Ecolab Inc.

It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations for Ecolab. Thank you, Mr. Hedberg. You may 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 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 the actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the risk factor section in our most recent form 10-K and our posted materials. We also refer you to supplemental diluted earnings per share information in the release. With that, I'd like to turn the call over to Christoph Beck for his comments.

Thank you so much, Andy, and welcome to everyone on the call. Building on our momentum with strong and reliable growth, that's the headline for Ecolab third quarter. Thanks to exceptional execution by our team, Ecolab delivered a very strong quarter as our momentum continued with 7% organic sales growth, which was actually exactly as expected, and 18% growth in adjusted earnings per share, reaching the high end of our expected range. Against unpredictable macro conditions, we drove continued strong pricing, new business, accelerated volume trends, and continued robust margin expansion. Our focus remains on offense, which we are best at, continuing to fuel strong and consistent double-digit earnings per share growth. We maintained strong organic sales growth with pricing increasing by 7%. This increase reflects both the value-based pricing we put in place last year and the new pricing we've implemented this year, reflecting the enhanced value we offer to our customers. Our volume trends continue to strengthen as well, which is great news, with new business helping to accelerate volumes despite softening in global and market demand. Organic operating income margin continued its impressive expansion, up 160 basis points compared to last year, reaching 15.5%. This notable progress reinforces our path toward achieving our long-term margin goal of 20%. In the third quarter, our adjusted gross margin expanded 360 basis points to 41.3%. This strong expansion is a result of our value-based pricing strategy, improved volume trends, and a slight decline in delivered product costs. While global energy prices remain dynamic, we're confident in our value-based pricing strategy and, if absolutely necessary, our capability to implement energy surcharges. We continue to take a prudent stance on the trajectory of delivered product costs, as costs remain up nearly 40% compared to pre-inflation levels. Assuming the current high energy price environment persists and our costs ease only slightly in 2024, We continue to expect very strong gross margin expansion in the quarters ahead. This will help us make progress in achieving our historical 44% gross margin and our 20% OI margin target over the next few years. Underlying productivity also remains strong as we continue to leverage our leading digital capabilities. As expected, SG&E expense was relatively stable versus second quarter levels. The year-over-year comparison reflects the rebuild of incentive-based compensation, a result of our strong sales and earnings growth, and the strategic investments in our growth engines. We also expect SG&E dollars in Q4 to remain very consistent with second and third quarter levels. Our performance further strengthened across our businesses. A highlight was institutional and specialty. We grew organic sales double digits and organic operating income 28%. Organic OI margin was up 260 basis points to 19.3%, approaching its historical 20% level. Our industrial segment also performed well, especially comparing to an extremely strong Q3 last year, led by attractive growth in food and beverage and in water, as our unique ability to bring end-to-end water and hygiene technologies to customers continues to drive strong share gains in the segment. Operating income growth eased a bit in the third quarter, reflecting the incentive-based compensation we built, as mentioned in the last call. And importantly, we expect this segment's operating income to return to double-digit growth in Q4. Our health care bifurcation strategy is progressing well. Strong pricing and new business help to improve underlying sales growth and operating income. The business also benefited from larger-than-normal surgical sales, which is not expected to recur. While we are pleased with our progress, delivering sustainable and profitable growth remains a focus for me and for our team. Life Sciences' growth also improved to mid-single digits despite continued short-term pressure for everyone in this market as our team continued to win shares. While we expect the market to remain under pressure for the next few quarters, our ongoing investments in additional new product capacity and team capabilities will allow us to capitalize on attractive long-term high growth, high margin opportunities. In summary, in the third quarter, we delivered as expected with strong sales and solid earnings growth. Now looking ahead. We expect our strong performance to continue in the fourth quarter with adjusted earnings per share increasing 17% to 24% versus last year, which is above the mid-teens growth we had guided to during our second quarter call and will bring the full-year EPS north of 2019's EPS. This performance is expected to be driven by new pricing, volume growth, and robust gross margin expansion expected to be up 250 to 300 basis points versus last year. As we shared with you at our Invested Day in September, we see continued strong momentum in 2024. Even as global uncertainty remains with softening macro demand, we continue to expect mid-teens of better growth in adjusted earnings per share in 2024. As always, we'll remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing leverage, and returning cash to shareholders. Most importantly, with the best team science and capabilities in the industry, we will continue to grow our share of the stable and high-quality 152 billion market we serve. I believe that Ecolab's long-term fundamentals are stronger than ever, and I am confident in our outlook for continued strong performance as we work to deliver superior shareholder returns. So thank you for your continued support and your investment in Ecolab. I look forward to your questions. Thanks, Christoph.

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

Thank you. We'll now be conducting a question and answer session. We ask that you please limit yourself to one question so that others may have a chance to participate. If you'd like to ask a question, please press star 1 on your telephone keypad and a confirmation tone to indicate that your line is in the question queue. You may press star 2 if you'd like to move 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. Thank you. Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Kristof, Scott, good afternoon.

Good afternoon, Tim.

So, I see you equipped 19% OI margin and institutional in the third quarter, which was great to see. If you go back to pre-pandemic times, you're doing about 21% OI margin every year on an annual basis. I think there's some debate amongst the investor community about whether or not Ecolab will ever get back to that 21% OI margin days or if the business has structurally changed. I'd love to get your perspective on that, Christophe, how long that might take, particularly given the good momentum that we've seen this quarter.

Thank you, Tim. I have no doubt in my mind that we will get there. We have a great team running a great business on a great trajectory. And as mentioned many times, Tim, the P&L of INS will end up in a better place post the cycle versus previous years like 2019. Just for perspective, so in Q4, as mentioned during Investor Day as well, our OI dollar we'll already be back to the 2019 level. So I really expect to cross that 20-21% line in the next few years while we drive new business, innovation, price, the advantage of the new organization as well with the focus on sales and service, and leverage as well digital technology as we've done over the past few years. So of all the opportunities we have in front of us, all the challenges that we might be facing, I think institutional is going to be probably one of the best promises that we have had of us.

Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed with your question.

All right. Thanks. Good morning. You mentioned a few times in the slides, in the release, in your comments, just about new business wins. Can you talk to the selling environment, your sort of traction with new wins and how we should think about new ads going forward? Thank you.

Thank you, Seth. Well, selling new business is what we're best at and what we like the most doing. So we shift to offense. over the past few quarters is delivering results because our team is really focused on driving new business with our customers. In more difficult environments, and it's always been the case at Ecolab, well, our customers are looking for ways to improve their operating performance, which is what we've always done for them and that they need the most right now. So they're very receptive to what we can do as well for them. At the same time, we're bringing as well all the offerings from the company, especially water and hygiene in industrial segments, but also in institutional, which are very well received by our customers. And we have innovation as well, which has made a step change over the last few years. which are addressing customer challenges or opportunities that they have. So all in, the team focused on what they truly like with the right tools, right innovation, right new products, and customers that are open to what we can do for them, speak, improving their operating performance. Ultimately, that's all driving better performance in terms of new business, which is really good.

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

Yeah, hey, Christoph. And a question along a similar line, and particularly just related with just volume expectations. I mean, you were pretty confident a couple months ago that you were going to deliver positive volumes in 3Q. I guess it rounds down to zero, or maybe claddish is the best way to describe how that came in. You're talking about positive volumes in fourth quarter. I guess, I don't know, did 3Q change versus your expectations of where it would come in? And the backlog combined with, or the new wins combined with base earnings, I guess, how do you envision volume moving into early next year? Thanks.

Volume is the most important driver, obviously, for us. And Q3 happened pretty much as expected. We can talk about rounding. obviously here but we were in positive territory which is good and if we exclude Europe which is the most difficult place in terms of volume we are at plus one percent already and I feel confident that in Q4 we will have a one percent volume growth overall so for the company so when I look at the trajectory that we're having on volume especially with all the pricing that we've done over the past few years and in a market that's not exactly booming right now. I feel really good with what we're doing, where we're heading, and to your point, so for 24, while it's the best way we can close the year, it's with good volume momentum in order to start 24 in whatever environment we're going to find with a company that's having good sales momentum, which is our number one priority as a company right now.

Our next question is from the line of Mike Harrison with Seaport Research Partners. Pleased to see you with your question.

Hi. Congratulations on a nice quarter here. Just in terms of the healthcare and life sciences business, I'm curious if we saw any of the benefits from some of the changes that you're making on the healthcare side of that business already in Q3, or are those actions still to come?

and then just curious on the one-time six percent sales benefit uh did that also help margins come in higher or or was that kind of a an average incremental margin contribution hey thank you for your nice comment mike uh is three comments um on on your questions so focused on on health care not life science i know that they all combine obviously but two very different stories um as we know so First, if we saw some results of the organizational changes in Q3, the short answer is yes, but it's early. I've been really impressed with how the team has executed this bifurcation, truly leveraging the market strength, the breadth, the critical mass of institutional, both in terms of selling to new customers or existing institutional customers the healthcare portfolio, and at the same time, getting the costs down. The team has moved very fast, very well, and I'm really pleased with where we are right now. But that being said, it's very early in the process, so it's going to leverage as well or lead to better results in the quarters to come. There's still a lot of work that remains, but I like the progression. It's going to be always better as we move forward. Now, the last point, And one time sale was related to a contractual commitment that we had to deliver. So by the end of the third quarter, If you strip that out, healthcare had kind of low signal type of growth, which is better than in the past, but probably what we're going to see in the next immediate quarters until we can truly accelerate by leveraging the power of institutions. But overall, I like the progress that we're making on healthcare. But let me be very clear. So I've not been happy with the performance of healthcare for many years. I'm really happy with what the team is doing now in terms of transformation, early results, more is to come, and more work is also required to get to the place that we all want to be with that business.

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

Thank you, and a very nice quarter, Christoph and team. Thank you David. Just on delivered product costs, they came in below your expectations or better than your expectations. What drove that and what are your expectations for Q4?

So DPC or delivered product cost was roughly 3% down versus last year. a little bit better than what we had expected. It's always a very broad mixed bag, as you know. So we have 10,000 raw materials that we buy, so they didn't all go in the same direction, obviously. So some easing on the market. At the same time, our supply chain team, speak procurement team, did also some remarkable work as well with our partner suppliers. So brought both together led to this 3% easing versus last year, keeping in mind that our costs are still 40% higher than where they used to be preinflation. That's important to keep in mind. I expect kind of the same type of costs for Q4, so kind of a similar easing versus the prior year. And I expect basically so those costs to stay similar in the quarters to come, which will mean so this slight easing versus 23 when we talk about 24. So I'm not banking on big improvement in the quarters to come. And if they come, well, we will all benefit from them. Thank you.

The next question is from the line of Jeff Stokoskis with J.P. Morgan. Pleased to see your third question.

Thanks very much. Ecolab buys its raw materials sometimes monthly, sometimes quarterly, sometimes annually. So raw materials have moved down through the course of the year, but it may be that the timing of your contractual agreements has slowed the benefits for Ecolab. Can you talk about how you purchase your raw materials in terms of the way raw materials are repriced. That is, should we expect different increments, different incremental changes on a six month basis or a three month basis or an annual basis?

Well, um, I have two ways to answer your question. So in a complicated way or in a simple way, uh, Jeff, so I'll go for the simple way. Um, you're right that depending on the raw materials, it's monthly, some quarterly, some, uh, annually, uh, with different types, uh, of contractual agreements. Uh, I think we have a very good team. We have the new leadership, uh, as well, who is doing an exceptional work, uh, by the way. So on, uh, on procurement. The short way to explain it is usually we have a two or three quarters lag between the market-to-market price changes, up or down, by the way, that impact two or three quarters down the road, our P&L. That's the rule of thumb that I'm using and that you should be using as well.

Our next question is from the line of John McNulty with BMO Capital Markets. Please just hear through your question.

Yeah, thanks for taking my question. So the industrial business, I guess I was a little surprised to not see a little bit better margin lift just given that you have gotten some good pricing there and the raw materials does look like are starting to come off. So I guess, one, can you help us to think about what the volumes were there and then Do you feel like we're at a bottom in terms of the volumes for that business, and maybe we start to see things level off a bit, or is there more to kind of think about in terms of concerns going forward? How would you frame that?

Thank you, John. Well, industrial is in a very good place, actually. But I'd like to ask Scott maybe to give some perspective on margins evolution.

Yeah, happy to, Christophe. So, yeah, as you're referring to, the industrial Y growth was at 8%. But the growth rates are really impacted by a couple things. Certainly there's a base comparison to last year. If you look at this on a two-year basis, that business is improving. And then also, as we spoke to on the SG&A, they're impacted by the incentive comp given the strong performance they've had in the year. But overall in that business, as Christoph sort of referenced, that the strong pricing that we delivered this year, we continue to add new pricing. And now as we start to see that DPC easing modestly, and there was certainly the biggest impact by that, but on a dollar basis that oi really remains very strong and think we'll continue to prove off these levels but really as as christoph mentioned the opening expect that the growth to return to double digit uh oi growth in the fourth quarter and you'll see the marginal impact on that as well yeah as mentioned early on uh john i like a lot the performance uh of industrial for the past few years and that's going to be even more true uh in the years to come

If you strip out that incentive-based compensation, so the OI growth would be in the upper teens, which is what you're going to see in the fourth quarter as well. So it was kind of a one-quarter story underlying performance very strong.

Our next question comes from the line of Manav Patniak with Barclays. Pleased to see you with your questions.

Thank you. Just a two-parter, Christoph. So, you know, in the pricing, firstly, I think, you know, in terms of what you already have in place, if you roll through, I think you get mid-Singapore's pricing next year. But just curious on how you feel like you could keep pushing the pricing dynamic. And then just a quick follow-up was, you know, the new sales pipeline that you're really confident on. Like, how big is that for perspective? Like, how much of a, you know, volume headwind can that offset?

Great question, Mana. I'm sorry, they're related, obviously. But the first one, pricing dynamics. If we think about our pricing, so going up, retention has remained very stable, customer retention, and at the same time, so volume accelerating. So it's basically showing that our balance of pricing and volume acceleration is going quite well. And I'm keeping a very close eye. on that because we're keeping customers for life in our company and I want to make absolutely sure we do that the right way for our customers and for our company. So bottom line, I like the pricing that we've had so far when I look at what's going to happen in the next few quarters. So in Q4, the carryover from last year, by definition, is going to get close to zero, obviously, since it's going to be annualizing. So over the 12 months, new pricing is quite good, actually. So I'm especially pleased with the new pricing we have, which we will have, obviously, in Q4. And in 2024, it's a bit early, so to go too much in details, but we're going to be pleased with the pricing that we have while we keep accelerating as well the volume. So really keeping both in a very good place. Now to your question on the net new business, as you know, so we're not reporting the dollar value of the growth, but we are really so reaching record levels on a quarterly and annual basis as well of new business. Our team is 80% focused on your business. It's where we're good at, what we like doing, as mentioned before. And those good results ultimately are compensating for the softening of the demand globally out there from all our customers. So if our volume is accelerating, it's all related to our new business.

The next question is in the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.

Hi, good afternoon. Thank you for taking my question. Hey, Christoph, I want to get back to a question that was asked earlier in terms of the volume. It sounds like after three quarters of negative volumes, you're starting to get into the positive territory. Could you just go into some of the kind of standout categories over there? What volumes are increasing and which volumes are decreasing? I know you mentioned a little bit about geography, but maybe you could talk a little bit just by business unit, what's going on in various areas of industrial. Obviously, paper is down, but what are the standout areas where you might have accelerating volumes versus the ones which are shrinking, and how we should think of that going into next year with some of the softening end markets?

Yeah, so to give you a simple answer, so the ones that are on the soft side, paper, you mentioned it, and Europe is the second one. So those are the two. Everything else is trending in either positive direction or improved direction if they were on the negative side. I'm especially pleased with the INS, Institutional Specialty Improvements, And water is going to keep improving as well. So those two key businesses are going to be good in the quarters to come, at least with what we're seeing as well right now. So we have pest elimination as well, which is always a bit of a different volume play, as we know, that's doing exceptionally well. We know that competition has a lot to do with themselves, by the way. It's providing us an opening for us to gain share as well, and our team is doing an excellent job in pest elimination, where we see our growth really steady, strong, and margins as well at the same time, so keeping improving. So overall, our business is in a very healthy place. with a few places where we need to work on, as mentioned, so Europe and paper. But to the point of Europe, I'd like to mention as well that margin improvement has been great. So volume challenged in Europe, as we know, but okay, not great. And when I think about our operating income, it almost doubled in Europe in the third quarter. So the team has done some really good work.

Our next question is from the line of Andy Whitman with Robert W. Baird.

Please proceed with your questions. Oh, great. Thanks for taking my questions, guys. I guess maybe, Scott, probably for you, when I was just looking at the adjustments to the results, I noticed that there was $26 million of restructuring, and the total exclusions were 13 cents for the quarter. You talked about last quarter expectation of five. And actually, the guidance for fourth quarter is pre-taxed around $30 million by my calculations, or 9 cents. I guess, could you just talk about what the restructuring actions were in the quarter and the quarter ahead? Maybe which segments, geographies, and are these, is another restructuring program that you've taken in the past forming here? Or can you just maybe talk about some of the operational effects of what you've achieved and are trying to achieve?

Yeah, certainly, Andy. I'm happy to do that. Thanks for the question. Yeah, so if we look at Q3, the special charges restructuring was higher than we had got it to. But that's really due to the timing of the phasing of our combined savings program that we had announced earlier this year that's really focused. Your question on where are we focused on it, this was really targeted around institutional and health care. And as well as Europe, it started in the end of last year, and then we added on to it earlier this year. And that's what really drove it. But really around the timing of it, still expected, as I think I've talked about in previous calls, that about of that program, about 90% of those costs are going to be done by the end of next year. OK. And so there will be a little bit of a tail going into 2024. But really, then, if you look at that, as Christoph talked before, we're seeing the benefits in health care from the program there. But we're also seeing great improvement in the institutional businesses. And that's where it was really focused. And then, as we talked about at the end of last year, the actions taken against Europe. And Christoph mentioned that we're seeing really great margin improvement in Europe as well. So I think the actions that we were taking are having the benefits we expected.

Let me add a few comments here. I totally support what Scott just said, obviously, and really happy that most of the combined programs are coming to a close by the end of this year, which was the plan, so delivered as expected as well. At the same time, we know that digital technology, artificial intelligence will open some new productivity opportunities. So for us in the future, there's nothing clear in our plans right now, but we will keep looking at that. And if there is an opportunity to improve significantly our productivity through technology in the quarters and years to come, we will certainly capture them and discuss that with you.

Our next question is from the line of Steve Byrne with Bank of America. Pleased to see you with your question.

Yes, thank you. Christophe, I'd like to hear your view or maybe ranking among your four key product areas, water, hygiene, energy, and pest, with respect to potential share gains. And would you expect your SG&A to increase over time commensurate with revenue growth, or do you see a pathway to perhaps reduce that 47,000 headcount in a way that you know, either utilize your digital approach or whatever to be more efficient and help you reach that 20% operating margin goal.

There may be two questions in your question here, Steve. So first, in terms of share gain, we're not the consumer good company, so it's a bit harder to have the exact numbers, obviously, here. But directionally, When I look at the big ones, so INS up 12% in a flat market. So that's obviously indicating very interesting share gains. Pest elimination up double digit when competition is either in the single digit or down for some of them as well. Well, that's showing as well, so share gain. Industrial, even comparing to a very strong last year in the mid-single, well, PMI in the U.S. and in the EU is negative. So that's also showing share gain as well. And as mentioned in health care, so growing back again is also showing quite a healthy performance. So overall, I like a lot how we're progressing versus our peers in the marketplace. Now, to your question on SG&A, as I've shared with you in the past, I think that ultimately the company is going to be much bigger in the years to come. I don't think that our team is going to be much bigger, but I'm not expecting the team to be reduced. but it might be in different places. And I want to make sure that the number one place where I want to have all the firepower I can is in the frontline, which means our team serving our customers, where we will leverage digital and AI technology, not only to improve productivity, to help them serve more customers, sell more solutions, But more importantly, spend way more time in creating value for our customers, which drives, obviously, value for our customers, which drives new business, which drives pricing, and ultimately, improves our margin. So the way I think about SG&A in ratio, it's going to keep going down the years to come. But ultimately, I'll make sure as well that through digital technology, we increase the impact of our frontline with our customers, which has been core to this company for the years past too.

Thank you. Our next question is from the line of Patrick Cunningham with Citi. Please proceed with your question.

Hi, good afternoon. On the life sciences business, how should we think about new business growth and investment into next year, given some of the persistent near-term weakness sort of juxtaposed with the long-term growth opportunity and margin expansion that you highlighted in your investor day?

Yeah. So, Patrick, so on life science, we've seen some improvement, which is good. in the third quarter in a market that's generally down. And I see that as a short-term impact in the industry. It's an industry, so pharma, biotech, that is very promising. So for the future, a few challenging times for a few quarters. We'll see how many more quarters that's going to last. So for the industry out there. But I'm very bullish with where the industry is. as a whole is going in the years to come. Now, when it comes to our own performance, well, the fact that we have positive growth is also a sign of the new business that we're generating, the share that we're gaining as well versus our competition. And it's in that time that Ecolab usually focuses the most in investing for the future. And as I've shared during Invest Today, well, we're investing in capacity, making sure that we will have enough production capacity so for the years to come to deliver our growth, and not just in one location, but in several locations in Asia, in Europe, and in North America. And at the same time, it's also building capabilities. It's building our team. It's building expertise. It's building science and R&D. as well at the same time. And if the market is a bit different short-term than what we had expected a year or two ago, our investment plan haven't changed because, for me, the future is totally unchanged. It's just a short-term impact that the market is having on everyone's performance.

The next question is from the line of Kevin McCarthy with Vertical Research Partners. Please receive your questions.

Yes, good afternoon. Christoph, I'd welcome your updated thoughts on the healthcare business. I guess in terms of operations, would you expect that business to grow on par with your corporate average next year or better or worse? And then on the strategic side, I think you've now separated infection prevention from surgical and maybe can kind of talk through what you're seeing in terms of incremental benefits from that in the early days as it relates to customer touches and productivity and the like.

Yeah, thank you, Kevin. So three things. First is bifurcation, infection prevention, and surgical, as mentioned earlier, is progressing very well. It's really providing the right focus for the surgical business that's serving different people in a hospital than infection prevention, which is much closer to institutional. This is helping, obviously, so the surgical business. And the fact that infection prevention is now so managed by the institutional team, well, we get not only so the reach, because they serve way more hospitals for institutional products obviously than healthcare did, well, you get immediate synergies from a growth perspective. You get the synergies on the cost side as well because it's a way bigger team than what healthcare as well used to be. So in terms of transformation, I like the progress that's being made. Now, in terms of growth performance, If I think short term, speak 24, I think healthcare is going to be below average of the company and more longer term, well, my objective is to make sure that our healthcare business becomes at least at the average of the company, if not better, but that's going to take some time and some work in order to get there.

Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Thank you, and good afternoon, everyone. Just a question from me on inventories. Just looking at it, it's down, I don't know, mid-high teens, year over year, but your volume is kind of flattish and price is up on your delivered products. So I'm just trying to understand if RAS are still sort of flattish, what's helping the inventory come down and improve the working capital performance?

Thank you, Vincent. I'm going to pass this one to Scott.

Thanks Vincent be happy to answer this so yeah as you probably saw our Q3 working capital was about $250 million favorable versus last year and largely driven by some targeted inventory reductions. We're down DOH is down about 10 days so the rate impact on that versus the end of last year so and that's really been driven by as the supply chain team has driven great supply chain resilience and allowed us to go after and reduce those inventory levels and so I would expect really like the working capital trajectory and expect really strong free cash flow growth through the balance of the year. And frankly, expect our free cash flow conversion to be above historical levels, which tends to be mid-90s, and expect that free cash flow conversion to be above 100% this year on a full year basis.

Our next question is in line of Rosemarie Morbelli of Good Valley Funds. Please proceed with your question.

Thank you. Bonjour, Christophe.

Bonjour, Marie.

Congratulations, everyone, on that great quarter. Institution did really quite well. And I was in, well, I was in several hotels recently. And the level of cleaning, changing sheets, changing towels and so on has come down substantially. I know you are adjusting your operations to reflect this different world, but I was wondering if you could give us a little more details on what you are doing, because if they don't change anything, you obviously don't sell your products, services, and so on. Details would be appreciated. Thanks.

Thank you, Rosemary. This is a core element of focus between us and our hospitality customers. It was initially driven by shortage, obviously, of labour that they didn't have to do all that work, which is still a challenge for that industry. At the same time, well, they like the fact that less labour meant as well less cost while pricing. went up that drove good margins for institutional customers, which ultimately is a good thing for the industry. And when the industry is doing well, it's a good thing for us as well at the same time. That being said, quality standards need to get back to where they used to be. It's exactly playing into what we're doing, which is having products that are delivering better quality, better standards, better cleanliness, with less labor. So it's two in one, it's three in one, it's automated dish machine, laundry, floor cleaning, whatever those solutions might be as well for the industry. So we've reoriented really over the last two years all our innovation towards increasing even more the automation level for our customers in order to drive better cleanliness, while using less labor and keeping the margins that they used to have so at the end of the day if an institutional industry hadn't changed for a long time like 100 years i think that the past few years it's an industry that has made a step change in terms of leveraging technology more than ever well this is exactly what we're doing for me um it's uh it's gonna help bring our partnership between us and our customers to a whole new level helping them perform better and for us leveraging all the innovations uh that we have to offer so at the end of the day a good news and cleanliness is going to improve as well in the hotels that you're going to visit thank you the next question is from the line of scott schneeberger oppenheimer please share your question uh thanks very much

Christophe, could you give us an update? It's been, I think, nearly five years since data centers and animal health became big areas of focus at the company. Could you speak to growth rates at both and how meaningful they've become within their subsegments of industrial? Thanks.

Well, the two are very different, obviously. So data centers is growing at an incredible rate. We're not giving the details here, but it's strong and it keeps accelerating. It's north of 30%, which is quite remarkable. You see that with the high-tech companies. Obviously, the usage of cloud is going up exponentially. They need way more computing power in places where there is limited water as well at the same time. And there's almost no one out there who can serve them in a way that's increasing capacity, reducing water consumption, and at the same time making sure that the uptime remains close to 100%. So quite a challenge from a technology and expertise perspective. This is playing exactly... to our strength as a company. That's why having focused on that business, having a dedicated team on it is paying off more than ever. And I think that we are at the beginning of that growth journey, which is really good. Animal health, a total different story, obviously, since the promise there is as the food industry is moving away, at least in places where it's still being used, antibiotics, Well, you need to have much higher level of hygiene in the farms that are growing, obviously, these animals. We've been building that over the last few years. It's not an exponential growth like data centers has been, is, and even more will be in the future. But that's a business that's in a good place, but that you can't compare with the data center business. But it's a very good complement to our food and beverage business, which is doing really well overall. So I like those focus and investments that we're making in those industries, but they're very different from each other.

Thank you. Our next question is from the line of Josh Spector with UBS. Please, here's your question.

Yeah, hi. Thanks for taking my follow-up. I guess two quick ones, probably both for Scott. When I look at SG&A, so flat into fourth quarter, if I think about normal seasonality, what that means for next year, extrapolating that gets me to like 4.4 to 4.5 billion or another 10% increase. I guess, is that the right way to think about it? Or would you expect it to move differently than that? At this second, you have about a billion plus in debt due in the next couple quarters, pretty low coupon. Are you looking to pay that off or would you roll that? Thanks.

Yeah, Josh, I'll handle the two follow ups. The first one on the debt and where we sit today have strong liquidity, as you saw in the free cash flows for the third quarter and the expectation for the full year. And we ended the third quarter with around about a billion dollars of cash. And so where we sit today, my expectation would be we'd pay down both maturities due in December and January. Combined, it's a little over a billion dollars. So expectation there. Again, long-term focus on capital allocation remains the same, but obviously in the short term, we're very committed to deleveraging and on a good path to do that. We're at the end of the third quarter. Leverage ratio is about two and a half and feel very good by the end of next year to get back down to our historical sort of two times range. Getting back to your question, as we talked about and Christoph talked about in the open, that the Q3 dollar was what we expected. I expect similar levels in Q4 as you talked about, but the year-over-year really largely driven by this incentive compensation. And then as well, if you look at Q3, had a tougher low incentive compensation last year. But that underlying productivity remains really strong. Just for perspective on that, the SG&A, as Christophe talked about, we will continue to grow this business, but we're needing less people. And actually in the third quarter, our head count year over year was down on SG&A 2%. And so our sales per head was up about 7%. So showing that good productivity. And I would expect it's early to sort of, you know, talk about 2024, but we'll expect to continue to drive great productivity next year, leveraging the technology that we've continued to deploy and really increasing the time that our sales team spent on creating customer value.

Maybe two points to build on what you just said, Scott. On SG&A, it's 100% under our control. We've demonstrated for years that we drive productivity the right way. It's not by squeezing costs. It's by automating our operations and focusing our teams on creating value with our customers. So I completely expect that in the years to come, through technology, through digital, through AI, we will keep on that journey and feel really confident about that. And the point on cash flow and debt, speak balance sheet, for me in those times having a very strong balance sheet not only has been true for us for many many years it's especially true today so getting our working capital so as tight as it can be getting our cash flow as strong as it can be through volume new business pricing and all that business obviously so generated is absolutely essential so on the two sides keep looking for good progression, both on SG&A productivity and the strengthening of the balance sheet.

Thank you. Mr. Hedberg, there are no further questions at this time. I'd like to turn the floor back over to you for closing remarks.

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 your day.

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. And you may now disconnect your lines and have a wonderful day.