Ecolab Inc.

Greetings. Welcome to the Ecolab first quarter 2025 earnings release conference call. At this time, all participants are in listen-only mode. The question and answer session will follow today's formal presentation. If anyone should require operator assistance, please dial star zero from your telephone keypad. As a reminder, this conference is being recorded. At this time, it is now my pleasure 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 first 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 supplemented 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 today. Really pleased to share the results of another strong quarter of double-digit earnings growth, thanks to our team's focus on delivering best-in-class outcomes for our customers no matter what. This is Ecolab at its best, demonstrating the strength of our team, our proven operating model, and the breadth and health of our business. Our superior performance reflected solid 3% growth in organic sales and strong 12% growth in EPS, as we continue to significantly outpace soft-end markets. This was driven by our team's ability to achieve attractive market share gains through our One Ecolab growth initiative and increased value pricing, all supported by our focus on delivering exceptional value to our customers, as we've always done. This good top-line momentum, along with improved productivity from our investments in digital technologies, drove a 190 basis point increase in our operating income margin. And this marks another important step in executing on our objective of delivering a 20% operating income margin by 2027, as we've talked many times. Well, looking ahead, the complexity of the global operating environment is increasing, with softer end market demand and rapid changes in international trade policies. With external conditions changing, we are naturally making proactive adjustments to our near-term delivery path. But importantly, our overall expectations for earnings this year remain unchanged. At the same time, we're continuing to make smart investments in our growth engines to fuel our top line, expand our margins, and build our future. So let me spend a few minutes on each topic to share what we are seeing and explain why I believe we're well positioned to deliver strong near and long-term performance. First on demand, we saw end market trends soften a bit, particularly in the heavy industrial markets, as customer production rates in some industries have eased. We've outperformed these trends because the technologies and services we provide to our customers are absolutely critical to their operations as they leverage our latest breakthrough innovations. And additionally, we also helped them significantly reduce their total operating costs, which they need now more than ever. And this led to a very strong new business in the first quarter. Kind of a record, actually. These were broad-based wins across our businesses and markets around the world, showing that our value proposition continues to resonate with customers. With demand has stabilized over the past few weeks, we expect it to remain soft for the remainder of the year. As such, we remain on offer. fully focused on generating new business and on installing our strong existing new business pipeline to continue to outgrow our markets and, as always, to gain share. Now, regarding the rapidly changing global trade environment, we're much better positioned than most, but we're not completely immune. A robust and agile global supply chain is a true competitive advantage that sets us apart in the marketplace. And as we've demonstrated for decades, We dare for our customers when they need us the most. No matter what, we will never, ever let them down. Through our local for local model, we've strategically positioned ourselves so that more than 90% of our sales are produced close to our customers, allowing us to effectively navigate challenges like this with quite a high level of confidence. We're therefore leveraging the strength of Ecolab to mitigate the impact of the 10% global baseline tariff. However, global tariffs greater than 10% and 145% tariffs placed on China are having broader impact on the cost of some raw materials, packaging, and some equipment. Even though we don't import much from China, we expect the annualized impact from tariffs and increased local supplier costs due to higher on-shoring demand to be a few hundred million dollars. To mitigate this impact, We recently announced the 5% rate surcharge for all customers in the United States only. This surcharge leverages the tools and capabilities we built a few years ago to ensure we can reliably supply customers while also delivering value to them that exceeds the total price increase. So it's a win-win situation. So we expect the benefit from the trade surcharge to build over the coming months with full implementation beginning in third quarter. As a result, we anticipate organic sales growth in the second quarter to be similar to slightly better than the first quarter as we accelerate in the second half. While we focus on executing well to overcome the challenging near-term operating environment, we're also continuing to invest in our long-term growth engines, including life sciences, pest intelligence, global high-tech, and Ecolab Digital. Each of these engines are at different stages of development that all are performing very well with attractive long-term growth and margin potential. Life Sciences, which is now a standalone segment, grew organic sales mid-single digits and delivered organic operating income growth of more than 30%. With this, our biopharma business grew sales double digits, driving attractive share gains as we leverage our investments in breakthrough innovation, global capabilities, and capacity expansion. Further investment in this attractive business will continue to have a near-term impact on operating income margins. However, we firmly believe it positions life sciences very well to accelerate its long-term growth and deliver operating income margins close to 30%. Our pest elimination business continues its rapid deployment of pest intelligence. Ecolab's proprietary digital solution that provides real-time insight into pest activity for customers across their enterprises. This program is growing extremely fast, and we're able to deliver even better pest-free outcomes for customers with enhanced service capabilities. As mentioned during prior calls, we're investing heavily in this program, which has impacted growth and operating income growth near-term. We'll begin annualizing these initial investments pretty soon. And as a result, we expect operating income margin for this segment to get back closer to 20% in the second quarter. We expect this program to fuel continued attractive sales growth and even further margin expansion as it's deployed over the next few years. In global high-tech water, business continues to perform exceptionally well as we deploy breakthrough innovation to the significant and expanding market. Global high-tech sales growth accelerated to nearly 30% leveraging our leading innovation and global capabilities to develop water circularity for microelectronics productions, as we call FABs, and high-performance cooling for data centers. And finally, as promised, this quarter we began reporting top-line performance for Ecolab Digital. This includes lease revenue from technology hardware like 3D Tracer and software subscriptions like Water Quality Intelligence. In the first quarter, Ecolab Digital grew sales 12% to 80 million or 320 million on an annualized basis, driven by extremely strong growth in subscription revenue. We expect this growth rate to accelerate throughout the rest of the year and beyond as we expand our digital offerings across our customer base and across Ecolab businesses to capture more of this multi-billion dollar high margin growth opportunity. As these growth engines continue to scale, we expect they will increasingly impact Ecolab sales growth and operating income margins in the years to come. So in closing, we're clearly planning to win, and we're very well positioned to navigate this complex external operating environment. And I'm confident that the best of Ecolab is still ahead of us. Our unique capability to deliver innovative solutions that help our customers achieve best-in-class outcomes, enhance operational performance, and conserve natural resources like water and energy and indeed now more than ever. Our strong and resilient free cash flow combined with an extremely healthy balance sheet with over a billion in cash and a 1.8 times net debt to adjusted EBITDA ratio puts us in a unique position of strength to take advantage of both organic and inorganic growth opportunities. This in turn allows us to deliver even greater value to customers and attractive returns for shareholders. I'm confident we are well positioned to deliver another strong in 2025 and beyond. So thanks again for your continued trust and investment in EGOLAB. I look forward to your question.