Ecolab Inc.

Greetings and welcome to the Ecolab third quarter 2021 earnings release conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Monahan, Senior VP External Relations for Ecolab. Thank you, Mr. Monahan. You may begin.

Thank you. Hello, everyone, and welcome to Ecolab's third quarter conference call. With me today are Christoph Beck, Ecolab's CEO, and Dan Schmeckel, our CFO. The discussion over results, along with our earnings release, and the slides referencing the quarter's results are available on Ecolab's website at ecolab.com slash 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. Starting with a brief overview, strong third quarter results were driven by robust new business wins and accelerating pricing, which along with the continued recovery in the U.S. and improving European markets, More than offset significantly increased delivered product and other costs. Looking ahead to the fourth quarter, we expect both accelerating sales volume and pricing momentum to leverage an expected continuing, though uneven, global recovery. We expect these drivers to result in the fourth quarter showing better year-on-year sales growth than the third quarter. We have also experienced continued substantial delivered product and other cost inflation that we believe will increase fourth quarter costs by nearly 20 cents per share. As a result, we expect fourth quarter earnings to grow double digits, though not as strong as the third quarter. We expect to once again successfully manage the current inflation challenges and uneven global economic recovery to deliver very strong sales and earnings growth in 2021, as a strong volume and pricing gains, along with productivity and cost reduction actions, enable us to offset the higher costs and yield double digit earnings growth. Recent programs, including Ecolab Science Certified and Net Zero, have further differentiated Ecolab's value proposition and enable us to help create better customer outcomes and reduce environmental impact while simultaneously reducing their costs. Our new business winds and innovative pipelines are at record levels. New market focus areas are positioned well to drive growth, and our leading digital capabilities continue to add competitive advantage. Our strong business momentum along with enhanced value proposition and favorable macro trends, position us well to leverage the post-COVID environment and deliver further, superior shareholder returns next year and for the future. And now here's Christophe Beck with his comments.

Thank you, Mike, and good afternoon, everyone. Great to be together with you today. So Q3 has been another very good quarter for Ecolab, demonstrating once again that Ecolab is in a great shape. with strong top-line momentum and a proven ability to effectively mitigate the adverse effects of inflation and the so-called supply shortages. Underlying sales trends were strong across the board. In a complex environment, we delivered 10% reported and 8% fixed currency organic sales growth, driven first and foremost by continued strong momentum in institutional and specialty that delivered 17% sales growth in the quarter and 24% from the institutional division. We also saw accelerated momentum in industrial sales with 7% growth and 13% in other segments driven by sustained high performance in pest elimination. Health care and life sciences posted negative sales growth year on year as they compared to exceptional growth during the pandemic as we know. However, the respective underlying sales growth stayed on a healthy mid-single and double-digit trajectory. This top-line momentum, combined with accelerating pricing and structural productivity that's benefiting from our state-of-the-art digital automation, drove the strong adjusted EPS delivery. More than upsetting short-term impact from Hurricane Ida and the rapid acceleration of global cost inflation, the team did an exceptional job minimizing the impact of Hurricane Ida, which we were able to successfully manage to be a much lower impact than initially expected at only $0.03 in the quarter. Most importantly, the team mitigated the impact of additional significant supply shortages to ensure exceptional service to customers while driving continued new business wins and strong price increases, contributing to a 31% increase in free cash flow. Current sales momentum is strong, and we expect it to accelerate. Strong new business and breakthrough innovation are expected to continue to drive top-line growth. Also, pricing will keep accelerating towards 4%. This strong volume and price momentum is expected to result in Q4 showing better year-over-year sales growth than what we've seen in Q3. At the same time, delivered product costs will keep increasing rapidly, which will continue to mitigate with great pricing. However, as we know with our model, this takes time to do well in a way that's sustainable long-term and aligned with the incremental value we create for customers. We therefore estimate that the timeline between pricing and cost inflation will impact the fourth quarter EPS by approximately 20 cents versus what we expected just a few months ago. But that, too, will address over the next few quarters. Next, we expect Q4 EPS to continue to grow double digits, though not as strong as in Q3, which will help us exceed the year with great momentum. With strong volume growth, continued pricing, and delivered product costs hopefully nearing its peak, will then enter 2022 in great position to deliver another great year for Ecolab. This strong fundamental business momentum combined with continued market recovery provides us with great confidence in the future and especially for 2022. In a world full of uncertainties, we keep driving strong business wins and a competitive differentiation. In a world where customers struggle to find reliable partners for innovation, especially product supply and expertise to help them run their operations efficiently and serve their customers safely, we have substantially strengthened our position as their clear, innovative, and reliable global partner. In a world where our institutional specialty customers and consumers especially are concerned about increased risks of infection, Ecolab Science Certified has become the reference that provides guests with the assurance they're looking for. And in a world where environmental impact has become front and center, our net zero offering is providing industrial segment customers especially leading in innovative ways to deliver on their commitments while improving their own financial returns. All this provides us with confidence that 2022 will be another strong year for Ecolab, with sales and earnings growth above our long-term trends. So with that, I look forward to your questions.