Greetings, and welcome to Ecolab's First Quarter 2022 Earnings Release Conference Call. As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce your host, Mike Monahan, Senior Vice President, External Relations. Mr. Monahan, you may begin.

Thank you. Hello, everyone, and welcome to Ecolab's first quarter conference call. With me today are Christophe Beck, Ecolab's CEO; and Scott Kirkland, our CFO. A discussion of our results, along with our earnings release and the slides referencing the quarter’s results, are available on Ecolab's website at ecolab.com/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 in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. Starting with a brief overview, continued strong double digit sales growth driven by accelerating pricing and further new business wins overcame substantially increased delivered product cost inflation and unfavorable currency translation to deliver the adjusted diluted earnings per share gain. Sales were led by double digit gains in our Institutional & Specialty, Industrial and Other segments with attractive growth in all geographic regions. We drove the strong sales performance in a rapidly changing environment where the rise in new COVID infections early in the first quarter slowed the global recovery and further disrupted supply chains while the war in Eastern Europe later in the quarter exacerbated the supply chain costs and geopolitical uncertainty. Our delivered product cost inflation soared an estimated 25% in the first quarter versus last year and added an estimated $0.55 per share of incremental costs to the first quarter alone. We reacted aggressively and continued accelerating our pricing, which reached 5% in the quarter, up from 3% in the fourth quarter. We now look for structural pricing to increase 6% to 7% for the balance of the year. And when adding in our previously announced energy surcharge of up to 12%, we expect very strong pricing to overcome the substantial delivered product cost inflation. Along with our new business wins, strengthened business portfolio and improved productivity, we look to realize continued strong top line momentum for the full year. We expect accelerating earnings growth through the second half and expect to deliver low teens growth in adjusted diluted earnings per share for the full year 2022, understanding there's a uncertainty in the timing of the surcharge realization, which will become clearer as we exit the second quarter. This strong business momentum along with our enhanced value proposition and favorable long-term macro trends position us well to leverage the post COVID environment and deliver further superior long-term shareholder returns. And now here's Christophe Beck with his comments.

Thank you so much, Mike, and good afternoon, everyone. I'm very pleased with how the team continued to execute in Q1. In a rapidly changing environment, we remain focused on what we could control, like new business, pricing, innovation, and exceptional customer service, while we continue to manage extremely well what we could not totally control, like obviously inflation, COVID restrictions, and now the war in Eastern Europe. We started '22, actually, with strong momentum as our fundamental business drivers continue to improve, which is most important to me. Fixed currency organic sales growth accelerated to 12% with 7% of that led by volume gains from strong demand and new business generation. Institutional & Specialty, as you just heard, led the quarter with 19% organic growth, continuing its strong recovery while Industrial further strengthened its already healthy momentum by delivering 12% organic growth, which is even better than what they delivered in Q4. Our margins were also trending very well for most of the first quarter, even ahead of our own expectations as we were on a path to nicely overcome the significant delivered product cost inflation until the war in Eastern Europe started. As we all know, this had a major impact on global energy costs, which impacted the last few weeks of the quarter. This spike in costs added an unexpected incremental $0.04 a share in the last month alone, resulting in a total unfavorable impact from delivered product cost inflation of $0.55 per share in the first quarter, close to 70% of our ultimate Q1 earnings. Importantly, we overcame the significant headwind, thanks to accelerated pricing, which rose from 3% in the fourth quarter to 5% in the first quarter. And most importantly, we did all this while maintaining strong momentum in demand, new business, pricing and productivity, the fundamentals of Ecolab. So based on what we see today and the actions we have already taken, I remain really confident in our ability to continue to deliver strong top line growth and accelerated pricing in '22 to get ahead of this new energy cost and to see our margins turn positive during the second half to deliver a strong full year 2022. Even if the path to get there has now changed quite a bit once again, the unexpected rapid rise of oil and gas costs during the last month of the first quarter will now impact three full months of the second. We therefore had to react boldly and we did. We decided to implement a global energy surcharge, the very first for Ecolab, which will now come on top of our increasing long term structural pricing. And once fully implemented, the surcharge will then behave as an offset to what we expect to be short term but incremental energy cost inflation. Now we started the second quarter actually with 100% of the incremental energy cost but 0% of the energy surcharge as its implementation started on April 1st. Because of this, we now expect the second quarter to see the most acute squeeze of the year between price and delivered product cost inflation, occurring at the same time the surcharge is being implemented with customers around the world, but early progress is very encouraging. As the energy surcharge progressively rolls out, we should see the bulk of the surcharge primarily impact the second half of the year and somewhat the second quarter. And accordingly, this initial benefit from the surcharge along with accelerating structural pricing, strong volume growth, and productivity gains should help us drive our second quarter delivery with earnings that approach last year's $122 million. And finally, as it's been demonstrated over and over again at Ecolab, when challenging times strike, we make absolutely sure we protect what matters: our people, our customers, and our company. Over the past few years, when we could have reduced our workforce to manage short term costs, we protected our global team, one of the key reasons why today our customer retention remains so high. We also protect our customers with major breakthrough innovation like Ecolab Science Certified, one of the key reasons why today our new business generation remains so strong. And we protected our company by investing in digital technology, one of the key reasons why today our productivity keeps improving. This approach has also demonstrated over and over again that our model starts generating significant margin leverage when cost inflation stabilizes and structured pricing holds. So with continuing strong demand for our unique solutions that prevent infections and protect natural resources when customers need them the most, we expect organic sales growth to remain in double-digit territory for the rest of the year. With structured pricing rising between 6% to 7% for the balance of the year and an energy surcharge that will progressively act as an offset for the spike in energy costs, we expect operating margin comparison to turn positive sometime during the second half of the year. This should then support our early expectations to deliver full year earnings growth that reaches the low teens, understanding, as you've heard, that there is uncertainty in the timing of the realization of the surcharge and actually the pace of inflation, but this will become clearer as we exit the second quarter. And also, let's not forget that our full year delivery includes $0.26 of Purolite amortization of 5% of EPS. As that momentum extends beyond '22, we expect to show Ecolab's hallmark of consistent superior earnings growth for many years to come. I look forward to your questions.

Thanks, Christophe. That concludes our formal remarks. As a final note before we start Q&A, we plan to hold our annual tour of our booth at the National Restaurant Association show in Chicago on Monday, May 23. If you have any questions, please contact our office. Operator, would you please begin the question-and-answer period?

Our first question is from Tim Mulrooney with William Blair.

Just one question from me today, Christophe, on the delivered product costs. I know you said they were up 25% in the first quarter. Can you just talk about how inflation trended through the first quarter and through April, and then how you're thinking about that progression through the second quarter?

Actually, we've become experts at this. Unfortunately, if I may say so, and it's important to step back, probably because when we look at 2021, so last year, the first half of the year had almost no inflation; it was close to 1%. Then the third quarter, as we remember, moved to 10% for us on delivered product costs, which represent 25% of our sales. In Q4, it doubled to 20%, and the full year saw 10% of inflation for Ecolab, so for 2021. And also to your point, in Q1 2022, we're expecting the same as in Q4, so 20%. Well, it moved to 25% because of the war in Eastern Europe that started at the end of February. We're expecting initially Q2 to be the same as Q1 or Q4, so 20%, 20%, 20%, and ultimately, we ended up with 20% in Q4, 25% in Q1, 30% expected in Q2. So when you're talking about April, it's trending towards this full second quarter of 30%, which we expect that for the full year, we should end up with 25% inflation for delivered product costs when we initially thought it would be 15%. To put it in perspective, Tim, just to conclude here, that will represent roughly $1 billion over 18 months that we will have to overcome, which we have overcome; so the part of ‘21 last year and delivering EPS growth, the same in Q2 as well as the quarters to come in 2022.

Your next question comes from David Begleiter with Deutsche Bank.

Christophe, looking at Q2 guidance, if you look at the various puts and takes on volume and pricing, et cetera. Can you discuss why we only approached last year's results? And secondly, what drives a strong earnings growth in the back half of the year?

That's a big question, David, but let me address it one by one. First, Q2, if I may. Well, the situation changed obviously when the war started at the end of February because the first half of the first two months of Q1 had a great start. We were trending really well, both in terms of top line momentum. You've heard this 12% organic growth driven by 7% volume and 5% price. Well, at the end of February, things changed. We were ahead of our expectations, getting ahead of delivered product cost inflation, and we're expecting to deliver strong Q1 and get in a very good position for a strong Q2 delivery. That was before the war started at the end of February. When the war started, we saw a good impact on energy costs, which triggered the surcharge that we've talked about, where we had just a few days basically to decide that globally, all businesses, all countries would move to compensate for this additional energy cost. As you've heard before, this month of March added $0.04 to our delivery. For the second quarter, you get three months of that obviously and trending up, unfortunately. So it will all depend now, as I mentioned in my opening remarks, on the speed at which we can deliver the surcharge, which is going well but is a complicated exercise. It's 40 end markets, it's 170 countries around the world; we want to make sure that all customers are aligned with it as well in order to have the right revenue recognition. So it's hard to know exactly how the timing is going to be. So I'm having Q2, basically with 100% of the headwind and a surcharge that's progressing during the quarter. How to know exactly where we're going to end at the end of the quarter? But I think we're going to get down close to where we were last year. Honestly, if we get to 95% of where I was last year, I'd be happy with it, but we will do our utmost to get as close as we can. That's the first part of your question. Second, for the full year with our ambition to get towards the low teens, which obviously requires a strong second half. Well, think about it: we have strong momentum, which always helps, 12% driven by high demand. The price is really good, with 5% that's been accelerating during the first quarter, moving towards 6% to 7% without major losses, it's always onesie-twosies, but nothing major. We have productivity that keeps getting better as well; you've seen that in our results for Q1 over 100 basis points of improvement. We have fundamentals that are in very good shape. Then we have the surcharge that's coming almost 100% for the second half. Getting the fundamentals plus the surcharge realization, and also expecting that inflation will plateau and ease at some point during the second half, well, we should end up in a very good place for margin leverage. It all depends on the timing, on the execution of the surcharge and how inflation is going to evolve. But if everything goes well, we'll end up in the right place with a very strong second half. Whether we end for the full year exactly will be harder to tell, but it's just a matter of one month or two at the end of the year that'll bring us to the final result. At the end of the day, David, what I'm really trying to drive here is to have the right fundamentals that ultimately, in '23, we end up in a place where we get the high margin leverage that we're all looking for starting in the second half and then making it even better for 2023. So those are the two parts of your question.

Just quickly on the surcharge, how quickly is the design to roll off if and when oil prices do ease off as well?

That's something that we will have to discuss with customers. I don't think that it's going to happen overnight. But it's going to take a few months to implement; it's probably going to take a few months to roll off as well whenever that's going to happen.

Next question comes from Manav Patnaik with Barclays.

Christophe, I just had a big picture question for you in terms of outside of obviously, the inflationary pressures you talked about, just curious if you're starting to see any macro pressures, maybe specifically in Europe, given all the press around it.

So generally, so far, so good, but we're all reading the newspaper and looking at the news, obviously. When I think in terms of demand for what we do, it's very strong. All companies have made sustainability commitments, as you know, and they need always more of our services in order ultimately to deliver on the sustainability commitment. On the other hand, as well from an infection prevention perspective, food safety, COVID, or whatever else that can be, our customers ask always more from what we're doing. So we don't have a demand issue, we're really on strong trends, which is really good. So far, we haven't seen or perceived any slowdown with two exceptions: the first one is institutional, the restaurants and the hotels, but especially the restaurants. We thought that it would open up quicker during the first quarter and continue on that trend during the second quarter. Well, it's been slower from a market perspective than what we were expecting, is that an outcome as well of the economic pressure at the beginning of the year? Was it related to Omicron? Obviously; but now is it because of interest rates and price of oil and so on? We'll see. So that's one small indication. The second one is China because of the COVID lockdowns over there that are more extreme than anyone was expecting. It's 4% of our company. So anyway, it's a good news, bad news; sometimes I wish it would be much bigger. Today, I'm happy it's only 4%, but that's probably where we might have some darkening clouds, hopefully not, but that could happen. Otherwise, so far, so good. The last thing I would mention, Manav, is probably currency. As you know, the dollar is strengthening. We're expecting roughly $0.10 for the full year, and it's doubled as we speak right now. I would imagine that this is going to strengthen as well, so it might become a further headwind.

And maybe just asked another way, like maybe near term, medium term, longer term, if demand is not an issue, do you plan on changing your sales force growth strategy at all?

I want to make sure I understand right what you're saying when you say sales force growth…

Would you be increasing your hiring pace given all this demand?

So yes and no. In the past, I would say, pre-digital times, our growth was almost directly correlated to the growth of our field sales force. That's changing now over time. It will still keep growing but not at the same pace as it used to over the last 98 or 99 years that we've been in business because digital automation is obviously helping us automate a lot of transactional work that our team is doing today. With remote monitoring, preparation of sales calls, you can do much more on the computers now, and we've implemented all that over the past few years, as you know, that requires less homework to get ready for customers, fixing equipment we can do that remotely. So there are a bunch of things that we can automate through digital technology, which will disconnect to a certain extent the growth of the company from the growth of the field force, which drives as well to SG&A productivity.

Next question comes from the line of Steve Byrne with Bank of America.

I'd like to better understand this energy surcharge; is it defined by oil, natural gas, or electricity, or does that depend on your customer? And just want to make sure I understood you correctly about the inflation you're expecting in the second quarter. If I understood you correctly, you're looking at a 30% inflation, maybe 20% from raw materials and 10% from energy; did I hear you right? And if so, are you getting any pushback on this energy surcharge given it's roughly twice the magnitude of your structural price increases?

So two parts. The first one, we've announced that to customers around the world; it's a global surcharge for the whole company, all customers, all industries, all countries. It gets implemented slightly differently business by business then afterward. Think about pest elimination, which is very different from a heavy industrial business like paper, for instance. But the general principle is, yes, it's related to the price of oil. What we've said is that the surcharge will be between 8% and 12%; it can go higher than 12% if the oil price gets higher. 8%, 10%, and 12% are related to oil pegs that we've defined with customers. If the oil price goes up further, the energy surcharge will go up further. We wanted to have it temporary, mechanical, formulaic as well so customers know how it works, when they get it, how much it is, and when it rolls off as well. That's the theory. The practice is obviously a little bit different, as mentioned before. Pest elimination might be different from a heavy industrial business. But generally, we discuss this with all customers to get it right, making sure that it's an offset to the energy cost increase that we have in our P&L. So far, it's gone quite well with customers around the world. It's early; we've been at this for three weeks. It started April 1st, but so far so good. It's going to take a few months to finalize as well, so I'm quite happy with the progress we're making right now, but there is still some work that remains in order to get to the right place. I might pause here just to make sure that I'm addressing your question.

I wanted to also ask you about the Purolite acquisition. You got four months under your belt now. Is anything surprising you, anything going slower than you expected, or anything that's a positive surprise?

Well, all of the above. It's progressing well with all the usual challenges of M&A integration. It was a family company. I would call it a big start-up as well. Then suddenly, you end up in a larger corporation with processes, with practices, and with the organization. There is some fractions that need to be aligned, but we're in a very good place. In terms of team, you probably know that our leader for Purolite is a General Manager who comes from Ecolab since the two brothers retired. They were all 80 years old or quite so that was very natural. We have a team combined from former Purolite people and people coming from Ecolab as well. From a performance perspective, you know that business was growing double digits as we took it over in '21. It will be growing double digits in '22. What's important to keep in mind is that the first half of the year, we are capacity constrained. The demand is higher than the supply we can provide, which is the reason why we are building a new plant in Pennsylvania and extending another one in the UK as well, and that's going to come online in the second half of the year. So we're going to have this pattern of double digit last year, slower growth in the first half this year, and much higher growth in the second half of this year. Then after that, raise by '23 since capacity has been such a big driver that we had to open in order to grow further. Last but not least, the more we look at it, the more we like it. It's an unbelievable industry, biopharma. It's huge. It's growing really fast. It's something we can address. There are very few competitors that can do what we can do. We have really strong technology that no one else has in some cases as well. What I like the most is that we can build a lot of things around it to really build that growth platform like we did 20 years ago with pest elimination and all the businesses that we have in the company than 10 years ago, in water that came as well, so around food safety and hygiene at Ecolab, and now we have Purolite that can serve the life science business but also the industrial businesses to which we can add some M&A down the road, which makes it even more interesting. So, all in all, I would do it again.

Our next question comes from the line of Ashish Sabadra with RBC Capital Markets.

I just wanted to focus on the Industrial segment. We saw some pretty broad based acceleration there across water, food and beverage, and downstream. I was wondering if you could talk about what kind of momentum you see going forward, and how much of it was volume versus pricing driven?

Industrial is in great shape; it's half our company, as you know. They're growing 12% organic in the first quarter of this year versus 7% in Q4. By the way, 5% was volume, 7% was price. What I like the most is that we have acceleration on all fronts. Water moved from Q4 to Q1, so 8% accelerated to 11%. F&B was at 4%, is now at 10%. Paper was at 15%, and remained strong at 16%. Downstream, which has been stuck for two years, ended up the year at 8% and 16% in this first quarter as well. What's really interesting is that there are some new engines in there, as we call them, like global high tech with data centers growing fast as well, the chemical industry, which is a new business we've created, and animal health, which are kind of those future growth businesses that are adding to the momentum of that group, which is doing really well, broad-based, across most countries around the world; in China, it's a little bit more tricky for the reasons I mentioned before, but otherwise, in very good shape. And just to wrap up on margins for that in Industrial, which is always a question: margins were down 10% in Q1, but it's important to keep in mind, they were up 19% versus 2019. Industrial has really shown ultimately how they behave during inflationary times; that was pre, obviously, this cycle. That was the '17-'18 cycle, and ended up with great margin improvement in 2020. And in that cycle, with very good pricing, we'll have margin leverage down the road as well as it did in the past and gets us up in terms of margin ratio as we go through each of those cycles.

And maybe if I can just ask a question at the high level on the volume side. Obviously, very strong momentum in volume. But as we go through the rest of the year, the comps get a bit tougher maybe on the Institutional side, easier on the healthcare side. But you should start to see some of the benefit from reopening. So how should we think about the volume trend at a high level across the company?

Overall, roughly the same for the reasons you mentioned, Ashish. Some are going to turn more positive, and some are going to slow down for comp questions, as you mentioned. But generally, top line is going to remain in double-digit territory, and the volumes will kind of remain, for the most part, similar, assuming there's no recession or big events happening out there. But otherwise, I think it's a pretty steady momentum that we have across the company.

Next question comes from the line of Chris Parkinson with Mizuho.

Christophe, would you just take a step back over the last few years? Obviously, there have been a lot of ebbs and flows during the COVID situation, or whatever you want to call it. You have launched a bunch of new, I would say, products but more likely programs in food safety, sanitization, among many other verticals. When you sit back and think with the management team about share gains potential, kind of where you are and where you could be, just is there any difference in how you would peg your growth algorithm for the institutional portfolio or pieces of industrial versus the market and peers versus, let's say, a few years ago? Just how has that thought process evolved?

Well, generally, we're definitely gaining shares; if we compare, obviously, always our growth with competition's growth. I guess you do the same. We're way ahead of most of them. We have some weaknesses sometimes that we recognize and deal with, obviously. But I feel good in terms of shares that we're gaining across the key businesses across the key countries. If you take Institutional, as you mentioned, for instance, it's interesting to take one fact since Institutional in the US is so big. Well, take our restaurant business in Institutional. Sales in Q1 are at the same level as they were in 2019, so pre-COVID. While the dine-in traffic in restaurants is down 75% compared to 2019 for all the reasons we know–staffing and all the staff that are struggling restaurants. Ultimately, back to the traffic in restaurants being a third down compared to '19, that's showing how much share we've gained as well in that specific example of Institutional, and that could cover other businesses as well.

And just a very quick follow-up on health care. You mentioned the supplemental, some momentum with elective surgeries in the US, offset by a slower recovery in Europe. But the competitive dynamic kind of evolved there also during the COVID situation. Some of the HPCs got a little bit more aggressive. Can you just talk about your strategy there a little bit more? Once again, where you stand today and how you believe you're positioned for growth, and just comment on how the Street should be thinking about modeling that over the next, let's say, two years?

Well, interestingly enough, before COVID, the major convergence of focus in health care was towards surgical. So operating rooms, central sterile, patient room, so really centered around the operating room, which I believe was a very small strategy, so I take no credit for this one. The company did it really well, except that during COVID, surgeries got shut down, postponed, and that happens a lot of times, so on and off, which drove everybody nuts in the industry. That happened again over the last six months with Omicron. So it's the right long-term strategy, Chris. I have zero doubt about that because it's ultimately about making sure you protect patients from hospital-acquired infections, which is good for patients; it's good for the hospital because they reduce their total cost, and they can operate more often, helping them avoid the need to repeat operations. So the strategy was right; it's still right for the future. It just had a lot of stops and starts over the last two years related to elective surgeries that have been shut down and restarted.

Next question comes from the line of Josh Spector with UBS.

I just wanted to follow up on the volume outlook for the rest of this year and specifically in Institutional. I just wanted to think about if business travel improvement is something that becomes a meaningful flex point for your outlook. So lodging room sold has recovered, but arguably that's more leisure versus business travel. I think your exposure hotel and region-wise would be more skewed to the business side. So do you think that improves and is that baked into the second half outlook at all, or is that a source of upside versus your current thinking?

So business travel is a small part of our business. But it does impact our lodging business, which is roughly 6% of our company, as you probably know. But we're taking any help in the market out there. I think that for the full year, we're going to have a lot of puts and takes. There's going to be some upside with travel. As you mentioned, leisure is getting better, and we feel it in our end market. Business travel is expected to ramp up in the months to come. But on the other hand, I think that there will be some economic pressure on most people in the US and in Europe as well, driven by the price of oil, interest rates, subsidies, you name it, that we had during COVID that are going to go away. The industry is feeling that pressure already. There will be good news and less good news, but we'll see what's really going to happen over the next few months. I can't influence that. The only thing I can influence is new business. New business in institutional has been doing extremely well during the pandemic and is continuing right now on top of pricing that they're getting, which is driving shares, as I was mentioning to Chris before. Ultimately, I think that institutional is going to be in a good place. One might say we could have grown even faster if everything would have been unleashed at the same time, but that's not how things work. Generally, the industry might slow down a little bit, and we might not grow as fast as we would have wished, but we will still remain in double-digit territory in '22, which I believe is a pretty good performance.

The next question comes from the line of Vincent Andrews with Morgan Stanley.

A couple of quick ones from me. The release mentioned that in food retail, due to staffing issues, some of the cleaning intensity had declined. Can you just clarify that staffing issue? Is that because in the quarter, there were COVID-related outages when Omicron was surging, or is that because customers are struggling? I'm just trying to understand how transitory the issue is.

Yes, it's an interesting one, Vincent, because for the most part, the retail industry is doing quite well, especially the large customers, the large retailers that we serve around the country and around the world. The trick is that they are all struggling with how much staff they have in their stores, so they need to choose where the people are going. Ultimately, they go and serve customers or do they do as much as they should. On the cleaning side, I want to be careful how I'm saying that, because we make sure our customers are doing things the right way. But in normal times, they would be doing much more than what they're doing today. It's all related to the staffing; they're shifting from one part of the store towards the commercial one, which is driving their stays.

And just as a follow-up, Scott, if I could ask you about how you expect working capital trends through the year. Obviously, in an inflationary environment, you're going to need more of it, but it looked like a pretty good build in the quarter, and you finished the quarter with a low cash balance. So just how should we be thinking about working capital and free cash flow for the year?

As you mentioned in the quarter, there was a bit of a build, as you'd expect. So free cash flows were in line with what we expected for the first quarter and really just below last year because we built working capital and CapEx, which you would expect as sales are growing, especially this strong. As we look for the year on a free cash flow basis, we expect that for the full year we would have free cash flows, it's really in line with free cash flow conversion, historical levels, which means that our working capital will sort of trend in line with the business growth.

Our next question comes from the line of Scott Schneeberger with Oppenheimer.

Christophe, following up on the Industrial segment. Just curious, in the press release, it cited unfavorable mix as a headwind. Could you elaborate a little bit on that please and just discuss where that's going? And then a follow-up in there is to a discussion earlier on Industrial about segment margin. A few years ago, pre-pandemic in the mid-teens. How quickly could the margin get back to that level based on what you're seeing?

So two parts to your questions obviously. So margins and mix. If I talk about overall margins, usually, it takes two years to kind of get through the margin cycle. Our inflation goes up, we get the pricing, we get the dollars back in the first year and in the second year, we get the margins back, and that's how we've grown our margins in industrial at every cycle. It’s going to be the same in this one, with one big difference: usually, the inflationary cycle will last a much shorter time. We're planning for two years, last year and this year. The cycle is going to be a little bit longer. But a very strong price muscle in industrial for a few reasons: first, because our premium products are competitive versus competition in terms of what they deliver. Our customers are interested in paying more to get more as well out of it. Second, we have a pricing approach, which is driven by eROI, as you probably know, which is basically getting a share of the savings that we create for our customers. It's a very natural organic pricing as well. In addition to the underlying pricing, we have the inflation pricing that comes on top of it. Bottom line should be towards '23. I think that assuming that inflation peaks now and eases in the quarters to come in '23 should help us see a rebuild and step up in margins in Industrial. That was your second question. The first one was the mix. There are three things: one is business mix. If you have paper, for instance, growing faster than water, paper is at lower margin than water, which affects the mix of businesses. Within a business, you can take downstream, as an instance; we have an important offering called additives that energy companies are using usually when the prices of oil are rather high because they can afford it. Those are growing really fast right now, but they have lower margin than the chemical offering we're providing those customers. The last one is the country mix as well. Depending on where you grow that has an impact on the overall margin of Industrial, those are the three big drivers of this margin mix.

Our next question comes from the line of Kevin McCarthy with Vertical Research Partners.

Christophe, coming back to the surcharges that you're implementing as of April 1st, how much might you actually expect to realize in the June quarter? The reason I ask is, I think your press release on March 15th indicated a range of 8% to 12%, and I imagine in some cases you get the high end immediately; in other cases maybe the low, and still other cases, perhaps you have some contractual limitations. So perhaps you can talk about the flow through as you begin to implement that program in the second quarter and also into the third quarter.

So two things, Kevin, and I can explain it in a complicated way and a very simple way. I'll take the simple one. The way we agree and align with customers in such a short period of time is really to ensure that the surcharge is an offset to the increase of commodity costs related to energy costs. So you get a net zero on our EPS delivery. If we don't get the surcharge, we have a negative EPS delivery because we get the inflation, and we don't get the surcharge. That's our thinking; the surcharge is a natural offset. For the second quarter ending in June, as you said, it's a transition quarter; we start from zero on April 1st, and we hope to be in cruising speeds in June or July. That's why I'm not perfectly accurate on where we're going to be at the end of June, because there's a lot of realization that needs to happen for those thousands of customers, millions of locations around the world, in 170 countries. This is real work. It's evolving very nicely, very well. I like the progress we're making, but it's an imperfect journey since we've never done this before. That's the way we think about it in terms of net impact. An offset for the second quarter is not going to be a straight line to success, but it’s going to end up in a good place this summer; I don’t know if it will be exactly at the end of June when the quarter ends.

And then secondly, I wanted to ask you about your Institutional earnings results in the first quarter, which came in a little bit better than we had anticipated. I guess my question is, did it come in better than you thought internally? And if so, what drove the positive variance in that piece of the portfolio?

Well, actually, so sales were really good. They could have been even better if Omicron hadn’t hit at the first part of the quarter. The earnings were good, but they're still not as high as they could or should be because they've been impacted as well by the delivered product cost inflation. So good growth, good productivity work. You might remember that we've implemented a global field system that is automating a big chunk of the transactional work that our field force is doing around the world; that drives better productivity. Innovation is adding to margin as well; we mentioned Ecolab Science Certified disinfection programs related to COVID and post-COVID as well. That’s all helping the margin. The truth is, it's going to happen in the quarters to come and in all probably the years to come. Because when all that comes together, and the pricing gets ahead of inflation, I firmly believe that the institutional margins will be even better after that cycle than they were pre-COVID. Whenever the past is or the future, let's assume it's going to be '23. But Institutional is on a very good path, both on the top line and the bottom line, and the best is yet to come.

Our final question is from the line of Eric Petrie with Citi.

How are underlying sanitizing sales normalizing compared to the 2019 levels?

That's an imperfect science. So it was - when we look at all the sanitizing sales that we have in the company, it grew over 50% during the COVID times. The way it looks like right now is that it should remain at roughly 20% above where it was pre-COVID, let's call it, 2019.

Typically, your Institutional margins over history are higher than Industrial. How do you see that as you were talking about mix and so forth, 2023 and beyond, and some of the growth verticals you have in Industrial as well as net zero?

As mentioned before, Institutional is going to be better after that cycle concludes, let's assume, '23, COVID inflation and all. It's not all going to happen on January 1st obviously. But post this cycle, the business performance, the P&L of Institutional is going to be better than it was in 2019 for all the reasons I mentioned in the prior question. On Industrial, we've had a very good journey of margin improvement over the years. Interestingly enough, this also happened during those inflationary cycles; we had the previous one. You might remember the margin improvement we had in 2020 that was growing north of 20% in terms of operating margin and ended up in a very good place, which is why I just mentioned earlier in the call, even though margins are down 10% in Q1, they're higher at 19% than they were in 2019 as well. So due to the pricing mix work that the team has been doing. That’s going to continue going forward. What you mentioned as well on net zero is something that was much less relevant a few years ago, but that's becoming very relevant now and going forward because many of our customers have made commitments on the sustainability objectives. Many of them are not progressing as fast as they were hoping for some good reasons and some less good; that's driving very good demand. For us, we've created a dedicated Net Zero division now within Industrial in order to serve those customers that are the most advanced. Those customers tend to be higher margin as well at the same time, which will help contribute to better margins for Industrial, and down the road, I expect Industrial to reach the same level of margin as Institutional and potentially even better.

Next question comes from the line of Shlomo Rosenbaum with Stifel.

Quick question; we had a lot of talk about pricing. I want to go back a little bit more to volumes. And just to ask, where are we on the overall company volumes like-for-like vis-a-vis 2019? In other words, how much is left in terms of return to normal play in terms of revenue potential? Like you talked about Institutional being back to where it was, but with in-person dining just down a significant amount. So if you were to put it like-to-like, what would you say the upside is or potential for revenue with just kind of normalization, say, coming if you were to assume that would come in 2023?

So I need to get to some numbers in order to get that. I want to make sure I get the right one. So from a top-line perspective, we're way ahead of 2019 already, obviously, but you ask the right question, in terms of volume. So if you look at Q1 '22, we have businesses that are already ahead of 2019. Industrial is ahead, Healthcare & Life Sciences ahead, our Other segment is ahead as well. The only one that's below 2019, roughly 10% in terms of volume is Institutional & Specialty and is expected to cross that line during the second half of the year, where we'll be in a place where all businesses, I mean all major businesses will be ahead of 2019 in terms of volume during the second half of the year.

So when I'm thinking about the recovery, you still have that should be largely a second half '22 and first half of '23, kind of improvement potential over there. Is that the right way to think of it?

Absolutely, especially in Institutional & Specialty, no doubt about that. That's why we're saying it's going to take a two to three year cycle where demand is going to be higher just because the industry is recovering from a demand perspective. When staffing increases in hotels, you've probably been in hotels lately. The service is a little different than it used to be even though you're paying the same prices for your rooms. Well, it's not because hotels won't have it that way; they don't have staffing to do it. That's going to add demand for us because those people are using our products. That's going to help us drive demand in '22 and '23. When it's going to stop, I don't know, but I think we have one or two years ahead of us of recovery, which is really good for that business.

And just for the follow-up question. Is one quarter really enough time to get the energy surcharge across the expanse of the customers that you guys have? It just seems like you're trying to hit everybody. At the same time, people also wanted to make new sales. Is there a focus being taken off of new sales in order to be able to do this? How should we think about it?

So first, getting it all done in one quarter, the short answer is no. That’s why I'm saying that in theory, if everything were done in the second quarter perfectly, yes, we would be growing our earnings very nicely. Well, it's not going to happen because we started from zero on April 1st, and at the end of June, we won't be done either for all the reasons you're mentioning. That's why it's hard to know exactly where we're going to be. But I know that this summer, let's put it that way, we will be in a very good place because all businesses, everyone around the world needs to get this done the right way. That’s exactly for the reasons we mentioned before. On the prioritization of new business versus pricing, we've been reasonably good at that. But I want to be perfectly honest with you: when we focus on pricing, let alone the surcharge, which is something totally new since we've never done it globally, you get your eyes off the ball of new business. I expect the plan to slow down a little bit to get the pricing right, but we want to get pricing done as quickly as we can to make sure that new business maintains momentum down the road. It's hard to do both at the same time.

Next question comes from the line of Mike Harrison with Seaport Research Partners.

I would like to approach the question about underlying market demand from a different angle. You mentioned business travel and some macro concerns in Europe. I'm interested in your broader perspective on consumer behavior in an inflationary environment. Are there any indications that inflation is beginning to affect consumer spending? This could potentially be reflected in restaurant foot traffic. However, most of us have not been in this sector during a time when inflation was this high. Any historical insights you could share would be very beneficial.

Yes, a few things. First, that kind of inflation, none of us has really experienced it. I guess our parents did. I was not in business. So last time it truly happened here was 30 or 40 years ago; it’s totally extreme and unusual, as we all know. First, we don't see a slowdown of demand yet; that's good news. But if we look at restaurants, especially in the US, if I look at the data that we get from the industry, you clearly see a slowdown of demand, which is most likely related to inflationary pressure because of oil, COVID, mortgages–you name it. But that's very early. Those are indications that are probably important to follow. The third thing is that when we move through slower times or more extreme recessionary times, which we don't assume is going to happen in '22, could happen in '23, who knows, we've gone through many times as a company. The good thing with the Ecolab model is that, yes, growth slows down but we are still ahead of market growth because we gain market share due to new business, innovation, expansion of our offering, and so on. That helps us to grow faster than the overall market and dampen the recession that we might have on our top line. Most importantly, in more difficult times for our customers, they need us more because our value proposition, as you know, is helping customers get better results at the lower total cost. That’s been true for 99 years as a company. In more difficult times or potentially recessionary times, customers need what we're doing even more, which is a reason why Ecolab has been doing quite well during slower or recessionary times.

And then second question on the high tech opportunity. I believe that's mostly centered around water and going into semiconductor fabs, as well as data centers. Can you talk a little bit about your market position there, particularly now that you've combined with Purolite? Are you in a position to win more than your fair share of opportunities as we feed some of this fab capacity expansion?

Absolutely, it's a fascinating business, which used to be part of like industries, our water business that was serving hotels, like manufacturing and so on. Now we've created a dedicated division that combines data centers and microelectronics. They are related but different. The main driver for data centers is to help those high tech companies reach their net-zero ambition. I mean you know all of them; they've made bold commitments that by 2030 for most of them, they want to be zero or positive carbon, and the same for water. We're the only company that can provide that to them, so that's obviously something we had to get organized to reach. We're making very nice progress by working with those large companies. This is Ecolab at its best because we serve enterprise customers for a very long time, forever, actually. We have them understand where they are today, how much water they use, what's the objective to get to zero, what's the roadmap to get there and drive execution towards that while maintaining a 99.9% uptime for all data centers. Microelectronics, just to conclude on that, is different but related. We wanted to have the same people because it's the same type of expertise that we need in the field. It's the production of microprocessors that requires high purity, high-quality water, which to a certain extent we were doing in the past, Ecolab, but we could not do the highest quality of water that's used in the production process of microprocessors. This is something we can do now with Purolite, which is the new offering that no one else can offer, which is helping not only Purolite but our global high tech business. So this is the beginning of the journey. So far, a very good story where I think we could truly own that market.

Our next question comes from the line of Rosemarie Morbelli with Gabelli Funds.

I was wondering if you could touch on the progress you are making on Life Sciences. I believe we did not really touch on that particular part of your business during the call.

Life Sciences has been a great business that we started, I think, five years ago, 2016. Doug, who we did that–I'm not taking any credit for that. It's been a great business that's been growing to almost $300 million today, growing double digits, some of the highest margin we have in the company. It’s a business that's doing well, facing hard comps versus '21 and '20 because that business went through such crazy high growth related to COVID demand. The underlying growth of that business is double digit and will emerge double digits in Q2 or Q3, I don't remember exactly, and will continue very well as the business goes on. We add Purolite, which is purifying the product produced in production lines. It creates a one plus one equals three type of proposition, like with water and food safety when we acquired Nalco. Life Sciences today is roughly $700 million to $800 million, growing double digits. We are constrained by capacity right now, mentioned earlier on in the call. But demand keeps getting higher. Two businesses are doing really well. Getting together, the offering is even more interesting. We just need to be able to produce what we're selling, and that's going to happen during the second half of this year.

Are you signing up large pharma facilities?

We do; that's where we focus. Life Science, Rosemarie, is 80% plus pharma; the balance is cosmetics, the traditional brands. Life Science for the most part is pharma, with a renewed focus on biopharma on mRNA and monoclonal antibodies, which is really the area within pharma that's growing the fastest and expected to be 40% of the overall pharma market by 2026 or 2027, so in the next few years. It's really interesting.

And then I was wondering, given the stock price decline, which continued today. Are you considering accelerating repurchases?

Well, it's what we've announced a few weeks or a month ago, I don't remember exactly the timing. I might ask maybe Scott, if you want to give some perspective as well on that.

As we announced in March that we are repurchasing $500 million of shares during the year. Through Q1, as you've seen, we repurchased a little more than half of that and we'll continue at that pace for that repurchase program, depending upon market conditions but also while maintaining our commitment to return to A range credit metrics by the end of next year.

Is there any possibility of increasing the $500 million, or should we expect to revisit this next year?

I think we'll keep pace on that $500 million this year. Again, as I mentioned, we want to make sure that we're committed to returning to these A-range level metrics by the end of 2023.

Our next question comes from the line of Andy Wittmann with Robert W. Baird.

I guess I just wanted to follow up on the earlier question around free cash flow. I think that question was centered more around working capital, and you said it would be kind of in line with historical levels. But Scott, it looks like if you back into your EPS guidance into net income that kind of walks back up to around $1.5 billion of adjusted net income. Historically, I guess you guys have said about 95% is a good way of thinking about free cash flow for Ecolab. So is that applicable for this year with higher-than-average growth rates and inflation? I guess that's another way of asking that question. But is basically that up backs you into about $1.4 billion of free cash flow? Is that the right kind of order of magnitude? Can you just comment again on the CapEx budget for the year as well?

Just on your first question, yes, your math is about right in that mid sort of 90% range, which is our historical cash conversion. So that would be where we would expect the year on free cash flows to be. And then as we think about CapEx, we talked a little bit about this after the fourth quarter, and we'll expect CapEx to return to our historical levels, which is about 5.5% to 6%. About half of that CapEx is merchandising equipment at customer locations. So that will grow as sales grow and as new business grows.

Our final question comes from the line of Kevin McVeigh with Credit Suisse.

Christophe, I wonder about any client reaction to the price increases? I know you were thoughtful through COVID. Are they more accepted given how thoughtful you were through the COVID process, or just any puts and takes? I mean obviously, everyone is seeing a lot of inflationary pressure, but just any thoughts from a client perspective?

I'm very satisfied with our progress in pricing. We need to address over $1 billion over 18 months, starting from mid-last year to the end of this year. Eighteen months is a relatively brief period. Our goal is to manage this while achieving two key objectives: first, to stay ahead of the inflationary curve, which we accomplished last year and plan to do again this year. We were on track to be ahead of the inflation curve in 2022 before the situation in Eastern Europe affected us. Although our timeline has been pushed back a few months, we are adding the energy surcharge, which will help us reach our goals. We aim to cover inflation while growing our margins in the future. The second objective is to ensure we don't lose customers. While we navigate these changes, we want to maintain over 90% of our customer base, and we have managed to retain all our major customers so far. It's essential to remember that we are a growth company, and I want to sustain our strong organic momentum as we optimize pricing and keep our customers. This is crucial because, in the Ecolab model, when our fundamentals—new business, innovation, pricing, and customer retention—are strong, and inflation subsides, we often see a significant improvement in margins. The timing of this is uncertain, but everything looks promising so far. I'm very pleased with the team's efforts in pricing while also preserving our customer base and driving growth simultaneously.

At this time, we’ve reached the end of our question-and-answer session. I'll now turn the floor back to Mike Monahan for closing remarks.

Thanks, Rob. That wraps up our first quarter conference call. This call and the associated discussion and slides have been available for replay on our website. Thank you for your time and participation; and our best wishes for the rest of the day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.