Ecolab Inc.

Greetings and welcome to the Ecolab third quarter 2024 earnings release conference call. At this time, all participants are in listen only mode. Question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure at this time to introduce your host, Andy Hedberg, Vice President Investor Relations. Mr. Hedberg, you may now begin.

Thank you, and 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 actual results could differ materially from those projected. Factors that could cause actual results to differ are described under 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.

Christophe Beck Thank you so much, Andy, and welcome to everyone on the call. And let me start by thanking our incredible team for their hard work and seamless execution this quarter again. It's because of our team's endless dedication to our customers and commitment to our goals that I have the pleasure of sharing another excellent quarter, delivering broad-based performance across our businesses and markets and geographies. Our company has never been as healthy as it is today, and I'm proud to lead such a talented team with such a great future. Moving to the specifics of our performance, our third quarter was highlighted by strengthening volume growth, continued strong value pricing, and robust operating income margin expansion. These all combine to deliver 19% growth in adjusted earnings. With this strong momentum, we are increasing once again the midpoint of our full year earnings guidance range. As expected, organic sales grew 4% with very healthy growth across our businesses. Importantly, volume growth improved to 2% driven by strong business wins and breakthrough innovation. The Ecolab team also delivered solid value pricing at the same time in our targeted 2% to 3% range in a quarter where carryover pricing is at zero and new pricing for 2025 is not in yet. In a world that remains hard to predict, our solutions are more essential than ever to our customers. Backed by our reliable supply and global expertise, our unique technologies are recognized to dramatically enhance productivity while significantly reducing water and energy usage. This solid top-line growth helped to further increase our gross margin 220 basis points to 43.5%. Our SG&E productivity also improved, consistent with our long-term trends. In 2017, our SG&E ratio was over 29%, and today it's around 27%. This year, we expect it will further improve from 28% in the first half to 26% in the second half, even after gross investments in frontline firepower, digital technologies, and service capabilities. And on a side note, third quarter SG&A also benefited from FX, which we expect will reverse next quarter. With this, we anticipate fourth quarter's SG&A ratio to be flattish versus last year's fourth quarter, While long-term trends, we keep improving 20 to 30 basis points per year. Overall, our operating income grew 22%. NOI margin expanded by 260 basis points to 17.9%, which is very close to a record third quarter margin for Ecolab. For the full year 2024, we expect an NOI margin of around 16.5%. 50 basis points better than our early commitment and 260 basis points better than last year. With our strong margin expansion momentum, my confidence in consistently delivering 12 to 15% long-term EPS growth has only strengthened. This will position Ecolab to reach our 20% operating income margin target over the next three years. Now I'd like to transition our attention from Q3 to what our teams are focused on to fuel long-term growth and margin expansion. Our growth engines in cleantech, high-tech, and biotech are showing strength and momentum, even if each are at a different stage of development. In the cleantech area, institutional specialty, as well as pest elimination, are both delivering strong performance, growing 7% and 8%, respectively, with operating income margins north of 20%. Global high tech, which includes data center cooling and water for microelectronics, is growing at strong double digits. And in biotech, our life sciences business remains ahead of the curve in what we believe will be a huge long-term growth opportunity. Our innovation pipeline also continues to build as we shift our focus from renovation to breakthrough innovation. With nearly $1.5 billion, our 2024 pipeline is at record levels and laser focused on the biggest opportunities across our clean tech, high tech, and biotech platforms. Finally, our OneEcolab growth initiative, which seeks to leverage our digital technologies to deliver best-in-class business outcomes, operational performance, and environmental impact at every customer location around the world, is progressing very well. Over the next few years, OneEcolab looks to more quickly unlock our current 55 billion penetration opportunity. Our early focus on our largest and fastest-growing 35 customers is showing promising results with significant total value delivered for our customers and a great growth opportunity for Ecolab. With strong long-term business momentum, record-free cash flow, and the proceeds from the sale of the surgical drapes business, our balance sheet is in a very healthy position. This provides us with many options to allocate capital to organic and inorganic growth opportunities. On organic growth, we are well positioned to scale unique customer solutions like our AI dish machine program for QSR and circular water systems for data centers and microelectronic manufacturers. On the acquisition front, we are now in a unique position to enhance our focus on the core fields of water, digital, and life sciences to generate strong returns for shareholders. In closing, I say this every quarter, and I'll say it again today. Ecolab's future has never looked brighter. Our leading customer value proposition, where our technologies help customers improve their operating performance while reducing their water and energy usage, is increasingly relevant, especially in unpredictable times and continues to fuel our growth and margin expansion. Simply put, we remain very well positioned to consistently drive 12% to 15% growth in adjusted diluted earnings per share in 2025 and in the years to come. So thanks again for your continued support and, naturally, your investment in our company. I look forward to your questions.

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

Thank you. We'll now be conducting the question and answer session. If you'd like to ask, we ask that you please limit yourself to one question so others will have a chance to participate. To ask a question at this time, you may press star 1 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 withdraw your question from the queue. For participants that are 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.

Hi, Christoph. Good afternoon. Good afternoon, Tim. I wanted to talk about volumes a little bit. We saw them accelerating here in the third quarter. It was great to see. It was slightly above our expectations. I'm curious how you're thinking about that trajectory as we move into the fourth quarter. Maybe you could talk about some of the moving pieces here, whether it's institutional, what's happening there volume-wise, or any other business that maybe having an outsized impact on that trajectory in volumes. Thank you.

Thank you, Tim. Yes, I'm very pleased with the 2% growth that we delivered in volume after the 1% in the previous quarter, and especially when it comes with a continuous build in value pricing. It's been quite a long time that we've managed to keep volume strong while building pricing, while retaining customers, all at the same time, which was quite remarkable what the team has been able to execute for quite a while, and especially in the third quarter. It's been because our team has been really focused the last few years at selling value for our customers. That's generated obviously record levels of new business and innovation sales. But your question on how broad-based it is, that's the best part of it because If I look at all our businesses, most are accelerating in terms of volume, which is good. And I'm especially pleased with institutional and specialty that are growing and gaining share in a market that's going down. And it's the same in industrial as well, where most of our businesses are improving as well. Their volume grows also in most markets that are either soft or going down. But if we look at the markets or the geographies, the regions, whatever we want to call them in our company, what's pretty remarkable is that we've delivered 4% organic growth when Europe was flat. which means that the rest of the world outside Europe was obviously north of 4%, which is demonstrating how nicely we're growing outside of Europe, which is a difficult place, obviously, to operate. But on the other hand, really like the margins that we have over there, but the growth is going to be our priority going forward.

Thank you. The next question is from the line of Manav Patniak with Barclays. Please proceed with your question.

Hi, good afternoon. This is Ronan Kennedy. I'm from Manav. Thank you for taking my question. May I please ask, Christoph, as DPC deflation tailwinds fade and inflation normalizes, how do the drivers of margin expansion and the pace of it evolve? So if not mistaken, there would be GM leverage with 2% to 3% price over 1% to 2% inflation. But to what extent is that margin expansion dependent on volume growth and makeshift, whether it be to high growth, high margin businesses or to digital?

Yeah, great question, Ronald. So as you said, we expect delivered product costs to get back to normal inflationary trajectory. kind of aligned with inflation as well, kind of low single-digit growth. We expect that turn, by the way, to happen in the fourth quarter, as we've mentioned as well early on. So the fourth quarter will be the inflection point where we've seen so kind of a slight tailwind in Q3. turning point in Q4 and then back to historical level in 2025. That's the way we've been used to deliver as well in the past, and I feel really good about that because the way we're going to deliver is ultimately by staying focused on volume growth, keeping value pricing as well humming as it has so far as well, At the same time, we will keep working on SG&E productivity, improving 20 to 30 basis points as well on an annual basis while we keep investing as well in the business as well at the same time. And ultimately, so you end up with these 12 to 15% earnings per share growth, which we expect very clearly to deliver in 2025. and the years beyond as well, which will lead us ultimately to the 20% oil margin that we've committed to. And I expect to get there over the next three years. So I feel really good about the trajectory that we have, even with DPC, Delivered Product Cost, getting back to its normal inflationary trends.

Thank you. Appreciate it.

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

Yeah, hi. Good morning. I wanted to ask specifically on institutional margins. I mean, you continue to do quite well there. However, when I look at margins relative to the past, there's been a lot more seasonality. So margins typically have been higher in the second half versus second quarter in the first half. It kind of stabilized. So I was wondering if you could unpack some of the moving parts there between maybe some of the reinvestments, product costs, et cetera. And as you look forward, is this now a more stable margin profile for that segment with some of the changes you've made in Europe, or do you expect that normal seasonality to kind of return?

Thank you, Josh. I'll give that question to Scott, and I'll add a few comments if needed after that.

Yeah, absolutely. Thanks, Josh. As you noted, the margin performance in institutional specialty has been exceptional. Q3, their OI margin was up 380 basis points versus last year. You talked of the seasonality. Certainly, sales tend to be higher in the summer there. Sequentially, we saw a very modest decline, Q2 to Q3, like 20 basis points. But that's really, to your point, we're investing in that business as we are elsewhere. making field investments there. And so that's really what drove that just sequential decline Q2 to Q3, but very happy with the margin expansion there. Performing well, as Christoph said, in markets that are not helping. But given what we do, the labor savings are more important to our customers and quarters move around, as you said. So I would expect OI margins for institutional, especially on a full year basis, around about 22%. So right around our long-term target.

Thank you. Our next question is in the line of John Roberts with Mizuho Securities. Please proceed with your question.

Thank you. There are currently outbreaks at a major deli meat provider and a major QSR. When something like this happens, do you pivot the sales force to leverage that as a teaching moment for your customers and drive more penetration?

It's an interesting question. And it's always sad that it happens, usually with a huge impact on human lives. And I feel really so sorry for all what happened. And every time happens as well, when things are happening on the market. And we really step back and look at It's never been happening to one of our customers just first. That's important to remember. And when it happens to some of those companies, we reach out and we offer our services. And almost every time after a while, they come to us and we work together in order to bring them to the right place. But most importantly, we talk about that to our new customers that haven't gone through those outbreaks, our current customers as well, what we've learned from it. So we never leverage that as a sales opportunity. We leverage that as a learning opportunity to use U-Term as well here. And almost every single time those companies come and join us. to do the right thing the right way, and ultimately so to protect guests, patients, consumers, which is part of our mission as a company.

Thank you. Our next question comes from the line of John McNulty with BMO Capital Markets. Pleased to see you with your question.

Yeah, good afternoon. I was hoping you could speak to the growth that you're seeing in the electronics and data center area and how you see that playing out over the next 12, 24 months. And is it largely coming from existing data centers that are now converting over to and seeing the value kind of that your solutions bring, or is it new data centers coming online? How should we be thinking about that?

Thank you, John. It's a very interesting set of end markets. So we call it global high tech, but it's really two complementary but differentiated end markets, microelectronics, obviously the production of microprocessors and data centers. They're related but different. And to your question, is it existing or new ones? It's both. We try to focus as much as we can to the new ones because we can embed our technology in the whole design of the data center or of the micro electronic production site called a fab usually. But we work on both actually, maybe just for perspective as well. When I think about AI in the next five years, so 2025 to 2030, When you think about it, AI uses 4% of the power that's generated electricity in the US today. It's expected to use 10 to 15% by 2030. At the same time, AI globally will require as much water to cool those data centers than the drinking needs of the whole of India in the next five years. So we thought that we were heading for a water-scarce world. Well, with AI, it's just gotten way more acute. So the fact that we're talking to those high-tech companies, they're very familiar with that challenge. And in the microprocessing world, so in the fabs, We help them produce those microprocessors in ways that we use and recycle water at every step of the production process, which is really complicated to do. In the past, while they were generating wastewater that they had to either dump or try to treat before they dumped it, never to reuse it, well, all the new technologies that we are deploying with our customers reuses and recycles water so within the fab and for the data centers technologies are evolving uh up to now most of the data centers were cooled because you were cooling the room where the computer was in and tomorrow it will be so cooling the chip that's within the computer and it's called the direct chip cooling and in both cases we have some very good offering and innovations to help them do that job as well in ways that are reducing water usage in dramatic ways. When they reduce water usage, they reduce power usage as well at the same time. They improve the uptime as well, and they reduce their cost, which is a very Ecolab-like type of model. So we've created dedicated teams, both for data centers and for microelectronics, in very dedicated markets, because that's not happening everywhere around the world, as we know, and really likes what we're building, what we've built, the performance of that business, and I expect it to become a major driver for us in the years to come.

Great. Thanks very much for the call.

Thank you.

The next question is from the line of Jason Haas with Wells Fargo. Please proceed with your question.

Hey, good afternoon. Thanks for taking my question. I'm curious if you could comment on the deceleration in the water segment. I recognize it's relatively slight, but I was curious if that was entirely driven by mining or if there are any other factors. And if there is some softness in mining, just talk about when you would expect you could see some improvement there. Thanks.

Thank you, Jason. You gave the answer, actually. Water is very stable growth, as we had in Q2, was impacted by mining, which is the smallest business, by the way, which has a tendency to be more lumpy, not cyclical, but lumpy. It's in remote places. You send all those products as well in long distance as well. So it's not every quarter is created equal, and that's the only reason for the water trend. Otherwise, businesses are doing really well, and they're trending up as well at the same time, which is a good thing.

Great. Thank you. The next question is from the line of Patrick Cunningham with Citi. Pleased to see you with your question.

Hi. Good afternoon. So I know it's early days, but could you discuss how the OneEcolab initiative is progressing in terms of commercial buy-in, value pricing, and some of the modest cost efficiencies you laid out in the prior call? And then you mentioned the early focus on the largest 35 customers. What's been the feedback from those customers?

So let me give the first part of the question to Scott, and then I'll talk a little bit more about the so-called 35 top customers.

Yeah, as we talked about last quarter, we've really just launched the program. And as you said, it's very much focused on growth, really getting after accelerating to our five to seven percent targeted sales growth, focusing on our biggest customers, leveraging the teams that we have, but very focused on growth. The savings are pretty incidental to the program, frankly, but like the way it's going, getting to this best in class performance, the best restaurant, best hotel, data centers within our network, and really transforming the way we work, working with these largest customers to get after and really accelerate that $55 billion opportunity, cross-sell opportunity that we have.

So to build a little bit on that, so it's a combination of three things, as I've shared early on on previous calls as well here. So it's exactly what Scott has been talking about, really so penetrating a much bigger share of the $55 billion that we have as a penetration opportunity within all customers. And it's the total opportunity for the top 35 is $5 billion, and half of it we don't have. So that's a penetration opportunity that we have. But second, it's to help our team as well figure out what's the path in order to deliver that penetration opportunity while delivering the value for our customers. And third, it's to drive the productivity. um which is third priority but we'll take it um we know that technology helps us improve our productivity which helps us invest while keeping improving productivity as well at the same time so one comment so for the the top 35 which is a combination um of our largest 20 customers plus our emerging 15 so those are the ones with the potential um to become one of the top 20 slash 35 in the future, the reception from our customers has been very positive because the way we sell is evolving. In the past, we've been selling so much more annually, incrementally. What are the new things I can do for you? Tomorrow, we're selling very differently. And it's saying, well, if one customer has a lot of facilities, locations, units, restaurants, well, we can help them understand if all your units were performing at the best performing unit, what would be the potential? And that's the new way of selling, of saying, well, you can get that much savings in your operation in all three elements. First, your business outcome. It can be food safety in a restaurant example. The second is the operational performance. And third is the environmental impact. You add all three, you get to a dollar impact. You translate that in the total value delivered. And we develop a plan in order to deliver that. That's driving growth for us, performance for our customers. And our customers have been very pleased with that approach. And to be honest, it was customers that were asking us to approach them that way. So it made, obviously, the sale to those customers much easier. Early on the journey, but very promising so far.

Great.

Thank you so much.

Our next question is from the line of Chris Parkinson with Wolf Research. Please proceed with your question.

Great. Good afternoon. Christoph, you continue to put up pretty good results in pest elimination. The margin was just a touch bit lighter than we were anticipating. Can you just hit on any color? I think that's a pretty asset-light business. Is there a headcount investment there? Is there innovation in terms of your digital efforts? Just any color of how we should think about the growth rate relative to to the margin progress, even if you just want to hit on a longer term, would be incredibly helpful. Thank you.

Yeah, you said it, Chris. It's a remarkable business. So high single-digit organic growth, high margin, insane return on invested capital because there's almost no capital that's being invested in that business. So there's a combination of high margin, low capital, so drive huge returns as well at the same time. When we compare ourselves with other companies, large companies out there, and there's only four, so it's pretty easy, that are large, and then you have a zillion of smaller ones that represent the lion's share of the market, by the way, as well, where we are the best performing business in the world as well. So when we look at that combination, best performing business in the world, great performance versus all our businesses as well that we have. Well, it's pretty easy to come to the conclusion that we should invest more behind that business and see exactly what we're doing, what we've been doing as well over the past few quarters. And that's impacting the margin short term, but for good results, obviously long term. And to your question, where do we invest? It's basically in three areas. The first one, it's in innovation. You've heard about our past intelligence business, which is ultimately connecting the million of devices that we have um around the world in order to simplify um the work that our teams need to do in a big conference center well you might have 500 devices over there you need eight hours to get it done while with pest intelligence you need 20 minutes to get the same job done and you have a better result as well in terms of activity in those locations so better for us better for the customer and better for the shareholder because it's a great added value business as such. The second is to invest in our team. It's sales firepower to sell more better to more customers around the world. And the third one is to invest in smaller, bolt-on acquisitions, all focused on commercial. Sometimes some residential is coming with it, but this is absolutely not our focus. We are commercial B2B business here. That's where we want to be in the future. So all in all, a great business that I believe has much more potential for the future. That's why we're investing behind it as well, and that has some impact on the margin short-term, but for great return long-term.

great color thank you thank you chris our next question is from the line of shlomo rosenbaum with stiefel please proceed with your question hi thank you for taking my questions um uh christoph the the uh margin is definitely doing better than expected and looks like you know you you put a framework in terms of time wise into where to get when to get the 20 you said the next three years I was wondering a little bit more shifting onto the the revenue side of things in terms of growth with declining raw material costs bit you know that tailwind kind of now going to be behind you should we expect you to be leaning more into pricing should we expect that volume is going to get. better with the investment in the resources? I'm just trying to map to, you know, what will be maybe 4% to 5% growth this year, you know, to getting to the 5% to 7%, which is your targeted range.

Well, ultimately, I want to get to that targeted range, obviously. That's going to take some time to get there. That's the beauty of our business. It's very consistent, very long-term, good momentum, and it's going to be a combination of volume and pricing. I think the 223 on pricing range that I've been talking about and that we've been delivering as well in 2024 seems to be the sweet spot. We didn't know exactly where it would be. In the past, pre-COVID, it was 1 to 1.5, and we see that 223 seems to be the sweet spot going forward, and the balance is on the volume side. Interestingly enough, when I look at all our sales of all our businesses, we're close to 60% of our portfolio today is already within the range that we committed to at Investodays a year and a half ago when we were together. So the majority of our business are already humming in the right direction. And when I look at the opportunity we have out of the penetration, the $55 billion that I talked about just before as well, our new growth engine in water circularity, in high tech, in pest elimination, in life sciences, the whole breakthrough innovation portfolio that's coming online as well. And last but not least, the monetization of our digital offering as well at the same time. makes me feel good about our progression towards that committee range of the five to seven. But what's important is when I committed to 12 to 15, we don't need the five to seven to get there. That's why for next year, even if we keep progressing nicely so quarter over quarter uh towards um that that range will be delivering the 12 to 15 as well at the same time because value pricing is driving obviously 100 margin the volume is going to help and we keep driving productivity as scott has mentioned as well so with the one ecolab initiative we're expected to have 20 to 30 basis points as gna improvement longer term why we keep investing 20 to 30 basis points as well in the three big categories that I mentioned as well on earlier calls. So generally, nice progression towards the range that we want to accomplish. Thank you.

Our next question is from the line of David Begleiter with Deutsche Bank. Pleasure to see you with your questions.

Thank you, Christophe. Staying on value pricing, how should we think about for next year in terms of being closer to 2% or closer to 3%? What are the key drivers for the lower upper end of that band?

You know, it's going to be between two and three, David, and we always round that number to make your life a bit easier. So sometimes it falls on the two, sometimes it falls on the three. But you've seen this year, it's gone pretty well. We are 2% in Q3, because as mentioned in my open, As well, you have no carryover left in the third quarter, and you don't have the new pricing for the coming year in there either as well. So it's kind of the lowest pricing quarter. That's always the case. It's not a new thing. But I feel good with this two to three, as mentioned, feels like the sweet spot. We're going to try to get as high as we can on that range. But For now, since we just have a few quarters under our belt of that, I want to make sure that I stay within that range, feel really good about that, and the closer we can be on the upper side, the better we'll be. The very good news is that, as I've mentioned many times, we drive that value pricing based on the TVD, so the total value delivered, that we deliver for our customers, the savings in their operation, in business outcome, operational performance, and environmental impact. And that TVD number is way higher than the pricing that we are delivering, which is demonstrating that net-net, it's a very good deal for our customers, and it's obviously a very good deal for us. So I feel really good about staying, getting in that range, and having it very stable for the longer run.

Thank you.

Our next question is from the line of Pavel Makhanov with Raymond James. Please proceed with your question.

Thanks for taking the question. You had a divested share this year, but I'm not sure that you've acquired anything since 2023. What are your latest thoughts on the M&A front?

So we don't comment too much on M&A, obviously. So it's a lumpy proposition. So by design, obviously, we don't plan too much in advance. But let me share some perspective on that. So we have a great track record of M&A if I look at the 10-ish years. behind us, we did roughly 100 transactions, smaller, bigger ones. So we have a lot of experience on how to do that really, really well with a very high success rate. The second point is, as mentioned in my open, we are in a great place from a balance sheet perspective, very low leverage, great cash flow. So a very strong, very healthy balance sheet. And the third point is our M&A pipeline that we've been nurturing for years continuously is very strong and very focused on the three big areas I've mentioned all the time. The first one being in water technology, but high technology, not basic technology. Second, it's digital and high tech. um is in in life science so those are the three big areas so i feel good with what we've done in the past the position that we in in terms of firepower and third in terms of opportunities that we have so can't comment much on what's going to happen but we best positioned uh ultimately to capture whatever would make sense for shareholders and for the company appreciate it thank you

Our next question is from the line of Jeff Zakowskis with JP Morgan. Please proceed with your point.

Thanks very much. Year on year, was volume growth in industrial close to zero and volume growth in institutional and specialty close to four? And in terms of your 20% longer term margin target in three years, would you reach that

if you were at the bottom of your five to seven percent sales range um or do you need to be at the top or it doesn't matter you'll you'll get there anyway i feel really good about getting there for the reasons um that i've mentioned um as well earlier um we don't need to be at seven percent 7% is obviously easier than 5%. 5% is in a very good place to be to get to this 20%. But if we were to continue on the track we're now, so this 4 to 5, which is not my objective, obviously, so we want to keep accelerating our top line as well, but the environment plays a role as well around us, we would get to this 20% over the next three years. If you do the math with the 12 to 15% by year for the next three years you get very close to that you add a few other things as well, like the one Ecolab initiative and you get there so pretty mechanically. We all know how the next few years are going to be from an external world perspective. We're going to react to that, as we've done in the past as well. But I feel really good, Jeff, about delivering that in the next three years, as mentioned earlier.

And then the volume growth question?

The volume growth question. Philippe Metzger- As mentioned, so to get so within this two to 3% is a busy or one to 2% sorry and two to 3% are on on the value pricing is the base case to get to the 20% anything that comes on top of that will help us get there quicker.

James Heitinger- i'm sorry I meant for the quarter was industrial close to zero and institutional close to four and the quarter.

Year-on-year, Jeff, just to understand that well. Yeah, we had INS in Q3, so I'm looking at the table here is a bit north of 3%, and industrial is a bit north of 1% in Q3. Okay, great.

Thank you so much.

You're welcome, Jeff.

Our next question is from the line of Lawrence Alexander with Jefferies. Please proceed with your question.

Good afternoon. It's Dan Rizwan for Lawrence. Thank you for taking my question. I was just wondering if you've ever really talked about how much of a cannibalization new technologies does of some existing products, if at all, and if you ever really talked about the vitality index for you guys.

Thanks. So the vitality index, the way we calculate it, so the sales of new products introduced within the last five years, that's our definition. That's the one that we've been using for a very long time. It's around 30% plus, and it's growing with our increased focus on breakthrough innovation. So really pleased with that. And the cannibalization, we don't really disclose that number, but it's not very high, especially on the innovation side. And most importantly, all new products and offering coming on the market are incremental at margins. And this is the number one objective that we have.

If it's 30% growing, is there a target you guys have over the next, say, five years or three years, given what you've laid out before with your sales growth target?

Can you ask again? I'm not sure.

I'm sorry. Sorry. Vitality index is at 30%, but growing. Given your sales growth targets, is there a target for vitality index? Do you expect it to get up to north of 40%? or higher, or is that, I mean, I just, how should we think about the growth from here?

It's going to be north of 30%. Uh, we haven't committed to a number out there. So for me, the quality, um, of innovation is more important, uh, than just the number, uh, as well here, because it's this big shift that we've made, you know, the 30% in the past was mostly, um, renovation of existing products and offering, um, that we provided to our customer. Now, almost half of that innovation pipeline, which is at record level, is what we call breakthrough innovation. That's an end-to-end solution for a data center, as I shared before, for a microelectronics manufacturer, for a brewer, or for a restaurant, making sure that their performance reaches the best-in-class level of performance as well. So the impact of our innovation is shifting way more in terms of driving performance for our customers and driving our top line, and most importantly, our margin as well at the same time. So the 30% is going to go up, but most importantly, the quality of the innovation pipeline is going to be much better. Thank you very much.

Our next question is from the line of Ashish Sabhadra with RBC Capital Markets. Please proceed with your question.

Thanks for taking my question. I was just wondering, how should we think about the benefits of the growth investments and frontline digital technology and service capabilities as we approach fiscal year 25 in terms of like the pricing tailwinds or volume growth, but also operating efficiency for any incremental color? Thanks.

So the best way to think about it, Ashish, is that it's fueling obviously our acceleration towards the five to seven, helping us get obviously so to the 20% ROI margin over the next three years, as mentioned. And it's three components. One is the sales via power, more people on the street, more efficient at doing it as well. Second, it's digital technologies. And third, it's service capabilities. like the One Ecolab initiative that you heard as well as from Scott a little bit early on as well. But what's important is we make those investments while driving a net productivity improvement as well at the same time. That's why I shared with you a little bit the numbers here. We think about in the years to come 20 to 30 basis points of our sales in growth investment in the years to come. and still getting 20 to 30 basis points of sgna productivity improvement while we do that so the improvement is a net of the investments that we're making so you get um good to applying evolution and at the same time um an eps in line so with the 12 to 15 leading us to the 20 over the next three years that's great color thank you thanks crystal thank you

Our next question is from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Yes, good afternoon. Christoph, I was wondering if you might hit the reset button for us as it relates to healthcare and life sciences. So now that you've closed the GSS divestiture, how would you characterize organic sales growth prospects and margin uplift prospects for 2025 and beyond?

So two different businesses, health care and life sciences, as you've said, so with the reset, we're going to separate that as well. So in 2025 and beyond, that you have more clarity as well about those to businesses, especially life sciences. Honestly, health care is becoming a pretty small business after the divestiture. It's very close to the institutional team as well, since they're leveraging the same sales force, especially in the United States. And I'm very pleased with the evolution that we're having here. So it's a smaller business where we want to improve the profitability of that business and build um a new proposition around uh instrument reprocessing as i've shared with you as the next step on the healthcare journey we did the first step was driving cost to the right place second is bifurcation of surgical and infection prevention third the sale of surgical drapes and fourth is um to rebuild or to build the instrument reprocessing business for the future. We have a nice base to start with in Europe on that, and that's going to be the base that we're going to build on in the years to come. But still, it's going to be a smaller business, more quality business, and I expect that business to grow. Low single to mid single digits in the years to come, but really driving margin. The second, which is much more important, is life sciences. And we've made that bet since 2016, 2017. It's a great business in a great end market. I believe that it's going to be a booming business in the next five to 10 years. The industry is in a transition phase right now after the complicated years of COVID. We've been growing slightly. My ambition was to grow double digit. Well, we've been low single in that business while most of the competition was down, by the way. So it doesn't make me feel good, but certainly better than the trends that we've seen in other companies in this business as well. But when I look at what we're doing, how we're building that business, as I've said, so we're close to a billion today. I expect the business in the next five to 10 years to be a few billions at margins that should be in the 30 range, if not more than 30 as well. We're building towards that. I like a lot the progress that we're making. The speed at which we're going to get there, well, is also a bit depending on the market. But generally, this is an investment I like. And the more I look at it, the more I understand the opportunity out there, the more I like it. And I think that we're all going to love that business down the road.

Thank you very much.

Our next question is from the line of Andres Castanos with Barenburg. Please proceed with your question.

Hi. Actually, following up on health care, you just disconsolidated a business that was making 20% margin, and you are expanding margins quarter on quarter despite that. So can you help us understand that, what has gone well and what is turning around within health care?

So the margin you were talking about was a combination of healthcare and life science, as mentioned before. So it's a combination of two very different businesses. One is serving hospitals and the other one is serving obviously the pharma industry and biotech, which is pharma as well. So obviously we'll have, so if I look at today, so post the sale of surgical drapes, Our healthcare business is kind of a break-even type of business. We knew that. So no big surprise. But it's a very eco-lab, institutional-like type of business. So we know how to get to a better place. It requires work, time, and some investment to get to the right place. And this is a playbook that we're familiar with. I like where we're going, and we're going to get to the right place. It's less than 5% of the company, so it's a very small business over there, but we really want to have this one being smaller but much more quality-focused than what we had in the past. On the life science side, we're investing now, as we've been investing in many businesses that we've built in the past, so we're conscious on how we're investing in capacity, in capability, in team, in expertise, in technology as well, so to make sure that we can compete with the two or three other big ones on the market as well, but truly aiming at the type of margin that's closer to 30, if not more than that, down the road as well. So very differentiated roadmaps, both for healthcare and for life science. Life science really focused as building a multibillion dollar business in the years to come, and health care really focusing on building a highly quality business, which will remain relatively small in the years to come.

Thank you. Our next question is from the line of Mike Harrison with Seaport Research. Please just use your question.

Hi, good afternoon. Hi, Mike. Christoph, I'm curious about the recent hurricanes and whether you saw any impact on your institutional or specialty businesses. Can you quantify any drag that you saw in Q3? And would you expect that to worsen in Q4 or be similar?

Well, I don't know what's going to come in Q4, Mike, obviously. So I can't talk about events that haven't happened yet. But we've gotten... very good at that uh i'm always heartened obviously um with the human impact uh of those situations uh on our teams and uh more broadly we had a plant in asheville as well you've heard them in the news as well uh but our supply chain team has become such a world-class uh team that's so resilient, so well organized in addressing whatever can happen in the environment of the market out there that ultimately we haven't seen anything in the third quarter from a business perspective. There's a human impact obviously, but not on the business side. We've become so much better from a resilience perspective that I feel quite good with whatever can happen out there, assuming it's something that's in a normal range, obviously. And even those more extreme situations around the world, I've been really pleased with the way we could deal with them. When you think about it, 92% of our sales are produced locally. in a place like in china it's 99 for instance as well and that whole evolution of producing locally for local markets not only has been better from a performance perspective but it has risen as well our resilience levels in in dramatic ways i'm so pleased with our supply chain team didn't used to be a huge competitive advantage in the past. Today and tomorrow, supply chain is a huge competitive advantage that we have as a company, and our customers recognize that every single day, especially in extreme times, because we're always there for them. We never let them down.

Thank you.

The next question is from the line of Vincent Andrews with Morgan Stanley. Pleased to see you. It's your question.

Thank you. Christophe, can I ask you, if you think about your market share gains, whether it's new business wins or increased share of wallet, maybe compared to the beginning of the year or this time last year, however you think is more sensible, how would you characterize them in terms of their pace of acceleration? And are you doing better more with wallet share gains or with new business wins, or is it about the same?

Well, it goes a bit together. When we have a share of wallet, that's an increased market share as well because we're taking it from competition by definition. But we try as well to get to new incremental type of offering. The example I was giving uh before on data centers and microelectronics uh water we use and recycle well those are applications that customers do not have um today so that's an incremental sale that's not a share gain uh because they were not buying uh from someone else which is where we focus um a big part of our attention but the 55 billion i mentioned before which is the focus of One Ecolab. Well, it's Wallachia, obviously, because those are sales that are being generated by competition so far. I like a lot the progression that we have, the fact that our top line is healthy, our volume is improving as well. In many markets where demand is not exactly accelerating, if anything, it's staying kind of stable out there. So for me, our share gains are improving over time. And if I look as well at our new business generation, very healthy as well. That's a good indication for what's to come down the road. And as mentioned before, our innovation pipeline, which helps us sell as well to customers, is stronger than it's ever been as well at the same time. Good indications for the future as well. So good evolution from a shared gain perspective the last 12 to 18 months and good indication for the quarters to come as well with those leading indicators of new business and innovations.

One is not materially stronger than the other in terms of leading indicator.

The new business is the is the closest, obviously, but you know you get new business thanks to innovation as well at the same time. So we don't measure them so separately like that is some double count. If you just you can't add both of them and to say that's the whole pipeline that we have down the road. But the fact that both are record levels is a very good indication that we can maintain our sales momentum and accelerate it as I was sharing before. Thank you very much.

Our next question comes from the line of Charles Neaver with Piper Sandler. Please proceed with your question.

Thanks for taking my question. Just a couple quick things. One, in terms of the fact that oil pricing has dropped quite a bit lately and may continue to drop a little bit more, and I know that's not sort of an effect on a raw material standpoint, but when people are looking for savings and the savings that you can offer them on the energy side, does that drop, will that drop affect your ability to raise pricing further than it might have otherwise gone? Meaning at higher oil prices, the value you save them is bigger. So therefore, price hikes would be bigger. So is this sort of a little bit of a problem in terms of how far you can raise pricing? And secondly, can you talk specifically about Europe? And so, you know, we know it's slow, we know the economy is slow, but is there anything specific? Is it Asian imports? Is it anything that's happening in Europe that is specifically sort of hindering your ability to grow at any, at a better pace? You know, and will it change or can it change in your, obviously in your favor?

Two different questions, obviously here. So, Charles, the first on pricing. Well, the best indication is what happened the last 12 to 18 months where raw material costs were tailwind for us. And we still delivered some very strong value pricing because we are delivering so much total value delivered this TV day. as mentioned before, so to our customers. Ultimately for them, well, it's PVD minus price if it's a net positive. So for the customer, usually it works well. And that's what we've demonstrated over the last two years. So we've demonstrated that even in an environment where delivered product cost is a tailwind, we can generate value pricing as well at the same time. Well, when it becomes a headwind as we expect it to be sometime in Q4 and certainly in 2025. Well, the whole discussion of value pricing is even more important obviously here. So I feel reasonably good at delivering the value pricing in the next few quarters and years to come because we've been able to deliver very strong value pricing easier environment from a DPC perspective. Well, in a more difficult one in the future, it should not make it harder, but it should make it slightly easier. Selling pricing is never something easy, so I want to be careful how I'm saying that as well at the same time. But generally, so that's why I feel really good about 2025, because We have good volume growth. We have steady value pricing. DPC is probably going to become as a headwind. We have good productivity. But the combination of all four together puts us in a very good place to deliver these 12% to 15% in 2025 no matter what, which is something that we've practiced over the last few years. So we know how to manage that, and we'll keep managing it well going forward.

Thank you. Our final question is from the line of Scott Schneeberger with Oppenheimer. Pleased to see you with your question.

Thanks very much. Chris, all the way back to the first question, it was a discussion about how volumes had picked up a little bit. And you mentioned you were really proud of how you continue to get pricing and retention had been quite strong. I just kind of want to ask this as a look back question. About two years ago was when you really started increasing pricing, inflationary environment. And curious, did you see anything really unique or dynamic with retention over the last couple of years, which I imagine is improving now? But just get a little perspective is what I'm looking for over those two years on retention and anything currently on the competitive environment that may influence that as well. Thank you.

You know, the retention rate, which is close to 95%, it's been true for a very long time as a company, hasn't changed in the last few years, which have been kind of extreme years since 2020, as we know. There was COVID and there was the hyperinflation driving the higher pricing as well. We've stayed at the same or very similar retention level, which is why I feel really good about our approach that's been demonstrated over years now in the most extreme of the situation. Our focus on total value delivered, making absolutely sure that our customers get more savings in their own operations by delivering better outcomes, better performance, and better impact. ultimately is more than what we ask from a pricing perspective. So a net-net, very good thing for them, and ultimately a very good thing for us as a company and you as shareholders, obviously here. So retention, very stable. Volume, strengthening. Pricing, strengthening as well at the same time. So kind of a very good balance of all drivers here. So at the end of the day, I feel really good with the momentum that we have as a company, as mentioned to Tim at the beginning, very broad-based across businesses, across geographies, with Europe being the tougher place. It's always going to be the case. I've been living there for half of my life as well, and we know how to win in Europe as well at the same time, which is driving, ultimately, so margin improvement, driving productivity and delivering so these 12 to 15 EPS growth feel really good about where we're heading for 2025 and for the years ahead and ultimately get to this 20% ROI margin. That's the next step, but my focus is already beyond the 20% and making sure that we can grow beyond that for the benefit of all our shareholders. So that would be in summary how I would look at it.

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. Hope everyone has a great rest of the day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.