Ecolab Inc.

Greetings. Welcome to the Ecolab second quarter 2025 earnings release conference call. At this time, all participants are in listening mode. The question and answer session will follow today's formal presentation. If anyone should require operator assistance during today's conference, please press 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. Andy, you may now begin the presentation.

Thank you, and hello, everyone, and welcome to Ecolab's second quarter conference call. With me today are Christoph Beck, Ecolab's chairman and CEO, and Scott Kirkland, our CFO. A discussion over 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 factors section in our most recent Form 10-K and 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 for his comments.

Thank you so much, Andy, and welcome to everyone joining us today. the Ecolab team delivered another very strong quarter. Once again, very consistent with our guidance. Our team's relentless focus on execution and delivering exceptional value to customers enabled us to achieve double-digit earnings growth despite the unpredictable global operating environment. Organic sales continued to grow to a certain extent, led by strong value pricing, solid momentum in our core business driven by our one Ecolab strategy, that's working really well, and fueled by breakthrough innovation, as well as steady, strong performance from our growth engines. This good momentum more than overcame an even end-market demand, particularly in our paper and basic industries and businesses, which represent only 15% of Ecolab's total sales. In other words, the remaining 85% of our business grew organic sales 4% and operating income by 18%. reflecting our broad and resilient business portfolio. This is a major strength of Ecolab, allowing us to deliver superior performance in good, like in more challenging times. Now, let me spend a few minutes on our key growth drivers and talk about why I remain very confident about our future in 25, in 26, and beyond. First, on value price. It continues to build in the second quarter, increasing to 2%. This growth is supported by increasing value that our technologies and services bring to customers as we help to deliver best-in-class business outcomes, operational performance, and environmental impact. During the second quarter, we also began implementing our trade surcharge for all customers in the United States only. Given the dynamic international trade environment, this surcharge, coupled with the expertise of our world-class supply chain team, enables us to reliably supply our customers while delivering value that exceeds the total price increases. With this now in place, we expect our total pricing to strengthen closer to 3% in the third and the fourth quarters. Next, the growth in our core segments like institutional and specialty and global water. while both continue to progress very well. In institutional specialty, we continue to drive robust share gains, allowing us to continue to outperform the industry while overcoming the headwind created by the strategic decision to exit a few non-core, low-margin business. These exits, which are mostly in our hospitals and retail businesses, are causing a one to two percentage point drag on institutional specialty second quarter growth. But they're also helping us to further enhance our focus on the most critical customers and at the same time to further improve our long-term margin profile. So all in all, a very good story. In global water, performance was led by food and beverage, which accelerated to 3% organic growth by executing very well on our one-ecolab growth strategy that provides customers with a comprehensive hygiene and water offering that actually no one else can truly provide. This strength more than offset the software performance in more difficult end markets in paper and basic industries, as mentioned before. Excluding these businesses, global water sales growth accelerated to 4% and operating income grew double digits. Finally, Ecolab growth engines, which include best elimination, life sciences, global high tech, and Ecolab digital continue to perform exceptionally well. Collectively, these businesses make up nearly 3 billion of Ecolab's annual sales and grew double digits in the second quarter. Pest elimination organic sales growth accelerated to 6%, benefiting from our one Ecolab growth strategy and also the shift to our digital pest intelligence model. As expected, operating income margins increased sequentially to nearly 20%. And as we continue to deploy pest intelligence, in the next coming years by leveraging our major digital capabilities, we expect to generate steady, strong sales growth and very attractive operating income margin expansion. Life sciences grew mid-single digits, led by strong double-digit growth in biopharma, as well as in core pharma and personal care, while performance in water purification was partially impacted by shorter-term limitations in production, and we are at full capacity. Also, OI grew significantly, benefiting from the strong growth in our high-margin biopharma business. We expect reported OI margins to stay in the mid-teens as we invest further to fill this long-term high-growth business with OI margin potential of 30%. Also, our global high-tech business continues to grow very rapidly, with sales up over 30% and operating income margins exceeding 20%. We're just at the beginning of this incredible growth story. But this is one we will own by leveraging our vast expertise in cooling for data centers and water circularity solutions for microelectronics production. And finally, Ecolab Digital kept accelerating sales growth to nearly 30% in the second quarter, reaching an annualized run rate of $380 million, driven by rapid growth in subscription revenue and digital hardware. This exceptional performance, combined with value price and share gains across the businesses, drove a 170 basis points increase in Ecolab's second quarter operating income margin. While commodity costs anticipated to keep increasing by low to mid single digits in the second half of the year and into 26, we expect our operating income margin to continue to expand at steady levels due to growth in high margin businesses, value price, share gains, and productivity improvements. In total, We continue to expect our full-year 2025 operating income margin to reach a solid 18% on our path to deliver a 20% ROI margin by 2027, and I've mentioned we will not stop there. Looking ahead, most business fundamentals seem to be turning up, which provides me with the confidence to deliver 12% to 15% adjusted EPS growth for the quarters to come in 2025 and into 2026, as we also keep investing in our growth engines. Our experience in navigating past macro challenges has only strengthened our capabilities and agility. With our diversified portfolio, record innovation pipeline, strong growth engines, and focused execution, we have plenty of options and levers to deliver on our commitments in almost any environment. Our unique ability to provide innovative solutions that drive best-in-class outcomes, enhance operational performance, and conserve vital resources like water and energy for all our customers is crucial, or more crucial than ever. With a strong and resilient free cash flow, an extremely strong balance sheet, and a super low leverage ratio of 1.7, we are very well positioned to capitalize on both organic and inorganic growth opportunities. These strong foundations enhance our ability to create significant value for our customers and drive attractive returns for our shareholders. I therefore remain very confident in our ability to deliver sustained, strong performance in 2025 and beyond. So thanks again for your continued trust and your investment in Ecolab. I look forward to your questions.