Ecolab Inc.

Greetings. Welcome to the Ecolab third quarter 2022 earnings release conference call. At this time, all participants will be in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations.

Mr. Hedberg, you may now begin. Thank you. Hello, everyone, and welcome to Ecolab's third quarter conference call. With me today are Christoph Beck, Ecolab's chairman and CEO, and Scott Kirkland, our CFO. A discussion of our results, along with our earnings release and 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 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 refer you to the supplemental diluted earnings per share information and release. With that, I'd like to turn the call over to Christophe Beck for his comments.

Thank you, Andy, and welcome to everyone. In Q3, our team delivered another strong quarter with steady double-digit organic sales growth of 13%, and total pricing that accelerated from 9% in the second quarter to 12% in the third. Industrial grew 16% organic with 15% pricing, and institutional specialty grew 12% organic with 10% pricing as markets stabilized. The other segment, led by pest elimination, continued on its strong trajectory with 13% organic and 7% pricing, and health care and life sciences, with year-over-year comparisons finally stabilizing and with life sciences clearly leading. Most importantly, accelerating pricing exceeded continued substantial delivered product cost inflation, with the net benefit expanding significantly since the end of the second quarter, which helped further ease year-over-year gross margin pressure. This alone, with increased productivity gains, led to renewed positive growth in fixed currency operating income with nice gains in the industrial, institutional, and other segments. All in all, a clear and further step on our journey to fully recover our margins and get back to strong and steady earnings growth. With this clear commitment to continuously improve earnings performance, quarter after quarter, we have been preparing for an environment where inflation will remain high for longer and interest rates will impact demand. This is especially true in Europe, where the war and the energy crisis are impacting demand and global energy costs. In my view, This is just the beginning, with inflation in Europe at 11% as of yesterday and natural gas prices 60% higher than a year ago, which is the equivalent to $180 per barrel of oil today, with future pointing toward $230 by the end of this year. More importantly, we're taking early action. As we take a realistic view of what's ahead and we continue to expect earnings growth to progressively improve, but at a more moderate pace than previously anticipated coming out of Q2. Over the past few years, Europe has become a very strong, successful, and critical market for Ecolab, with steady growth, profit margin improvement, and the right team to strengthen our market leadership positions. We're therefore entering this European winter with confidence, confidence not built on hope, but on momentum, actions, and exceptional execution led by a great team. We're in a unique situation to accelerate our performance improvements as we've launched a new initiative that will lead to 80 million of annual savings when fully implemented, helping to partly mitigate the negative impact of the war short-term and improve longer-term performance. This along with accelerating pricing, new business, and productivity gains is expected to deliver a strong acceleration in operating income growth. This sequentially improving operating performance is expected to be offset by unfavorable impact from currency translation and interest expense, resulting in fourth quarter adjusted diluted earnings per share approaching last year's 128. Now more broadly, and with pricing and productivity work showing strong continued momentum and now fully in execution mode, we've clearly shifted our primary focus to offense. We've accelerated new business generation to gain more share. We've sharpened our attention on customer value creation to improve their total operating costs, and importantly, protect our pricing in the long run. We've increased our investments in select breakthrough innovation to help customers save more water, energy, and cost when they need it the most, especially in Europe. And we've prepared to accelerate pure light growth with new capacity coming online as we speak. This will help us unlock our large order backlog and expand proprietary technologies across high growth, high margin, and markets in life sciences, nuclear power, microelectronics, and lithium extraction for EV batteries. Being back on offense while staying on price execution and productivity is good for Ecola. This is where we are at our best and what we love doing most. Looking ahead, we do not expect the global environment to improve anytime soon, but it's in time like these that our growth model demonstrates its strongest resilience and our customers need us the most. We will therefore remain laser-focused on exceptional execution to enter next year in a position of strength. with strong double-digit organic sales growth, total pricing getting further ahead of inflation, and productivity work mitigating the impact of the energy crisis and the war in Europe. We're now in a position to deliver earnings growth that progressively aligns with our strong historical double-digit growth performance. And this, for me personally, remains my core objective. We have all it takes to win, short-term and long-term. Our 152 billion total available markets keep getting bigger. with customers increasingly needing our solution to reduce their total operating costs and water and energy usage. Our pricing and productivity work provides us with a firm runway to recapture our historical OI margin and drive towards our long-term 20% OI margin objective, helping to drive significant earnings power as inflation eventually eases and our value delivered keeps rising. And our leadership team, Now together with Darrell Brown as Chief Operating Officer and my trusted partner has never been stronger. This is why I'm more confident than ever about our future and our ability to deliver superior long-term performance for our customers and our shareholders. I look forward to your questions.