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.

Thanks, Christophe. That concludes our formal remarks. One final note before we begin Q&A. As a reminder, we'll be hosting our Investor Day on September 4th in Minnesota, where Ecolab's senior leadership team will provide an in-depth review of the company's strategy to drive strong growth and attractive margin expansions. This event will also include interactive sessions showcasing ECOLAB's latest breakthrough innovations. Please contact me if you're interested in joining us. With that, operator, would you please begin the question and answer period?

Thank you. If you'd like to ask a question at this time, you may press star 1 from your telephone keypad, and a confirmation tone will indicate your lines in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question per caller so that others will have a chance to participate. If you have additional questions, please rejoin the Q&A queue. One moment for our first question. Our first question is from the line of Tim Mulroney with William Blair. Please proceed with your question.

Kristof, Scott, good afternoon. Good afternoon, Tim. Yeah, so for my question, I wanted to ask, you know, TAB, Mark McIntyre, I think some folks works we're thinking, maybe that you would raise your your guide or maybe the the low end of the guide. TAB, Mark McIntyre, A little bit this quarter so so even though the second quarter came in line with expectations. TAB, Mark McIntyre, I think some folks are maybe expecting a little bit more for the second half of this year, can you just walk us through the puts and takes here is there is there may be some conservatism being baked in here or is there. Maybe something else that I'm not seeing. Thank you.

Thank you, Jim. It's actually a combination of both conservatism and at the same time, investing further in our growth businesses. 13% growth on earnings for the second quarter, getting these twice to 15 for the second half and beyond. For me, this is the commitment I've made to all of you guys. And this is where I want to make sure that at least I deliver that. Actually, I really like where we are right now. So we have good momentum with, as mentioned, 85% of our business growing 4%. And the growth engines, the one I mentioned before, that represent close to 3 billion in sales, well, they're growing double digits. So our investments in growth are really working. Second, the macro trends around water for AI infrastructure, purification for life sciences, and productivity for hospitality and best intelligence, well, they're all trending in our favor. It's a good thing. And our business fundamentals of new business, innovation, value price, productivity, they're all trending in a positive direction. So I'm with you. I feel good about where we are, where we're going about the second half and for 2026 and beyond. But as we know, the world is a bit of a complicated place. And we honestly always build some room for the unexpected. And the last few years, while we had plenty of this and some could call it conservatism, for me is making sure I can deliver what we've promised. And secondly, we keep investing more in our growth engines to fuel this long-term momentum in life science, in data centers, in fabs, in pest intelligence, in ecolabs, digital, and ultimately this will keep paying dividends in the long run for all of us. So bottom line, I think we're in a very good place. And any overdeliveries that we will get in the quarters to come and years to come, will be shared between returns for incremental returns for investors and incremental investments in our gross businesses. So all in all, I think it's a win-win for the company and for investors as well at the same time. For me, as I've mentioned, this 12 to 15 is not an ambition. It's a commitment, and anything that comes above will be a combination of returns and investment in our gross businesses.

Our next question is from the line of Manav Patniak with Barclays. Let's just use your question.

Thank you, Christophe. I just wanted to touch on, you know, pricing and, you know, from a volume perspective, obviously, as you mentioned, there was, you know, an uncertain case, et cetera. Just can you help us dig through what you're hearing, what you're seeing on the pricing front? I think, you know, the 2%, I believe, was supposed to be two and a half to maybe a bit higher. If you could just talk about what we should expect in the second half with and without the surcharge pricing that you have coming in?

Yeah, thank you, Manav. I like a lot where we are on pricing. And keeping in mind it's value pricing, we've made that commitment to customers as well that we will always deliver more value, which means cost savings in the operations, than the incremental price they paying for us. It's kind of a value share. pricing in our company. So 2% in Q1, 2% in Q2, starting the US trade surcharge as well in the second quarter. So far, so good, but it's always a start during the quarter you announce it. So for Q3, Q4, I expect pricing to move closer to Q3. So I don't know exactly where we're going to land in Q3, but in Q4, it's going to be three. Hopefully, it will be three or close to three as well in Q3. But all trending up. And again, backed by the value delivery for our customers. And what's most important is that the retention of our customers, which is something that we look at very closely, is getting stronger as well at the same time. And as you see in the volume, positive as well, especially strong in our gross businesses. So all in all, it's working well. And I see value price as a good revenue stream at 100% margin for us and in ways that are driving savings in our customers' operations as well at the same time. So it's working really well.

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

Thank you for taking my question. So just wanted to focus on the pest elimination business where we saw an improvement. Can you talk about some of the efforts around pest intelligence, how those rollouts are coming together, and how should we think about the puts and takes for growth going forward? Thanks.

Thank you, Ashish. We love that business. Pest elimination is just an unbelievable story, which will shift towards pest intelligence over the next few It's not going to take forever, but we're going to move from best elimination, the business that we have today, with our people going and visiting every location and looking at every device at our customers' locations, which are millions around the world, to best intelligence, where most of it is going to be done 24-7 remotely with our team, ultimately. So going to the places where they can add value and not chasing devices. means mousetraps that are empty. We are on an unbelievable journey with that. The huge advantage we have is that as Ecolab, well, we have massive capabilities in digital, in sensing technology, the Ecolab 3D clouds. We have all it takes to put that into practice. in our best elimination business. As I've shared with some of you as well, the last few months, we've concluded one of the major retailers here in the US, which was our pilot, making sure it was working from a technology perspective, from a model perspective. And interestingly enough, when we think about the pest-free ratio, the industry is at 92% today, which means 92% of the customer locations are pest-free. The average for Ecolab is 95%, which is better. You still have 5% of the locations that are not test-free. pilot that we deployed is showing that we can deliver 98 trending to 99 would never get to 100 because it's nature obviously but 99 seems to be um the right number so great outcome the model is working the customer is ready with uh is open and ready with the financial model as well at the same time we're moving to a second retailer as we speak The third one is lined up as well, so for the months to come, and we'll expand as well across all our end markets in the months and quarters to come. I think that whole business in the next few years is going to become a full pest intelligence-based model with a new financial model, obviously, that's driving more growth, better margins, and most important, 99% pest-free environment for our customers. So a very good story.

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

Yeah, good morning, Mark. Good afternoon. Thanks for taking my question, Christoph. Can you help us to think about the delivered product cost that you saw in this quarter and how you're thinking about that as you go into the second half? It seems like there's kind of still a lot of moving parts around tariffs and headwinds around that, raw materials, kind of some of them fading, some of them pushing higher. So can you help us to think about those trends?

Yes, John, a lot of moving pieces, to say the least. We've been used to that. Let me ask Scott just to start with the answer.

Yeah, absolutely.

Hi, John. Yeah, on DPC, so similar to Q1 and Q2 commodities, so the market, if you will, was up low single digits, which includes the impact of tariff and tariff-related inflation, which we're seeing. But the net DPC was slightly favorable as we've gotten efficiencies from our great supply chain team. So we expect... James Rattling Leafs, The market the commodity inflation to be up that low single to mid single digits. James Rattling Leafs, In the quarters to come, ultimately, depending on the tariff impact, but we expect to continue to do better than this, with the impact from our supply chain team which we're seeing in the results of our gross margins being up 100 basis points in Q2.

James Rattling Leafs, So the combination of supply chain doing. an amazing work to get a net DPC that's favorable and value price that's trending positively as well is obviously driving a very positive equation for our margins, which is one of the reasons why our gross margins went up 100 basis points, okay, in Q2.

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

Thank you. Good afternoon. Christophe, on the U.S. surcharge, do you still expect to realize roughly half of what you announced? And are you seeing competitor support for this surcharge? And lastly, why not anything on the international side in terms of the surcharge? Thank you.

So a few questions in there, David. So first, on competitors, they've announced a trade surcharge. I'm not in their books, obviously, so I don't exactly know what they're doing. The good thing is that we're gaining share, again, all of them, which is a good place to be. So good that they're all participating and that we're winning as well at the same time. The second, in terms of delivery, Um, it's an imperfect, uh, science, uh, as we know, but generally working, uh, as you've heard. So, from Scott, when we look at, uh, uh, tariffs, uh, uh, increase of prices by local, uh, manufacturing concentration. our optimization in supply chain plus the trade surcharge. It's a net positive and you see it in our margins. Ultimately, the mechanics work really well for us and for our customers, which is exactly where we want to be. And the third part of your question, international, We have all it takes to get it done. It's just that today, as you know, those trade deals with the economies around the world, well, are unilateral. So it's a tariff you get when you import or you export to the US, not when the US is exporting to other markets. At least we haven't seen those. The moment we see those, if there is a reciprocal action from any market out there, we have the mechanics. We know how to make it work. We've used it with energy surcharge in 2022. We can use it. So far, we don't have any reasons to do it. So we will not use it as long as the tariffs remain as they are to export to other countries.

Thank you. The next question is in the line of Chris Parkinson with Wolf Research. Please proceed with your question.

Great. Thank you. Christoph, despite a pretty sluggish macro environment, your margins in institutional life sciences seem to be moving in the right direction. And on one hand, you've been talking about price, presumably productivity and portfolio rationalizations on the positives versus presumably a still pretty sluggish macro and perhaps a little bit of growth spend on the opposite side of it. But just You know, in the context of the macro we're in, what do two key results tell you about your longer term opportunities by segment? Thank you.

Great question, Chris. Well, what it's telling me is that it's working because INS has reached the highest level of margin they've never had in their history. this team is doing unbelievable work by really focusing on what customers need the most. And it's labor automation, labor optimization, whatever the words are. They have a hard time to get talent, and the talent they're getting is at a higher cost, which in a way is a good thing for the general environment, but not so much for the P&L of our customers. So when I look at automation solutions, for our INS customers, it works for them, it helps them reduce their costs in dramatic ways, which means that we can get some of that value share in our value price. So that's good for us, good for them. Same time, we also leveraging technology within INS, really pleased with Way IMS is embracing digital technology, one Ecolab platform that we've developed for the whole company, for the whole IMS as well at the same time. So we get an improvement as well at the same time from an operating performance perspective, which is really good. And the third thing is that because of that better service, better outcome, better productivity for our customers, We gain share as well at the same time. And you see the growth of INS is really good. It's even been impacted one to two points by those exits, as I mentioned before, which were private label businesses, which didn't have much to do with our service business, by the way. Well, we're gaining share. And that's showing that it's working. Customers like it. So the combination of all three, gaining share, driving value for our customers and driving operational performance within INS well next to the highest margin in our history in INS and it's going to continue on that good trajectory so for the quarters and years to come.

Our next question is from the line of Vincent Andrews with Morgan Stanley. Please receive your question.

Thank you, and good afternoon, everyone. Wondering, Christophe, if you could speak a little bit to, I believe in your prepared remarks, and please correct me if I'm wrong, you mentioned that you were maxed out on capacity in certain parts of the water business. So I'm just wondering if you could expand on that a little bit. And likewise in PEST, it sounds like these customer trials are going extremely well. So I'm wondering, you know, sort of what the S-curve of the implementation of that new technology, your better mousetrap, so to speak, what the timing and pace of that's going to be, and if there are any potential capacity constraints there that you need to get in front of.

Yeah, so two different businesses. Obviously, it's our best intelligence with the better mousetraps, which are truly better mousetraps. It feels easier to do than it truly is. to get that working really, really well millions of times around the world where we operate with best elimination and in the future, so best intelligence. We wanted to make sure it was working before we go too far, getting ahead of our skis and not delivering the value to our customers would not be the right thing to do. Obviously, having one of those great retail partners which is a reference point in the U.S., was exactly what we wanted to do, and it worked. And now we're getting second, and as mentioned, the third one as well. I think it's going to take a few years. It's going to take less than five years, hopefully much less, but let's see, to shift the whole business towards best intelligence. We have a great team with a great leadership. and customers that really love what's being done. At the same time, we have digital capabilities that none of our competitors do have. So that should be all positive, obviously, for us. In life science, You're right, so we've got some capacity limitations in our water business, so within life science, water purification, the life science business, but not for the pharma business directly. Pharma, biopharma, as mentioned, is growing double-digit, very strong, very good, really pleased to see that all the work that we've done over the past two, three years since we acquired Pure Light ultimately is paying off and really looking some really good momentum and most importantly great acceptance by our customers and in the second quarter so we had maintenance that was planned in one of our plans in Europe that limited how much we could produce there and that had a slight impact on our production over there that plant that's okay uh we need to live with it that's not much to do with demand um obviously so kind of business as usual the next question comes from the line of patrick cunningham with city please cease your question hi good afternoon thanks for taking my question yeah maybe just a related follow-up there on water and i think that

operating income growth was rather modest relative to solid pricing growth and good underlying growth there. I think you cited supply chain costs and unfavorable mix, but I think our assumption was some of these faster growing markets had better mix. So what was the source of that unfavorable mix?

Scott, do you want to answer that question?

Yeah, I happen to do it, Patrick. As Christoph noted in his opening, basic and paper have been a drag and And that water OI growth of 6% was all due to basic and paper. If you look at the water OI growth excluding both basic and paper, the sales were up 4% and the OI was up strong double digits.

The next question is from the line of Shlomo Rosenbaum with Stiefel. Please receive your question.

Hi, thank you very much. If you don't mind, I'm going to ask a little bit more of a two-parter. First one is just on the organic growth. If we're kind of bouncing around at 3%, And, uh, you know, volume is only kind of 1% here, you know, are you still, do you still have the same level of confidence on that operating margin target? You know, especially if we don't start to see a material improvement in, in the volume side, and then just want to touch on what you said on pest, uh, in terms of morphing the model, uh, cause we've had a couple of quarters of growth that were lower that we're used to seeing in that, in that business is, is part of the shifting the model. giving you a near-term headwind to revenue growth in that business? Thank you.

Thank you, Schloman. Yeah, two very different questions. So on best elimination, the short answer is yes. The shift towards best intelligence is not an obvious shift. It's a pretty significant shift within our organization. It's new technology. It's a new route model. It's a new financial model. It's a complicated piece, if I may say so, to make it work really well. And on top of it, as you know, We had a few incidents that we had to deal with, unfortunately, as well, caring about our team that's so important for us in the company. So it was kind of behind us. Now we keep investing on best intelligence because It's going to help us really lead that transformation in that industry in the US and around the world, not just in terms of amount of devices, but in terms of type of technology and business model as well at the same time. So it requires some investments, financial investments, but resources as well at the same time, which are people, obviously. So doing that work generally feels good with the trajectory we have. on the top line in terms of model as well. So the 20% plus is going to just strengthen with that shift in model in best intelligence So generally a very good story. Those transformations are never obvious and it's not a straight line to heaven either, but great leadership team, great team executing very well. And as mentioned before, so customers very pleased with how it's working because at the end of the day, well, it's aiming to the 99% best free environment that matters. Now to the first part of your question. My confidence to get the 20% by 27 just keeps getting stronger. If we look at the second quarter, well, with offline growth of 3%, being able to deliver 13% earnings growth and operating income margin up 170 basis points, obviously it's kind of a demonstration of what accelerated growth could mean. as well as for the delivery of the company. And as mentioned, we have two businesses, and there will always be a few businesses that are not exactly in a great place. That's the strength of the portfolio we have as a company here. So this paper on basic industries, well, 85% of the company is growing 4%, and 20% of our growth engines are growing double digits. as well at the same time, and that's where we invest. So generally, the mix of growth is going to turn positive, and that's going to help us get closer to the 20% quicker as well at the same time. So I can't judge what's going to happen in the outside environment, but generally, I feel really good about the 20% by 27%.

Our next question comes from the line of John Roberts with Mizuho Securities. Please proceed with your question.

Thank you. With the balance sheet now in great shape, how would you characterize the pipeline for inorganic growth? It's been a while since the PureLight deal.

It's been a while, end of 21. We did PureLight. We did a few smaller acquisitions in the meantime, which is the bread and butter of our M&A engines. by the way, and sometimes we have a few bigger ones. And you're right, we have great cash flow, great cash flow conversion, very low leverage ratio, and it's going to keep getting lower, obviously, as time passes by. It's putting us in a great position to invest where it makes more sense. And John, we're going to keep investing as we always done. It's first in dividends. It's in our business and we have plenty of opportunities. We talked about innovations on this call. It's on our customers' technology as well, in dispensing, in dish machines, in equipment, and so on, as we've always done. And then there is the M&A. I really like the pipeline that we have. um very focused on the three areas that have been priorities for me water and especially on the high-tech side data centers and microelectronics so perhaps in other words in life science and in digital technology so i really like the pipeline we have the capabilities we have at the same time but we will always remain disciplined as well in terms of how we deploy our capital. So if we find the right things, and as mentioned, there are a lot of right, good things out there for us, we will move and we'll let you know, obviously. And as a lot of priority will always be buybacks, as we've done in the past few years, and as we're doing as well in 25 at the same time. So I don't think we could be in a better position right now. So we have a great machine generating a lot of cash. a fortress balance sheet, great opportunities in front of us, and priorities that haven't changed for a very long time.

The next question comes from the line of Jeff Stokakis with JP Morgan. Please receive your question.

Thanks very much. In the water business, the organic change was 2% Bill Meyers, The Capacity Collective, And I think your water business grew maybe volumes grew one please correct me if i'm wrong. Bill Meyers, The Capacity Collective, and. Bill Meyers, The Capacity Collective, Your overall price for the company was you know 2% but it seems that it was lower in water, so it is the challenge for the second half to get better pricing in the water division and do you need it in paper. And in heavy industry where you're contracting a little bit, is that the challenge for the second half in pricing?

No, I don't think so. Our world of business has always been pretty strong at driving value price backed by total value delivered. They've invented actually that concept a long time ago. So, they know how to do it. They've been good at delivering it. Same time. We make absolutely sure that we get the value price when we truly get as well. So the, the cost savings within our customer operation. So, we, we know this closing by segment, as you know, so price and volume, but. You're more right than not. So with your assumption on water, which makes me feel good, actually, and as mentioned before, so water organic growth X paper basic industries, well, would be full. So it's a very good story, as Scott mentioned as well. And the operating incomes would be up in the meetings as well at the same time. So a really good story. So for me, Jeff, it's really focusing on what grows best in water. It's global high tech, data centers, And especially so microelectronics, these two growing collectively, so 30%, very good. The rest of the business is growing nicely. And we have those two businesses that are not growing, paper and basic industries. But I think that that's going to change at some point. Basic industries is, as you maybe or maybe don't know, it's our steel business. It's our power business and it's our chemicals business are in there. Well, those ones with what's happening around us with the whole trade negotiations, I think ultimately are going to turn better as well over time. And the paper business is very much related to consumer goods growth as companies grow out there, the FMCG of that world. So those ones are going to be okay. It's never going to be a great growth, but it's going to be okay as well. So if I put it all together, 85% is going really well in that water business. 15%, a little bit more challenged. Margins are really good in the businesses that are growing fast. And our growth businesses keep accelerating, especially in the high-tech sector. So generally, water will be in a good shape.

Thank you. The next question is from the line of Andy Whitman with Baird. Please proceed with your question.

Great. Good afternoon, and thank you for taking my question. I guess I wanted to ask about free cash flow and just try to understand a little bit more about what's happening here. As I look at it on a year-over-year basis and normalize it for days, like the inventory, up just a smidge. Receivables are up more than a smidge. And payable days are actually extended as well, yet every year the cash flow is down. And year to date, you're about 65% of your adjusted net income. I know you always target 95%. And so, obviously, the second half is going to have to ramp if this year is going to be a 95% year. So, I guess, Scott, maybe the question is, do you still expect it to be a 95% year or And maybe what happened in the first half, or did anything happen that's unusual in the first half that we should know about that maybe has you at or slightly below plan for the year?

Thank you, Andy. I'll pass this to Scott.

Andy, on cash flow, the high-level answer is on the year. I expected the pre-cash flow conversion to be right around 90%, which is our historical trend. As you think about cash flow for the year, what you might not recall in Q1 is that we had an unfavorable year-over-year comparison. If you look at Q2, the free cash flows were actually up 17% year-over-year, driven by the great earnings growth. But in the year to date down because of that Q1, and we had this really strong comp the last year, and it was just due to the timing of cash payments. And then that 90%, as I said, we expect to deliver for the full year. It's driven by the strong earnings growth. But as you might also recall, I talked about CapEx will be a little bit higher this year, around 7%, which is why it's at 90, not maybe closer to 95%. But I feel very good about the free cash flow trajectory. But because of the Q1, the year-to-date number looks a little bit funky.

Our next question is in the line of Matthew Dillow with Bank of America. Let's see if you have a question.

Yeah, thank you. Good afternoon. Margins in life science were poor. pretty strong on the quarter. Can we just dive into that a little bit and maybe what's driving the expected quarter-over-quarter drop back towards the mid-teens from the nearly 20% on the quarter itself?

It's two things, actually, Matt. When you think about life science, there are Margin growth in Q2 was especially driven because pharma, biopharma had great growth and they had the highest margins as well at the same time. So the mix of margins was highly positive in the second quarter. So very good story to that great outcome as well at the same time. Interestingly enough in that business, it's a little bit depending on the deliveries as well that you can have, you know, price per pound is absolutely huge in that business so depending on the exact timing of deliveries it might be on one quarter or the other one which is totally fine there's no cyclicality in that business year over year it's pretty steady but quarter by quarter so you might have some timing differences related to deliveries but what's most important is that as I've shared so Many times we keep investing in that business. We are the small, agile of the three players in that industry on the planet, and one remains. So we keep investing in that business. So you get mid-teens type of reported OI margin. The true underlying are closer to the mid-20s. out there, so it's kind of investing the difference in capabilities, means innovation, people, R&D in the world and capacity in plants as well at the same time in order to really fuel that business and get to that leadership position that we're looking for as a business here. So it won't be a straight line to heaven, but a very strong performance I've always been bullish about that business. Well, the results so far this year are very strong, and they're going to keep getting stronger. So it's a really good story that keeps getting stronger, but I want to make sure I keep investing as well at the same time. That will have an impact on our OI margin for a while.

Our next question is from the line of Mike Harrison with Seaport Research Partners. Please receive your questions.

Hi, good afternoon. Just looking at the balance sheet and the 1.9 billion in cash on the balance sheet is kind of an elevated number. I know that you have about $600 million worth of notes that are coming due, but any other explanation of why that cash balance is getting so high and kind of should we expect that to remain high, you know, adjusted for that $600 million of notes payable?

Hey, good to hear you, Mike. I'll pass it to Scott, obviously.

Yeah. Hey, Mike. First, I'll just start by saying our priorities around capital allocation have not changed. As Christoph said before, it's dividends and best in the business and what's left over. We think about buybacks. As he said, balance sheet's in a great position. Net leverage is down to 1.7. And just for reference, our long-term target is around two times. So in a very good position, as you said, about $1.9 billion at the end of Q2. That included $500 million from a bond offering we did in June. And that was in advance of a Euro maturity of about $525 million that we paid down in July. So there was a little bit of a timing from the bond offering on the maturity here. But still, even after that, cash remains high. But it's really the fact that we have this strong balance sheet, and we like the optionality it gives us to create value, particularly in this environment. Right, as Christoph said, we get to invest in the business, capabilities, capacity, firepower, innovation, but at the same time, we have a very good M&A pipeline that we'll be opportunistic about, but also very disciplined and in a great position to enhance value by investing in those growth engines that he talked about, water, GHG, life sciences, digital, but be disciplined about it to make sure we drive great returns. So we like the position we're in.

Next question is in the line of Lawrence Alexander with Jefferies. Please receive your question.

Hello. So one question about the gross investments that you're doing in the three gross areas or the three priority areas. How do the IRRs and cash paybacks or payback periods compare with the more traditional investments? that Ecolab would do in the institutional and in the Nalco business in the 90s, 2000, 2010. Can you just give a sense for if there's any material difference in the economics that you're seeing?

So I don't have an exact answer to that. I don't think that Scott has one either, but it's for businesses. And depending on how you count, it can be even five, because it's life science, it's GHG, so global high tech, which supports data centers and microelectronics, it's pest intelligence, and it's Ecolab Digital. All four or five are growing very fast. So close to 3 billion, growing double digit, which margins that are closer to a 30 than a 20. That's a very good story. So if margins are over average, and as you know, we invest as we go as a business, as a business model principle, basically, well, we should have a return that's higher than the average. That's my rocket scientist math. I'm not the science guy, but that's the way I would look at it, and that's why I keep investing in those businesses where I know they will be booming. When we think about biopharma, well, this is the future of pharma. When I think about data centers, well, we're growing 30%. We have technology that no one else has in order to really help data centers shift the power that's being used for cooling, which is 40% of the power by the way, towards computers. When we think about microelectronics, think about one of the big microelectronics manufacturers in Asia, in the world, today uses as much water as one of the largest food companies in the world in one year. So you put those two numbers together and say, well, water solutions will be game changing for that industry. Pest intelligence, we talked about it. And Ecolab Digital, that's doing unbelievable work under David Bingenheimer's leadership here. It's been a year, 380 million annualized business, growing 30%, a very high margin. Those are all businesses that are going to be great down the road. For me, I know it's higher than average in terms of return, and it's definitely the right thing to do.

Our next question is from the line of Josh Spector with UBS. This is his third question.

Hi, good morning. I was wondering if you could size how much you think you're reinvesting in the business today versus what you thought you would do in 2025, six months ago. And if you could just help us understand kind of where that is going, I guess, in the context that your SG&A is actually down year over year, where is that going? And kind of how do you think about the timeline of that payback? Somewhat similar to Lawrence's question. Thanks.

You know, it's a difficult question to answer here, but you've heard from Scott in terms of GAPEX, so it's been one percentage point plus that we've invested this year. And since it's working quite well, it's maybe something we might be continuing to do as well. In SG&A, it might be half a point. It depends how you define that very clearly, but we want to make sure that it's focused on three things. The first one is safe firepower, which means serving customers. Second is digital technologies. And third is one Ecolab. This is where we invest, how we invest, and really making sure that we build those businesses as strong as we can. So I hope it's giving you some perspective on how we're thinking about it. But at the same time, like the life science example before, I want to know what's the margin pre-investment and post-investment so that we know what's the long-term run rate. and life sciences, that's our mid-teens reported, mid-20s underlying, and well, as the business grows, that's going to go up as well at the same time. So very focused, very controlled, and we know where we're going.

Our next question is in the line of Jason Haas with Wells Fargo. Please proceed with your question.

Hey, good afternoon. Thanks for taking my question. This one may piggyback off the last question, but I'm curious if you could maybe give some examples of the cost savings and efficiencies that you've been able to find as you've implemented OneEcoLab and some of your other initiatives. Thank you.

That's a great question for Scott, who has done an amazing work in OneEcoLab, especially the one company part, which is really aligning the whole company behind our customers by leveraging technology, GenAI, in dramatic ways. Probably one of the companies most advanced in that work, at least that's what we hear out there. So Scott, why don't you share a little bit what you see and what you're doing?

Yeah, absolutely. Jason, as you said, S&A leverage is very good. We drove 50 basis points in Q2. Expect to drive that 20 basis points we talked about earlier in the year as we continue to invest in the business. The one thing I do want to note, I would take the opportunity, not every quarter will be created equal. We expect Q3 SG&A to be up a couple points sequentially, Q2 to Q3, in part due to FX. If you look at FX last year with a favorable item in Q3, it will be unfavorable this year. But to get to the core of your question on the savings, what's driving that leverage, it's one Ecolab, which is allowing us to reinvest in the business. As we've talked about, Ecolab is a growth program. But at the same time, there's productivity that we're getting out of it, that we're focused on driving this growth with our cross-sell opportunity, which is $55 billion. But at the same time, we're driving great efficiencies as we do that. We're ahead of schedule on $140 million of savings. I would say we'll be a little bit north of 50% of that realized in 2025. Of course, the costs come a little bit ahead. And driving those savings is how we use our five global centers of excellence, right, and create some scalable processes in leveraging that Igenic AI that Christoph talked about, automating and augmenting people work, right, which includes, which improves the experience of both our customers as well as our associates. So I expect, as I said, the SG&A leverage to be about 20 to 30 basis points in 2025 as we continue to then to reinvest in the business. But beyond 2025, that platform from One Equal Lab and the digital platform that we're building there is going to help us generate leverage above our historical average, which has been about 20 to 30 basis points.

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

Yes, thank you, and good afternoon. Christoph, I appreciate your bifurcation into the 85% that's doing well and the 15%. where basic industries are more challenging. I'm curious as to whether the relative weakness in those basic industry markets may necessitate any new or incremental actions by Equal Lab. I'm thinking about portfolio composition, resource allocation, productivity initiatives and the like. Or is it the case that, you know, hey, these are really just cyclical end markets and they'll come back before too long and it would be a mistake to uh, go down those paths. Maybe a different way to ask the question is, is it purely cyclical or do you see any structural, uh, elements that may argue for pulling some levers?

No, I don't see any structure, uh, issue. And, uh, if there were, um, I mean, we've demonstrated that in the past that we have no problem of addressing those issues either ourselves or in better hands, as we did with our surgical business in 2024. This is not the case in those two businesses. And if I step back just for a second, One of the big strengths of our company, of Ecolab, is the number of end markets that we're serving, the number of geographies that we're serving as well at the same time, which means that when some are struggling a little bit, well, the vast majority is doing well, or some very well, like our growth engines. as mentioned before. So there will not be all our businesses, all our geographies being in the green all at the same time. That would be an ideal world. So I see that as a strength of the company. And when I think about those two businesses, especially in basic industries, when I think about power, it's been a sleepy business forever. And we have very good shares we serve most of the nuclear plants if not all of them out there but it's not been growing for a very long time well this is changing dramatically now because of all the developments in in ai infrastructure data centers microelectronics and so on there that requires so much more uh power this takes time obviously to ramp up but A business which I thought had limited future I think has now a big future, and we have all the capabilities and even some of the capabilities that the industry themselves do not have anymore because, well, we were the ones having it, and they just reduced their capabilities and leveraged what we had in the past, especially in the nuclear industry. well, I think that that's going to be good for us in the future. When you think about that with paper business, the shift that we've made from graphics paper, which We are much less used to be off our business. It's less than 20% today. And if our company is of any indication where we're trying to be a total paperless company, that everything is on digital, well, the business is going to disappear. And that's why we're shifting towards consumer products, tissues and towels and specialized packaging. I like the innovation that we're making here. We have a lot of science, a lot of R&D. in that field. So we will get to the right place. So in short, those two businesses are not candidates for strategic options, to use the industry term out there. It's much more for us to bring them to the right place, and we know how to do that. So generally, I'm okay with those.

Thank you. Our final question is from the line of Scott Schneeberger with Oppenheimer. Please receive your question.

Thanks very much. I have a question for both of you. Scott, first, have you had time to consider the one big beautiful bill act, the impact most likely on free cash flow, how you're thinking about that, any comprehensive quantification? And then, Christophe, a lot of discussion, particularly about some of the basic industry paper software areas that seem, you mentioned earlier, impacted by tariffs. Could you just kind of address a high level how you're thinking about the tariffs right now, how it could affect in the back half? I know it's very uncertain, so you can't really give one scenario. But what you're thinking about, what's on your mind as far as what you may be experiencing in the back half for the broader business? Thanks.

Thank you, Scott. I'll pass it first to the other Scott to talk about the BBB. And then I'll cover the other question.

Thanks, Scott. So, hey, net overall, it's still early days, but our expectation is the big beautiful bill is going to be a net positive for the company. As you think about it, encouraging investment in the U.S., which is our strongest market, market growing really well with good margins, at least to the tax side of it. A bit early to quantify any impact, but I would just tell you where I'm sitting here today. I don't expect it to have a material impact on our tax rate, frankly. But again, that overall expected to be overall favorable to the business on the tax side. If anything, there be be some short term cash tax timing, but not an overall effect on the rate.

So for the second part of your question, Scott, the tariffs for the second half, well, they're going to be more impactful by design. It's just a question of time. But as mentioned before, I feel really good with our preparedness, the mechanics as well of it. I see four components of it. So on one hand, you get the pure tariffs, how much you pay when you import, but we don't import that much since 92% of what we sell is produced locally, which has been our model for a very long time as a company and we're driving that up. The second of the price is going up. So for local manufacturers, because everybody's unsure, that's the whole idea, obviously, of the tariffs here. And then we mitigate that. So first by great supply chain work. And I'm really blessed with the team we have in supply chain. And we have the trade surcharge. And if I put all that together, it's a clear net positive. in practice in Q2. And when I look at the outlook for the second half of the year, I feel really good about it. And that's one of the reasons why our pricing is going to go up in second. As I've mentioned before, I feel really good about our delivery of our 13% or 12 to 15 for the next few quarters and for 2026. Because, well, we're in a very fortunate place. Momentum is good. 85% of the business are 4% and delivering double-digit operating income is a very good place. The macro is good for us in terms of water for AI infrastructure. Sorry, I'm going to get it right. Life science for biotech, productivity and hospitality, and in-person intelligence. And ultimately, it's our fundamentals. are really strong as a company. I'd like to end where I started as well, that whole conversation. I feel really good about where we're going, really good about the delivery for the next few quarters, getting to this 12 to 15, aiming at this midpoint and anything that gets above it. because of all the good things that are happening. Well, we'll be shared between investors' returns and investments in future growth, and we'll be totally transparent as we move forward on that journey. But overall, in a very good place, and I feel good with where we're going for the second half of 2026. So thank you to all of you. And with that, Indy.

Thank you. That wraps up our second quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation. I hope everyone has a great rest of the day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines.