[Jason Haas, Analyst at Wells Fargo & Company]

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 I was curious if that was entirely driven by mining or are there any other factors in if there is some softness in mind, can you just talk about when you would expect to see some improvement there. Thanks.

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

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

[Jason Haas, Analyst at Wells Fargo & Company]

Great, thank you.

[Operator]

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

[Patrick Cunningham, Analyst at Smith Barney Citigroup]

Hi, good afternoon. So I know it's early days but could you -- 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. But what's been the feedback from those customers?

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

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.

[Scott Kirkland, Chief Financial Officer at Ecolab]

Yeah. 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 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 working with these largest customers to get after and it really accelerates that $55 billion opportunity, cross-sell opportunity that we have.

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

So to be a little bit on that. So it's a combination of three things. I've shared early on, on previous calls as well here. So it's to do exactly what Scott has been talking about, really so penetrating much bigger share of the $55 billion that we have as a penetration opportunity within all customers. And it's -- the total opportunity for the top 35 is $5 billion, and half of it we don't have. So that's a penetration opportunity that we have. But second, it's up to our team as well to figure out what's the path in order to deliver that penetration opportunity while delivering so the value for our customers. And third, it's to drive the productivity, which is third priority, but we'll take it.

You know the technology helps us improve our productivity, which helps us invest while keeping improving productivity as well at the same time. So one comment for the, the top 35, which is a combination of our largest 20 customers plus our emerging 15. So those are the ones with the potential to become one of the top 20/35 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, while we can help them understand if all your units were performing at the best performing unit, what would be the potential.

And that's the new way of selling saying, well, you can get that much savings in your operation in all three elements; first, 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 three, you get to a dollar impact, 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 in the journey but very promising so far.

[Patrick Cunningham, Analyst at Smith Barney Citigroup]

Great. Thank you so much.

[Operator]

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

[Chris Parkinson, Analyst at Wolfe Research]

Great, good afternoon. Chris, you continue to put up pretty good results in pest elimination. Just the margin was just a touch a bit lighter than we were anticipating. Can you just hit on any color? I think that's a pretty asset-light business. So -- is there a head count investment there? Is there innovation in terms of your digital efforts? Just any color on how we should think about the growth rate relative to the margin progress even if you just want to hit on it longer term, would be incredibly helpful. Thank you.

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

Yeah, 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, obviously the combination of high margin low capital or drive huge returns as well at the same time. When we compare ourselves with other companies, large companies out there, and there's only four. So it's pretty easy that are large and then you have a zillion of smaller ones that represent the lion's share of the market, by the way, as well. We are the best-performing business in the world as well. So when we look at that combination, best-performing business in the world are great performance versus all our businesses as well that we have. Well, it's pretty easy come to the conclusion that we should invest more behind that business and 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 are obviously long term.

And to your question, where do we invest? It's basically in three areas. The first one is in innovation. You've heard about our pest intelligence business, which is ultimately connecting the million 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, well, you might have 500 devices over there, you need eight hours to get it done. With test 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 takes firepower to sell more better to more customers around the world. And the third one is to invest in smaller bolt-on acquisitions, all focused on commercial, sometimes some residential is coming with it, but this is absolutely not our focus. We have 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. That's why we're investing behind it as well, and that has impact on the margin short term, but for great return long term.

[Chris Parkinson, Analyst at Wolfe Research]

Great color. Thank you.

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

Thank you, Chris.

[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 for taking my questions. Christoph, the margin is definitely doing better than expected and it looks like you put a framework in terms of timewise into where to get when to get to 20%, you said the next three years. I was wondering a little bit more shifting on to 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? 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?

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

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 consistent, very long-term, good momentum. And it's going to be a combination of volume and pricing. I think the two to three on 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 one to one and half, and we see that [Indecipherable] 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, close to 60% of our portfolio today is already within the range that we committed to at Investor Day year and 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 billion 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. 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 five to seven. But what's important is when I commit to the 12 to 15, we don't need the five to seven 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. Volume is going to help, and we keep driving productivity. As Scott has mentioned as well. So with the One Ecolab initiative were expected to have 20 to 30 basis points SG&A improvement longer term we keep investing 20 to 30 basis points as well in the three big categories that I mentioned as well on earlier calls. So generally nice progression towards the range that we want to accomplish.

[Shlomo Rosenbaum, Analyst at Stifel Nicolaus]

Thank you.

[Operator]

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

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

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 and upper end of that band?

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

It's going to be between two and three, David, and we always around that number to make your life a bit easier. So sometimes it falls on the two, sometimes it falls on the three, 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 third quarter, 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. It's not a new thing. But I feel good with this two to three, as mentioned, feels like the sweet spot, we're going to try, obviously, to get as high as we can on that range. But for now, since we just have a few quarters and our belt of that I want to make sure that I stay within that range. We feel really good about that and the closer we can be on the upper side, the better it will be.

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 the operation 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 saying, getting in that range and having it very stable for the longer run.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you.

[Operator]

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

[Pavel Molchanov, Analyst at Raymond James]

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&A front?

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

So we don't comment too much on M&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&A. If I look at the 10 years behind us, we did roughly 100 transactions, smaller, bigger ones, so we have a lot of experience on how to get really, really well with a very high success rate.

The second point is -- as mentioned in my opening, 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&A pipeline that we've been nurturing for years continuously is very strong and very focused on the 3B areas. I've mentioned all the time, the first one being in water technology, but high technology, not basic technology. Second, it's digital and high tech and third is in life science. So those are the three 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 -- so 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.

[Pavel Molchanov, Analyst at Raymond James]

Appreciate it.

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

Thank you, Pavel.

[Operator]

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

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

Thanks very much. Year-on-year was volume growth in industrial close to zero and volume growth in Institutional and Specialty close to four. And in terms of your 20% longer-term margin target, in three 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.

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

I feel really good about getting there for all 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 the four to five, which is not my objective obviously, 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 three years. If you do the math, with the 12% to 15% by year for the next three years, you get very close to that. You add a few other things as well like the One Ecolab initiative, and you get there pretty mechanically. We all know over the next few years are going to be from an external world perspective. 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.

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

And then the volume growth question?

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

The volume growth question, as mentioned, so to get within this 2% to 3% is obviously a 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.

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

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

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

Year-on-year, Jeff, just to understand that well. Yeah, we had INS in Q3 was -- I'm looking at the table here north of 3% and Industrial is a bit north of 1% in Q3.

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

Okay, thank you so much.

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

You are welcome, Jeff.

[Operator]

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

[Daniel Rizzo, Analyst at Jefferies Financial Group]

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 is cannibalization new technologies does of some existing products, if at all? And if you ever really talked about the vitality index for you guys? Thanks.

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

So the vitality index, the way we calculate it, it's sort of sales of new products introduced within the last five 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 innovations, so really pleased with that. 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 in the market are incremental at margins, and this is the number one objective that we have.

[Daniel Rizzo, Analyst at Jefferies Financial Group]

If the vitality index [Phonetic] is 30% growing, is there a target you guys have for the -- over the next, say, five years or three years, given what you've laid out before with your sales growth target?

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

Can you ask again? I'm not sure [Speech Overlap]

[Daniel Rizzo, Analyst at Jefferies Financial Group]

I am sorry, sorry. Vitality index 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?

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

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. That's an end-to-end solution data center, as I shared before, for 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.

[Daniel Rizzo, Analyst at Jefferies Financial Group]

Thank you, very much.

[Operator]

Our next question is 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. 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 '25 in terms of like the pricing tailwinds or volume growth but also operating efficiency. So any incremental color? Thanks.

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

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, so to the 20% OI margin over the next three years as mentioned And it's three components. One is the sales via power, more people on the street, more efficient at doing it as well. Second, its digital technologies; and third, its service capabilities like the One Ecolab initiative that you heard as well from Scott a little bit early on as well. But what's important is we 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 investments in the years to come and still getting 20 to 30 basis points of SG&A productivity improvement while we do that. So the improvement is net of the investments that we're making. So you get good applying evolution and at the same time, an EPS in line with the 12% to 15%, leading us to the 20% over the next three years.

[Ashish Sabadra, Analyst at RBC Capital Markets]

That's great color. Thank you. Thanks for the color [Phonetic].

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

Thank you, Ashish.

[Operator]

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

[Kevin W. McCarthy, Analyst at Vertical Research Partners]

Yes, good afternoon. Christophe, I was wondering if you might hit the reset button for us as it relates to health care 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?

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

So two different businesses. Healthcare and Life Sciences, as you said, with the reset we're going to separate that as well in 2025 and beyond that you have more clarity as well. So about those businesses, especially Life Sciences. Honestly, Health care 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. 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 health care journey.

We did -- the first step was driving cost to the right place. Second, is bifurcation of surgical and infection prevention. Third, the sale of surgical drapes and fourth is to rebuild or to build the instrument reprocessing business for the future. 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. I believe that it's going to be a booming business in the next five 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, 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're close to $1 billion today, expected business in the next five to 10 years to be a few billions. 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. 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.

[Kevin W. McCarthy, Analyst at Vertical Research Partners]

Thank you very much.

[Operator]

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

[Andres Castanos, Analyst at Berenberg Bank]

Hi. Actually, following up on health care. You just consolidated that 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 health care.

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

So the margin you were talking about was a combination of health care and Life Science, as mentioned before. So it's a combination of two very different businesses. One 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 health care business is kind of a breakeven type of business. We knew that. So no big surprise. 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.

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 two or three 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. So very differentiated road maps, both for health care and for life science. Life science really focused as building a multibillion dollar business in the years to come in health care really focusing on building a highly quality business, which will remain relatively small in the years to come.

[Operator]

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

[Michael Harrison, Analyst at Seaport Research Partners]

Hi, good afternoon. Christoph, 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?

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

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 a plant in Asheville as well. 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 third quarter 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 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. 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 this used to be a huge competitive advantage in the past 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 always have 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.

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you. Christophe, could 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?

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

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 where we use and recycle. Well, those are applications that customers do not have today. So that's an incremental sale, that's not a share gain because they were not buying from someone else, which is where we focus a big part of our retention. But the 55 billion I mentioned before, which is the focus of One Ecolab, well, it's wallet cheer, obviously, because those are sales that are being generated by competition so far.

I'd like to let 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. 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.

[Vincent Andrews, Analyst at Morgan Stanley]

One is not materially stronger than the other in terms of leading care [Phonetic].

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

The new business is the closest, obviously. But you know, you get new business, thanks to innovation as well, at the same time, so we don't measure them so separately like that. There's 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. 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.

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you very much.

[Operator]

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

[Charles Neivert, Analyst at Piper Sandler Companies]

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 there'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, will that drop affect your ability to raise pricing further than it might have otherwise gone, meaning at higher oil prices, the value sale figure -- 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?

And secondly, can you talk specifically about your -- and so we know it's slow. We know the economy is slow, but is there anything specific? Is it Asian imports? 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 a tenant change in your -- obviously, in your favor?

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

So two different questions, obviously here. So Charles, the first on pricing. Well, the best indication is what happened in the last 12 to 18 months where raw material costs were tailwind for us, and we still delivered some very strong value pricing because we are delivering so much total value delivered this TVD, as mentioned before, so to our customers. Ultimately for them, well, it's TVD minus price, if it's a net positive. 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, while the whole discussion of value pricing is even more important, obviously, here. 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 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. Selling pricing is never something easy. So I want to be careful how I'm saying that as well time.

But generally, so that's why I feel really good about 2025 because we have a good volume growth. We have steady value pricing. DPC is probably going to become as a headwind. 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 well going forward.

[Operator]

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

[Scott Schneeberger, Analyst at Oppenheimer]

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 two years ago was when you really started increasing pricing, inflationary environment. I'm curious, did you see anything really unique or dynamic with retention over the last couple of years, which I imagine is improving now. But just to get a little perspective is what I'm working for over those two years on retention and anything currently on the competitive environment that may influence that as well. Thank you.

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

The retention rate, which 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've 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 ask from a pricing perspective.

So net-net, a very good thing for them and ultimately a very good thing. So for us, as a company and you as shareholders, obviously. 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, 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 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, saw margin improvement, driving productivity and delivering so [Phonetic] this 12 to 15 EPS growth. I 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 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.

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

Thank you. That wraps up our third 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. I hope everyone has a great rest of the 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

• Timothy Mulrooney, William Blair
• Ronan Kennedy, Barclays PLC
• Joshua Spector, UBS Group AG
• John Roberts, Mizuho Securities
• John McNulty, BMO Capital Markets
• Jason Haas, Wells Fargo & Company
• Patrick Cunningham, Smith Barney Citigroup
• Chris Parkinson, Wolfe Research
• Shlomo Rosenbaum, Stifel Nicolaus
• David Begleiter, Deutsche Bank Aktiengesellschaft
• Pavel Molchanov, Raymond James
• Jeffrey Zekauskas, J.P. Morgan
• Daniel Rizzo, Jefferies Financial Group Inc.
• Ashish Sabadra, RBC Capital Markets
• Kevin W. McCarthy, Vertical Research Partners
• Andres Castanos, Berenberg Bank
• Michael Harrison, Seaport Research Partners
• Vincent Andrews, Morgan Stanley
• Charles Neivert, Piper Sandler Companies
• Scott Schneeberger, Oppenheimer Holdings Inc.