Ecolab Inc. (ECL) Earnings

Management highlights

- Accelerating momentum across portfolio with organic sales growth 4% driven by value pricing 3% and volume growth 1%. - Expanded operating income margins reflecting discipline execution and OneEcoLab approach. - Growth engines like global high tech, life sciences, pest elimination performing well. - Core portfolio including institutional, specialty, food and beverage, light water performing strongly. - Paper and heavy water stabilizing. - SG&E productivity improved meaningfully with digital and agency capabilities scaling.

Guidance

- Expect organic sales to increase 6% to 7% in the second half of the year. - Expect EPS growth to strengthen in Q3 and Q4, resulting in unchanged full-year expectations of adjusted diluted EPS growth of 12% to 15% this year excluding short-term impact from the pending Cool IT acquisition. - Cool IT financing and non-cash amortization expected to have a short-term impact on adjusted EPS in the second half of the year, reducing quarterly EPS by approximately 20 cents, but underlying EPS growth remains unchanged. - Beyond short-term impact, expect EPS growth including Cool IT to accelerate back into the 12% to 15% range as contributions from Cool IT and roll-off of NALCO acquisition amortization accelerate.

Segment performance

Global high tech and digital growth grew more than 20%, driven by strong demand tied to digital adoption and the ongoing AI build-up. Life sciences accelerated to 11% growth, led by bioprocessing, where sales more than doubled. Pest elimination delivered a strong quarter with 7% growth. Institutional strengthened with solid growth across restaurant and lodging customers. Specialty gained share with 9% growth. Food and beverage outperformed its end market again, drawing 5%. Light water delivered steady growth. Paper and heavy water stabilized as supported by new business and innovation.

Risks & headwinds

- Conflict in the Middle East driving sharply higher global energy costs creating additional pressure across supply chains. - Magnitude of energy cost increases requiring additional action to ensure reliable supply, with higher commodity costs impacting second quarter EPS growth by a few percentage points. - Regulatory approval needed for Cool IT acquisition which could impact the timeline and integration.

Analyst Q&A

• Q: In your outlook, you shared you expected gross margins to stabilize in the second half, which is quicker than some investors may have been expecting. Can you help us understand how this fits into your goal of reaching a 20% OI margin in 2027, including with the impact that the cool IT system acquisition will have?

  A: As mentioned, commodities cost in 22 was up 50% and margins went further up post cycle. Here commodities cost is up 9% and expected to stay high until end of year. Expecting to get dollars back as we exit Q2, and gross margin to stabilize in second half including Ovivo. Excluding Ovivo, gross margin would be up 70 to 80 basis points. OI margin will be even better as SG&A keeps improving. Math of pricing, DPC and commodity cost, 30% of DPC impacted by energy costs. 5% to 6% pricing in second half helps stabilize margins. Cool IT adds a scaled direct-to-chip liquid cooling platform and positions global high-tech with an integrated, service-led cooling solution for high-density AI data centers, with Cool IT having strong first quarter sales growth ahead of 30% plus discussed on acquisition call.

• Q: Could you help us understand the base macro scenario embedded in the guide? Does it assume broadly stable demand environment with modest improvement, or does it contemplate an already cautious consumer posture?

  A: Our assumptions are pretty conservative with 9% commodity inflation in second quarter expected to stay till end of year and probably into next year. Expecting 1% volume growth in second half, with 5% to 6% pricing leading to 6% to 7% upline growth. Growth engines are doing really well collectively, core business is in strong and steady growth performance, underperformers are stabilizing.

• Q: Very strong growth in high tech, 20% plus. You talked about CoolID also growing really about that 30% growth in 1Q. I was wondering if you could also talk about OVivo, how that's tracking compared to your expectation, if you could talk about the cross-sell opportunities of OVivo with your core offerings in high tech, and also as you're thinking about cross-selling once the CoolID acquisition closes.

  A: Global high tech is going to become strongest growth engine in near to long term future. Together with life science, two amazing growth engines. High tech with legacy business, Evo, Cool IT, gets to a business of one and a half billion growing 20, 25 percent or more at high margin. Bovivo helps in microelectronics move from 5% water recycling to north of 95%, game-changing for fabs. Cool IT first quarter sales growing well ahead of 30% plus discussed. Avivo has backlog higher than thought due to reasons mentioned.

• Q: Maybe just shifting tack to one Ecolab. Sales growth, you called out noticeably above kind of the core. I guess, can you highlight how much better it was than the core? And if you've got any ways to further accelerate the program now that you've been running on this program for a couple of years now?

  A: It's been a little bit less than two years. Most obvious outcomes are Food and Beverage United with strong results, top 35 largest customers growing quite a bit faster than the average of the company, and through GenTech technology with remarkable savings in performance. Pace is picking up.

• Q: On cool IT, can you help us with the 20 cents of dilution in Q4? And what is your expectation or forecast for dilution in 2027 from Cool IT?

  A: It's $0.20 per quarter in the second half as described. Excluding cool IT this year, we're going to deliver the 12-15 as mentioned. By 2027, the net impact of roll-off of now-going amortization really offsets the non-cash amortization from cool IT, so feel very good about staying in that 12% to 15% range from an ETF growth perspective.

• Q: I wanted to ask about the life science business, the strength in the organic growth. Is this the step change that we've been kind of waiting for in the near-term foreseeable future, but can you just help us contextualize how this business is going to then react once the new capacity comes online? And, you know, what type of operating leverage should we expect to see kind of intermediate-term in this business?

  A: This is the performance we were looking for, building towards. 11% growth in first quarter, double-digit growth business all in. Operating income leverage, getting close to 30%, might be in mid 20s in short to mid term as we keep building capacity, like plant opening in second half of the year. Bioprocessing business grew north of 100% in first quarter, steady growth expected.

• Q: Obviously there's a lot to go on in terms of raw materials over the next two quarters. But in terms of your 27 CMD margin targets, it seems like you're actually well ahead in certain cases, slash in line. But I'd love it if you could kind of walk us through the intermediate to longer term puts and takes of of those targets, and specifically how you're thinking about any newer dynamics across institutional markets, as well as kind of the impending ramp of life sciences as well.

  A: We're very confident in market expansion. Delivered north of 500 basis points of wide margin expansion in past, feel good about delivering 19% this year, 100 basis points year on year. 100 basis points left to get to 20% next year. Institutional specialty already north of 20%, life sciences underlying north of 20%, pest elimination north of 20%, most of water as well. Next ice storms beyond 20% are to be seen.

• Q: I did want to talk a bit more about global water and the margins. There were three dynamics going on. There was the Ovivo acquisition. You called out some raw material inflation. I suspect that hit you pretty hard in March, which you obviously couldn't price right away for. And then the stabilization of the headwind of the softer sales in heavy water and paper. But that That you called out an upper single-digit operating income growth decline, which I would have thought would have helped the percentage margin. So maybe you could just unpack, you know, the margin performance in global water, the decline, and how those three different buckets contributed to it and how we should think about it over the next couple of quarters.

  A: Overall water was flat in terms of OI growth, slightly 0.5% down in Q1. Excluding paper and heavy water, water has been growing top line mid-single and operating high single-digit. Water is doing really well ex-paper and heavy. Working on paper and heavy, but most focus is on gross part of water. Combination of global high tech and improving paper and heavy water will lead to good results for second half in water.

• Q: The specialty division within INS, pretty impressive organic growth. In an environment where you see weaker foot traffic and consumer, highly sensitive to wage inflation, is most of your growth coming from deeper penetration of digital suites and productivity tools versus traditional chemical volume at this point?

  A: Mostly focused on solutions that are helping them get the job done at a lower cost because they use less labor and less natural resources, energy and water. In specialty, it's a business of scale, standards at scale, performance at scale. Helping large quick serve fast food companies understand best performance and scale solutions across the system. Margins are high and business is steady.

• Q: I was just hoping to get a little bit more detail on what you meant that the paper and the basic industries are turning the corner. Is the growth getting better over there? Is it that you've just seen, you know, you haven't seen any more paper mills that are closing? Like what's going on with the metal side of it? Are we going to see those businesses get to flat this year?

  A: The whole company excluding paper and heavy is growing 5% plus top line. Water is also in that range with good volume growth. Paper and heavy water have stabilized, haven't been impacted by closures anymore in the last few months. Expect them to get to a more positive territory in second half. They have good margins and not destroying value for the company.

• Q: Is your inflation higher on raw materials or is it higher on your CapEx because you purchase a lot of equipment that has metals and plastics contained in it?

  A: Mostly on the commodity raw material side of things. Logistics as well, but nothing dramatic on capex related to technology equipment.

• Q: Christoph, you said that cool IT is growing a lot faster than 30%. Is it growing 50% or 70% or 60%? Can you quantify that? And secondly, when you think about competing in the data center markets in direct-to-chip technology, does the competition emphasize water treatment chemistry, or is their direction more equipment-based? And how do you see your competitive status in offering water treatment technology in the direct-to-chip area?

  A: The true growth is close to the triple-digit range. We need regulatory approval for the acquisition which should happen sometime in the third quarter. Competition has some players, but our offering of higher uptime at a lower water usage and lower or better power performance is game-changing. Our technology is a water business, removing heat, which we've mastered for 80 years, and we're combining it with Cool IT's technology.

• Q: Christophe, thank you. And thanks for kind of addressing that. I feel like one of the concerns we hear from investors all the time on the cool IT deal is just the It doesn't feel like a consumables business. But I had two to kind of backfill on this. One, the $0.20 per share dilution that you're talking about per quarter, is that math based on the 30% sales growth that you had been laying out there? Or is that reflective of the 100%, near 100% sales growth that it's currently looking at and does that matter, uh, over the near term? And then how R and D intensive do you expect cool it to be? Because presumably the technology change over here could be pretty rapid and, uh, cold plates and things like that. It's not really like a core competency of, of Ecolab.

  A: The base case is the 30% growth plus we've talked about. Anything better helps. The 20 cents per quarter is a good base case once closed. Cool IT is super strong in R&D, and we're combining it with our 3D trace-out technology. It's a water business removing heat, which we've mastered for 80 years, and it's a typical one plus one equals three situation.

• Q: I was hoping that I could ask a question on the pest business, just in terms of the digital and kind of smart connected traps that you're rolling out. Can you give us a sense of what percentage of customer locations are using those new traps? Maybe just give a little more color on the timing of that rollout and when you might expect to see some margin benefits as you get better efficiency from your sales and service force with those new traps?

  A: We have roughly 700,000 smart devices implemented so far. Plan is that in the next three to four years the whole pest elimination business is going to be a best intelligence business. Expect to reach probably a million connected devices by the end of this year and keep ramping up. It's going to have an impact on growth, retention, performance for customers and margins.

• Q: As you think about the surcharges and the pricing traction you have and how that has changed over the years, is your percentage value capture across your portfolio increasing, or is it a matter of delivering more value but capturing the same percentage? And as you think about those dynamics Are the newer businesses where you prefer to focus your time right now, do they have a higher value capture level relative to the value created for the customer than kind of some of the older legacy Ecolab businesses?

  A: We've perfected this over the past four or five years. We always do it in a way beneficial to customers, with total value delivered north of what we capture in price. Not every business is equal. Margins went up, retention remained strong. It's an execution play our teams are doing well.

• Q: Great. Thanks for taking my question. I guess I just wanted to have你 elaborate just to touch more on that one. It seems like the achievement of the energy surcharges will be important for that second half ramp here. And so just given that, Christoph, as you look at the total customers that you expect to approach with the energy surcharge versus how many you've approached today and are aware that this is coming, can you just help us understand how many of them or what percentage of them have been approached and are aware of this coming, and how many are still in the go-get for the balance of the year for you to achieve your ultimate target there.

  A: Everyone is impacted, 100% of customers, businesses, and countries we operate in. It's the third time we're doing it, started April 1st, progressing very well. Mechanics, systems, tracking are in place. Progressing well with most expected to be done at end of Q2, early Q3, with surcharge converted into structural as quickly as possible.

• Q: I was curious if the conflict in the Middle East has had any impact on any of your end markets in terms of, like, hitting your customers' confidence in any way in any segment?

  A: Yes, but Middle East is a pretty small business. Critical for customers there, we're helping them, and it might impact slightly our volume growth in Q2, but it's going to help us gain share in the second half. Customers trust us and we're proud of the team's work there.

• Q: I'm unfortunately going to continue to ask on the price-cost side of things, but我 just wanted to get some clarity that it's a little bit odd to me that you're talking about high single-digit Roth inflation in 2Q. I mean, that's coming quicker than I think I would have anticipated. And then you're not really saying that it's going to increase through the rest of the year, which most other companies are expecting higher inflation in the second half. So I'm wondering, one, what's different or unique there? And then, two, just your ability to ratchet up that surcharge automatically if inflation goes to mid-teens from the high single digits? Is that baked in or is that something that has to be retrieved by你?

  A: We buy a lot of products, over 10,000, so it's broad and stable. Commodity costs started in February, impacting second quarter due to inventories. We're well insulated, and in extreme cases, we can go to the next level of energy surcharge, which we've done before, with customers familiar with the discussions. This is something our teams master well.

• Q: I'd appreciate your updated thoughts on the subject of SG&A leverage Looks like you were able to decrease your ratio of SG&A to sales by 130 basis points in the March quarter. Is that a reasonable trajectory to think about for the next several quarters? Maybe you could provide some updated thoughts on what you're doing productivity-wise and the effect of acquisitions on that ratio as we model the company going forward.

  A: SG&A leverage is well mastered. We're at the forefront of agency in our organization, delivering great results. As mentioned, went up 130 basis points due to OneEqualLab program and digital and AI programs. Benefit from M&A, primarily Avivo, accounted for 20 to 30 basis points in first quarter, but underlying is above long-term target. Expect SG&A leverage to be around 100 basis points full year, with underlying above long-term target due to faster sales growth和 productivity.

• Q: I'm going to touch on light water. You saw some solid sales in first quarter, expecting that again in second quarter. Do you expect transportation and green energy, which were cited, to remain? uh the primary drive drivers going forward and what's what's driving those verticals um is it is it something just from a few large projects or or is it a structural uh uh formation that's creating here

  A: Light water is doing quite well. Transportation is one driver, providing better paint with less water and waste for advanced car manufacturers. Green energy is another, similar to semiconductor manufacturing. Institutional water is also a part, working with large real estate和 facility management companies. It's a structural formation with performance keeping getting better.