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Operator
Greetings, and welcome to the Ecolab second quarter 2023 earnings release conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. 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, Andy Hedberg, Director of Investor Relations. Andy, you may now begin.
Andy Hedberg
Thank you and hello everyone and welcome to Ecolab's second 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 the slides referencing the quarter 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 on the risk factor section in our most recent form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. With that, I'd like to turn the call over to Christophe Beck for his comments.
Christoph Beck
Christophe Beck Thank you, Andy, and welcome to everyone. In Q2, our team delivered another very good quarter, building on continued strong momentum and, once again, making further improvements compared to the last quarter. Strong execution as well as easing inflationary pressure helped us get to the upper end of our expected Q2 earnings growth range. In an environment that remains unpredictable, our shift to offense continues to gain traction, and our confidence in delivering midterm performance that's ahead of historical average trends clearly keeps getting stronger. Organic sales growth remains strong at 9%, driven by the steady recovery of institutional specialty with 13% organic growth. Pest elimination and industrial fallout delivering 11% and 9% organic growth respectively. Despite softening global end market demand, overall volume trends remain steady. In other good news, volume, excluding Europe, improved from flat in Q1 to 1% growth in Q2. So volume trends are improving further too. Adjusted earnings per share grew 13% led by strong organic operating income growth that accelerated from 19% in the first quarter to 21% in the second. Although year-on-year comparisons are getting harder, pricing remains strong at 10% as further new pricing continues to grow. Delivered product costs were 5% higher than last year but eased sequentially a bit more than expected, which is further good news. We kept working on strengthening our performance, including targeted actions in institutional, life sciences, and healthcare. Institutional had another remarkable quarter as it continued its very strong recovery. Focus on your business and penetration drove share gains in units served, solutions sold, and sales delivered. Growth, value pricing, and productivity drove strong margin improvements, which we expect to continue in the second half. Additionally, innovation in labor automation positions institutional as the ultimate leader in a market undergoing a foundational transformation driven by evolving consumer habits and increased use of digital technology. All good news for us. Our highly attractive life sciences businesses was not immune to the short-term market pressure, which led to flattish sales. However, this is much better than competition, and life sciences growth potential remains extremely strong. Even if this short-term market transition takes a few quarters to get back to strong growth, we're staying on offense. We're taking this as an opportunity to gain share with major customers and to further invest in capacity and capabilities in bio-pharma and under-structured water, even if it results in short-term operating income decline. As promised, we're also continuing our rapid transformation in healthcare. In the first quarter, we announced a restructuring program to right-size our cost structure. This is progressing well. Now, over the next few months, we will also be creating two separate yet focused businesses from our North American healthcare business, surgical and infection prevention. Surgical, which provides protective drapes for surgeons, patients, and equipment in operating rooms, will become a standalone business. Infection prevention, on the other hand, which provides environmental hygiene to reduce hospital-acquired infections, we leveraged the critical mass of our North American institutional field sales and service organization to expand customer reach and significantly improve productivity. This is just a further step on our journey to transform healthcare into a profitable business that serves hospitals exceptionally well. While we continue to focus on margin improvements, which improved 130 basis points in Q2, we also accelerated our shift to offense. Our 1,100 corporate account managers achieved a record new business pipeline by leveraging enterprise opportunities to drive penetration and by focusing on new business prospects to expand our reach. Our more than 25,000 field sales associates sharpened their focus on exceptional service and deploying new business, which resulted in promising share gains. Our 1,200 scientists remained focused on breakthrough innovations, which enabled customers to achieve better outcomes at the lower total cost through reduced use of natural resources. We're also ramping up our investments in digital technology. With Ecolab 3D, one of the largest IoT cloud in the industry, and our 1,000 digital experts, we're uniquely positioned to further empower our field and customers to deliver best-in-class performance, to unleash unique customer value, improve field productivity, and deliver an exceptional customer experience. You'll have the opportunity to experience some of this firsthand at our investor day in September. In summary, we delivered the second quarter exactly the way we wanted, with strong top and bottom line momentum, despite the challenging environment. Looking ahead, we anticipate delivered product costs to remain high, but to ease progressively and for global demand to soften further. Although none of this is new, the good news is that we are well positioned to win in this environment as our momentum keeps picking up. In the second half of the year, we expect volume growth to continue improving and gross margins to expand 150 to 200 basis points versus last year. During the last few years, our expertise grew as we maintained our team and rolled out new innovative solutions. Our retention rates remain high as we protected customers from supply shortages. Our margins continue to recover and our organic operating income accelerated as we drove pricing in thoughtful ways while increasing customer value. With this, we expected adjusted earnings growth in the third quarter to improve further and to reach 12% to 19% with continued strong momentum as we exit the year. Finally, we'll remain good stewards of capital by continuing to invest in the business, increasing our dividend reducing our leverage, and returning cash to shareholders as we've always done. Most importantly, with the best team, science, and capabilities in the industry, we will continue to grow our share of the high-quality 152 billion market we serve. In other words, our future has never looked brighter. I look forward to your questions.
Andy Hedberg
Thanks, Christoph. That concludes our formal remarks. As a final note, before we begin Q&A, as Christoph mentioned, we'll be hosting our 2023 Investor Day at our Nalco Water Headquarters in Naperville, Illinois, on Thursday, September 14th. If you're interested in attending or have any questions, please contact my office. Operator, would you please begin the question and answer period?
Operator
Thank you. We'll now be conducting a question and answer session. We ask that you please limit yourself to one question and one brief follow-up per caller so that others will have a chance to participate. If you'd like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you, and our first question is from the line of Tim Mulroney with William Blair. Please proceed with your question. Good morning, Christoph.
Christoph Beck
Good morning, Tim.
Tim
Just one question for me today. You touched on this a little bit in your prepared remarks on the institutional margins, but I just wanted to dig in a little bit more because I noticed that your institutional margins, they were essentially flat year over year in the first quarter. It jumped up significantly in the second quarter, kind of showing progress to rebuilding back to those pre-pandemic margins. Can you just talk about what drove that inflection in the second quarter why it happened now, and if you think that type of expansion is sustainable in the back half of this year. Thank you.
Christoph Beck
Thank you, Tim. Great question, because institutional is our largest single business, as you know, in the company, and they had a remarkable quarter in Q2, which followed a very good quarter in Q1 as well. So I've been very impressed with how the team delivered once again. So you mentioned it, so 13% sales growth, 40% operating income growth. So the team executed perfectly well. And what's important is that our new model, which we announced a few years back, now is focused sales and service organizations. One really focused on driving gains, and the other one servicing customers extremely well. Well, this new organization is working really, really well. That was the right move that we made a few years back. So we're gaining share with new business. This business has a new business pipeline, which has reached record highs over the past few months, and they've done an excellent job at executing this new business. Pricing has been very good as well, which has been driven by the total value delivered that they're delivering for customers that need it more than ever. If I look at the unit share as well in the market with the number of units that went down, we're quite stable versus 2019, which is remarkable. Penetration is up. as well with programs like Ecolab Science Certified that's driving the usage of much more solutions than in the past as well in that business. And one other point, mentioned it so many times, so since 2019, the food traffic in food service restaurants, dining traffic, is down a third. Our sales in that same segment in the U.S. is up 12%, so a massive growth. share of gain that we've delivered here. So we expect this momentum to continue in the quarters to come. And I even think that the OI dollars that we had in Q4 2019 could be pretty close, closely delivered in Q4 this year as well, which means that we would be in dollar terms very close to where we were in 2019. well, it's only upside from here. So institutions did really well. It's driven by fundamentals of new business, of pricing, of productivity, of customer service, and I like a lot where we are and even more where we're going. Thank you.
Operator
Our next question is from the line of Ashish Subhadra with RBC Capital Markets. Please proceed with your question.
spk11
Thanks for taking my question. So pretty solid gross margin expansion in the quarter, and thanks for providing color on the gross margin expansion for the back half of the year as well. I was wondering if it's possible to quantify what the delivered product cost was in the quarter, and there was obviously a comment on the delivered product cost to ease, but I was wondering if you could help quantify how we should think about those delivered product costs in the back half. Thanks.
Christoph Beck
Hey, thank you, Ashish. I'll pass that question to Scott, our CFO.
Seth
Yes, I see. So thanks for the question. Yeah, as you said, hey, gross margins and prove nicely, you know, it was up modestly in q 120 basis points, but really saw a great expansion year over year in q2 up 130 basis points, as Christoph said, continue to drive new pricing as well as maintaining the pricing that we'd already achieved and had hit that peak in pricing in q1, but continue to drive new pricing And then seeing that DPC inflation easing a bit. So, you know, as you said with that, is that easing inflation on DPC as well as the new pricing is what is going to help drive continued margin expansions in that 150 to 200 basis points year over year. So we expect, you know, DPC to continue to be up year on year, just at a smaller rate as we see in the second half of the year. So as we said, up 9% in Q1, 5% in Q2, and probably low single digits in the second half.
Operator
Thank you. The next question is from the line of Seth Weber with Wells Fargo. Please proceed with your question. Hi, good morning.
Seth Weber
I wanted to go back to the strength in the institutional margin for a minute. Can you provide us kind of where you're at on the cost-saving program? I'm just trying to gauge how much of the margin expansion is a function of price versus volume versus the actual cost initiatives that you guys have kind of started to talk to, but not clear where you're at in that process. Thanks.
Christoph Beck
Thank you, Seth. I'll pass that question as well to Scott, but before I do so, the two main drivers, institutional volume slash new business and the pricing, that they've done really well, also fed by new business. And the restructuring that we announced as well earlier is going quite well, but I'd like to have Scott to provide some more details on that.
Seth
Yeah, happy to do that. Yeah, as Christophe said, institutional margins are doing very well. It's really a combination of everything. As we talked about earlier this year as part of the expanded program, that expanded program had a total run rate savings of about $195 million. And we expect to realize the vast majority of that, let's call it 80 plus percent of it, by the end of this year. We're progressing on track for that, about that pace, through the end of Q2. And that represents for the full program as well as the institutional and the INS business.
Operator
Thank you. As a reminder, we ask you to please lend yourself to one question. If you have any additional questions, you may reenter the queue at that time. The next question comes from the line of John Roberts with Credit Suisse. Please proceed with your question.
John Roberts
Thank you. Nice quarter. Can you give us a rough split of the healthcare business between surgical and infection in North America? And why is surgical so much smaller in Europe?
Christoph Beck
Yeah, John. Hi. So in North America, it's roughly half-half. And in Europe, it's mostly infection prevention, which is the reason why the bifurcation that I've talked about is happening in North America, because in Europe, it's a different business, almost focused on infection prevention today already.
Operator
Our next question comes from the line of Josh Spector with UBS. Let's just hear your question.
Josh Spector
Yeah, hi. Thanks for taking my question. Just, Christoph, I'm intrigued by your comments around volume, about them continuing to improve. I think a lot of companies have been a little bit cautious about some of the trends in Europe, and that's still a relatively sizable market for you. So what are the drivers that you see that give you that confidence about volumes improving? And when you talk about that, is that up year on year, or is that sequential? Thanks.
Christoph Beck
Yes, Josh. It's year on year. So the improvement that we will see in Q3 and in Q4. And in Q2, I was pleased to see that excluding Europe, our volume went from flat to plus one year on year once again. And it's all driven by the way we are driving the business because the end markets, Honestly, so everywhere around the world have a tendency to soften. It's not true everywhere, but for the most part, they're softening quarter after quarter. Hopefully, that's going to change as well over time. We're not counting on that. Just to be clear, our assumption is really that the end market trends will continue to soften in the next few quarters. How we're driving growth, it's the old-fashioned way. by driving fundamentals. It starts with new business. This is a practice that we have perfected over years slash decades. As we call it, a growth to win pipeline, which is our new business pipeline, is at an all-time high. Right now, and we need to deliver it, obviously, by executing it, so customer by customer. In some businesses, it's quicker, like in institutional, or it takes a bit more time. In industrial, since it's heavy equipment that we need to install. But new business is really good. Penetration as well of new solutions within existing customers. is a priority for us because it's the lower cost to execute because we go to those customers anyway. This is improving as well. Innovation is also in a very good place. Our innovation pipeline is also at an all-time high. So it's an execution question as well. So to get that done, especially in what we call the mega markets in North America, Western Europe and in China, while we follow closely after in the other markets around the world. So those are the big reasons. And it's also driven by our new growth businesses like data centers growing over 20%. microelectronics uh close close to that uh as well uh and our water business um that's doing really well uh at the same time so it's really focusing on the fundamentals what we can control because we can't control what's happening on the market our next question comes from the line of david begleiter with deutsche bank please proceed with your question thank you um christophe you are investing in the business
Josh
Any way to quantify how much more you're investing this year than last year on either an absolute or relative basis? Thank you.
Christoph Beck
Good question. I think that's for CFO as well. So he's looking forward to more questions. Last time he had half a question. So I'm glad that we can do it in tandem today. So, Scott?
Seth
Yeah, David, what I'd say is I would give you a specific number here. I would say we've continued to invest in the business, not significantly different than we have in the past. As we've said to the last few years, We've continued to invest in the business, adding capacity, maintaining the team, investing in the team. So proportionally, it's not the big driver of what you're seeing from the OI margin expansion. Any change in that investment?
Christoph Beck
But maybe one comment I'd like to add as well to that, David, is that we differentiate how we invest behind our businesses. So just to share a little bit how we're thinking about that as well, we call our growth engines for more investments because they grow faster. They have a higher margin as well. We have another category, which is more transforming businesses that could get better as well. They get a bit less, but they're very focused in how we can drive our better margins. And then you have kind of the third category. So the ones that need to become more profitable, they get less investments. until they get to the right profitability margin. So we really do that in a thoughtful manner by business, by market, making sure we invest the best way we can.
Operator
Our next question is from the line of Jeff Sikakis with JP Morgan. Pleased to see you with your question.
Jeff Sikakis
Thanks very much. Your SG&A costs are up 7.5%, which is about your rate of sales growth. Why isn't SG&A going up at a lower rate. By contrast, your cost of goods sold sequentially is up 6%. Your revenues are up 8%. So it looks like your raw materials are falling. And I take it that that's giving you some benefit. Is that correct? And then lastly, it's been a hot summer. Should that give you above average or better water treatment chemical demand in the third quarter?
Christoph Beck
Great question. Thank you, Jeff. So three questions here for Scott, I guess.
Seth
Hey, Jeff. Yeah, I'll touch on the SG&A. Good question. The SG&A was up a little over 7.5% year-on-year in the second quarter. What I tell you is the underlying productivity remains really strong. Headcount has come down actually modestly over the last year while sales has increased. Our SG&A ratio was flat in Q2. But just as a reminder, we're down about 300 basis points over the last three years. The Q2 SG&A increased. More than half of that was really driven by what we call the higher incentive compensation and really is driven by our strong performance. So what I would say around that as well is that on the SG&A, I would expect in the second half the SG&A dollars to be pretty stable from what you saw in Q2, which would mean it's sort of the the mid to high single digits for the year. Certainly in Q3, as you might recall, we're going up a tougher comp in Q3 last year. But we also expect longer term to continue to drive productivities as we're leveraging the digital investments that we've made over time.
Christoph Beck
So that's on SG&A. Maybe an additional comment here. We've had that question so many times, Jeff, on how we reached the bottom in terms of SG&A ratio? The short answer is no, because of what Scott just said. All the digital technology that we've been implementing, plus all what's to come, will improve the performance of our organization. So for this year, expect our SG&A dollars to remain kind of stable quarter after quarter, keeping in mind that our headcount at the same time is slightly down as well, which is driving that productivity, not because we spend less time with customers, we spend more time, but we automate most of the transactional work, if I may say. Your second question was on delivered product cost. It is easing a bit faster than we had expected, but it's important to keep in mind it's still 40% up versus two years ago. uh pre-inflation so obviously that trend is a positive trend for us and i'll take that uh obviously to improve margins as well but most of the work is on pricing and new pricing which is going really well and your last question um on the summer uh we are in 172 countries um so it's not impacting um in in material ways um the business uh the way we look at it so No influence of that, at least no significant one.
Operator
Our next question is from the line of Christopher Parkinson with Mizuho. Please proceed with your question.
Christopher
Great. Thank you so much. Just on the institutional side, you have some very helpful commentary by region. I was just hoping to dive down a little bit more on the volume trends and the various geographies, obviously specifically North America. And just what ultimately is underscoring the confidence and kind of market share gains, just given all of the volume volatility in the post-COVID era, just any color on that and just trying to extrapolate where the real opportunity is heading into 24 and 25. Thank you so much.
Christoph Beck
Thank you, Chris. On institutionally, it's been pretty broad-based, the improvements that's been true. in the three mega markets, again, as we call them, in North America, in Western Europe, and in Greater China. Good progress on all three fronts here, which is our main focus. And then we have all the other markets, which are doing very well as well at the same time, even though they're secondary in terms of investments and in terms of priorities for us. The way we grow volume is really so in institutional to get even better at CTC, CTG, circle the customer, circle the globe, or in more modern way to describe it with enterprise sale. To have an exclusive or as close to exclusive partnerships with our global customers. A program like Ecolab Science Certified, which is mostly focused on North America today, helps the customer secure their guests, improve their performance, and improve as well guest satisfaction at the same time when they use all our products as well at the same time. Many of our customers are franchised organizations, which means leveraging what we do is helping deliver the quality standards that they want, that they define at the central level anywhere around the world. It's only us who ultimately can deliver that as well. And last but not least, it's a solution to improve labor automation. Institutional customers have had very good years in terms of margins the last two years because they've managed to have higher prices and lower costs initially because of the labor shortage and ultimately have noticed that it was a good way to improve their margins and our innovation is focused on helping them keep those better margins by automating the work that used to be done by what I would call cheap labor. So those are the main drivers for the growth in institutions.
Operator
Next question comes in the line of Manav Patniak with Barclays. Please proceed with your question.
Manav Patniak
Yeah, hi, thank you. Christophe, I guess in healthcare, apart from perhaps increased focus, I was just wondering if you could you know, help us understand how splitting the business is going to, you know, change the growth trajectory here. Because, you know, you've obviously tried a few different things in healthcare. So just wondering, you know, I guess is this one last attempt or, you know, does it fit in the portfolio? Just some longer term thoughts as well would be appreciated.
Christoph Beck
Thank you, Manav. Good question on healthcare. So we will stay serving hospitals with what we do as a company. So protecting what's vital, reducing hospital acquired infections remains a point of focus. The fact that our healthcare business has not been growing and has not been making money for quite a very long time is something that I have committed to change. And I made that commitment pretty clearly. So what we are doing is a very thoughtful plan where quarter after quarter I want to make moves that are driving us to a place where it is a business that is growing nicely, it is not going to be high growth but that we get good profitability. The first move was really so in Q1 to do this cost restructuring in North America and in Europe so to get the right cost base. evolving so pretty nicely. We don't plan delivering on that front and I wanted to make a second step which we announced a week ago to the organization and wanted to share with you as well in the release and on that call where we want to have those two businesses surgical which is really focused on drapes protecting surgeons, equipments and patients which is very different than our infection prevention business, which is much more traditional Ecolab business of hygiene and disinfection, infection prevention. Well, those two businesses, we want to have them separate. They're more focused. They're serving two different parts as well in the hospital. And most importantly, our infection prevention business, which is the one with the lowest profitability, cannot afford the cost structure that we have today. On the other hand, leveraging the huge sales force that we have in institutions in North America, well, they get immediately a much broader reach on the market because institutionally serving hospitals and the food service and hospitality side today already and at the same time get a huge boost in terms of cost productivity so we're improving infection prevention business performance kind of almost overnight it's going to take obviously so a few months to get there but it's kind of a sure thing it's in our hands while the surgical business which is doing quite well and with good margins is going to remain a focused business so we have those two businesses in a better place, and that's the next step that we want to execute towards our ambition to have a good healthcare business ultimately.
Operator
The next question comes from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.
Shlomo Rosenbaum
Hi, thank you. I actually want to piggyback on Manav's question. Is the infection protection business going to be kind of folded into institutional if you're going to be leveraging their sales and service organization, what is going to be kind of standalone on its own? And by separating these businesses, does it also make it easier if you can't get them to the place you want to be to kind of sell them off in bite-sized pieces?
Christoph Beck
So a lot to unpack in your question here, Shlomo. So I'm not going to comment about the future. It gives us more options, let's put it that way. But we'll have those two businesses. One, our surgical business, our drape business is going to be standalone with its own divisional structures, supply chain. So very verticalized, if I may say. The infection prevention business, we're going to have the best of both worlds because we're going to have a division that's focused on corporate accounts, on marketing, on innovation, R&D, really driving that business strategically, while commercial execution is going to be done by institutional, where you get much more reach and a much better cost structure as well at the same time. So two focused businesses, surgical, totally verticalized, infection prevention, a separate division, but leveraging institutional as their commercial arm.
Operator
Our next question is from the line of Andy Whitman with Robert W. Baird. Please proceed with your question.
Andy Whitman
Excuse me for taking my questions. I wanted to dig into the... Excuse me. the life sciences performance in the quarter and your comments, Christoph, about how there's some short-term disruption in that marketplace. I was hoping you could elaborate on this, perhaps address what's the cause of the short-term disruption. Perhaps maybe that's related to the prior few years with all the vaccines and COVID and other things like that. Maybe we just need to come off of that period. I don't know. And if you could just talk to the confidence that you have in the recovery. It sounded like it's not going to be necessarily right here in the third quarter, and you said I think maybe the comment was a few quarters. But any detail that you can give to support the return to that growth in life sciences, including whether that's the legacy life sciences business or the newer filtration business that you acquired a year or so ago?
Christoph Beck
Thank you, Andy. So life sciences is a great business. It's been a great business since we started in 2017 when we brought the various pieces together. And the future is even better because while it's going to be the golden age of pharma and biopharma is going to be the new way of producing drugs and vaccines going forward as it's been demonstrated, with COVID over the past few years. So a great business that has delivered very well with a very good future. Pure Light is a new element to that business, which adds drug filtration to it, as well as new capabilities to filtrate any other liquid, especially water in other industries. um as we've mentioned so the the industry is a bit under pressure um today i feel pretty good so with our flattish uh growth because if i compare to competition uh which are great companies by the way um well their growth is way down um so being flattish uh i feel pretty good about that it's driven by What you mentioned, it's kind of still the outcome of the past few years with COVID-related production, inventories as well, and an industry that is basically getting ready for the future. It's not going to last long. It's going to last a few quarters, so we're not going to see a major pickup in Q3, but I think it's going to happen over the next few quarters. But if anything, when I look back, so a year ago, how I was looking at life science, how am I looking at the market and the business today, where I feel really good and even better with where we're going, which is why... we decided to stay on offense. Even if the market is pressured for a while, it's not going to last forever. So for me, making sure that we can get more new customers, that we can build capabilities, which means expertise, people on the street, people in R&D, innovation, and at the same time building capacity as well to produce for the future, well, it's the best time to do it. That has an impact on the operating income margin. That's okay because we know that that business is kind of north of 30% on a long-term run rate basis. It's worth doing it. So a few quarters a bit pressured. but we're going to get to a better place and that business is more promising than it's ever been. So I feel good about life sciences.
Operator
Our next question is from the line of Patrick Cunningham with Citi. Please proceed with your question.
Patrick Cunningham
Hi, good afternoon. So we're starting to see some deceleration on pricing. What can we expect for normalized pricing going forward? And specifically on the water business, you've highlighted the unique competitive position and customer sustainability objectives. Do you think that will translate into higher pricing power relative to historical pricing? Thank you.
Christoph Beck
So two short answers here, Patrick. The first one is the deceleration of pricing, as you mentioned, it is 100% related to year-on-year comparison. The carryover, we've kept 100% of it, including the energy surcharge, by the way. And on top of it, we're expanding as well new pricing because we've become as well even better. We've always been good at pricing as an organization. Well, over the past two years, we've become even better because it's been so much related to the value we're creating for our customers or the savings in their operations in dollar. And we want to make absolutely sure That net-net, it's a positive story for customers, which it is. So that's the first answer. Entirely, so the slowdown entirely related to a year-on-year comparison. Carryover is stable and pricing is expanding, which leads to the second question, pricing for the future. I don't know where it's exactly going to shake out. We've been always within the range of 1% to 2% in the past 10 years or pre this inflationary time. Post that cycle, whenever that cycle is over, it's going to be better than that. I don't know exactly what the number is going to be, but it's going to be north of 2%. That's for sure.
Operator
The next question is from the line of Lawrence Alexander with Jefferies. Please proceed with your question.
Lawrence Alexander
Good afternoon. So, it sounds as if the path to positive volumes in the back half is you're widening the spread that Ecolab can get versus the end markets. How do you see that developing in 2024, 2025? Do you think you can keep the new wider spread or expand it further? Or do you see kind of this as a bit contra-cyclical and as the end markets recover, Maybe Ecolab's volume spread sort of compresses a little bit.
Christoph Beck
We'll see where we end up in 2024. If I'm looking at currently, I'm pleased with the fact that we're better than the market. The fact that we're improving ex-Europe as well in Q2 and that we are in positive territory is a very good sign. I like the evolution that we're having in Europe as well. We have a great team doing very good work over there. So Europe is going to improve as well. So all the time, new business is very strong, as mentioned earlier. So it's really focusing on what we can control, new business, penetration, innovation, enterprise selling, Those are the old-fashioned good ways of driving volume. We've been successful so far. As mentioned, the last two years we focused primarily our attention on pricing and margin. We shifted our attention primarily on volume, so a quarter or two ago, and it's working. And usually those trends take a few quarters to take hold in our organization. But when we have good momentum, it remains as well. So I feel positive about where we're going for the second half, so for sure. And I see no reason why it shouldn't be good for 24 as well.
Operator
The next question is coming from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Kevin McCarthy
Yes, good afternoon. Perhaps a two-part question on the price-cost spread. Christoph, on the price side, would you call out any particular areas where you're seeing the most positive sequential momentum on price realizations and perhaps other areas where it's more of a struggle and starting to flatten out sequentially? And on the cost side, really a similar approach or question in that, are there particular areas you would call out where your costs are dropping fast on a sequential basis and other areas where, you know, you have stubborn increases.
Christoph Beck
Yeah, Kevin, I'll give that question to Scott. But before we get there, again, so mentioning and underlining how we look at pricing, it's really so twofold. It's on one hand, making sure we keep the carry over, that we don't give price back. And that's been working really well across the board. And at the same time, that we can drive new pricing as well in all businesses. And that's been working very well as well in the organization. But with that, I'll leave it up to Scott to give us some more insight.
Seth
Yeah. Hi, thanks, Kevin. Yeah, as you talk, as Christophe said, there's the carry-in pricing, the pricing we executed last year, which we said had peaked at the 13% at Q1, but continue to drive that new pricing. And really the pricing across the board, as I think about it by segment, very strong pricing across INAS, industrial, healthcare life sciences, and our other segments, which is mostly pest, as you're aware. But really strong pricing, both that we had in the carry-in, the structural pricing we did last year, as well as the new pricing that we're continuing to accelerate this year. As I think about your other question from a cost perspective, DPC, you know, industrial took the lion's share of the cost increases over this inflationary environment over the last couple of years. So that's where we're going to see the biggest impact as that DPC costs have started to ease, which we talked about in Q2, which was 5% relative to the 9% last year. So as that continues to ease, we'll likely see the biggest benefit in industrial, just given that they took the lion's share of the increase over the last two years.
Christoph Beck
And Kevin, I'd like to remind you of just two facts I mentioned before as well. So with industrial having reached in Q2 already the 2019 operating income margin, which is a very good sign, and INS, so institutional specialty in dollar terms, not in margins, being back to 2019 in the fourth quarter of this year as well. So two big indications for our two major businesses, that our margin recovery is really well on track and it's not going to stop there. It's going to keep improving.
Operator
Our next question is from the line of Steve Byrne with Bank of America. Pleased to see you with your question.
Steve Byrne
Yes, thank you. I was curious to hear an estimate from you on what fraction of your sales would you say involve equipment at your customers that either you own or that is proprietary to you that would have to be removed if a competitor were to come in and scoop up that business. And with respect to competitors, are you seeing any changes in competitive dynamics out there, such as, you know, the Salinas-Diversity combination? Are you seeing anything coming out of that?
Christoph Beck
So a few questions in here to unpack. So Steve, first on the equipment question, just would like to remind you that 95% of our sales are recurring. So it's not equipment by definition. This is chemistry or lease programs or digital subscriptions. So sales that you get recurringly on a monthly, on a weekly basis. the equipment component is really, really small. At the same time, since you have equipment in those customer locations, well, it increases the stickiness as well of our business with our customers. Not obvious to change, so from us to someone else, especially since equipment is not going to be at the same level of technology, to say the least, but this is not the way we're driving our business with our customers. We want them to stay with us, not because it's hard to change the equipment, but because they get the best service, the best customer experience, and most importantly, that their total cost of operation is going down because they reduce their usage of natural materials. resources, carbon and water, and at the same time, as well as the labor. So that's the way we drive our business, 95% recurring, less than 5% equipment. And to your last question about the competitive situation, our competition is busy right now, but we take them very seriously, as we've always taken them, and the fact that our new business generation is doing really well is a good indication that we're kind of winning that war.
Operator
The next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Vincent Andrews
Thank you very much. I'm just wondering if you can give us a little more specifics on the volume by segment. I mean, I see what you said for the total company on an ex-Europe basis, but can you tell us anything in particular about the key segments?
Christoph Beck
Generally, the volume profile is similar in every business. I like a lot what the institution and specialty is doing. As mentioned so many times during that call, they are in positive territory and are keeping accelerating. They are at the forefront. They had the most to recover as well at the same time, but basically doing really, really well. Industrial, let's not forget that they had a lot of work to do in pricing over the past two years. And as mentioned before, being in a position to deliver similar margins in this quarter, in the second quarter, than what they had in 2019 is a remarkable accomplishment. And now, so shifting over the last few quarters on the new business, Well, it's helping improve as well the volume in industrial. And I'd like to call out as well that water in industrial has been positive, remains positive, and has a very good story as well here. And the drag is in paper, which is mostly driven by our customers reducing inventories. after all the past few years disruptions that they had. But I like the new business that we have in paper. So paper is going to improve as well. The inventory meltdown of our customers is going to improve as well over the next few quarters. So all in, institutional specialties are strong and getting stronger. Industrial improving as well with paper becoming better over the next few quarters. And I've mentioned the other businesses are getting better as well as we move forward.
Operator
Our next question comes from the line of Scott Schneeberger with Oppenheimer and Company. Pleased to see you with your question.
Scott Schneeberger
Thanks very much. I have one for both of you, a quick one for Scott. I'll ask them both up front. Scott, you mentioned... Headcount down, but SG&A pretty steady through the balance of the year on an absolute level. Is that incentive comp, which is the delta, and how should we think about that? Because you had a few challenging years. This looks like a really good year. How should we think about that in the back half and then going into next year? And, Christoph, for you, thanks for – I was going to ask on paper, but I also want to ask in the industrial segment – I think because you just did a cover paper pretty well, but food and beverage, a big sub-segment there. That's been double-digit growth for, gosh, a year and a half. Are you continuing to win a lot of new business? How does that trajectory look? And maybe if you could bear down a little bit into the sub-markets, dairy, beverage, and brewing, food, and just give us a little bit of color of the strength you're seeing. Thank you.
Christoph Beck
I guess, Scott, you start.
Seth
Yeah, Scott, I'll start on the SG&A question. Yeah, as I said, the big driver in Q2 of the SG&A increase was incentive compensation and would expect that similar level of sort of incentive compensation headwind as you see it. Granted, it's the reason for it is what we're performing very well and rebuilding on that incentive compensation, but expect that to be the biggest piece of the SG&A year over year for the second half as well. But certainly, as we've rebuilt on the incentive compensation, we'd expect it to be less of a headwind next year. But really, more importantly, as we've talked about, continuing to drive this SG&A ratio, which we've done very well over the last few years, the 300 basis points, And would expect, although for this year, because the incentive compensation, the SG&A sort of productivity or leverage will be more modest than we saw over the last few years, would expect to continue to drive that leverage in the future, especially as we're leveraging the investments we made, the cost savings programs that we have to continue to drive great opportunity on the SG&A productivity going forward.
Christoph Beck
Then the second part of your question, obviously, so different on our F&B business, one of our largest businesses. I'm really pleased with the work that the team has done in this business. They've been able to work well on both growth and margin recovery. They've been impacted, obviously, by the inflationary costs and delivered product costs, but managed well to manage new business and the margin performance. Second, it's a positive industry. So it's serving consumer goods industries. You're familiar with most of them. They've done quite well over the last few years and they're still doing well today. So it's a good place to be as an industry. And the third point I'll make is that it's one of those industries that's very interested in what we do. It's about food safety, which is essential for them. It's non-negotiable, obviously, so for their brands. And our customers do very well with it. And at the same time, they are the most advanced companies in terms of commitment on a carbon footprint, on water usage, on waste management at a lower total cost, which is exactly what we do. for them, so they are very interested in what we do. And the last point I'll make is we have this unique position of bringing water management and food safety in one offering, which no company today can offer. We're uniquely positioned to offer that to our customers. and we perfect that model all the time, and I like a lot where we're heading because that's exactly what those customers are looking for, which are the reasons why this business is doing so well.
Operator
Thank you. Our next question is a follow-up from the line of John Roberts for Credit Suisse.
John Roberts
Thank you. North American Healthcare Infection Protection is going to use the commercial organization from institutional. Do you have any other examples of within Ecolab of sort of cross-segment collaboration like that and will that result in any inter-segment financial reporting?
Christoph Beck
So two parts of your question John. On one hand so we will for the time being so keep that reporting consistent with what we've done for now. I can't speak for the longer term but for now I want to keep that consistency to keep the clarity. I made a commitment to you that we will improve the healthcare business. I truly want to show the improvements that we're making. It's not by folding it in something else that we're going to improve it. So we're going to remain consistent and transparent. Now, the second part of your question, on institutional, so being used by other businesses. The best example I can provide you is for QSR, so the quick serve restaurants, McDonald's, Burger King, Wendy's, and so on, always more using dish machine in order to automate the labor they have in their restaurant. As you know, so QSR is a separate business and it's been true for 30 years. It's not exactly a new thing. In here, well, the institutional team is the one that's serving those dish machines as well. It works really well because we get the reach because we have institutional everywhere in the country and they get the cost productivity because of the critical mass and density that institutional is having. So what institutional is doing for QSR is kind of similar than what we're looking to do for healthcare as well. So it's a model that we've practiced in the past already.
Operator
Thank you. Mr. Hedberg, there are no further questions at this time. I'd like to turn the floor back to you for closing remarks.
Andy Hedberg
Thank you. That wraps up our second 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. Hope everyone has a great rest of your day.
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